I’ll be publishing my next monthly Fintech Monitor on Monday, but here’s an update on last edition’s discussion of algorithmic stablecoins – both bad news and good news!
This U.S. Federal Reserve paper identifies some high-level environmental preconditions that support a general-purpose CBDC in the United States. These preconditions are necessary, though not sufficient, and can be broadly grouped into five areas: clear policy objectives, broad stakeholder support, strong legal framework, robust technology, and market readiness. Within each area, detailed elements are discussed. These areas and elements are not exhaustive because many systems, tools, processes, and structures will need to be in place for a CBDC. In addition, many of these elements are interconnected. For example, engaging with a broad array of stakeholders and monitoring market readiness could inform clear policy objectives and vice versa. The paper does not attempt to prescribe how to address these preconditions; it aims to spark further inquiry.
The Bank of Jamaica (BOJ) announced plans to begin a central bank digital currency (CBDC) pilot in the second or third quarter of 2021. Over the last couple months, the BOJ has undertaken the requisite preliminary work relating to assessments and protocols aimed at receiving government approval for a pilot to run for a couple of months and be finished by the end of the year. If the pilot is successful, the BOJ aims to issue the new CBDC to the public in early 2022. The BOJ highlighted the benefits of CBDC which include increased financial inclusion, and providing another means of efficient and secured payments. Also, for deposit-taking institutions, the BOJ claimed that CBDC represents an opportunity to improve cash management processes and costs.
As the law will determine what type of central bank digital currency (CBDC) can be issued in each jurisdiction, getting the legal model right is a crucial step in introducing one. The current statutory language seems to provide the ECB with enough room to offer a digital euro directly to the public through digital accounts if it so chooses. However, for example, the US and Brazilian central banks are authorized to establish relations only with a limited set of institutions, notably banks, not with people or corporations. Without a change to these rules, digital dollars and digital reais would have to be distributed to the public through intermediaries, just like cash is made available today through banks. For all central banks considering issuing a CBDC, the time to tackle the legal troubles and seek legislative reform is now, because reaching a political consensus on this model may take time, since CBDCs raise many contentious issues, from changing the business of banking to creating new privacy risks.
The Bangko Sentral ng Pilipinas (BSP) established the Payments and Currency Management Sector (PCMS) to manage the interplay of physical currency and digital money. PCMS is tasked to maintain the safety and integrity of the local currency and to ensure a well-functioning payments and cash ecosystem that supports sustained and inclusive economic growth, in alignment with the BSP’s Digital Payments Transformation Roadmap. The new sector, which consolidates existing currency and payment management units, is responsible for producing banknotes, coins, and securities documents; refining gold; and printing of cards for the national ID.
The Bank of Ghana has launched a new regulatory and innovation sandbox to provide a controlled testing environment for new financial products and services, in partnership with US-based technology firm Emtech. Emtech has built cloud-based software specifically for central banks. It said the sandbox would allow financial firms to interact with the central bank to test digital financial products while evolving [an] enabling regulatory environment. The sandbox is open to banks, specialised deposit-taking institutions and payment service providers.
“Bitcoin is vulnerable to government surveillance and prohibitions that could quash crypto exchanges and drive trades underground. But it arguably could survive underground better than could a banking system based on commodity redeemability that must be openly accessible to be trustworthy. If Bitcoin will continue to thrive as an investment and medium-of-exchange-in-waiting “until the authorities do better” at managing fiat money (and at allowing financial privacy), then Bitcoin may thrive for a long time to come.”
* The views expressed herein are those of the author and should not be attributed to the International Monetary Fund, its Executive Board or its management.