MNI INTERVIEW: CenBanks Moving Soon On E-Money - Ex-BOC Deputy

By Greg Quinn

     OTTAWA (MNI) - Central banks may soon announce more steps towards digital

currencies to head off the potential challenge from private-sector competitors

like Facebook's Libra and unleash the benefits of much lower transaction costs,

former Bank of Canada Deputy Governor John Murray told MNI.

     Until Facebook announced its plans in 2019, policy makers thought they had

many years to study these questions, but now, with Libra set to launch in 2020,

they are being forced to rethink, Murray said.

     "I know something is going on, this has really lit a fire under the central

bank community," he said in an interview last week. Moves by private companies

like Facebook "really accelerated things I would say, and I would imagine that

in a very short while you are going to see some announcements," he said. "If not

definitely committing to it, certainly giving a progress report with a lot of

promise there."

     In theory, digital currencies could allow the public to deposit savings in

interest-bearing accounts directly at a central bank, an arrangement which could

facilitate monetary policy by making it easier to implement negative interest

rates. But this could also disrupt the financial services industry, so policy

makers may instead take a half step and create untraceable digital money without

accounts, Murray said.

     Six central banks, including the Bank of Canada, the European Central Bank,

the Bank of Japan and the Bank of England, said Jan. 21 that they had created a

group, together with the Bank for International Settlements, to assess the

potential cases for central bank digital currencies. Last August, Bank of

England Governor Mark Carney floated the idea of a network of central bank

digital currencies, which might even begin to reduce the global influence of the

U.S. dollar.

     --SKEPTICISM FADES

     The Fed has also signaled that it is aware of the need to understand and

perhaps match some of the innovations in digital money, while noting that demand

for cash is still rising in the U.S. unlike some other nations.

     Murray's own skepticism faded in recent months on evidence digital currency

could slash the costs of buying everything from milk at a local grocery store to

sending money overseas. New units of exchange backed by central banks would be

more stable than speculative assets like bitcoin, he said. Facebook's idea of

global money backed by a basket of several national currencies is a throwback to

the International Monetary Fund's Special Drawing Rights, he said, which was

created as an international reserve asset during the Bretton Woods fixed

exchange rate system and still serves as a unit of account for some

international organizations.

     "Facebook and others present a far more serious threat," to traditional

money, because of the combination with giant social networks and advertising

platforms, he said.

     Stable digital money would be faster and more convenient than paper, while

central bank accounts could eliminate liquidity and credit risks in the

commercial banking system, Murray said. Tokens may be superior to cash by

improving record keeping, being more portable, and cutting down on illicit

transactions, he said.

     The potential for lower transaction costs from an internationally-traded

digital unit of exchange might conceivably even outweigh the economic advantages

of preserving some national currencies, Murray said. "I'm not saying they have,

but as Facebook pushes for the introduction of a global currency, and various

fintech companies with their payment systems and alternative currencies press

for something that's more multinational, this is kind of where you're going."

     At the global level, the emergence of a joint digital currency could chip

at the U.S. dollar's dominance in FX markets. There could be another divide if

China advances already stated signals about a digital currency and pulls in its

own bloc of nations for a joint currency, Murray said. "This move towards

something more multilateral and international in nature I think is definitely an

important consideration, it's not just the national context anymore," he said.

     Change is coming and the question is likely how to best seize the benefits,

Murray said. "Things have accelerated" in recent months "and I would certainly

put a higher probability on central banks having to respond."

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

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