Bejoy Das Gupta, Chief Economist, eCurrency
The coronavirus pandemic is bringing heightened focus on central bank digital currencies (CBDCs) for retail use by consumers and businesses. In the U.S., this would be a Federal Reserve-issued digital dollar, a well-regulated and state-backed digital means of payment, with the same purpose as physical cash. Digital innovations were already resulting in a rethink of monetary arrangements and payment systems globally, through the introduction of CBDCs. The COVID-19 crisis makes it even more imperative that this is done as a priority.
Central banks have been devoting considerable attention to researching whether and how to issue CBDCs in response to private sector initiatives (e.g. e-money and cryptocurrencies such as Facebook’s Libra) challenging the role of sovereign states as the sole provider of money in the digital age. While they have moved slowly so far, the threat from Libra, which has sought to position itself as a global currency, and now COVID-19 should instill greater urgency.
The BIS reported in January 2020 that 80% of 66 central banks surveyed were undertaking extensive work on CBDCs, up from 70% a year earlier (footnote 1). A subset representing a fifth of the world’s population indicated that they are likely to issue CBDCs in the next few years.
Developing countries are attracted to retail CBDCs because of the cost savings and efficiency gains from reduced cash usage. They are also motivated by the growth-enhancing and inequality- reducing financial inclusion that CBDCs would spur. Meanwhile, advanced economies, where cash usage is already declining, would also benefit from continued public access to central bank money in a digital form. Otherwise, the payments system could be dominated by a few large private providers, which raises concerns of competition, consumer protection, efficiency and stability.
In the context of the coronavirus pandemic, retail CBDCs would have come in handy for two reasons. First, retail CBDCs would have given a digital alternative to handling virus-tainted physical currency. The BIS reported last week that, although scientists think that the probability of transmission via banknotes is low compared with other frequently-touched objects, the COVID-19 pandemic has led to unprecedented public concerns about viral transmission via cash (footnote 2). Meanwhile, the Federal Reserve in early March begun storing currency shipments from Asia for seven to 10 days as a precautionary measure. The PBoC sterilized banknotes in infected regions from February, along with other central banks such as South Korea, Hungary and Kuwait. In India and Indonesia, amongst other countries, the authorities have encouraged cashless payments.
Second, governments could have used them for distributing emergency support to households. Through the use of CBDCs, these handouts would be instantaneous and cost effective, providing direct relief quickly and shoring up demand. The U.S. government could have used it for distributing the $3400 cash support to eligible households as could other countries with similar schemes. However, without a digital dollar, U.S. households may have to wait quite a while before checks are issued, delivered by mail, and cleared through banks. In today’s digital era, this process is archaic, expensive and slow. Moreover, it will be difficult to reach the financially- excluded millions, without bank accounts or fixed addresses, and in dire need of the assistance. In developing countries, where half the population is unbanked, implementing such programs effectively would pose even greater challenges, as many countries are discovering.
While it is too late for retail CBDCs to assist current pandemic-alleviation efforts, central banks should implement CBDCs before another crisis. So, what are central banks’ next steps?
In this regard, getting the operational and policy design right is paramount. A badly designed CBDC may not yield all the hoped-for gains. Equally, it could exacerbate risk concerns. Moreover, an unattractive CBDC design may discourage their use by consumers.
The optimal architecture calls for central banks to be the issuers of CBDCs. The distribution to users would then be done through banks and mobile payment service providers. As a result, individuals and businesses can access CBDCs through the existing payments infrastructure, which is made interoperable. This helps create a risk-free digital payments system backed by the state as a public good. Because the CBDCs can be used across all networks, this approach is pro- competition and pro-financial inclusion. Financial integrity compliance would remain the responsibility of banks and non-bank intermediaries.
Appropriate design removes risks worrying some central banks. Being token-based means that central banks do not have to manage hundreds of millions of accounts or e-wallets. Potential financial stability and banking disintermediation concerns are also mitigated, supported by limits on transaction sizes and holdings. Anonymity features of cash are preserved for small transactions below a threshold set by policymakers, but not for large ones to curb illicit activities.
In sum, COVID-19 has shown that central banks need a well-designed and secure currency instrument for the digital age, alongside notes and coins. They should accelerate efforts to get a retail CBDC in place before the next health or another crisis hits.
Footnotes:
Boar, Codruta, Henry Holden, and Amber Wadsworth. 2020. “Impending Arrival – a Sequel to the Survey on Central Bank Digital Currency.” BIS Papers 107, Jan. https://www.bis.org/publ/bppdf/bispap107.htm
Auer, Raphael, Giulio Cornelli, and Jon Frost. 2020. “Covid-19, cash, and the future of payments.” BIS Bulletin, No. 3, April.https://www.bis.org/publ/bppdf/bispap107.htm https://www.bis.org/publ/bisbull03.pdf