A collection of bitcoin, litecoin and ethereum tokens sit in this arranged photograph in Danbury, U.K. (Photographer: Chris Ratcliffe/Bloomberg)

Central Bank Digital Currencies May Not Be Worth The Trouble, Says BIS’ Carstens

While most major central banks have been cautious about crypto assets being depicted as currencies, some have toyed with the idea of issuing their own digital currencies.

In India, a government-appointed panel on digital payments had suggested the central bank look into the idea in 2016. The panel had noted that there are “several benefits of digital currency, including the instantaneous settlement of transactions, reduction of costs and more importantly enables the central bank to detect the existence of counterfeit currency on a real-time basis.”

The Reserve Bank of India has decided to explore the possibility but later abandoned it.

Agustín Carstens, who serves as the general manager at the Bank of International Settlements, said the “adjustment cost” associated with moving away from fiat currency to digital currency may not be worthwhile for central banks to undertake if there is no “social need” for that change.

“If you compare what a central bank digital currency can give you and if you compare what you have today in a two-tier system where the central banks provide an important infrastructure and on top of that infrastructure you have other applications provided by third parties, you can get a very competitive payment system,” Carstens said. “There is not much value to be added by a central bank digital currency,” he said.

If at some point we see that public in general is demanding a central bank digital currency, most central banks will be ready to respond. But if there is no clear demand, then there is no real benefit for pushing a central bank-backed digital currency.
Agustín Carstens, General Manager, Bank of International Settlements

Carstens was speaking on the sidelines of the CD Deshmukh memorial lecture at the RBI’s Mumbai headquarters.

Carstens and Bank of International Settlements have also been critics of crypto currencies and have advised that central banks deal with them with caution. When asked whether he supports the RBI’s move to effectively ban crypto currencies in India, Carstens said it is appropriate to limit the spread of these units due to concerns about inadequate anti-money laundering and know-your-customer checks.

“I think most people realise now that they are not really currencies. They are not a store of value, they are not a good medium of exchange, nor is there pricing based on them. Therefore, they are not money,” he said. They can be seen as assets but not currencies, Cartsens said.

Central Banks And Financial Inclusion

Carstens speech at the RBI was focused on the role of central banks in financial inclusion.

He stressed on the need for central banks to meet their core objectives — price stability and financial stability — to aid financial inclusion. While maintaining price stability helps keep confidence high in the currency, financial stability ensures trust in the financial system.

However, these are necessary but not sufficient conditions.

“Other elements too are important. New technology can play a crucial role in breaking down barriers for both citizens and financial institutions. To foster this process, central banks and financial authorities must provide the right infrastructure,” said Carstens while adding that central banks and innovators are vital partners. “One cannot achieve financial inclusion without the other’s help.”

While stressing the need to harness new financial technologies to achieve inclusion, he cautioned about the risks of the expanding influence of technology-driven platforms. Such platforms can lead to excessive concentration of power and strains over data protection, Cartsens said. In addition, criminals can exploit the anonymity conferred by some digital platforms and the absence of supervisory oversight, he said.

For financial innovation to promote financial inclusion further, its potential adverse effects must be addressed. Policymakers can play a vital role here by upgrading or providing new infrastructure, both hard and soft.
Agustín Carstens, General Manager, Bank of International Settlements