In times of crisis, topics and people who had lurked unrecognised suddenly become the centre of attention and the subject of debate. In the 2008 financial crisis, it was central bankers who emerged, blinking, into the spotlight of unaccustomed publicity. In the pandemic, alongside the indispensable health professionals and epidemiologists, we have seen digital payment and central bank digital currency specialists take centre stage.
Last month’s OMFIF Digital Monetary Institute Symposium convened over 1,700 participants from 120 countries, including senior central bankers and public officials on the one hand, chief executive officers of pioneering digital economy companies on the other and pretty much every other profession with an interest in financial services. Two years ago, we could just about have held the colloquium in a phone box. In two days of discussion, debate and often heated argument, we identified five major trends that will shape the future of digital money.
Against the tragedy of the pandemic, we have seen a rapid acceleration of the move from a physical economy towards a digital one. Nowhere has this been more apparent than in financial services and payment methods, with a marked decline in the use of cash. Both financial markets and the real economy will digitalise further, driven by a combination of new technologies, public policy and entrepreneurial zeal. Not all incumbents will survive. Not all innovators will succeed. Managing the balance between stability and innovation will be tricky.
CBDC not if but when
A digital economy requires digital payment instruments. Entrepreneurs are willing and able to provide them. We are already seeing the birth of retail central bank digital currencies in the Bahamas and China, with more to follow. Experiments with stablecoins and tokens are taking place in capital markets and will become more widespread. There are many valid policy reasons for central banks and governments to introduce a CBDC, but none more compelling than the risk of losing financial and political sovereignty to either the private sector or to other sovereign actors. Major economies will be wary of the potential threats to financial stability and fractional reserve banking posed by some varieties of CBDC, but will be persuaded, sooner rather than later, to juggle competing interests.
Abundant private currencies
A tapestry of currencies will soon cover the world. These will be both quasi-fiat (such as stablecoins) and private, with many occupying the space in the middle. Money will be dumb, smart, local, international, private, public and all things in between. It will be principally digital in form, although there will also be physical representations, particularly of sovereign currencies. Cryptocurrencies will continue to bloom and perish with equal rapidity. Some will become institutionalised investment assets, though probably not widely accepted payment instruments. Physical cash will continue to exist for the foreseeable future, even if usage declines.
Cross-border currency competition
Just as there will be intensifying competition within national boundaries between public and private payment instruments, so too will there be growing competition between nation states and currency areas. Whether this will be waged by private sector proxies or by central banks as an extension of national policy remains to be seen. This competitive arena will extend to regulation, governance and technology with universal agreement about the benefits of co-operation and interoperability and fierce disagreement about who should have the whip hand.
Arm’s length public-private partnerships
The private sector is realising that, whatever utopian dreams some have, it is not going to be allowed an unopposed takeover of a fiat financial infrastructure, which sovereign states have spent several centuries building. Central banks appreciate that, whatever their manifold capabilities, they have neither the appetite nor the capacity to launch and run accounts for millions of citizens. In designing, piloting, launching and running CBDCs, there will have to be a degree of partnership and co-operation between private and public sectors. The balance of power, activities and functions between the two will vary widely between countries. Partnerships will range from the enthusiastic to the wary, but going it alone is unlikely to be seen as a viable long term option, except in a narrow range of circumstances.
‘I never make predictions, especially about the future’ has been attributed to a number of seers. I am confident that of these five predictions, not all will be correct. I am just not sure about which ones. I am certain that we shall be hotly debating the subject at the next annual DMI Symposium.
Philip Middleton is Chairman of the OMFIF Digital Monetary Institute.