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Money as we know

When I came to the States, in 2018, to work in the beloved Midtown NYC, I had my first pure pearl experience with “digital payment only” or “non-cash basis”. Almost none of the grab and go restaurants in the area accept cash, such as Dig Inn, Sweet Greens, Little Beet, to mention a few.

During my first week I didn’t have a US bank account, which means no USD debt not credit card. In summary, for one week and had to ask one of my co-workers to pay for my lunch. At least it was a good opportunity to explain that with my Brazilian card I would have to pay IOF (Tax on Operations of Credit, Exchange and Insurance), and given that for almost everyone in the financial industry be tax efficient is a good thing, my ask for help became less awkward for a recently joined teammate. 

Besides the opportunity to talk about Brazilian taxes, it was shocking to see how easily my cash on hand lost all its meaning inside these restaurants. The promise of value and the whole abstract memory those physical pieces of paper were caring were absolutely gone. 

After that, I started to think a lot in my macroeconomic classes and cryptocurrencies. Of course it was not only me wondering about this digital transformation. Since January 2020, Bank for International Settlements (BIS) together with Bank of Canada, European Central Bank, Bank of Japan, Sveriges Riskbank, Swiss National bank, Bank of England and Board of Governors Federal Reserve System were tasked by the governors to develop analysis of the Central Bank Digital currencies (CBDC), a state-backed form of digital currency. According to this select group, all the discussions aim to safeguard public trust in money, maintaining price stability, and ensuring resilient payments infrastructure.

            But if everyone is already using a debit/credit card as a form of payment, what is the point of a “new” digital currency? Can’t our credit cards be considered digital money from the Central Bank? Starting from a common ground, the idea that most money comes in the form of publicly issued bank notes is not the reality, money is a mix of private and public-sector liability. Surprise: the money as we know today feels as public money only because that promise value, in which its unit can always be redeemed against public money at par, it is basically a regulation framework. There we start in our macroeconomic classes, looking at the hierarchy of Money and Credit:


CBDC, as it is designed, is a 100% Central Bank liability.  And there is one of the biggest fears, the critics of the digital currency foresee a “flight to trust”, with people preferring to place deposits directly with the Central Bank, hurting private bank funding. BIS explicitly mentioned about it in its executive summary “the introduction of a CBDC could erode banks’ retail deposits, resulting in a less stable funding mix. Any assessment of the materiality of these sources of financial stability risk, and the effectiveness of possible mitigants, would depend on the specific design of a CBDC and the structure of the financial system in which it might exist.”

It is also true that back in September 2008 the financial system lost confidence and CBDC could work as a way to have a full-collateralized digital currency ecosystem. On that front, the People’s Bank of China has already forced the country’s main digital payments providers (WeChat and Alipay) to hold all deposits as reserves at the central bank on a fully collateralized basis. 

Hyun Shin, the Economic Advisor of the BIS, is one of the most prominent advocates of digital payments and digital currencies. In one of its latest speeches he said:

“The beauty of money is that you don’t need to know the whole history – that I am holding it, is enough for it to be worth something to the next person, even though they don’t know how hard I had to work to acquire it. 

But money is also a social convention – there is a whole record that’s somehow captured in that paper. In theory, if you can have a complete ledger, you can have a complete institutional memory. That theory has long existed, but it has been a twinkle in people’s eye. What technology has done is enable an abstract idea to become concrete. You can construct that ledger and you can do it electronically and use the best of data.”

            And here comes another big concern: privacy. Is it worth it to have states with a ledger that gives them unlimited access to people’s money history? According to BIS data from 27 countries, not yet. Besides the recent push for anti-money-laundering and KYC regulations, the informal economy still a big part of people’s life, especially in developing countries, which can explain the negative response. People’s trust in the government is also another factor, China example in this case also generates massive questions.

            There are a lot of points that need to be addressed, such as the influence of CBDC in the monetary policy, interest rates and legal framework. But COVID19 is speeding the discussions, the disease is accentuating the tendency to have debit/card as the main form of payment, creating side-effects for the remaining holdouts, mainly in the informal economy. 



From BIS latest report: “Regardless of the motivation, any approach to issuing a CBDC will naturally be cautious, incremental and collaborative”. Stay tuned. 


Related links:

https://www.bis.org/publ/othp33.pdf

https://ieor.columbia.edu/files/seasdepts/industrial-engineering-operations-research/pdf-files/Mehrling_P_FESeminar_Sp12-02.pdf

https://ftalphaville.ft.com/2019/01/10/1547096400000/When-the-state-takes-on-the-digital-float--the-state-takes-on-the-risk/

https://www.bis.org/publ/othp33_summary.pdf




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