Bitcoin critic Agustín Carstens, general manager of the Bank for International Settlements (BIS), delivered a stark message on Friday about the future of money. Despite rapid technological changes, Carstens says central bankers aren’t compelled to overhaul monetary policies. Central bank-issued digital currencies (CBDCs), he adds, are not in demand.
Speaking in Dublin at the Central Bank of Ireland, Carstens explains that money and payment systems together make up the monetary system, and that the system is thwarting technology and Bitcoin hype.
“Throughout history, technological innovations have continually reshaped the monetary system, either by changing the nature of money or the workings of the payment system. These times are no different. The hype around Bitcoin and its cousins has died down somewhat. But innovation continues.
What seems new this time is the sheer volume of innovations and the fact that both components of the monetary system are targeted at the same time. Historically, changes to payment systems have been infrequent. Changes to the nature of money have been even rarer. But now, attempts to create new forms of money or to engineer new ways to pay appear almost weekly.
This afternoon, I will share some thoughts on how technological innovation may affect the monetary system. I am particularly interested in the implications for central bank money and what so-called central bank digital currencies (CBDCs) would mean – not just for the system, but for all of us as citizens.”
Carstens says the “gung-ho” spirit of fintech startups could unleash unreliable tech that undermines the financial system. He says central bankers need to tread cautiously since central bank-issued tokens would have a major impact on money.
“The monetary system is the backbone of the financial system. Before we open up the patient for major surgery, we need to understand the full consequences of what we’re doing.”
Carstens describes the two-tier financial system which comprises the customer-facing banking system and the central banking system.
“The central bank is a public institution charged with ensuring that inflation is under control, the economy runs smoothly and the financial system is sound. Commercial banks are private businesses that thrive by attracting and serving customers.”
“There are historical instances of one-tier systems where the central bank did everything. In the socialist economies before the fall of the Berlin Wall, the central bank was also the commercial bank. But I do not think we can hold up that system as something that will serve customers better.”
Carstens charts how money would flow from commercial banks to central banks, if central banks offered customer-facing services.
“Imagine that the Central Bank of Ireland and the ECB were to offer deposit accounts to everyone and then issue debit cards and mobile phone apps for you to make payments with. In such a scenario, the central bank would be taking on the customer-facing business lines.”
“If bank deposits shift to the central bank, lending would need to shift as well. So, in addition to the deposit business, the central bank would be taking on the lending business. The central bank would need to meet business owners, interview them about why they need a loan, and decide on how much each should receive.”
Such changes, Carstens says, have the potential to completely up-end the way that monetary policy affects the economy.
After surveying 60 central banks which represent countries covering 80% of the world population, the BIS has concluded that CBDCs are unpopular.
“Very few central banks think it is likely that they will issue a CBDC in the short to medium term, be it retail or wholesale. Having looked into the matter, central banks have decided not to jump in.”
“Central banks do not feel compelled to face a major change in the way they conduct monetary policy.”
“So far, experiments have not shown that new technologies would work any better than existing ones. There is no clear demand for CBDCs on the part of society. There are huge operational consequences for central banks in implementing monetary policy and implications for the stability of the financial system…
Central banks are indeed proceeding cautiously and considering all relevant issues. We will flash the warning light if needed. Central banks do not put a brake on innovations just for the sake of it. But neither should they speed ahead disregarding all traffic conditions. We have to make sure that innovations set the right course for the economy, for businesses, for citizens, for society as a whole. This is what we are doing now.”
Despite cutting-edge innovation that is pushing the world toward cashless systems to move money around, Carstens points out that cash is still king in most countries.
“In a number of countries, the demand for cash has fallen substantially as consumers and retailers have embraced electronic means. Two examples are Sweden and Denmark, where stores and restaurants are increasingly reluctant to accept paper money. Instant mobile payment solutions are gaining ground rapidly. The latest data from Sweden show that mobile payments are being used as often as cash to make payments. Young people use their mobiles to pay almost twice as frequently as they do with cash.
But for most countries, cash is still in high demand. The amount of cash in circulation has actually increased over the last decade in tandem with electronic payments. In the short term, there is no urgency to come up with a substitute for cash. Things may change in the future, however, and central banks want to be prepared.”
As the head of the BIS, an international financial institution owned by the world’s central banks, Carstens has vehemently clapped back against Bitcoin supporters. In an interview last year with Swiss-German news outlet Basler Zeitung, Carstens urged “young people” to “stop trying to make money.”
You can check out the full speech here.