In September 2021, a group of global central banks drew up an operating manual for potential digital currencies, known as CBDCs. The aim was to finally keep up with the many private cryptocurrencies available, and avoid the possibility that the new technology could cause a run on commercial banks. Creating central bank digital currencies is a massive challenge as public trust so essential to keeping the monetary system stable must be maintained. CBDC technology should be useable with existing domestic payment systems and customised to economic conditions. Central banks, including the Federal Reserve in the US, the European Central Bank and the UK’s Bank of England, are working alongside the Bank for International Settlements (BIS), a global organisation that fosters international monetary and financial cooperation.
To find out more about CBDCs, Speak Up met with Simon Youel, head of policy and advocacy at Positive Money, a non-partisan research organisation based in the UK and EU that campaigns for a banking system which supports a more efficient, democratic and sustainable economy. We began by asking Youel how the current system works.
Simon Youel (English accent): The current banking system is a synergy between public money issued by the state and private forms of money. The vast majority of money in our economy is created as a form of debt: loans that the bank issue to the public, which has to be paid back, and we pay interest on that. But in order for people to have trust in that money, they need to be able to redeem it in money which is public, issued by the state, as the final means of settlement. In our economy, cash is the only form of public money available to people. The only other forms of public money are central bank reserves, which are only accessible to banks and transacts between their accounts and the central bank. The current banking system is self-serving, fuelling climate change... The idea of Positive Money was, we need new forms of public money that we wouldn’t have to pay interest on, and which serves a public interest.
When you think of alternatives to the system, you think of cryptocurrencies, like Bitcoin, which appeared after the financial crisis of 2008. But today, Bitcoin does not enable economic activity and is not a viable currency, says Youel.
Simon Youel: Bitcoin came out as an alternative to the banking system, but Bitcoin, especially in recent years, has become less of a means of payment and more a speculative asset. Bitcoin is extremely inefficient: there are very high transaction costs; it’s not actually that anonymous, the FBI have managed to track people down using cryptocurrencies. People are buying Bitcoin not because they actually intend to use it as a means of payment, but as an investment. The main functions of money are: a unit of account, a means of payment, and a store of value. Cryptocurrencies focus on that third aspect: a store of value.
Other cryptocurrencies try to address these issues, but their value is volatile. One alternative is a stable coin. Facebook is developing one it has called Diem, and we asked Youel about it.
Simon Youel: Stablecoins are backed by assets or pegged to another currency, so they maintain a stable value, and can have anonymous or decentralised features. Diem really woke people up to the issues around these private digital currencies, because once you have a huge network like Facebook issuing a currency, that can rapidly scale up. Facebook could offer the currency for free to people to get them using it, and central banks are worried about that because that could mean [that] they lose control over the monetary system. If you don’t have control over money, you’re very limited in what you can do as a policymaker. Perhaps even more worrying is [that] these business models like Facebook are relying on monetising, harvesting and misusing people’s data. Imagine what they could do if they have control over your ability to make payments...
AN ACCOUNT FOR ALL
The inefficiency and expense of making international transactions is further encouraging governments to develop CBDCs as virtual versions of fiat (or normal) currencies. China leads the way with its digital yuan. Should we be worried that it could be used as a tool of control?
Simon Youel: It’s understandable why people have worries, but I think there are a lot of misunderstandings. Even the Chinese central bank digital currency, as the Bank for International Settlements has verified, doesn’t collect user data. What a central bank digital currency would do is allow everyone to have an account with the central bank. So essentially it would circumvent our reliance on the banking system. A digital currency could transact directly between people’s accounts, and this could also work internationally.
However, says Youel, we are right to question national motivations. Under the current system, the US dollar is the global reserve currency and has massive advantages that a digital dollar would aim to reinforce.
Simon Youel: At the moment the dollar is the global reserve currency, which means that a lot of economies are reliant on obtaining dollars in order to function economically and to trade. There could be a new digital global currency. The economist J.M. Keynes proposed, after the Second World War, that we have what he called the ‘Bancor’ which would have been a global reserve currency not tied to any one currency, which international trade could be conducted through. Instead, we got the dollar, and for America, it’s a great advantage. But, maybe we could see a shift in the balance of power: China has flirted with the idea of trying to introduce a new global reserve currency.
A CBDC could facilitate an important change in monetary policy, known as ‘helicopter money’, says Youel. In critical times, governments need to get cash to people fast. But the way it works now is via quantitative easing, where the rich become richer in the vain hope that money will filter down.
Simon Youel: If the central bank thinks there isn’t enough money in the economy, what they would currently do is quantitative easing: inject new money into the economy by buying up government bonds off people with new money, so those people become wealthier. With a central bank digital currency, and if everyone had an account at the central bank, the central bank could just insert the new money rather than having to go through the banking system and financial markets. So ‘helicopter money’ is the central bank just directly giving the money to households. That would be much more effective, everyone could get the same amount.
bye bye banks?
Positive Money does not campaign for an end to private banks, but for a more diverse mix of them: public-owned, private-owned, banks owned by their members... as long as they’re playing their role in serving society. Local currencies, such as the Brixton pound, or payment systems, such as M-Pesa in Africa (which enables people to make payments through their phones rather than through banks), expand financial inclusivity. The vital thing, says Youel, is that the banking system and financial policy support a more sustainable economy. In fact, the most sustainable and accessible form of money currently available is probably cash. Every transaction made in Bitcoin under its current ‘proof of work’ system, for example, has a gigantic carbon footprint. And we have to think of the carbon footprint of whatever payment method we use, says Youel, including the energy used by data centres across the world when we make payments by card.