Marcel made the comments in a speech titled “High-level Policy Panel Discussion on Central Bank Digital Currencies” at the OECD Global Blockchain Policy Forum held in Paris on Sept. 12.
Chile’s central bank governor, Mario Marcel, says central bank digital currencies (CBDC) can provide additional flexibility at a time of “unconventional monetary policies.”
Marcel’s opening remarks acknowledged that cryptocurrencies like Bitcoin are already showing disruptive potential and provide some benefits over the legacy system. He said:
“Disruptive technologies in Finance or ‘FinTech’ are transforming the financial industry landscape, challenging traditional business models. These technologies have been able to address some gaps in the traditional financial industry that can be grouped into five categories: Access, Speed, Cost, Transparency and Security.”
However, Marcel argues that this new technology can also be adopted by the banking system itself to mitigate its disruptive potential. Moreover, Distributed Ledger Technology (DLT) can provide some benefits that conventional money technology cannot, according to Marcel.
DLT and CBDC could “enhance market efficiency” based on some research, says Marcel, who also notes these digital currencies can be more flexible in an “unconventional” monetary policy environment.
Specifically, one of the main benefits would be:
“Crisis management around the Zero Lower Bound. In a world of low real interest rates, the impact of unconventional monetary policies, such as QE, nominal GDP targeting and forward guidance, appears to be limited. … Fixing negative nominal interest rates in a flexible way could improve the Central Banks’ toolkit.”
Marcel, however, does acknowledge some possible drawbacks and that more research is needed to fully understand the technology’s potential. Moreover, the general public could interpret negative interest rates as “a new tax” and would likely meet pushback from lawmakers.
Marcel adds that CBDCs can give central banks more intervention tools and reduce the risk of bank runs. Also, balance sheets on a transparent ledger can make it easier to “unwind troublesome financial institutions and divest their assets.”
But while Marcel notes that CBDCs do not necessarily need a blockchain, he concludes:
“Monetary policy channels in a world with CBDCs may be faster and more powerful.”
As Cointelegraph reported earlier this month, China is reportedly at the forefront of central bank-issued digital currencies and could launch its own as early as Nov. 11.
In March, Bank of International Settlements chief Agustin Carstens warned that banks should not stop innovation, but should still approach cryptocurrencies with caution.
Meanwhile, Morgan Creek Digital Assets co-founder Anthony Pompliano said in July that low-interest rates and money printing by central banks provide “rocket fuel” for Bitcoin’s value.
Central Bank Officials: DLT Can Improve the Global Financial System
On March 7, three monetary and cryptocurrency experts discussed the challenges and prospects of central bank-issued digital currencies at the Massachusetts Institute of Technology (MIT) Bitcoin Expo 2020.
The panelists acknowledged that distributed ledger technologies (DLT) could improve the existing global monetary system, however, argued that significant challenges persist regarding the privacy, interoperability, and scalability of blockchains.
Sonja Davidovic, an economist with the International Monetary Fund (IMF), warned central banks not to rush to implement blockchain systems without properly vetting the technology first.
She stated: “What we’ve seen a lot is that there’s a hype out there and people are quickly jumping to choosing that technology just because it’s popular.”
“That certainly happened with blockchain. The result of that is that we’ve seen central banks that are directly engaging with it without going through the proper process of testing the technology in a proof of concept, selecting vendors through an open bidding process, and having a request for proposals.”
Despite an array of distributed systems available to central banks, Davidovic claims that none have demonstrated robust privacy and interoperability. The IMF official added that central banks face magnified risks in implementing these technologies – as they typically outsource development to third party companies.
“It’s about the weakest link. You can have a secure system, but if the people who’re operating the system click on a phishing email or allow a security breach, your most robust system is not going to help with security.”
Robleh Ali, a research scientist at the MIT Digital Currency Initiative and a former Bank of England official, predicts that central bank digital currencies will ultimately take on many different “hybrid” forms.
“You’ll likely end up with a hybrid in the end. I don’t think every central bank would choose the same system. How they interact with each other will be key, so you can sort them into a single system.”
Bob Bench, the director of applied fintech research for the Federal Reserve Bank of Boston, asserted that cryptocurrencies like Bitcoin cannot scale to meet the needs of central banks.
“BTC is very interesting because it’s mostly just transactional values. But if you’re trying to build a retail central bank currency – like China, for example, there’s 40 trillion in volume last year generated through WeChat alone – you need something that over and over and over again, can move value and do it quickly without breaking.”
Despite acknowledging that DLT “might work”, the federal reserve official urged central banks to consider the risks of “putting their full faith and trust of their government’s currency” into DLT.
Bench added that Alipay and WeChat have come to comprise the world’s digital central bank reserves following the People’s Bank of China’s move to fund both platforms directly since June 2019.
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