While China Is Already Testing CBDC, US's Goal Is 'To Get It Right'
Central banks are still more focused on risks of central bank digital currencies (CBDCs) while they're increasingly cooperating with each other in an attempt to investigate this potentially new form of local and cross-border payments, according to statements by the panelists of an International Monetary Fund’s (IMF) online seminar today. (Updated at 16:42 UTC: updates in bold.)
Hosted by Kristalina Georgieva, Managing Director of the IMF, the panel discussion on the future of cross-border payments featured Jerome Powell, Chairman of the US Federal Reserve (Fed), Ahmed Alkholifey, Governor of the Saudi Arabian Monetary Authority, the country’s central bank, Agustín Carstens, General Manager of the Bank of International Settlements, and Nor Shamsiah, Governor of Bank Negara Malaysia, the country’s central bank.
Powell recognized that there are a number of ways in which CBDCs could improve the global payments system, among others by “reaching consumers that have traditionally been underserved” by financial institutions. However, he also said that the US economy was characterized by strong demand for cash, and had a highly banked population. A domestic CBDC could complement, “but not replace” other forms of digital money, according to the Chairman.
“We’re committed to carefully evaluating the costs of a CBDC for the US economy,” Powell said. “We have not made a decision to issue a CBDC and there’s work to be done … before making such a decision.”
According to him, it is “more important for the US to get it right than to get it first”.
Powell’s remarks were echoed in some statements made by Shamsiah who said that the reasons to issue CBDCs included a “lack of confidence in local currency” or the shortcomings of banking systems in developing countries.
Meanwhile, Alkholifey said that the Saudi central bank has partnered with its counterpart from the United Arab Emirates (UAE) on an experiment to explore the design and applications of CBDCs in facilitating cross-border payments.
“Six commercial banks have participated, three from each country. The experiment revealed that the technology was viable for cross-border wholesale payments,” Alkholifey said.
Asked by the IMF’s general director whether the CBDCs’ proliferation across the world could lead to a fragmentation of the global financial system, Carstens rejected the idea, claiming that any “CBDC will always be a national decision … and therefore, it will respond primarily to domestic circumstances” which is why “China, Sweden, the US, Mexico are at different stages” of the process.
For example, last week, Stefan Ingves, the Governor of Sveriges Riksbank, the central bank of Sweden, said that there "shall be digital state money as legal tender, an e-krona, issued by the Riksbank." He argued that e-krona, Swedish CBDC, is needed for Riksbank's future operations, and for retaining several functions of cash where cash is no longer used. It could ensure "a uniform monetary system," and would reinforce krona as means of payment in Sweden, which is particularly relevant if other currencies, such as Libra, begin to compete with krona in that area, Ingves argued. He wants the government to "review the concept of legal tender."
Also, the central Bank of Canada is set to beef up its central bank digital currency (CBDC) resources by hiring an Ottawa-based economist to “provide analysis relevant for the potential development of a CBDC” and “monitor and analyze developments in electronic money and payments, including CBDCs, [cryptoassets], stablecoins and crypto exchanges.”
At the same time, in China, citizens are already testing the digital yuan.
Meanwhile, presenting CBDCs as a means of increasing central banks’ control over the flow of cross-border payments, Carstens said “if an advanced economy issues a CBDC and someone in a third country will want to use it, it will require the approval of the central bank of that country”.
Raoul Pal, CEO & Co-Founder, Real Vision Group and Global Macro Investor commented ahead of the panel today that CBDCs are “coming and they will change everything”.
“If you don't think CBDCs are coming, you are missing the big and important picture. This is going to be the biggest overhaul of the global financial system since Bretton Woods,” Pal said.
After the Bretton Woods Conference of 1944 where the IMF was created. The IMF played a major role in the global post-war monetary system, establishing gold and the dollar as the standard and greatly influencing the US's position in global politics.
Also today, the IMF released a report that discusses the potential macro-financial effects of CBDCs and so-called global stablecoins (GSCs), such as Libra. Some of the main conclusions of the paper are these:
- As the pace of digitalization accelerates, the landscape of international finance will likely be in a state of flux.
- For the countries that adopt foreign CBDCs and/or GSCs, the main challenge is how to preserve macroeconomic and financial stability without forgoing the benefits of more efficient cross-border payments and better access to international capital markets.
- For countries that adopt GSCs issued by Big Tech platforms, they will have a strong interest in ensuring that the GSC arrangement has robust governance and risk management.
- Countries that issue CBDCs need to carefully consider the costs and benefits of allowing nonresidents to use their CBDCs.
- The implications for the IMF of the emergence of CBDCs and GSCs will require further analysis.
Watch the whole discussion below:
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