THE THREAT AND THE PROMISE OF DIGITAL MONEY / THE FINANCIAL TIMES OP EDITORIAL

The threat and the promise of digital money

Cryptocurrencies look overhyped, the new payment platforms useful and Libra worrying

Martin Wolf


© James Ferguson


What is the future of money in a digital age? This was the subject of an event at the Peterson Institute for International Economics last week.

This seminar was the intellectual high point of my time at the annual meetings of the IMF and World Bank in Washington. The first answer to that big question is: “It is complicated.” The second is: “It is really important” — especially since Facebook’s Libra project.

This new idea has forced policymakers to think hard — and rightly so. Money is too important to be left to the private sector alone. Like the law, it is a foundational public good. The state has always had oversight over money and must continue to do so. Lael Brainard, a governor of the US Federal Reserve, made clear that it will, in an excellent speech at the event. But the Fed is not the only regulator to be thinking about these new players in the monetary system.

How should they do so? In the panel I moderated, Hyun Song Shin of the Bank for International Settlements made a distinction between the “architecture” of the monetary system and the “technology” that enables it. Today’s monetary system offers an example. The bulk of the money we use is the byproduct of lending by private institutions (banks).

Accordingly, our money mostly consists of the transferable debts of banks to account holders. A century ago, the accounts were on paper. Now, they are on electronic registers. But the architecture has not changed.




So, is what we are now seeing a change in the architecture or merely in the technology? To answer this question, it is useful to recall the three functions of money: unit of account, store of value and means of payment. Today, the unit of account is established by the state, but the store of value and payments systems are mostly provided by banks. In this context, consider three forms of digital money: cryptocurrencies; established digital payment systems, such as Alibaba’s Alipay; and Facebook’s Libra.

Cryptocurrencies offer new units of account, stores of value and means of payment. Thus, they also offer a new architecture for creation and use of money. But it is a lousy architecture. As Ms Brainard put it in her speech: “Early iterations of cryptocurrencies have exhibited extreme volatility, limited throughput capacity, unpredictable transaction costs, limited or no governance, and limited transparency.” They are an anarchistic fantasy.




The new payment systems are, however, both real and large. According to Ms Brainard, “in China, consumers and businesses participate in two mobile networks, Alipay and WeChat Pay, which by some accounts handled more than $37tn in mobile payments last year”. At the very least, these systems transfer retail payments to new players. But, as an important paper by Markus Brunnermeier and Harold James (both of Princeton) and Jean-Pierre Landau (of Sciences Po), argues, digital payment systems also potentially create rival ecosystems, with payments linked to data networks, with banking and asset management as subordinate functions.




Yet, while these systems change how retail payments are made, their implications for the monetary system must be kept in proportion. These providers use bank or central bank deposits as stores of value.

Moreover, the payments balances of Alipay and WeChat only amount to about 2 per cent of bank deposits in China. Above all, wholesale payments dwarf retail payments. Given intraday fluctuations and scale, wholesale markets depend on intraday credit from the central bank.

They cannot operate on a “cash in advance” basis.

Libra, however, promises a new global payment system supported by a “stablecoin” backed in a non-transparent manner by assets denominated in national currencies. This raises a host of issues: money laundering; financing of crime and terrorism; consumer protection; the effect on monetary policy and stability; impact on the banking system; and effectiveness of global regulation. “Move fast and break things” is the last motto the world needs in finance. Moreover, Facebook has not proved itself worthy of trust, to put it mildly.




Where does this leave governments, central banks and regulators? Watchful, one hopes. But they also need to recognise new opportunities for faster and cheaper payments, particularly cross-border, and greater financial inclusion.

So far, however, cryptocurrencies are overhyped, the new payment platforms useful and Libra worrying.

Yet, in this new digital world, central banks also need to ask themselves whether and how to create their own digital money. This should not just be to replace increasingly outmoded paper cash (now a 1,000-year-old technology), but also to compete with commercial bank deposits. Just as the internet has ended up as more of a source of enhanced government control than one of greater freedom, as libertarians hoped two decades ago, so the revolution in digital money might allow the central bank to replace the liabilities of private banks with its own. In this way, the seignorage from money creation, now enjoyed by private banking, would be transferred back to taxpayers. The Fed does not intend to pursue this path. But Sweden is thinking of doing so, as Stefan Ingves, governor of the Riksbank, stated at the Peterson Institute seminar. Others may follow.




Some of the new ideas may prove far less revolutionary than many hoped. Some may be rejected outright. But others look far more valuable, especially that of central bank digital currency.

That could transform today’s monetary systems, which might turn out to be a really good thing. Let digital technologies fuel experimentation, cautiously.