20 January 2022

BIS's Carstens speeech: Digital currencies and the soul of money

My main message today is simple: the soul of money belongs neither to a big tech nor to an anonymous ledger. The soul of money is trust. So the question becomes: which institution is best placed to generate trust?

In a speech at this university four years ago, I addressed the growth and pitfalls of cryptocurrencies such as Bitcoin.¹ Since then, the debate on the future of money has grown much broader, but it continues to touch on the very foundations of the monetary system.

Today I will take inspiration from your institution's namesake. The great Johann Wolfgang von Goethe was a well-travelled cosmopolitan and a true universalist. He was a poet and novelist, a playwright and theatre director, a scientist and statesman. Remarkably, his work anticipated some key economic issues of our time, including central bank independence.²

Goethe's work confronts fundamental questions. In his masterpiece, Faust, he addresses the "Gretchenfrage" – a term that has become synonymous with a fundamental question of life.

For central bankers, the Gretchenfrage has always been: what is the soul of money? Today, technologists, innovators and futurists are offering new answers to this question. Some say that in the future, money and finance will be provided by just a few big tech corporations. Others dream of a decentralised system in which blockchains and algorithms replace people and institutions. And maybe, all of this will take place in the Metaverse.³

My main message today is simple: the soul of money belongs neither to a big tech nor to an anonymous ledger. The soul of money is trust. So the question becomes: which institution is best placed to generate trust? I will argue that central banks have been and continue to be the institutions best placed to provide trust in the digital age. This is also the best way to ensure an efficient and inclusive financial system to the benefit of all.

Let me elaborate on this theme, starting with the institutional foundations of money.

The institutional foundations of money

Money is a societal convention. People accept money today with the expectation that everyone else will accept it tomorrow.

At its core, trust in the currency holds the monetary system together. Like the legal system, this trust is a public good.⁴ Maintaining it is crucial for the effective functioning of societies.

Trust requires sound institutions that can stand the test of time. Institutions that ensure the stability of the currency as the economy's key unit of account, store of value and medium of exchange, and that guarantee the safety and integrity of payments.⁵

Throughout a history measured not in years but in centuries, independent central banks have emerged as the key institutions that underpins this trust in money. Alternatives have often ended badly.⁶ It is for good reason that most countries have established central banks with a clear mandate to serve society. As public policy institutions, central banks have proven successful in upholding trust while adapting to societal and economic change.⁷

In pursuing these mandates, central banks have managed to constantly adapt to technological, economic and societal changes. This is why central banks are actively engaging with digital innovation. They are working on new central bank public goods such as wholesale financial market infrastructures, retail fast payment systems and central bank digital currencies.

Of course, in a market-based system, the private sector remains the main engine of the economy. In today's two-tier monetary system, deposits are by far the most prevalent form of money held by the public, since cash holdings are relatively small. Banks, in turn, place their own deposits with the central bank as "bank reserves".

In this case, central banks provide an open, neutral, trusted and stable platform. Private companies use their ingenuity and dynamism to develop new payment methods and financial products and services,. This combination has been a powerful driver of innovation and welfare.

But we cannot take this successful symbiosis for granted. Some recent developments may threaten money's essence as a public good, if taken too far.

To illustrate this, let me offer three plausible scenarios for the future of money.

• In the first, big tech stablecoins compete with national currencies and against each other too, fragmenting the monetary system.
• The second relates to the elusive promise of crypto and decentralised finance, or "DeFi", which claims to offer a financial system free from powerful intermediaries, but may actually deliver something very different.⁸
• The third realises the vision of an open and global monetary and financial system that harnesses technology for the benefit of all.

You can probably guess which vision I espouse. I will close by discussing what it will take to achieve it.

Big tech stablecoins

Let's start with stablecoins issued by big techs. Stablecoins are cryptocurrencies that base their value on collateral, often in the form of deposits with commercial banks or other regulated financial instruments. They thus piggyback on the credibility of sovereign currencies. Stablecoins are issued in this first scenario by big techs, or large companies whose primary activity is digital services.

Big techs have made important contributions to financial services. Their new and innovative products have allowed hundreds of millions of new users into the formal financial system.⁹

In the process, they have also achieved systemic relevance in several major economies. For example, big techs channel 94% of mobile payments in China.¹⁰

This trend could accelerate if one of these firms were to grow in an unfettered way and create a dominant, closed ecosystem around its own global stablecoin.¹¹

Once established, a company is likely to erect barriers against new entrants, leading to market dominance, data concentration and reduced competition. In addition, its stablecoin could disintermediate incumbent banks, which could even pose a risk to financial stability.

Moreover, if one big tech stablecoin takes hold, others will seek to imitate it. We may end up with a few dominant walled gardens that compete both with each other and with national currencies, thus fragmenting the national and global monetary systems. As the initial benefits fade, the well-known problems of market concentration will quickly follow.

In addition, the same economic forces that foster inclusion can also cause discrimination, privacy violations and market concentration. One reason is that data are subject to large externalities. For example, one person's data can reveal information about others.¹² Moreover, it is possible that the data holder ends up knowing more about users' behaviour than users do themselves.¹³ Armed with exclusive access to data, big techs can quickly scale up and dominate markets.

Let me be clear: it is undesirable to rely solely on private money. Users may initially find great convenience in paying with a big tech global stablecoin. But in doing so they may be handing the keys to our monetary system over to private entities, driven by profits and accountable only to their shareholders and other insiders. Such an arrangement could erode trust. A public good like money needs oversight with the public interest in mind....

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