Regulators may be setting their sights on how to regulate Big Tech – as we discussed in last month's blog post – but, as central banks and finance ministers prepare to convene in Washington in April for the IMF/World Bank Spring Meetings, the issue poised to generate the most interest from the cryptocurrency community is whether, how, and why central banks might accelerate their ability to issue central bank digital currencies (CBDC).
On March 22nd, the General Manager of the Bank for International Settlements (BIS), Augustine Carstens, delivered a speech that provided hints about the preferred approach within the central bank community. The bottom line is that momentum continues to build towards central bank participation in the digital currency trend. Regulatory policy regarding payment systems and competition/antitrust law are only just starting to surface in the public policy dialogue. This post looks at the current state of play.
What the BIS General Manager Said
Carstens’s speech covered some familiar ground. The General Manager noted that technically, central banks already issue some CBDC through their settlement operations for commercial banks. He also distinguished between wholesale and retail CBDC, delineating the operational challenges associated with a retail CBDC.
The speech provides intriguing data about current CBDC activity by central banks globally. The data show that 100% of all BIS member central banks are actively conducting research on CBDCs.
This should come as no surprise. Both the BIS and the IMF – as well as leading central banks – over the last two years have been publishing analysis regarding CBDCs. The more interesting data shows that roughly 50% of central banks have reached the proof of concept stage and roughly 10% of central banks have reach the pilot program/development stage. The chart from the speech appears below:
The data comes from a 2018 study conducted by the BIS’s Committee on Payments and Market Infrastructures (CPMI) covering more than 60 central banks which cover 80% of the world’s population.
The data suggests that at least 6 central banks are actively engaged in development and pilot arrangements for issuing a CBDC that goes beyond the current bank payment system operations and at least 30 central banks are working on proofs of concept. Sadly, Mr. Carsten’s speech does not provide details – much less a comparative analysis – on what kind of pilot programs or proofs of concept are underway at central banks globally. While surveys indicate that the majority of central banks do not plan to issue CBDC in the medium term, the level of activity suggests that an impressive number of central banks will be ready to issue CBDCs sooner than most expect.
What It Means – Regulatory & Antitrust Challenges for Banks and Cryptocurrency Issuers
After last year’s CPMI Report, it should come as no surprise that central banks fret over the potential monetary policy implications associated with issuing official CBDCs. Carstens acknowledged this worry, noting in passing that a CBDC “would change the demand for base money and its composition in unpredictable ways.”
This is not a hypothetical statement. As he notes in the speech, in countries where digital payments are the norm at the retail level (e.g., Sweden, Denmark), “the demand for cash has fallen substantially.” The shift in demand for cash has a material impact on monetary policy targeting. IMF research released on March 1, 2019 agrees, but also indicates that a CBDC will only materially impact the demand for cash in economies where reliance on digital payments at the retail level is low.
The more interesting policy implications arise, indirectly, in the realm of payment systems regulation.
If policy formulation follows Carsten’s logic, central banks will leave the retail interface to private commercial banks and other providers of payment services (e.g., debit card issuers and credit card issuers). This would place central banks directly in competition with private cryptocurrency issuers, particularly if those issuers are themselves commercial banks.
The challenge, of course, is that commercial banks are starting to experiment with digital currency issuance at the wholesale level, not the retail level. As this FinTech RegTrends blogpost recently noted, JPMorgan’s JPM Coin promises “instantaneous” settlement synced to smart contract execution, all driven by blockchain technology which creates real competition for payment services between the commercial bank and the Federal Reserve’s Real Time Gross Settlement System. At the retail level, the only digital currencies currently available are issued by non-state actors and conversion to fiat currency remains complicated, in large part because most payment systems restrict access to currencies only issued by sovereigns. Leaks to the New York Times indicate that non-bank messaging platforms like Facebook are also exploring digital currency issuance.
Creation of a CBDC would thus add to the types of technology-powered items being exchanged for value within economies. No serious research has yet surfaced regarding exchange rate issues if, and when, non-state issuers (or their users) seek to convert their digital currencies into fiat currencies at commercial banks. Beyond the valuation issues, concrete regulatory policy issues will also arise because central banks will have to define whether, and under what conditions, privately issued cryptocurrencies will be permitted to flow between banks through the official sector payment system.
Policymakers are starting to debate these issues indirectly by providing views on whether or not individuals should have direct access to, and accounts with, the central bank in order to use a CBDC. Carstens argued that the Soviet experience with having the central bank serve retail customers illustrates why it is far from optimal for central banks to be so closely connected to consumers. IMF economists seem to be more friendly to the idea.
The March 2019 IMF research suggests that central banks should provide digital cash “at no cost to those that use it or retailers and billers that accept payments from it” in order to increase reliance on CBDCs relative to cash. By reducing the transaction cost, the lower fee would create incentives for retailers “to encourage consumers to adopt” the CBDC. They further suggest that policymakers rely on antitrust/competition law enforcement actions based on payment services fees in order to “provide a check on the market power of suppliers of other payment instruments.” The implication is that CBDC issuers will want to ensure that their own currency crowds out alternative issuers.
The policy debate regarding CBDCs and cryptocurrency regulation is just getting started. However, as noted above, research and official speeches – thus far – indicate that policymakers will first address payment system access and antitrust regulatory policy issues as they prepare to issue electronic currencies. Monetary policy will of course also remain a key focal point.
The next inflection point comes in April, when central bank governors and finance ministers meet in various formations during the IMF/World Bank Spring Meetings. Various ministerial meetings also occur at this time, notably the Group of Twenty and the Financial Stability Board.
We are still very far away from concrete policy proposals. Shifts in policy in this area will remain incremental throughout 2019, and possibly 2020. The best way to manage exposure to unanticipated policy shifts is to watch closely the evolution of technical payment systems policy over the near to medium term.
A version of this post originally appeared on The FinReg Blog hosted by the Global Financial Markets Center at Duke University School of Law.