Money Talk
A Central Bankers View on the Future of Money and Payments
Submitted by NGO THANH TU, 17-06-2019, 10:41 AM, Thread ID: 134240
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17-06-2019, 10:41 AM
#1 This article was first published onCash and Payment Newson April 3, 2019and is being reprinted with permission from the publisher.
With so much talk about Central Bank Digital Currency (CBDC), it is not a coincidence that Agustn Carstens, General Manager, Bank for International Settlements chose this topic to give at the 9th Whitaker Lecture in Dublin at the end of March.
The key for Mr Carstens is not the D in CBDC we are all used to the digital world but the CB or Central Bank element. A CBDC would allow members of the public to make payments electronically with money issued by a central bank. They could deposit money direct into and use debit cards issued by a central bank.
The consequences of such a system are far reaching and would be very different to what we have now. Our monetary system is the backbone of our financial system, so it is worth understanding the consequences before embarking on radical change.
One half of our monetary system is money and its three purposes have not changed much over time a unit of account, means of exchange and a store of wealth. The other half of the monetary system is payment systems, which also come in many shapes and sizes. For example, retail systems typically handle large volumes of relatively low-value payments, whereas wholesale systems handle large-value and high-priority payments like interbank transfers.
Two worldwide trends have been driving change in payment system design for quite some time. One is speed, especially in the retail systems. The other is globalisation, which has increased demand for cross border payments and thus helped drive the development of the Eurosystems new Target Instant Payment Settlements services, TIPS, which can handle multiple currencies.
Maintaining trust
Both money and payment systems are essential to the functioning of a modern economy. Both rely on trust. We accept money as payment because we trust that we can pass it on to someone else later. Maintaining that trust in the monetary system is generally regarded as a number one priority in any economy and in most countries, it is the responsibility of the central bank.
The CBDC debate is not about the technology, it is partly about the potential decline in the use of cash, and what central banks should do about it.
How then would our monetary system fare with CBDCs? The CBDC debate is not about the technology, it is partly about the potential decline in the use of cash, and what central banks should do about it. However, in reality, for most countries, cash is still in high demand and so, in short, there is no urgency to find an alternative, though central banks need to be prepared for the future.
A cash substitute is in any case only one potential form of CBDC. Instead, the BIS has identified two main CBDC varieties. A wholesale model where the CBDC would be restricted to a limited group of users and used for interbank payments, and a retail model based either on digital tokens or on accounts and universally available. That translates to individuals being able to open an account directly with their central bank.Clearly, there are important differences between cash and CBDC. Unlike cash, CBDC is not anonymous. And a CBDC could pay or charge interest.
In terms of technology, the digital token technology is still broadly untested, whereas the technology for an account-based CBDC has been available for decades. So far, central banks have generally chosen not to provide such accounts because of concerns of the impact it would have on the financial system.
Our current system is built on two tiers. The customer-facing banking system is one tier, and the central bank is the other. The two tiers work together. The first tier is used for payments between accounts in the same bank, while payments to accounts in different banks are settled through the central bank system.
Currently, these settlement accounts are the only existing forms of CBDC, and only commercial banks have access to them. The challenge is that if central banks were to widen access to this CBDC then they would have to offer deposit accounts, issue debit cards and in effect offer many of the deposit services currently performed by commercial banks.
This could then increase, particularly in times of uncertainty when customers would inevitably prefer to have deposit accounts at central banks, and fewer at commercial banks. It follows on that if deposits shift to the central bank, then perhaps lending would need to shift as well. So, in addition to the deposit business, the central bank would be taking on the lending business, with all the commitments of time and resources that requires.
In this scenario, the role of the central bank starts to change dramatically. Traditi
With so much talk about Central Bank Digital Currency (CBDC), it is not a coincidence that Agustn Carstens, General Manager, Bank for International Settlements chose this topic to give at the 9th Whitaker Lecture in Dublin at the end of March.
The key for Mr Carstens is not the D in CBDC we are all used to the digital world but the CB or Central Bank element. A CBDC would allow members of the public to make payments electronically with money issued by a central bank. They could deposit money direct into and use debit cards issued by a central bank.
The consequences of such a system are far reaching and would be very different to what we have now. Our monetary system is the backbone of our financial system, so it is worth understanding the consequences before embarking on radical change.
One half of our monetary system is money and its three purposes have not changed much over time a unit of account, means of exchange and a store of wealth. The other half of the monetary system is payment systems, which also come in many shapes and sizes. For example, retail systems typically handle large volumes of relatively low-value payments, whereas wholesale systems handle large-value and high-priority payments like interbank transfers.
Two worldwide trends have been driving change in payment system design for quite some time. One is speed, especially in the retail systems. The other is globalisation, which has increased demand for cross border payments and thus helped drive the development of the Eurosystems new Target Instant Payment Settlements services, TIPS, which can handle multiple currencies.
Maintaining trust
Both money and payment systems are essential to the functioning of a modern economy. Both rely on trust. We accept money as payment because we trust that we can pass it on to someone else later. Maintaining that trust in the monetary system is generally regarded as a number one priority in any economy and in most countries, it is the responsibility of the central bank.
The CBDC debate is not about the technology, it is partly about the potential decline in the use of cash, and what central banks should do about it.
How then would our monetary system fare with CBDCs? The CBDC debate is not about the technology, it is partly about the potential decline in the use of cash, and what central banks should do about it. However, in reality, for most countries, cash is still in high demand and so, in short, there is no urgency to find an alternative, though central banks need to be prepared for the future.
A cash substitute is in any case only one potential form of CBDC. Instead, the BIS has identified two main CBDC varieties. A wholesale model where the CBDC would be restricted to a limited group of users and used for interbank payments, and a retail model based either on digital tokens or on accounts and universally available. That translates to individuals being able to open an account directly with their central bank.Clearly, there are important differences between cash and CBDC. Unlike cash, CBDC is not anonymous. And a CBDC could pay or charge interest.
In terms of technology, the digital token technology is still broadly untested, whereas the technology for an account-based CBDC has been available for decades. So far, central banks have generally chosen not to provide such accounts because of concerns of the impact it would have on the financial system.
Our current system is built on two tiers. The customer-facing banking system is one tier, and the central bank is the other. The two tiers work together. The first tier is used for payments between accounts in the same bank, while payments to accounts in different banks are settled through the central bank system.
Currently, these settlement accounts are the only existing forms of CBDC, and only commercial banks have access to them. The challenge is that if central banks were to widen access to this CBDC then they would have to offer deposit accounts, issue debit cards and in effect offer many of the deposit services currently performed by commercial banks.
This could then increase, particularly in times of uncertainty when customers would inevitably prefer to have deposit accounts at central banks, and fewer at commercial banks. It follows on that if deposits shift to the central bank, then perhaps lending would need to shift as well. So, in addition to the deposit business, the central bank would be taking on the lending business, with all the commitments of time and resources that requires.
In this scenario, the role of the central bank starts to change dramatically. Traditi
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