COLUMN-Pandemic shock may hasten central bank digital cash: Mike Dolan
(Refiles with April 9 date in dateline. The opinions expressed
here are those of the author, a columnist for Reuters.)
By Mike Dolan
LONDON, April 9 (Reuters) - This coronavirus crisis may have
come too soon for central banks now mulling digital currency as
legal tender but the financial problems the health scare
presents could hasten their arrival.
Getting government and central bank cash instantly, fairly
and securely to where it's needed most in an emergency has been
one of the biggest challenges presented by this pandemic and the
deep recession it's causing. And central bank digital currency,
or CBDCs, could help solve some of those problems.
Electronic money is how many people already operate via
their bank accounts. Legal tender digital cash is different in
that it operates just like traditional notes and coins but would
be in a digital format akin to cryptocurrencies, such as
Bitcoin, and used for payment or passed between individuals via
blockchain-style digital wallets. Unlike a cryptocurrency, it's
created and guaranteed by the central bank.
As well as avoiding health risks posed by physically passing
around money in a pandemic, the advantages of moving to CBDCs
include the ability of central banks to inject cash to
households and firms at speed, allowing tracking and withdrawal
of the funds eventually and even taxation if necessary to
prevent cash hoarders avoiding negative interest rates at banks.
On the other hand, central banks have hesitated so far due
to technology, security and privacy questions and also concerns
about the stability of the standing banking and payments system
from any sudden rush to CBDCs.
Yet even before the virus hit, central banks of Britain, the
euro zone, Japan, Canada, Sweden and Switzerland and the Bank
for International Settlements were already due to meet this
month to pool findings on plans for digital cash.
According to Deutsche Bank analyst Marion Laboure, this
group of central banks - representing about a fifth of the
world’s population - are likely to issue a general purpose
digital currency within three years.
The status of that April meeting is unclear. But it comes as
central banks and governments come under pressure to deliver
cash to households and businesses during an economic shock that
will see major western economies shrink at rates not seen for a
Standing methods of pumping money through the banking system
via so-called "quantitative easing", where central banks flood
commercial banks with cash by buying bonds, are already in full
swing to the tune of trillions of dollars.
Additional trillions of government fiscal spending has
ratcheted up in tandem, supporting healthcare, paying salaries
and even posting checks. The bill is gigantic, but the cost of
that debt is held down by central banks buying government bonds.
So far, so good. That's stabilised credit markets to some
degree but what about the public at large and wider economy?
PEOPLE'S DIGITAL QE?
The halt of much economic activity to stop the spread of the
coronavirus means governments and central banks will struggle to
get money directly to both businesses starved of cashflow and
workers who are furloughed or laid off.
A well-aired criticism of QE since the last crash 12 years
ago was that much of the money got bunged up in the banks as low
demand for loans prevented it getting to the households and
firms that needed it most and it merely ended up inflating asset
prices held by the wealthiest - culminating in slow growth,
rising inequality and a wave of political frustration.
Many experts feel central bank digital currencies could go
some way to addressing these problems.
The "whatever it takes" mantra from most policymakers mean
policies previously considered taboo are suddenly in the mix or
are being openly debated and discussed.
On Thursday alone, the Bank of England agreed to lend the UK
government money directly if needed for its COVID-19 spending
plans if debt markets proved too cumbersome.
Shortly after, the Fed announced another massive $2.3
trillion programme, this time for small and mid-sized firms via
banks, lending directly to local governments and even providing
for corporations with poor credit ratings.
Some proposals for CBDCs have emerged that potentially blend
all approaches germane to this shock and the policy conundrums
it throws up.
In a paper for Washington's Petersen Institute published
last week, economists Julia Coronado and Simon Potter
advocated a system of digital payment providers that allowed the
Fed to directly pay households to stabilize income in a downturn
when interest rates were already zero.
They argue that this Fed-backed digital currency could both
augment automatic fiscal stabilizers and "harness the power of
helicopter money or quantitative easing."
The gist of the proposal involves what they dub 'recession
insurance bonds' — zero-coupon bonds authorized by Congress
amounting to a share of GDP sufficient to support demand in a
severe recession. Treasury would credit households' digital
accounts with these bonds and the Fed would purchase them from
households in a downturn after its policy rate hits zero.
(by Mike Dolan, Twitter: @reutersMikeD)
First Published: 2020-04-09 21:59:58
Updated 2020-04-09 22:03:00
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