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Central banks urged to create digital alternative to cash

Central banks urged to create digital alternative to cash

Central banks should issue a digital version of cash to prevent the ‘privatisation’ of money and trust in the monetary system disappearing, according to a new report from research and campaign group Positive Money.

With Facebook's Libra looming on the horizon and the Covid-19 pandemic further depressing the use of physical cash, the authors says that a central bank digital currency (CBDC) could be introduced to give policymakers more effective tools to support the economy, particularly during times of crisis, while maintaining financial stability.

While central banks the world over explore different versions of electronic money issuance, Positive Money advocates for the creation of an electronic version of cash accessible to the general population through accounts at the central bank.

The idea has been investigated in some detail by a number of central banks who remain wary of destabilising the commercial banking system by becoming a competitor for deposits with their banking charges.

Positive Money insists that a CBDC could increase financial stability by providing a safe public form of money and breaking the oligopoly that banks currently have on the digital money and payments system.

A CBDC would make it easier for the government to undertake ‘helicopter money’ or ‘people’s quantitative easing’, suggests the report, allowing central banks to distribute newly created public money directly to citizens rather than going through financial markets.

It would also be a means of enforcing competition for deposits among commercial banks. For instance, increasing the rate of interest paid on a CDBC would force banks to increase the interest they pay in order to attract deposits.

Author of the report, economist Konstantin Bikas, says: “Money cannot exist without trust and neither can the monetary system. As a public form of money, cash provides the trusted foundation our whole economy relies on, and its rapid decline, especially in light of the Covid crisis, could lead to the whole system falling down.

“Policymakers must introduce a digital version of cash as soon as possible if we are to avoid the privatisation of money itself.”

Comments: (2)

Christopher Williams
Christopher Williams - RTpay - Winchester Uk 23 April, 2020, 10:55Be the first to give this comment the thumbs up 0 likes

There is a relatively simple way to answer the points raised about ensuring commercial banks do not suffer major reductions of deposits, by limiting the CBDC balance to a maximum of, say, $1,000 equivalent in local currency. This ties in with FATF recommendations on AML/ CFT, enables diasporas to pre-qualify funds for remitting to families - and is sufficient for usual levels of monthly spending. 

Where banks may suffer is in not being able to charge exorbitant rates on credit card borrowing (if better cash management becomes a habit)  and on cross border transfers - but then they should, shouldn't they??  

Matthew Key
Matthew Key - keyinnovate.com - London 27 April, 2020, 11:421 like 1 like

This is positive. I have for some time said a central bank endorsed digital currency is the way forward> this potentially is a great (and cheaper) way to distribute money to where its needed and this is more importnat than ever right know for obvious reasons. It can help stregthen the economy, make tax more efficient and help to reduce fraud. It does need standards and global agreements but the potential advantages clearly outwiegh the disadvantages.