Tue, Nov 19, 2019 - Page 9 News List

Updating the regulations as the digital money revolution nears

By Huw van Steenis

How radically will digital currencies change our methods of exchange and the way that we think about money? With innovation in digital payments barreling ahead, these questions are now commanding the attention of the World Economic Forum and other international institutions.

Regardless of how Facebook’s own digital-currency moonshot, Libra, fares, it has already provided a wake-up call for firms and policymakers around the world.

“If revolution there is to be, let us rather undertake it than undergo it,” Otto von Bismarck once said.

The question for policymakers is not whether to try to shape the digital-money revolution, but how.

Digital money is already a key battleground in finance, with technology firms, payment processing companies and banks all vying to become the gateway into the burgeoning platform-based economy. The prizes that await the winners could be huge. In China, Alipay and WeChat Pay already control more than 90 percent of all mobile payments and in the past three years, the four largest listed payment firms — Visa, Mastercard, Amex, and PayPal — have increased in value by more than the FAANGs (Facebook, Apple, Amazon, Netflix and Google). In a way, Libra is actually crashing the party late.

The opportunities offered by digital money are clear. Across Western countries, moving money is overly costly and inefficient, and those who end up paying the most are often the ones who can least afford to do so.

As I argued in a report for the Bank of England this year, improving these processes could yield significant returns and social benefits.

Moreover, the needs — the potential returns — are even greater in many emerging markets, particularly when it comes to cross-border payments.

According to the World Bank, the average cost of sending international peer-to-peer remittances averages about 7 percent of the sum. Efforts to improve the main payment channels are ongoing. TransferWise, for example, claims to have reduced the average cost of cross-border transfers for its clients to 0.74 percent.

However, less well-trodden routes remain a challenge, owing to the hurdles posed by money-laundering rules and poor data quality.

Given the concerns that Libra has raised, some central banks have begun to explore the option of issuing their own digital tokens. Others are studying the thorny legal and regulatory challenges posed by digital money so that they can safeguard monetary and financial stability.

For her part, Lael Brainard, a governor on the US Federal Reserve Board, recently suggested that the risks of cryptocurrencies outweigh the benefits. By contrast, the People’s Bank of China is forging ahead — though not toward the decentralized or “permissionless” blockchain model envisioned by crypto-enthusiasts. The Chinese central bank wants to use cryptography to issue tokens to mainstream banks, which will then be passed on to customers within the existing two-tiered banking system.

Hence, if the European Central Bank (or others) wanted to be the first central bank to issue digital money, the opportunity is there for the taking. To policymakers considering the options presented by digital money, I would offer five recommendations from my Bank of England report:

First, monetary authorities should create the infrastructure to enable alternative payment methods to connect to one another. The private sector can flourish when central banks act as a platform for innovation, as Bank of England Governor Mark Carney has shown by granting non-bank payment firms access to its payments system.

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