Comment: The digital currency armed forces: Central banks enter the fight to protect national sovereignty
Former MP and now lobbyist for companies in the financial services and other sectors
A group of seven central banks, including Canada’s, issued a statement indicating that they are working together on common principles and key characteristics for a viable central bank digital currency, or CBDC.
Banks in Canada, the UK, the European Union, Japan, Switzerland, Sweden and the US take seriously the threat that private digital currencies pose to monetary policy control. Equally important is that the exclusion of China from the group signals that central banks will become aware of the threat to national sovereignty if they do not participate in the official digital currency game or if China receives a first mover advantage.
Central banks have been watching the advent of digital currencies (bitcoin, Facebook’s scales, etc.). But there’s a new urgency as COVID-19 has accelerated the cash escape. Private digital currencies are no longer just a supplement to normal “cash” transactions, they are replacing them. In Sweden, the number of people using cash to make their last purchases has fallen to 13 percent, down from 39 percent 10 years ago. Experiences vary from country to country, but the trend is clear.
But now something else is at stake. Bank of Canada Deputy Governor Timothy Lane said this aloud. Official digital currencies can pose a strategic threat: “If one country introduces a central bank currency, it immediately creates the potential for other countries to be affected … and that can create completely different problems.” He probably has China in mind, where the People’s Bank is of China is well on its way to electronically operate.
The authority to issue a CBDC is rising on the list of “wishes” of central banks around the world. A CBDC is an electronic version of a legal tender (traditional banknotes and coins). It would be based on blockchain or some other technology to keep it secure. The authority to issue a digital currency has suddenly changed from “nice-to-have” to “need-to-have”.
A number of factors play a role – the increasing attractiveness of private digital currencies, including “cryptocurrencies” and “stablecoins” (such as Facebook’s Libra); Concern about foreign control over digital payment platforms; the attractiveness of anonymity, which results from the fact that transactions are taken from normal, traceable channels; and concerns about loss of control over monetary policy. Add to this fears that cash could be a vector for coronavirus transmission, a recent Australian study found, and it’s a perfect storm.
No country can afford to lose control of its currency or to surrender control of its payment system to foreign payment processors, whether state or private. The writing is on the wall, or at least in the coding that enables private digital payments. Cash is dead.
To do nothing means to leave the field to the cryptocurrencies. Bitcoin, the best known, is viewed by central banks as too volatile to serve as a widely accepted unit of account for buying things unlike cash or an official digital currency. Bitcoin is viewed more as a speculative commodity that is traded in and of itself. Facebook’s Libra is only slightly tastier as it is backed by real currencies like dollars, euros or pounds.
In any case, central banks are concerned about their ability to track money transfers outside of official channels. This hinders efforts to combat money laundering and other illegal activities. For China, private networks are hindering the ability to monitor offshore money transfers.
Doing nothing can also mean an increasing dominance of the US dollar. China’s long-term goal is for the renminbi to replace the US dollar as the main reserve currency in international transactions and settlements. While this may be a dream, China will do nothing to strengthen US monetary hegemony.
Being the first to be on-site with a CBDC is an unsurprising strategic move for China to support its geopolitical and economic aspirations. A Chinese CBDC would put China at the forefront of the competition for the world’s next global currency.
The monopoly over the national monetary system (the right to provide and control a national currency) is at the heart of monetary sovereignty. Central banks guard this power jealously and do not give it to anyone.
And not only China is concerned about the dominance of the USA. A study by the European Central Bank on the advantages and disadvantages of digital currencies found that many private payment service providers (the units that process your electronic payments) are “foreign owned” and protectionist policies outside the EU could lead to payment disruptions. One of the declared goals of the ECB is to ensure that European citizens “cannot be excluded from the payment ecosystem through the unilateral actions of others”. (Read: US Tech Giants Like Facebook.)
Cryptocurrencies like Bitcoin and other private digital currencies do not benefit from deposit insurance, which protects money with recognized and regulated financial institutions. Official digital currencies, on the other hand, would likely have deposit insurance protection. And an official digital currency would not bypass or disregard a country’s banking system, but instead let banks play the same intermediary role that they now play for cash and are responsible for the due diligence and customer interface. Nobody wants a central bank to be the interface with individual customers yelling about bank charges.
Neither Bitcoin nor Libra are backed (directly) by the “full faith and credit” of an official government issuer. A CBDC would be. That stability should count for something. However, policymakers can have an uphill battle to convince the public that they have struck the right balance between stability (of the national monetary system) and the privacy that individuals desire.
It is an uncomfortable reality that consumers want privacy but interact with all kinds of unregulated actors in their online financial activity. An official digital currency would be stable but not anonymous.