CASH MANAGEMENT: MACRO/RESEARCH
several years, and in April 2021 announced the joint creation, with HM Treasury, of a Central Bank Digital Currency Taskforce to coordinate the exploration of a potential UK CBDC.7
BoE Governor Andrew Bailey
has also dismissed the idea that private cryptocurrencies will gain widespread acceptance. Speaking at the World Economic Forum in January 2021,8
Bailey
commented that, while digital innovation in payments would continue, bitcoin and other private cryptocurrencies lacked the essential features to make them more than transitory.
The fact that the world’s central banks have warmed to the idea of backing a digital currency marks something of a sea change over the past decade. Writing in February 2020,9
Euromoney Editorial Director Peter
Lee commented: “First central banks ignored cryptocurrencies, then they mocked them, next they fought them and now they are building their own. Before long, CBDCs will be in use, with possibly startling consequences.”
The shift in attitude has been tracked by the Bank for International Settlements (BIS), which has monitored speeches given in recent years by central bank governors and other senior figures. As flow reported in December 2020,10
hold their money directly at the central bank. Obviously, this would disrupt legacy bank franchises and impact financial stability [see Figure 2, page 55]. Some degree of disintermediation is an inevitable consequence of a successful CBDC. Thus, commercial banks need to consider how to react to a prospective loss of deposit funding.” But she adds that “currently, the digital currency model favoured by most central banks seems to be two-tier issuance. As with a traditional currency, transactions would be decentralised and supply would be centralised.”
The demise of cash If more by circumstance than design, Covid-19 has set the stage for the widespread adoption of CBDCs. In her paper, Laboure writes of the pandemic accelerating the demise of cash by four or five years – even if it is not about to disappear anytime soon.
However, she makes the point that Asia and China are leading the way and notes how, at the end of 2018, “around 73% of internet users in China used online payment services” (up from 18% in 2008) and that the World Bank says that “85% of Chinese
the BIS found that as the
number of speeches on the topic of digital currencies steadily increased, the tone had shifted from negative to rather more positive.
The BIS has noted that many forms of CBDC are possible “with different implications for payment systems, monetary policy transmission as well as the structure and stability of the financial system”. The two main variants are wholesale CBDCs and general purpose, also known as retail CBDCs. “The wholesale variant would limit access to a predefined group of users, while the general purpose one would be widely accessible.”
Disintermediation “The world has shifted from asking whether digital currencies will succeed, to how and when they will become mainstream,” notes Laboure in her February 2021 white paper, The Future of Payments Series 2 – Part II. “In the long run, CBDCs will displace private cryptocurrencies and become the norm,” she predicted.
Laboure warns that “with bank accounts paying low interest rates, a CBDC has a high potential to disintermediate the banking system. People might choose to
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adults who bought something online also paid for it online… This is significantly higher than other emerging economies.”
Laboure also believes that emerging market economies are likely to continue to lead the race in developing digital currencies. The Future of Payments Series 2 – Part II considers the barriers that advanced economies must first overcome for their populations to adopt them. The principal two obstacles are low interest rates and cultural/privacy norms. Cash is still widely regarded as a “store of value” and a “safe haven”, and it appears that higher interest rates for digital currencies will be needed before this perception changes.
Yet even in the first weeks of the Covid-19 crisis, Western consumers were showing greater readiness to transition to a cashless society. Concerns that traces of the virus can linger on notes and coins lent impetus to the move away from cash to contactless payments for regular daily purchases, which was further encouraged by an increase across many countries in the maximum limits applicable to ‘tap and go’ contactless cards. For example, the UK upper limit rose from £30 to £45
ECB President Christine Lagarde has suggested a digital euro could be launched in the next five years
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