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17 September 2019

Financial Times: Central banks should not issue digital currencies


Rather than rush to compete with the likes of Facebook, Tether and WeChat, or ban them outright, central banks would be better off following the PBoC model of bringing digital payments into the central banking fold and focusing on what they do best: managing stability, writes Izabella Kaminska.

Since the official sector won’t step up, the theory goes, central banks should fill the void — and slow the growth of nonbank competition — by issuing digital currencies to the general public. This is arguably easily done because central banks already provide highly efficient digital real-time settlement services to the banks they oversee. CBDC enthusiasts argue other benefits come in tow: they would allow central banks to impose negative interest rates very broadly, when necessary, and supply the market with unlimited safe assets.

Yet there are good reasons why such institutions have historically steered clear of retail services, preferring to focus on wholesale transactions with institutions they license and control.  For one thing, there are competition and privacy concerns. There is a genuine risk that CBDCs could make it much harder for banks to attract funds, and in so doing undermine their ability to make loans. That could in turn put pressure on central banks to enter the lending market directly to compensate. A central bank that is the cheapest provider of both retail payments and loans would begin to resemble a monopolistic state bank. This is hardly progress.

Even without the competition issue, central banks should be wary of moving into retail. Providing good quality services that comply with modern regulatory standards in an extremely competitive environment is no easy task. Central banks are simply not well equipped to be profit-oriented, customer-facing specialists.

Full article on Financial Times (subscription required)



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