Central bank digital currencies (CBDCs) can have broad implications for the global balance of power in both finance and politics, but the optimal scenarios for adoption have yet to be found.
These are some of the ideas voiced by the panelists discussing Chinaâ€™s digital yuan project on Wednesday. The panel was arranged by Policy 4.0, a Bangalore, India-based think tank, which has recently released a series of reports on the digital yuan.
The discussion featured Policy 4.0 founder Tanvi Ratna, CoinDeskâ€™s Chief Content Officer Michael Casey, Governor John Rolle of the Central Bank of the Bahamas, Tomasso Mancini Griffoli of the International Monetary Fund, Dave Birch of the Official Monetary and Financial Institutions Forum (OMFIF) and the chairman of VeriFi Pindar Wong.
Griffoli outlined three scenarios for adoption for future digital currencies issued by central banks: a limited usage just for remittances, currency substitution for countries with weaker currencies, and a multipolar world using different CBDCs as reserve currencies.
The currency substitution scenario would be a continuation of an already ongoing trend, Griffoli said. Some 18% of countries around the world already see half of their populationâ€™s deposits in foreign currencies.
The issue here may be the loss of monetary policy control for such countries, â€œespecially in countries where the business cycle is not aligned with the business cycle of the [CBDC] issuing country,â€ Griffoli said.
At the same time, the issuing country can also face issues if its digital currency gets popular abroad, possibly leading to significant swings in capital inflow, exchange rates, banksâ€™ balance sheets and asset prices.
But Griffoli noted that various countries issuing digital currencies could bring global benefits.
â€œA greater use of CBDCs can lower cross-border financial frictions, so markets can be deeper and more integrated,â€ he said. â€œThere is the possibility that rebalancing towards a more multipolar world can be accelerated by the CBDCs, and that can be a good thing.â€
Threat for the dollarâ€™s domination
Nations issuing CBDCs should be cognizant of the political implications of CBDC use, said OMFIFâ€™s Birch.
â€œYou canâ€™t pretend that CBDCs donâ€™t have a political component,â€ Birch said, pointing out that a huge number of U.S. dollars are circulating outside of the U.S. because people around the world use it for savings or for criminal purposes such as money laundering. This, in turn, allows the U.S. to exert significant soft power on other countries, Birch said.
Widespread adoption of CBDCs around the world could reduce the dollarâ€™s domination, leading to unpredictable effects if, for example, those non-dollar CBDCs are used for sanctions evasion, Birch added.
For the countries willing to introduce a CBDC, itâ€™s important to think through the design of such systems. The main goal should not be reducing the cost of transactions â€“ which many countries have already achieved â€“ but creating â€œa platform for innovation and economic growth,â€ in which a CBDC might be even not the only kind, but one of the many digital assets integrated into a new-generation payment system, Birch said.
The money of the future will not only be used by humans, and thatâ€™s important to consider while designing the CBDCs, said Verifiâ€™s Wong. In the smart cities of the future that are driven by data, we will see â€œarchitectures that have peopleâ€™s money, machineâ€™s money and algorithmsâ€™ money,â€ Wong said.
Digital cash for the Bahamas
For the Bahamas, the issue is no longer an abstract discussion: the country is actively working on issuing its own CBDC. The new payment system should help to better connect the scattered archipelago population financially.
One of the main issues the Central Bank of the Bahamas is trying to solve is how to make the new digital cash available to everyone in the country, includiung the undocumented population immigrating from Haiti, without neglecting know-your-customer and anti-money laundering protocols, Rolle said.
Another important question is data protection, especially for young people who might leave an additional digital financial footprint by using new digital coins.
â€œWe also focus on the education of potential users,â€ Rolle said, including â€œunderstanding how you can be as safe in this space as with cash.â€