Support grows for central bank digital currency

Two new reports provide intellectual underpinning for more active engagement by central banks in digitalisation initiatives.

Support for central bank digital currencies (CBDCs) is growing following the release of a new report describing potential use cases, along with IMF managing director Christine Lagarde admitting the idea should be considered.

A report released at Sibos by IBM and OMFIF (Official Monetary and Financial Institutions Forum), an independent think tank for central banking, economic policy and public investment, describes potential use cases for central banks to support CBDCs, a digital form of fiat money, established by government regulation.

The idea has now received a boost from the IMF itself with a speech by managing director Christine Lagarde at the Singapore Fintech Festival, supporting the idea. Announcing the release of a new IMF paper, Casting Light on Central Bank Digital Currency on the pros and cons of the concept, Lagarde said, “We should consider the possibility to issue digital currency. There may be a role for the state to supply money to the digital economy.”

A digital currency, she suggested, could satisfy public policy goals such as financial inclusion, security and consumer protection, and privacy in payments. With regard to the first of these goals, for example, she noted that digital currencies are able to reach people and businesses in remote and marginalised regions. “We know that banks are not exactly rushing to serve poor and rural populations,” she commented. “This is critical, because cash might no longer be an option here. If the majority of people adopt digital forms of money, the infrastructure for cash would degrade, leaving those in the periphery behind.”

Lagarde acknowledged a number of potential downsides to digital currency, including risks to financial integrity and financial stability, but, she suggested, “We should face these risks creatively. How might we attenuate them by designing digital currency in new and innovative ways? Technology offers a very wide canvas to do so.” In the world of FinTech, said Lagarde, “We need to harness change, so it is fair, safe, efficient, and dynamic.”

The OMFIF/IBM report released at Sibos is informed by a survey of 21 central banks, which ran from July-September 2018, which revealed that 54% of respondents believe CBDCs can be used to improve the speed, efficiency and resilience of cross-border payments. Some 69% of respondents found significant issues with existing cross-border transaction processes. Respondents were, on the whole, optimistic about the use of smart contracts, since these afford central banks flexibility in payment and settlement processes. Banco Central do Brasil, South African Reserve Bank, Norges Bank, Deutsche Bundesbank, European Central Bank and the Bank of Finland were among the institutions that participated in the survey.