In a fascinating recent address, “Do we need "public money?”, Sir Jon Cunliffe, Deputy Governor for Financial Stability of the Bank of England, addressed not just whether central banks should have their own digital currency but whether “public money” was needed at all.
“Even without the new, technology enabled forms of money that are on the near horizon we are seeing accelerating changes in the way we live and transact that will greatly reduce and perhaps eventually eliminate the role that public money plays in the economy today.”
In Australia, RBA Assistant Governor (Financial System) Michele Bullock says “with this project we are aiming to explore the implications of a CBDC for efficiency, risk management and innovation in wholesale financial market transactions”.
According to Fitch Ratings, “the key benefits of retail CBDCs lie in their potential to enhance authority-backed cashless payments with innovations in step with the wider digitalisation of society”.
In a report entitled "Central Bank Digital Currencies: Opportunities, Risk and Disruption", Fitch noted CBDCs “may open up new policy options, such as transfers into CBDC accounts as part of disaster relief or stimulus efforts. The programmability of CBDCs offers further avenues for flexibility – including the potential to influence social behaviour. However, attaching such features to CBDCs may make them less attractive to users, relative to cash”.
Moreover, “widespread adoption of CBDCs may be disruptive for financial systems if associated risks are not managed. These include the potential for funds to move quickly into CBDC accounts from bank deposits, causing financial disintermediation, and for heightened cybersecurity threats as more touchpoints are created between the central bank and the economy”.
Those findings reinforce a key challenge for CBDCs is they won’t offer the anonymity and near invisibility of cryptos.
Two probable outcomes
There’s a long history of financial innovations growing unfettered until they reached a certain threshold – when they were fettered. In the relatively recent past the growth of another virtual currency – card-based credit – was reigned in when regulators decided the card schemes were charging too much for processing interchange fees.
There are two probable outcomes for crypto currencies: they will be incorporated as viable payment and value store entities into the financial mainstream via regulation; or they will be absorbed, piecemeal, into the financial system as other institutions – including central banks – utilise the underlying technology and platforms.
As Katie Martin wrote in the Financial Times, “If and when central banks and regulators do assume control, it will probably bite a chunk out of the value of cryptocurrencies and leave some holders with substantial losses. But anyone left out of pocket will not be able to complain that they were not warned”.
However, this doesn’t mean conventional financial institutions have nothing to worry about. While they can exploit new platforms like blockchain, many won’t. So these new technologies, along with the cloud, machine learning and artificial intelligence could still enable new institutions to enter the market.
Technology intelligence sheet CB Insights provides just an introductory list of services which could be disintermediated including payments, clearance and settlement systems, capital raising, securities and their exchanges, bank lending, trade finance and security management.
So while cryptocurrencies as they exist today will struggle to go beyond the speculative fringe, many of the foundational elements of those currencies may well truly re-shape financial services.
Andrew Cornell is managing editor of bluenotes