It could be the most important speech of the year from a central banker.
Andrew Haldane, chief economist and member of the monetary policy committee of the Bank of England (BoE), spoke on Wednesday at TheCityUK conference about opportunities in digital finance.
He had lots to say about long-overdue innovation in payments and SME lending, all of it well argued, none of it particularly new.
The key moment came when he briefly turned to central bank digital currency (CBDC).
“On the monetary policy side, one of the most pressing issues for monetary policymakers today is the zero (or close to zero) lower bound (ZLB) on interest rates,” said Haldane.
“At root, the ZLB arises from a technological constraint on the ability to pay or receive interest on physical cash, whether positive or negative. In principle, a widely-used digital currency could mitigate, if not eliminate, that technological constraint by enabling interest rates to be levied on retail monetary assets.”
OK. Euromoney can forgive you for having missed it. Haldane is a smart central banker and so it is often hard to work out what on earth he is talking about.
A fully functional CBDC can move far more swiftly
Geoff Yu, BNY Mellon Markets
However, this is dynamite: a G7 central banker openly saying a key attraction of CBDC for policymakers is the ability to charge negative or positive rates on the cash in your e-wallet.
Even the People’s Bank of China, which is far ahead of other central banks along the path to CBDC, has not discussed this openly.
It is the kind of talk that inspires wild fantasies. Here is one from Geoff Yu, senior EMEA market strategist at BNY Mellon Markets.
You are wandering across a parking lot in Brooklyn. Suddenly, a helicopter lands and out steps Federal Reserve chairman Jerome Powell with a bag of freshly printed dollar bills of various denominations.
He walks up to you with a small bundle and stuffs it into your wallet. He tells you the money is to help with the weekly shopping or a little extra to spend at local businesses struggling with the pandemic. There is no need to pay it back.
Powell strongly advises you against saving it or using it to repay debt, explaining that this doesn’t do as much for the economy as spending. He jumps back into the helicopter and flies off for his next drop.
Is it such a ridiculous dream?
PBoC helicopter drop
In October, the PBoC handed out RMB10 million ($1.5 million) of its new CBDC to 50,000 residents of Shenzhen, a city of 12 million people. The lucky winners in a lottery for this test drop of helicopter money received about $30 each to spend in any of 3,400 designated retail outlets from supermarkets to petrol stations.
Yu tells Euromoney: “Think of applying a negative interest rate in extremis as equivalent to giving you a time limit to spend your money. Say you have $10 in your CBDC wallet, but you are being charged a negative interest rate on it of 10% per day. In 10 days’ time, your virtual $10 bill will have disappeared. You have to go and spend it.
“Applying interest rates directly to cash potentially has a massive impact on the transmission of monetary policy.”
There is another element now in play of the power central authorities could potentially exercise through CBDC.
Yu says: “If the central bank also has geolocation control over where you can spend that money, CBDC might allow for micro-targeted helicopter drops to provide stimulus in particular neighbourhoods at particular moments.”
We need more talk on CBDC. It could have enormous implications for our money
In November, Brooklyn was showing a higher Covid-19 infection rate than other boroughs in New York City, putting it more at risk of a lockdown, which could potentially lead to serious economic problems for households and businesses.
Sorry, Williamsburg – Jerome Powell is not going to set down his helicopter anywhere near Bedford Avenue.
The Fed is full on with quantitative easing (QE), but that involves buying US treasuries from commercial banks, filling them with cash, reducing the term cost of money and encouraging them to lend it out. The problem is getting the money to where it is needed.
Banks are tightening credit standards and even when individuals obtain low-cost loans or receive handouts, they may be inclined to save the money or pay down debt instead of spending it.
In April and May, the US Treasury and the Internal Revenue Service claimed to have made 159 million separate economic impact payments to Americans worth $267 billion. Fully 35 million of those payments were in the form of cheques, with 120 million in direct deposits.
What did people do with the money?
No one knows.
So, there are good reasons for world central banks to be looking at the potential benefits of CBDC and programmable money right now.
Founding principles
In October, the Bank for International Settlements together with the Bank of Canada, European Central Bank, Bank of Japan, Sveriges Riksbank, Swiss National Bank, BoE and the Fed published their founding principles for a retail CBDC, asserting that any such venture should co-exist with physical cash, do no harm to monetary and financial stability, and promote broader innovation and efficiency.
These central banks now claim that a convenient and accessible CBDC could serve as an alternative to potentially unsafe forms of private money, offer users privacy, reduce illegal activity, facilitate fiscal transfers and/or enable programmable money.
Most central banks started exploring CBDC reluctantly in response to Facebook’s Libra, knowing they had to be ready to crush it if it took off. They worried, however, that if people had CBDC accounts with central banks, then at the first hint of a financial crisis, deposits would flee high-street banks.
Negative rates might prevent this. That money would not flee if central banks charged a negative rate of 30% for holding cash with them. So CBDC need not disintermediate or destroy the banking system.
Now forward thinkers such as Haldane are turning to the attractions. Could they be on a mission to make CBDC happen?
Central banks supporting the founding principles say they are committed to continue providing cash “as long as there is public demand”. There is no mention of how this will be measured or how widespread this demand must be.
China is already far ahead in innovative payments technology
In 26 pages of founding principles, one word is glaringly absent: China. The central banks discuss cooperation and interoperability while ignoring the one country that is already preparing for general adoption of CBDC in time for the Winter Olympics in February 2022.
Will snowboarding fans returning from Hebei province to Colorado have downloaded apps for CBDC accounts with the PBoC and might they use these to pay each other back for meals and drinks when they are away from Chinese territory?
The renminbi is not going to replace the dollar. Even with the supposed convenience of CBDC, it is no use trying to spend foreign currency unless your coffee shop or grocery store will accept it.
However, what about near neighbours such as Burma or Belt and Road countries that fall within China’s natural sphere of influence?
“If one of those countries were to suffer a balance-of-payments and currency crisis and the population felt a need for hard currency, then the RMB would be a candidate for that hard currency role,” says Yu.
“A fully functional CBDC can move far more swiftly, providing the issuing central bank is willing to allow non-residents to hold a digital wallet. It is foreseeable that a country’s monetary system could be supplanted at rapid speed, with obvious geopolitical implications.”
Over time, as countries that have pegged their currencies to the dollar can testify, doing so means the US controls their monetary policy.
This is why China’s move towards CBDC has such implications for the rest of the world. The seven central banks behind the founding principles may not mention China, but this is clearly their response.
China is already far ahead in innovative payments technology. It doesn’t write cheques for short-term stimulus payments. Indeed, many economies where populations lack access to formalized traditional banking systems are already moving to the post-bank account age.
We need more clear talk on CBDC. It could have enormous implications for our money. All central banks are now studying it, their top academics are all over it, experiments are under way.
They are playing with fire, but it seems that most central banks still have no clear idea what they want to do with CBDC.
China does.
