Given that Britain’s treasury and the Bank of England are exploring the potential of a possible central bank digital currency (CBDC) for the UK, the House of Lords Economics Affairs Committee recently launched an inquiry into CBDCs, hearing both from HM Treasury and the bank about the issues confronting them in their work, as well as going out with a public call for evidence. In a similar spirit, Jerome Powell, chairman of the US Federal Reserve, has been clear in the past that while research into a “Digital US Dollar” is well underway, the Fed would not issue a digital version of the US dollar without congressional approval.
In many areas of our lives, new technology is challenging our long-held conceptions and the way we do things. This is also true for how we think about money and how money, as a human technology, might evolve in the future. In this respect, digital currencies are an important area of development. However, when it comes to digital currencies, cryptocurrencies, private digital currencies of which Bitcoin is the most established and well-known, typically grab all the attention.
Relative to private cryptocurrencies that have been around for more than a decade (Bitcoin was launched in 2009), public central bank-issued digital currencies are a more recent development. No major country has yet to issue a CBDC. However, according to a survey recently conducted by the Bank of International Settlements (BIS), they have become a significant focus for central banks globally: 86% of them are currently engaged in work in this area – many are doing research, formulating work plans, or in development phase, while others, such as China, are already conducting advanced tests. Although perhaps going unnoticed relative to the attention that private cryptocurrencies are attracting, the advent of CBDCs might be the most revolutionary among all digital currency developments, directly affecting the everyday lives of billions of people around the globe.
A central bank digital currency is an electronic form of sovereign, central bank-issued money that will be available to all citizens and businesses – like banknotes and coins, but in digital form. It is intended to be an easy-to-use, instantly transferable, digital cash substitute – “digital cash.”
The move from paper cash and coins to digital cash can be seen as a natural technological progression. But beyond differing technology, different forms of money can have distinctive political, social, and economic properties that are unique to them. For example, with CBDCs, as opposed to regular cash, central banks may be exposed to real-time information on money transfers – who is paying for what and when. This raises questions about privacy protection. If not designed in a way that protects the public’s information, CBDCs can lead to greater state control. In liberal democracies that value freedom and privacy, this is clearly an issue that needs to be properly addressed.
Other concerns for examination and debate are questions about the potential impact of the availability of CBDCs on the stability and functioning of the banking system that is reliant on cash deposited with it for its lending activities, and on the efficacy of central bank monetary policy in an era of digital cash. There are others.
On the other hand, in a digital era in which paper cash is disappearing, a CBDC could offer social benefits as a mechanism for continuing to make central bank money available to the public and, potentially, as an alternative system to the increasing dominance of big-tech private payment services (think of a scenario in which Google/Facebook/Apple completely control payments and had a major failure like the one Facebook had only very recently).
The Bank of Israel has had a working group focused on this subject since 2017. The central bank has been making good progress in this area, including conducting some public consultations. The central bank emphasizes that their work is currently focused on research and on some preliminary preparatory activities, and that the decisions about whether to issue a “Digital Shekel” and what its design might be have yet to be made.
Who exactly should weigh the risks and opportunities, opposing needs and interests, and ultimately make these important decisions?
The question of whether to issue a public digital currency is often framed as a technical matter merely relating to electronic payments. As explained above, it is not. The issuance of digital currency by the state could have political, social, as well as profound monetary implications. These issues should be examined within a broad perspective. The process should, of course, include monetary and technology experts, but alongside other stakeholders – and with the public interest in mind.
Following the examples of the UK and the US, an Israeli CBDC and its potential design should be discussed and debated in an open process run by parliament and should ultimately be decided upon, through appropriate legislation, by the political representatives of the public. Up until now, the Knesset has been silent on this matter. It should wake up.
The writer is chief investment officer of Clarity Capital.