Central banks should issue digital currencies of their own
Digitalisation has reshaped how we communicate, organise, interact, move and trade. It is now changing money. Mobile-phone based electronic payments are becoming just like cash: contactless, cheap and easy to make on a peer to peer basis, including across borders. Life without a bank account becomes possible, which helps financial inclusion in places with no banks and high mobile penetration.
Many companies are seeking to exploit the synergies between money and platforms in a digital economy. In China, Tencent and Ant Financial aggregate payments with social and commercial activities for millions of users. Facebook and 27 partners have announced plans for a Libra digital coin.
For governments and central banks, the digitalisation of money raises new challenges and the Bank for International Settlements warned this week that they are coming “sooner than we think”. First, physical cash may be disappearing as a medium of exchange. Trust in banks has depended on the perceived convertibility of deposits to cash. In a cashless society, there would be no direct access by citizens to sovereign money. Deposits would no longer be convertible with possible detrimental effects on financial stability.
Second, the monetary system may become more fragmented. The economic logic of networks and platforms means they have an incentive to maximise user numbers and a tendency to evolve into closed systems. They may create “digital currency areas” where participants are kept together because they share and exchange the same type of digital money.
Third, because digital money is naturally cross-border, it opens the way to new forms of currency competition, from Libra among others. Some governments may try to use digital payment networks to internationalise their currencies, while others will face a risk of “digital dollarisation” through the penetration of foreign currencies in their domestic economy. This has the potential to significantly reshape the international monetary system.
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