This article by three ECB economists argues that central bank digital currency (CBDC) would not only have domestic macroeconomic and financial implications for the issuing economy, they would also have implications for the rest of the world. In particular, the unique characteristics of a CBDC, if used internationally, would create a new “super charged” uncovered interest parity condition which would induce stronger international linkages in a quantitatively relevant way. This suggests that introducing a CBDC sooner, rather than later, could give rise to a significant first-mover advantage.
The ECB has offered nothing less than changing the geography of central bank money. It has importantly served as a reminder that existing practices for conducting international payments need to change if they were to improve materially. A digital euro will offer broader access with needed controls to reduce frictions between domestic and international markets, facilitate access to safe and liquid settlement mediums, ease balance of payments adjustments and thus improve international monetary relations. Those advantages may shift relative preferences of holding monies towards greater diversification in international payments.
The Digital Dollar Project published for comment initial proposals for nine distinct pilot programs to identify practical opportunities to test and evaluate key features of a U.S. central bank digital currency (CBDC) or “digital dollar.” The pilot programs are designed to explore how a U.S. CBDC could serve important public policy goals while addressing specific challenges faced by different economic stakeholders, including consumers, businesses, financial institutions, and fintechs. Some of the most compelling opportunities available with a U.S. CBDC include development of low-cost digital wallets as on-ramps to bank-lite products for un- and underbanked populations.
The U.S. Office of the Comptroller of the Currency (OCC) is proposing to make a special purpose national bank charter available to fintech companies that provide banking products and services. The idea behind these fintech charters is that banking is made up of three separable activities, payments, lending, and deposit taking, and the most burdensome bank regulations stem from deposit taking. Because the Federal Reserve regulates deposit-taking banks, it would not directly supervise banks with fintech charters, but as national banks, they would have access to the Fed’s real-time payment system, and be entitled to use its emergency liquidity facilities.
Professor Saule Omarova of Cornell Law School and several of her colleagues argue that the charters are “a dangerous power grab” based on an ambiguity in the National Banking Act of 1863. That law allowed the OCC to give charters to companies engaged “in the business of banking” but did not define exactly what that was. So the OCC is playing “an interpretive trick,” she says: “just because Congress never specified what banking is, [they] think they can decide.” State regulators tcould also lose power if the fintech charters are widely adopted. The New York Department of Financial Services, has sued the OCC to block the fintech charters; the case is on appeal.
Chen Yulu, deputy governor of the People’s Bank of China (PBOC), reportedly said that China should quicken the pace of research and development of the central bank digital currency, while ensuring that it is controllable and safeguards the security of payments.
Bank of Japan Governor Haruhiko Kuroda reportedly said the central bank will start experiments next spring on a digital yen to consider various requirements and fundamental principles for doing so in the future.
A Financial Stability Board (FSB) report found that the expansion of BigTech firms in financial services in emerging market and developing economies (EMDEs) has generally been more rapid and broad-based than that in advanced economies. Lower levels of financial inclusion in EMDEs create a source of demand for BigTech firms’ services, particularly amongst low-income populations and in rural areas where populations are under-served by traditional financial institutions. This has been supported by the increasing availability of mobile phones and internet access.