Pandemic shock may hasten central bank digital cash: Mike Dolan

This coronavirus crisis may have come too soon for central banks now mulling digital currency as legal tender but the financial problems the health scare presents could hasten their arrival.

Getting government and central bank cash instantly, fairly and securely to where it's needed most in an emergency has been one of the biggest challenges presented by this pandemic and the deep recession it's causing. And central bank digital currency, or CBDCs, could help solve some of those problems.

Electronic money is how many people already operate via their bank accounts. Legal tender digital cash is different in that it operates just like traditional notes and coins but would be in a digital format akin to cryptocurrencies, such as Bitcoin, and used for payment or passed between individuals via blockchain-style digital wallets. Unlike a cryptocurrency, it's created and guaranteed by the central bank.

As well as avoiding health risks posed by physically passing around money in a pandemic, the advantages of moving to CBDCs include the ability of central banks to inject cash to households and firms at speed, allowing tracking and withdrawal of the funds eventually and even taxation if necessary to prevent cash hoarders avoiding negative interest rates at banks. On the other hand, central banks have hesitated so far due to technology, security and privacy questions and also concerns about the stability of the standing banking and payments system from any sudden rush to CBDCs.

Yet even before the virus hit, central banks of Britain, the euro zone, Japan, Canada, Sweden and Switzerland and the Bank for International Settlements were already due to meet this month to pool findings on plans for digital cash.

According to Deutsche Bank analyst Marion Laboure, this group of central banks - representing about a fifth of the world's population - are likely to issue a general purpose digital currency within three years.

The status of that April meeting is unclear. But it comes as central banks and governments come under pressure to deliver cash to households and businesses during an economic shock that will see major western economies shrink at rates not seen for a century.

Standing methods of pumping money through the banking system via so-called "quantitative easing", where central banks flood commercial banks with cash by buying bonds, are already in full swing to the tune of trillions of dollars.

Additional trillions of government fiscal spending has ratcheted up in tandem, supporting healthcare, paying salaries and even posting checks. The bill is gigantic, but the cost of that debt is held down by central banks buying government bonds.

So far, so good. That's stabilised credit markets to some degree but what about the public at large and wider economy?

The halt of much economic activity to stop the spread of the coronavirus means governments and central banks will struggle to get money directly to both businesses starved of cashflow and workers who are furloughed or laid off.

A well-aired criticism of QE since the last crash 12 years ago was that much of the money got bunged up in the banks as low demand for loans prevented it getting to the households and firms that needed it most and it merely ended up inflating asset prices held by the wealthiest - culminating in slow growth, rising inequality and a wave of political frustration.

Many experts feel central bank digital currencies could go some way to addressing these problems.

The "whatever it takes" mantra from most policymakers mean policies previously considered taboo are suddenly in the mix or are being openly debated and discussed.

On Thursday alone, the Bank of England agreed to lend the UK government money directly if needed for its COVID-19 spending plans if debt markets proved too cumbersome.

Shortly after, the Fed announced another massive $2.3 trillion programme, this time for small and mid-sized firms via banks, lending directly to local governments and even providing for corporations with poor credit ratings.

Some proposals for CBDCs have emerged that potentially blend all approaches germane to this shock and the policy conundrums it throws up.

In a paper for Washington's Petersen Institute published last week, economists Julia Coronado and Simon Potter advocated a system of digital payment providers that allowed the Fed to directly pay households to stabilize income in a downturn when interest rates were already zero.