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Five hurdles to mint a CBDC

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The author was Vice Chairman Oliver Wyman and senior adviser to Mark Carney as Governor of the Bank of England.

Investor Hugh Hendry once quipped, “There are only five people in the world who understand money.”After the Bank of England and the UK Treasury I fired the first shot this week As for the UK central bank digital currency, we hope some of them can provide input.

The crux of the issue is how central bank digital currencies can co-exist with our financial system and add to it without harm. At stake is not just the type of tokens used for payments, but the structure of finance itself.

To avoid risk, many central bankers are proposing the creation of a “Goldilocks CBDC”. Not so much in circulation as to cause a runaway in the banking system as an individual switches savings to her CBDC, but not so little that it is irrelevant.

The European Central Bank has already proposed limiting CBDC to just €3,000 per person. The Bahamas, where his oldest CBDC is located, has limits on how much you can travel in a day.of BoE The plan proposes caps of between £10 and £20,000, and no interest will be paid on the new digital pounds.

But is it really worth spending billions on something so limited and risky? And what are the use cases? A shiny new digital token is unlikely to help the unbanked. His M-Pesa mobile money system in Kenya has had more impact than any of his CBDC pilots.

The history of money suggests that creating a Goldilocks scheme would be difficult.But it also marks the financial false start of many of the technologies and ideas that were later adopted: the first Finnish Avant, sometimes called his CBDC, and the British mondex It’s long since gone, but some of the features of storing cash on cards have been adopted.

Where are you going? Here are five considerations.

First, work needs to be done to understand why all previous CBDC pilots have been disappointed. His CBDC in the Bahamas, known as the Sand Dollar, is struggling to gain traction or promote social inclusion, according to a new study from the London School of Economics. His CBDC per capita is just 86 cents compared to his $1,365 per capita cash in this country. Nigeria has also struggled with penetration, with less than 0.5% of her Nigerians using eNaira, and China is reportedly unsatisfied with the level of use of its digital yuan pilots.

Second, do not underestimate the potential financial stability and implications for monetary policy. Building a safer banking system after the financial crisis has struggled. A friend of mine, Steve Eisman, a fund manager who famously bet on subprime mortgages before the financial crisis, says the banking system is now the strongest he’s ever been in his lifetime.

But a bank run is far from a theoretical risk in turbulent times. The Eurozone crisis saw a company with a banking license shift funds from French banks to his ECB. In times of crisis, individuals likewise may move him to the CBDC. The Bank of England announced a scenario last year where 20% of deposits could flow out of bank accounts into new digital currencies.

Third, we need to focus on wholesale rather than retail. Central banks are not suitable for providing direct accounts to retailers. Rather, they can make a big impact behind the scenes and make wholesale payments faster and safer, for example his BoE’s new Omnibus account. Ideas I Suggested A 2019 report to the BoE said it could be a platform for innovation.

Fourth, we only use systems that have been tested in large-scale battles. Central banks should learn lessons from the Australian Securities Exchange. The Australian Stock Exchange recently wrote off A$250 million ($170 million) on a failed blockchain payment system that was only 63% developed after seven years. The hurdles for critical market infrastructure should be very high.

Finally, money is too important to be left to central banks alone. The country needs to have an honest discussion with the central bank about his CBDC spending, competition issues with private banks, and privacy implications if financial structures can be traced before committing to his more radical CBDC. there is.

Whatever the future of money, the boom and bust of cryptocurrencies underscores the need for a well-regulated fiat currency. “It’s not that the IT revolution will take away the demand for money (except for Orwell’s command economy, it probably won’t even be there),” said Hugh, who really should be one of his five. claims Charles Goodhart of Even if the BoE ultimately decides against his CBDC, the investigation could encourage faster payments, better messaging standards, and greater security.

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