Global financial systems will require the underpinning of central banks amid the rise of big tech stablecoins and decentralised finance (DeFi), the general manager of the Bank for International Settlements (BIS) said in a speech today.
Central bank digital currencies (CBDCs) should “serve as a sound foundation for future innovation” in finance both nationally and globally, said Agustín Carstens in a talk at Goethe University’s Institute for Law and Finance in Frankfurt, Germany.
“The soul of money belongs neither to a big tech nor to an anonymous ledger. The soul of money is trust,” said Carstens, former governor of the Bank of Mexico.
“Central banks…are not there to make money by mining coins. Instead, they perform this role as part of their public service mandate.”
BIS is currently working with five central banks on research into CBDCs.
Big tech power
Carstens noted a vision of the future in which big tech-issued stablecoins compete with both national currencies and each other – a trend already well established in some places such as China, where Alipay and WeChat Pay account for 94% of mobile payments, according to both Carstens and analysis by Reuters.
Carstens said that while this can widen access to formal financial systems, it could also lead to market dominance, discrimination, privacy violations and less competition.
By removing the need for many existing banks it could risk financial stability, and could also create fragmented national and global monetary systems.
“Paying with a big tech global stablecoin might be convenient, but in doing so users may be handing the keys to our monetary system over to private entities driven primarily by profit,” said Carstens.
The promise of a decentralised ‘web3’ also holds risks that should be acknowledged, Carstens argued.
While applauding the goal of removing the concentrations of power through distributed ledger technology (DLT), currently seen most prominently in cryptocurrencies, he said “there is a large gulf between vision and reality”.
“To date, the DeFi space has been used primarily for speculative activities. Users invest, borrow and trade crypto assets, in a largely unregulated environment. The lack of controls such as know-your-customer (KYC) and anti-money laundering rules might well be one important factor in DeFi’s growth,” Carstens said.
Even smart contracts, which are automated, rely on code that must be written and updated by individuals and so are not as democratic as sometimes touted, Carstens added.
Meanwhile stablecoins, which are being investigated as a potential new payment method around the world, pose a risk so long as “issuers have an incentive to invest reserve assets in a risky manner to earn a return”.
One solution, Carstens concluded, will be for “incumbents, big techs and new entrants [to] compete in an open marketplace that guarantees interoperability, building on central bank public goods”.
CBDCs would inherit the trust already placed in national currencies, he argued.
“Different central banks would design and issue a new form of public money, tailored to their economies and social preferences. Importantly, central banks could work with each other and with the private sector, to ensure that these domestic CBDCs are interoperable across borders.
“It could lower the cost of cross-border payments; increase their speed and transparency, and broaden access to users in different countries.
“Private providers could interact with clients, conducting know-your-customer and other compliance checks. The private sector could build a host of financial services on top of such a system, from innovative payments to lending, to insurance and investment services.
“But safeguards could give users control over personal data. This would not require the selling of speculative coins that serve only to enrich insiders.”
At the start of the year, China became among the first countries to launch a real-world, large-scale test of a central bank digital currency (CBDC) – the digital yuan – in response to the domination of private digital payment systems.
Data released Monday showed 2.5 million downloads of the People’s Bank of China digital wallet app, although options for its use are still limited.
Around 90 countries are researching the possibility of creating their own CBDCs, although some have proven reticent.
A UK report published last week acknowledged the rise of big tech and the decline in physical cash use, a key anchor of public trust in the monetary system, but ultimately said the creation of a CBDC still lacked a convincing use.
The report argued that a CBDC could itself “present significant challenges for financial stability and the protection of privacy”, and that questions remained over how exactly one would counter any threat from privately issued digital currencies, how it would relate to the Bank of England’s current mandate, and how security risks would be managed.
Last year, El Salvador launched in the other direction when it became the first country to make bitcoin legal tender, attracting both praise and criticism.