Money is edging closer toward its biggest reinvention in centuries as central banks start to embrace the creation of digital currencies.
With modern technology and even the coronavirus facilitating a global shift toward cashless economies, and alternative concepts such as Bitcoin taking hold, monetary policy makers are acting to ensure they don’t fall behind.
That might one day mean central banks could make currencies directly available electronically for people to spend with their smartphone, backed by the integrity of the state. Before that comes to pass, a power struggle will play out over the future of money, raising issues ranging from privacy to social equality and financial stability.
“The whole effort is defensive,” said David Dollar, a senior fellow at the Brookings Institution in Washington. Central banks are “trying to get back into the key position to control currency and the money supply.”
The most proactive country is China, conducting real-world trials of a digital yuan, partnering with the SWIFT global transactions system, and cracking down on payment services like Jack Ma’s Alipay to reassert supremacy over its currency. Elsewhere, officials from Frankfurt to Washington are watching closely, pondering experiments of their own.
The idea behind central-bank digital currencies is that, unlike conventional electronic money, they aren’t bound up with regular banks. Nor are they debts, as on a credit card. And they certainly aren’t a privately created currency like Bitcoin.
They are cash — created by the state, just as notes and coins are — held directly in a citizen’s electronic “wallet” or phone app. There is no financial middle man.
“If you look at the history of money, you had Phase One with the gold and silver coins of the Greek Islands, Phase Two was book money with the Amsterdam Exchange Bank, Phase Three was banknotes,” said Wouter Bossu, deputy head of the International Monetary Fund’s Financial and Fiscal Law Unit. Central-bank digital currency would be a “fourth form of money in human civilization.”