MNI INTERVIEW2: Early CBDCs To Focus On Cross-Border Payments

Central bank digital currencies are likely to be focussed on cross-border payments as they are introduced over the next few years, and any move to take fuller advantage of their potential to transform monetary policy tools would only come much later if it comes at all, the soon-to-be-head of the Bank for International Settlements’ Innovation Hub Cecilia Skingsley told MNI.

The announcement by Facebook of plans, since abandoned, for a digital currency to be called Libra in 2019 was taken by central banks as a sign that they had better get a move on with developing their own virtual offerings, and, while the recent crypto crash has eased some of that sense of urgency, monetary authorities in jurisdictions from China to Sweden are moving towards launching e-money.

But, even though digital cash would in theory allow big changes to monetary frameworks, by permitting interest rates to go more deeply negative and potentially providing a lower-cost alternative to central bank reserves, central banks are likely to start modestly, building up infrastructure and promoting resilience while limiting any disruption to the financial system, said Skingsley, who will shortly leave her job as first deputy governor at Sweden’s Riksbank to move to the BIS.

Facilitating cross-border payments will be a first obvious use for CBDCs, she said.

"Cross borders is the big thing. What Libra did was the big wake up … If we want people to stay in the fiat money system we are going to have to step up to build the infrastructure," Skingsley said. "I think the big change in the years to come will happen in that area rather than individual countries launching a retail CBDC."

SLOW-MOVING CHANGE

In theory, CBDCs could significantly enhance central banks’ control over the money supply, but Skingsley, an advocate for a wide range of policy tools to be deployed in crises (See MNI INTERVIEW: Law Will Encourage Riksbank Inaction-Skingsley), said that any extension of the role of virtual currencies would come slowly, if at all.

"On the academic side, (some argue that) if you want to control the demand for a CBDC you have to get it interest bearing. There are others who say, no, you can sort that out through tax, or make it very deep negative if you are above a certain amount," Skingsey said. "I don't know, these are questions for the future. I think money has evolved over time .. we will just have to see.”

For the moment, central banks will start with a clear, limited mandate and only ask politicians for more tools if necessary.

“That is actually quite a slow moving, possibly structural, change. This is pretty complex as it is. If we, on top of all the complexity, also ask for a full mandate .. I don't think that will fly," she said,

"That is what I have seen so far, but who knows what the future holds. It depends on how the financial system develops and possible policy needs.”

But for the meantime central banks cannot afford to leave virtual currencies to private companies, she noted.

"It is only the central bank that is really interested in protecting the resilience on the system level," Skingsley said.