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Aug 13, 2020

Article by Former IMF Chief Economist: Epidemic Promotes the World to Turn to Digital Currency

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The British “Guardian” website published on August 6 entitled “Will the new crown epidemic make countries abandon cash and adopt digital currencies?” “The author is Kenneth Rogoff, former chief economist of the International Monetary Fund and professor of economics and public policy at Harvard University. The article said that the new crown crisis has accelerated the trend of cashlessness, and the world after the epidemic will develop rapidly in terms of payment technology. The central bank cannot lag behind the trend of the times. The article is compiled as follows:

The COVID-19 crisis has accelerated the trend toward cashlessness (at least in legal transactions that comply with tax regulations), and official discussions about digital currencies are heating up. From Facebook’s upcoming Libra coin to China’s proposed central bank digital currency, what is happening now may reshape the next generation of the global financial landscape. A recent report issued by the 30-member US group stated that if central banks want to have an impact, they need to start acting quickly.


It’s about global financial stability

This matter is of great importance, including global financial stability and information control. If not managed properly, financial innovation will often cause crises, and the U.S. dollar has given the United States a strong capacity for supervision and sanctions. The dominance of the US dollar is not only about the currency used, but also about the system of settlement transactions. Countries in the world, including China and Europe, increasingly want to challenge this system, and these regions are gestating innovation.

The central bank can take three different approaches. The first is to make major improvements to the existing system: reduce credit and debit card fees, ensure financial inclusion, and upgrade the system so that digital payments can be settled immediately without waiting for a day.

The United States is seriously lagging in all of these areas, mainly because of the strong banking and financial lobby groups. In all fairness, policymakers also need to worry about the security of the payment system: the next virus that hits the global economy is likely to be digital. Rapid reforms may bring unexpected risks.

At the same time, any effort to maintain the status quo should provide room for new members, whether it is a “stable currency” linked to a major currency like Facebook Libra, or the launch of large retail technology companies like Amazon and Alibaba. Of convertible tokens.

The most radical approach is to introduce a dominant retail central bank currency that allows consumers to open accounts directly with the central bank. This may have some huge advantages, such as ensuring financial inclusion and eliminating bank runs.


Radical change is at risk

However, radical changes also have many risks. One is that the central bank is at a disadvantage in providing quality services to small retail accounts. Perhaps in the future, this problem can be solved by using artificial intelligence or expanding the financial services of post office branches.

In fact, when it comes to retail central bank digital currencies, economists worry about a bigger problem: if banks lose most of the scattered depositors-the best source of low-cost borrowing-then who will pay consumers What about small business loans?

In principle, the central bank can transfer funds obtained from digital currency deposits to banks, but this will lead to excessive government control of credit flows and ultimately economic development. Some people may think this is an advantage, but most central bankers may have reservations about assuming this role.

Security is another issue. In the current system, private banks play a central role in payment and lending, and this system has existed around the world for more than a century. It does have problems; but despite the challenges brought about by the banking crisis, the systemic collapse of security is not the main problem.


China leads the trend of the times

Technologists warn that although the new encryption system (on which many new ideas are based) has a bright future, it may take 5 to 10 years to “solidify.”

China’s new digital currency offers a third, more moderate scenario. As detailed in the report of the group of 30, China’s approach is to eventually replace most banknotes, but not banks. In other words, consumers will still hold accounts with banks, and banks will hold accounts with the central bank.

However, when consumers want cash, they do not receive paper money (paper money is quickly becoming a thing of the past in Chinese cities anyway), but they receive tokens in the central bank’s digital wallet. Like cash, the central bank’s digital currency has no interest rates, giving interest-bearing bank accounts a competitive advantage.

Of course, the government can change its mind later and start offering interest; if the overall interest rate level plummets, the bank may also lose its advantage. This framework does eliminate the anonymity of banknotes, but many currency management agencies, including the European Central Bank, have discussed the introduction of anonymous low-value payments.

Last but not least, the switch to digital currencies will make it easier to implement negative interest rates, which, as I have been advocating for many years, will greatly help restore the effectiveness of monetary policy in a crisis. In any case, the world after the epidemic will develop rapidly in terms of payment technology. The central bank cannot lag behind the trend of the times.

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