Opinion: Technology is changing the nature of money. Here’s how it will affect our lives

Prasad: The convenience of digital payments for both consumers and businesses makes it unlikely that cash will last much longer.

China has two private payment providers, Alipay and WeChat Pay, which have covered the entire Chinese economy with very cheap digital payments. You can use them for something as simple as buying, say, a piece of fruit or a couple of dumplings from a street vendor. In advanced economies like Sweden, the private sector is doing equally well with very cheap digital payments.

IMF: Is it likely that cryptocurrencies like Bitcoin will be used to buy a cup of coffee or pay rent?

Prasad: Bitcoin has not performed well as a medium of exchange that can be used for everyday transactions. One of the main reasons is that bitcoin has a very volatile value. It’s like taking a bitcoin with you to a cafe, and one day you could buy a whole meal with it, and another day you could just have a small cup of coffee. In addition, Bitcoin is somewhat slow and cumbersome to use.

IMF: Some countries are considering adopting a so-called central bank digital currency (CBDC). What is the reason?

Prasad: For some developing countries, the goal is to increase access to financial services. There are many people in these countries who do not have access to digital payments. They do not have access to basic banking products and services. In countries like Sweden, where most people have access to bank accounts, the imperative is somewhat different. Swedish central bank Riksbank sees the e-krona, or digital krone, as the backbone of a private payment infrastructure.

IMF: How about China?

Prasad: The Chinese government is very concerned about the two payment providers who have come to dominate the payment system and are effectively blocking the entry of new competitors that could offer innovation. The Central Bank of China sees the digital yuan as essentially an addition to existing payment systems, but in principle capable of increasing competition.

IMF: How does a digital currency affect the central bank’s ability to control inflation and ensure full employment?

Prasad: Assuming that all American citizens actually have an account with the Federal Reserve, then it will be much easier for the Federal Reserve to make certain transactions, such as stimulus payments.

When the pandemic hit, the original coronavirus stimulus bill called for a large sum of money to be transferred to American households. Many households that had direct deposit information on file with the Internal Revenue Service were able to receive direct deposits into their bank accounts, but households that did not have this information on file with the IRS ended up receiving prepaid debit cards or checks, many of which were lost in the mail, and some of them were misappropriated or mutilated.

IMF: Can central bank digital currencies be used to fight tax evasion and other crimes?

Prasad: If you are unable to pay cash to your gardener or nanny, it is much more likely that these payments will be reported to the government. And especially for transactions with large amounts, this will certainly make a difference in terms of tax revenue. The presence of digital money also reduces the use of cash for illegal transactions, such as drug trafficking or money laundering.

IMF: Are there risks for private sector banks and payment systems?

Prasad: If the government actually provides a very low-cost digital payment system, it can make it difficult for private payment providers to continue to provide services because, after all, what private corporation can compete with the government’s rich pockets?

There is another risk that commercial banks, which play a very important role in today’s economy in terms of providing loans that stimulate economic activity, may find that their deposits are transferred to central bank accounts. In difficult times, depositors may feel that their deposits with a central bank or other government agency will end up being safer than with a commercial bank, even if the commercial bank deposits are insured.

IMF: Is there a solution to this problem?

Prasad: Experiments with CBDC, which are being carried out in China and Sweden, suggest that a two-tier CBDC system may work more efficiently. The central bank will provide the basic payment infrastructure and provide CBDCs primarily in the form of digital tokens, but the actual digital wallets that hold these CBDCs will be owned by commercial banks.

China's Digital Yuan Shows Why We Still Need Cryptocurrencies Like Bitcoin

IMF: Do you see the digital yuan threatening the dominance of the dollar as a global currency due to China’s status as a fast growing global economy?

Prasad: Not only the economic size or the size of the financial markets of the country issuing a certain currency, but also the institutional structure in this country supports the confidence of foreign investors. And those elements of trust include the rule of law, an independent central bank, and an institutionalized system of checks and balances. I think that in all these dimensions, the US still retains its dominance over much of the rest of the world.

IMF: The US Federal Reserve is wary of CBDCs. Why?

Prasad: We need to think about what the actual user scenario is for CBDC in each country, and in the US we certainly have some issues with our payment systems. Many payments are made with credit cards, which are actually quite expensive for merchants due to very high exchange fees. And many of these costs are passed on to consumers.

About 5% of US households are still unbanked or underutilized. So you and I can use Apple Pay, but to use Apple Pay, we need it to be linked to a bank account or credit card, and many households simply don’t have access to that.

So a CBDC could increase financial inclusion, but the Fed already has a major project called “FedNow” to improve the efficiency of both retail and wholesale payments; that is, payments between businesses and financial institutions.

IMF: Do official digital currencies pose wider dangers to society?

Prasad: You can see an authoritarian government using a digital version of their central bank money, essentially to keep tabs on their population. And even a benevolent government may decide that it wants to make sure that the money issued by its central bank is not only not used for illegal purposes, but also not used for purposes that it may consider not necessarily socially useful.

You may well see how money is used as an instrument not only of economic policy, but potentially even of social policy. This would be dangerous for the credibility of central bank money and for central banks themselves.

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