Our current payment system is not without faults, state Benoît Coeuré, Executive Board of the European Central Bank (ECB) and Jaqueline Loh, Chair of the Markets Committee of the Bank for International Settlements (BIS) in an opinion piece for the Financial Times. If bitcoin and other cryptocurrencies are proving to be “no better than gambling in a casino”, they have brought up fundamental weaknesses in our current system related to the remittance market and cross-border retail payments.
The global remittances market is a major source of income for many developing countries and therefore a crucial variable for economic development. Why are remittances so important? Because their contribution to the world economy is enormous: remittance volumes are three times higher than overall aid for development, amounting to $429 billion in 2016 for the former, according to the World Bank, and 142.6 billion in 2016 (OECD) for the latter.
Today, both remittances and international retail transactions engender high costs, slowed processing times and are often carried out by third parties that practice high fees (i.e. Western Union). This, conclude Coeuré and Loh, is the system’s Achilles heel. “Tokenized forms of digital central bank money could potentially help streamline many of the cumbersome clearing and settlement processes that are currently needed to complete securities and foreign exchange trades”. It will not replace cash but it could improve the current system by offering an almost instantaneous, transparent and direct access to payments, 24/7.
Indeed, until cash is as widely used as it is today (usage continues to grow in many parts of the globe), the development of central bank digital currencies (CBDC) will remain a secondary preoccupation for governments. The issue will, however, need to be addressed, add Coeuré and Loh. Because cash is the only currency that is also a public good, central banks must continue to monitor developments in digital payments.
If cash were to disappear, the public would suddenly become “wholly dependent on commercial money, and trust in the currency, a key public good, would be reliant on the creditworthiness of commercial entities and on specific payment technologies”. This, as Governor of the Swedish central bank Stefen Ingves nicely stated in a recent article, is a risk that must be taken into consideration because, when things go sour, will we be able to truly rely on private companies to maintain the cashflow?