When finance ministers and central bankers go to Washington this week, the International Monetary Fund has a message for them: Digital currencies are on the doorstep.
“In the U.S., and other countries around the world, it is just a matter of time before we see massive disruption,” Tobias Adrian, the director of the fund’s monetary and capital markets department, said in an interview. “There is at least the potential that new technology might lead to a new global payment system fairly rapidly.”
The Group of Seven nations will release broad guidelines today for regulating digital money. They will also discuss whether central banks should issue their own. Adrian’s team is contributing to the report.
G-7 members are the United States, France, Japan, Canada, Italy, Germany and the United Kingdom.
Central banks from Sweden to Canada and China are studying whether their money should have a digital counterpart. Sweden began an e-krona project in 2017 and has issued two reports on the topic. The Bank of Canada has launched a formal research project that has partnered with other monetary authorities. The U.S. central bank, by comparison, is focused on updating the domestic payment system to real-time settlements so money moves almost instantly.
The forces of change are coming from two longer-run developments that regulation may slow but not stop.
First, transactions are increasingly conducted online, and consumers and merchants want cheaper and faster payment systems. In the U.S. today, payments travel through banks and credit card companies, and along the way there are fees and delays. Those costs cut particularly into earnings of gig workers, immigrants, and low-income people.
“The American payment system is a giant reverse Robin Hood, sucking billions of dollars out of people who live paycheck to paycheck and depositing money in the form of credit card rewards to the already rich,” said Aaron Klein, a fellow at the Brookings Institution in Washington, who is critical of the roughly five-to-six years the U.S. Federal Reserve says it will take to launch its own real-time payment system.
The second trend is a potent threat. Social media and online platforms such as Facebook could create “stablecoin” currencies to facilitate transactions on their platforms. A stablecoin’s value is linked to some reserve asset and is designed to have less price variation than cryptocurrency.
Facebook has already proposed a global digital currency called Libra, with which regulators are grappling. Banks such as JPMorgan Chase’s JPM Coin have also conducted their own experiments with stablecoins, which are meant to speed up corporate payments.
A financial system that is moving away from a bank-centric model of payments to one that is based on payment platforms, leaves central bankers with a choice: Do they want their own country’s money or somebody else’s to facilitate those transactions?
A system of competing currencies “is what the U.S. banking system used to look like in the 1800s, and we had repeated financial crises,” said Julia Coronado, the founder of MacroPolicy Perspectives in New York and a former Fed board economist.
But today the public is demanding simpler payment forms and the central bank should find ways to embrace that while protecting the safety and soundness of money, she said.
That’s a tall order for the Fed to accomplish without congressional backing or support of the banking system, with which it has deep historical linkages. And so far, the U.S. central bank hasn’t looked to be a first mover in the space.
The Fed has no formal digital currency research effort, though its economists are keeping abreast of the topic. It is occupied with the build-out of its real-time payment system FedNow.
FedNow will compete with a private payment system run by banks that is already delivering real-time payments — for a fee. It will also continue to work through a bank-centered model rather than a payment-centered model. In fact, FedNow intentionally strengthens the current banking model rather than disrupting it.
A digital currency “is really about the industrial organization of the payment system,” said former Richmond Fed President Jeffrey Lacker. “The Fed has always aligned itself with the banking system, and FedNow is about preserving the privileged place banks have in that system.”
Economists predict the Fed can’t wait much longer to confront the question of digital currency. That’s also the view of the leaders of the Bank for International Settlements and the International Monetary Fund — Depression-era institutions that were founded to help stabilize the global monetary system.
“It might be sooner than we think that there is a market and we need to be able to provide central bank digital currencies,” Bank for International Settlements General Manager Agustin Carstens.
There are plenty of things to worry about, economists caution. Big tech monetizes user data and it would certainly continue to do so if the platforms got involved in payments, raising privacy concerns. Platform payment systems could easily develop into monopolies and help spread dollarization to other nations as merchants and consumers abandoned local currencies.
Information for this article was contributed by Alex Tanzi of Bloomberg News.
Business on 10/17/2019