Central banks around the world are now giving serious consideration to the pros and cons of making central bank digital currencies available to the general public, says a new study from the C.D. Howe Institute.
In Central Banks and the Future of Money, former Deputy Governor of the Bank of Canada John Murray notes while the consensus view remains that such a move would be premature, opinion on central bank digital currencies (CBDCs) appears to be shifting.
Supplying digital currencies in the form of circulating tokens or accounts held directly at the central bank is seen by many as something that might eventually be necessary, owing to the encroachments of Fintech innovations such as Bitcoin and other private-sector variants, states the report.
“While they debate the issues at stake, central bankers need to understand that maintaining the status quo is unlikely to be a practicable option, given the shifting financial landscape,” says Murray. “Some countries and central banks have moved beyond talking and have taken active steps to push the initiative further,” he adds.
This CBDC could take the form of a deposit, similar to those that people hold at commercial banks, or a digital token, exchanged using distributed ledger technology and functioning in the economy much like banknotes do today.
The report focuses on the pros and cons of the Bank of Canada and other central banks offering digital currency deposits to the public. Proponents believe CBDCs could materially improve the role of central bank money in the financial system by providing a more stable unit of account, a more efficient medium of exchange and a more secure store of value. Moreover, they could temper financial instability, improve the implementation and transmission of monetary policy, raise productivity, help finance government deficits, reduce tax evasion and discourage a number of other costly and illegal activities.
However, it is also possible that CBDCs might have a destabilizing effect on the economy in times of financial stress. As a safe and convenient alternative to commercial bank deposits and other types of private financial assets, CBDCs might act as a dangerous accelerant in the context of a bank run, transforming an isolated concern about one bank’s solvency into a system-wide crisis. Another source of concern is the disruptive effect that CBDCs would likely have on the competitive position of commercial banks, other financial institutions and key financial market infrastructures.
“In the end, the best way forward for Canada and other countries may not involve the introduction of a CBDC,” says Murray. “Some active government engagement now would nevertheless seem advisable to ensure the most promising ways forward are not precluded. Simply leaving it to the market to sort out would be very risky.”
“The question is not whether central banks will need to react, but how they should react to these tectonic technological shocks,” concludes Murray.
John D. Murray served as Deputy Governor of the Bank of Canada from January 2008 until his retirement from the Bank in April 2014. As a member of the Bank’s Governing Council, he shared responsibility for decisions with respect to monetary policy and financial system stability, and for setting the strategic direction of the Bank.