Public and Private Money Can Coexist in the Digital Age

IMF Blog, February 18, 2021

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Public and Private Money Can Coexist in the Digital Age

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Bibliographic details

• Authors: Tobias Adrian, Tommaso Mancini-Griffoli
• Published: February 18, 2021

Overview and authorship

• Title: Public and Private Money Can Coexist in the Digital Age
• Authors: Tobias Adrian, Tommaso Mancini-Griffoli
• Date: February 18, 2021

Dual monetary system: structure and advantages

• Today’s world is characterized by a dual monetary system: privately-issued money built upon a foundation of publicly-issued money by central banks.
• Advantages of the dual system:
  • Innovation and product diversity, mostly provided by the private sector.
  • Stability and efficiency, ensured by the public sector.
• Tradeoff: innovation and diversity vs. stability and efficiency — more of one usually means less of the other.
• Policy choice for countries (especially central banks): how much to rely on the private sector versus how much to innovate themselves; dependent on preferences, available technology, and the efficiency of regulation.

Public-private coexistence: mechanics and rationale

• Fundamental symbiotic relationship: private money’s option to redeem into perfectly safe and liquid public money (notes and coins or central bank reserves) underpins stability.
• Key mechanisms and enablers:
  • Redemption at a fixed face value into central bank currency makes private monies a stable store of value.
  • Sound regulation and supervision, government backstops such as deposit insurance and lender last resort, and partial or full backing in central bank reserves.
  • Redemption enables interoperability: transfers between different banks are settled via central bank currency that both banks trust and hold.
  • Interoperability spurs competition, innovation, and diversity of money forms.
• Conclusion: the option of redemption into central bank currency is essential for stability, interoperability, innovation, and diversity; a system with only private money would be too risky, and one with only central bank currency could miss important innovations.

Central bank currency in the digital age: pressures and technological challenges

• Uncertainty about whether central bank digital currencies (CBDCs) will displace privately-issued money or allow it to flourish depends on central banks’ ability and willingness to consistently and significantly innovate.
• CBDCs analogies and implications:
  • CBDCs are akin to both a smart-phone and its operating system: settlement technology (bits transferred) and a form of money (functionality and appearance).
  • Central banks would need to act more like Apple or Microsoft to keep CBDCs at the technology frontier and in users’ wallets.
• Technological dynamics:
  • CBDCs may be managed from a central database initially, but might migrate to distributed ledgers as technology matures.
  • Major ledger technologies may change following advancements, requiring frequent architectural redesigns.
  • User needs and expectations will evolve quickly and unpredictably; new transfer modalities (e.g., automated transfers by chips embedded in products) may demand new money features.
• Supply-side pressures:
  • Private sector will continue to innovate with new eMoney and stablecoin schemes.
  • Regulators will seek to contain risks while questions arise about interaction between private digital monies and CBDCs.

Partnership opportunities with the private sector

• Central banks need not be alone; CBDC design can encourage private-sector innovation on top of it.
• Design tools and possibilities:
  • Open application programming interfaces (APIs) could enable a developer community to expand CBDC usability beyond plain e-wallets.
  • Example add-on services: automated payments (pay-on-receipt), look-up functions to send money using phone numbers.
  • Vetting add-on services for safety will be essential.
• Coexistence and synthetic/digital private monies:
  • Some central banks may allow other forms of digital money to co-exist, leveraging CBDC settlement functionality and stability—analogous to parallel operating systems.
  • A private digital money would be a stable store of value if redeemable into central bank currency (digital or non-digital) at a fixed face value, achievable if fully backed by central bank currency.
  • It would be an efficient means of payment if settlement is immediate on its network and networks are interoperable through corresponding moves of central bank currency.
  • This form of digital money (previously called synthetic currency) could co-exist with CBDC under a licensing arrangement and regulatory framework that fulfills public policy objectives:
  • Operational resilience
  • Consumer protection
  • Market conduct and contestability
  • Data privacy
  • Prudential stability
  • Financial integrity could be ensured via digital identities and complementary data policies; partnering with central banks requires a high degree of regulatory compliance.

Policy implications and country choices

• If countries adopt CBDCs, they should consider leveraging the private sector to keep pace with technological change and user needs.
• The dual-monetary system can be extended to the digital age:
  • Central bank currency, regulation, supervision, and oversight remain essential to anchor stability and efficiency.
  • Privately-issued money can supplement the foundation with innovation and diversity—potentially even more than today.
• Final policy note: where central banks position themselves along the continuum between private-sector and public-sector provision of money will vary by country and ultimately depend on preferences, technology, and the efficiency of regulation.

Engagement

• The authors invite reader feedback via a 3-question survey on IMFBlog.

IMF Blog post by Tobias Adrian and Tommaso Mancini-Griffoli, February 18, 2021.

References

• in the past