I know you like the security of cash, the tangible feeling of holding a new
banknote. It helps you manage your spending and reminds you of being part
of a monetary union with shared values and a commitment to price stability.
But remember that time your wallet was stolen? Cash isn’t very safe. Plus,
you have to make a detour to withdraw cash from the bank, after the nearby
branch closed. Since the start of the pandemic, fewer stores accept cash
because of health concerns. Even the baker did us a favor the other day—do
you remember? But next time he may not have change for your €50.
You call me “the American” when I pull out my cards. Indeed, here it’s all
I use; I find it so much easier to pay!
But not everyone will agree. People without bank accounts rely on cash even
more than you. If it disappears, what will happen to them?
They may one day use central bank digital currency. Think of it as a
digital form of cash that you can hold on your phone, in an app called a
digital wallet, a bit like the one we use to send messages to each other.
You could transfer money there from your bank account, or simply hold
balances you receive from others. Instead of sending you a picture via
phone, I could send you those euros I didn’t spend.
Well, to the extent I could hold a digital wallet in euros. I would
probably have to register for one and provide my passport and other
information. Not for the state to snoop on me, but to make sure money
doesn’t go to the wrong people, like a terrorist group. No, don’t worry
mother, I don’t know any. Besides you, to whom would I send money anyhow?!
In any case, these privacy concerns are very important. Cash offers
anonymity. Had we eaten our cakes on the way home from the bakery, no one
would have known we had purchased them. To what extent will countries allow
spending in digital currency to be anonymous is an open question. Perhaps
you’ll get away with it when buying cake, but not a new car.
You may smile as you read this and think I have gotten carried away—that
this whole thing will only exist in sci-fi movies. Not at all. The Bahamas
already has a central bank digital currency. And many other countries are
testing or investigating them. If you ask me, it’s a question of when, not
if.
The potential advantages are considerable. Some countries want to lower
costs of handling cash, especially across vast territories or multiple
islands. Some are keen to improve financial inclusion, so those without
bank accounts still have access to a means of payment as cash use
diminishes. For many, payments are the first step to accessing other
financial services like savings accounts and loans.
Some central banks are concerned that their payment systems are
increasingly dominated by a few large, and often foreign, companies. So
they aim to offer an attractive domestic alternative, that would also serve
as a backup and induce the private sector to offer efficient services at
low cost.
Think of innovation too—a new digital currency may be like a personal
computer or a smartphone, spurring the development of new innovative
services and applications.
Despite these advantages, central banks are proceeding cautiously, and
rightly so. Payments are systemically important. They can’t go wrong,
crash, be subject to cyberattacks, or be used by criminals to launder money
or finance terrorism.
There are other risks too. Perhaps the most important is related to bank
funding. What if you decided to withdraw your savings from the local bank
and hold only central bank digital currency? I know, you’ve grown
suspicious of big banks since the last crisis. But banks are important to
channel your savings to finance someone else’s project. Maybe our baker
friend needs a loan to get a new oven. So it’s important to find ways to
limit vast or sharp shifts away from bank deposits. Some central banks may
impose fees if you hold more than a certain amount of digital
currency—we’ll see.
Similarly, people may choose to hold a digital currency issued by a foreign
central bank, if it is deemed safer, more stable, or perhaps more efficient
and easier to use. That would be a problem for the domestic banking system
and for central banks trying to steer their economy through interest rates
on assets in domestic currency. So central banks may have to find ways to
manage cross-border flows in and out of digital currencies. That’s a big
open issue we’re working on.
Finally, the credibility of central banks might be at risk, and the demands
on them will be significant. Can you imagine a central bank becoming more
like a software company, constantly needing to remain on the cutting edge
of technology and serve diverse and rapidly evolving user needs?
Fortunately, central banks don’t need to do it alone. The private sector
can partner with them to extend the functionality of digital currencies.
For instance, a private firm could allow you to send money to a phone
number in your address book (yours, Mother, is the first in my book), which
is linked behind the scenes to a verified user identity. Private firms may
also design the digital wallets to hold official digital currencies, and
could even create their own digital currencies, though fully backed and
supervised by the central bank (unlike many of those crypto coins out
there).
But don’t worry too much about those technical details; that’s my job. You
will just want to know that you’re using a safe, stable, and efficient
means of payment.
Now you know what I’m up to, and why I’m so excited about my work. Then
again, I know you’ll insist on paying for cake next time we meet—probably with a crisp paper note!
Very sincerely yours,
Tommaso