Over the past few days top policymakers from the IMF, ECB and Bank of England have addressed the prospect of a central bank digital currency. Here’s why it matters.
Though Brexit has dominated most of the headlines this week, momentum has been gaining on another question which could have profound consequences for the global economy.
This question is the future of cash – more specifically, what will happen to it as economies become increasingly digitised.
Cash is more than just a relic from the pre-digital age – it is risk-free money created by the central bank and made available to the public. Cash currently exists as notes and coins, which are estimated to make up just 3% of the UK money supply, with the rest of the UK’s money existing electronically. What many people don’t know is that most of this electronic money is not simply a digital equivalent of cash, as it is ultimately owned by private banks, that create it when they loan it out to us.
This is one of the reasons Positive Money has been campaigning to protect cash, so that people don’t have to rely on access to electronic bank credit to make payments. But we recognise that many people also prefer to hold their money and make payments digitally, which is why we are also proposing the introduction of digital cash alongside physical cash. Like physical cash, and unlike the money in your bank account, digital cash – often referred to as a central bank digital currency (CBDC) – would be issued by the Bank of England, rather than by private banks through credit creation, and would be risk free. As a publicly owned institution, we can think of the money the Bank of England creates as public money. Without a CBDC, an electronic money supply would essentially remain privatised.
Digital cash could therefore save us from an economic system dependent on private banks acting as rent-extracting money creators. It would also help facilitate public money creation, among other advantages.
The idea is being taken seriously by some of the world’s most important policymakers, as reflected by comments this week from the head of the International Monetary Fund, Christine Lagarde, European Central Bank board member Benoit Coeure and two Bank of England deputy governors, Dave Ramsden and Sam Woods.
Christine Lagarde accelerated the debate on Wednesday, when she suggested “There may be a role for the state to supply money to the digital economy” through a CBDC. She said “The advantage is clear. Your payment would be immediate, safe, cheap and potentially semi-anonymous… And central banks would retain a sure footing in payments.”
The same day Dave Ramsden fielded an influx of questions on the topic, as part of his Q&A for the Bank of England’s excellent Future Forum. It is encouraging that Dave Ramsden confirmed “We believe that it is important that the public has choice in the way that people choose to pay for transactions,” and that the Bank thinks “cash will remain a critical part of the payments landscape for the foreseeable future”. We asked Dave whether the Bank of England should therefore provide digital cash, and he replied “central bank digital currency is an interesting concept that we, at the Bank, have an open mind about and an active research agenda looking into.”
This is of course good news, but there’s a concern public policymakers are reacting too slowly to the digital transformation of our economy. As Benoit Coeure said on Thursday, “There is broad agreement that a (CBDC), in whatever form, is unlikely to be issued within the next decade”, as central banks’ studies are still in the early stages. In his Q&A on Friday Sam Woods also told us that the BoE is “not intending to launch a CBDC in the near term”. This is perhaps something to be worried about, as the longer the implementation of a CBDC takes, the higher the risks of a cashless society where digital money is monopolised by private interests.
It is important to treat money as a public good, in the same way we treat other resources crucial to the functioning of our society. We should resist our monetary system being dominated by private actors who would prioritise their own interests over maintaining universal accessibility and stability, just as we are right to be wary about the same thing happening to utilities such as water and electricity.
Ultimately, the decline of cash and technological change poses a fundamental question – should our money and payments system be surrendered to the hands of commercial banks and other private interests, or should we provide a public option through a state institution which has more potential for democratic accountability, such as the central bank? We at Positive Money believe the latter, which is why we’re campaigning for access to cash to be protected both physically and digitally with the help of a CBDC.