If nothing else, the coronavirus pandemic laid bare the gaps in our financial systems and the lack of inclusivity to those members of society who could most benefit from banking services and digital currencies.
Rough neighborhood. (Image by Herbert Hansen from Pixabay)
Maria Soriano was cautious by nature. Growing up in the Batasan Hills slums of Manila’s Quezon City, in the Philippines, being alert wasn’t just a matter of habit, it was a matter of life and death.
One of the many challenges of living in a slum in one of the most populous cities in Southeast Asia, was not just the lack of access to infrastructure, it was the lack of access to security.
But despite the grinding poverty, like so many others in Manila and in Southeast Asia, Maria has a smartphone and access to wireless internet, which has provided opportunities like never before.
Running a small coffee cart on the edge of the slum, Maria makes enough money to pay off the microloan she obtained for her small business, from an international non-profit organization and she’s able to pay off the microloan every month — all thanks to her smartphone.
According to Maria, who used to transact solely using cash, the move to digital payments has had a massive impact on her income opportunities.
“Before I had to worry about being robbed of the cash. There are no banks for me, so I had to keep cash around and it is not safe in the house or where my husband can get to it, because he will use the money for drinking.”
And Maria’s story is not unique.
In cities across the developing world, entrepreneurs like Maria, have been empowered by the rise of digital payments and microlending which have spurred a mini-economic revolution.
Pocket Banks
Without access to banking services, the smartphone has become a defacto bank for millions, using digital wallet and payment services from Paytm in India to M-Pesa in Kenya and Coins PH in the Philippines, to name a few.
But digital payments may not just be a matter of livelihood, but life itself.
In March, during the height of the coronavirus pandemic, the World Health Organization confirmed that banknotes may carry the coronavirus for several days and advised the use of contactless payments instead.
With heightened awareness of hygiene, the need for digital currencies and the payment gateways to support them has come into sharp focus and may have helped to accelerate the push by some central banks to develop their own digital currencies.
Speaking at a webinar organized by consultancy Accenture, Benoît Cœuré, Head of the Bank for International Settlements (a clearing house for central banks) Innovation Hub said,
“The (coronavirus) crisis has exposed the value of technologies which enable the economy to operate at arm’s length and partially overcome social distancing.”
“The current discussion on central bank digital currency also comes into sharper focus.”
And much like how China was the first to have contracted the coronavirus and also the first to have contained it, it’s also been the first to get to a digital currency.
Coming soon to a museum near you. (Photo by Twitter: @jankolario on Unsplash)
While other central banks have been deliberating over the costs and benefits of a digital currency for years, China’s central bank, the People’s Bank of China (PBoC) seized the moment and launched a pilot test of the digital yuan, rolling it out in four cities which are economic powerhouses — Shenzhen, Suzhou, Chengdu and the Xiong’An New Area, a high-tech new city about an hour’s drive southwest of China’s capital city, Beijing.
That Beijing selected Shenzhen, which was also the epicenter of China’s market reforms, demonstrates how serious the Chinese are about their digital currency.
But unlike other forms of digital payments which require internet connectivity — China’s digital yuan can be made through smartphone-based near field communication (NFC), a technology which enables suitably enabled smartphones to interact with each other in close proximity, thus allowing digital currency to be exchanged sans internet.
To be sure, mobile cashless payments, powered by the likes of Alibaba’s Alipay and Tencent’s WeChat Pay have been around for years and their ubiquity in China is unparalleled.
But Beijing’s launch of a digital yuan is another thing altogether.
Digital Yuan
With Chinese President Xi Jinping’s call for the nation to focus on blockchain technology, Beijing has hardly been coy about its ambitions behind the digital yuan, with English language state media China Daily, going as far as to claim that,
“(China’s) digital currency provides a functional alternative to the dollar settlement system and blunts the impact of any sanctions or threats of exclusion both at a country and company level.”
“It may also facilitate integration into globally traded currency markets with a reduced risk of politically inspired disruption.”
But a functional alternative does not a global currency make.
While China and Russia have already priced some bilateral energy contracts using the rouble and yuan, the vast majority are still priced in dollars.
And the dollar is still used to price everything from bullion to Bitcoin and all of the commodities in between that make modern life possible.
A digital yuan will not unseat the dollar’s supremacy just yet.
Despite being the world’s second largest economy, the Chinese yuan barely makes up 2% of global payments.
And in terms of choice of currency, American hegemony (for the most part) is a lesser evil to Chinese belligerence.
In reality, central banks have been studying the use of blockchain technology and the possibility of a digital currency for years, but the advent of Bitcoin and the prospect of Facebook’s own digital currency, Libra has hastened the need for action.
Mao would be impressed. (Photo by Eric Prouzet on Unsplash)
The Bank for International Settlements has taken a favorable view towards central bank issued digital currencies, not least because they would be backed by governments and represent a more direct means to control the money supply.
And early versions of the draft coronavirus stimulus bill before the U.S. House of Representatives, openly referred to something akin to a digital dollar and digital wallets for all American citizens, so that financial aid could be issued directly to all, including the unbanked.
But its not just the Americans who are seriously considering central bank-issued digital currencies.
Recently, the European Central Bank, in what can only be described as being very European, released a working paper analyzing the merits of its potential digital currency.
And in 2016, the Bank of England conducted a study on the feasibility of a central bank-issued digital currency and found that it could potentially increase GDP by as much as 3%, while improving the central bank’s ability to stabilize the business cycle.
So what’s stopping central banks from taking the plunge?
Time To Digitize
To be sure, the coronavirus pandemic has only made more obvious the need for currencies to digitize.
Whether it’s to prevent the spread of viruses themselves, or to ensure the timely delivery of much needed financial aid to the unbanked, the coronavirus pandemic made obvious all of the shortcomings of our current monetary systems.
And it wouldn’t just be for doling out stimulus packages either.
A central bank-issued digital currency would help monetary policy, by being able to directly target the money supply without having to rely on the largess of commercial banks.
And with real-time data regarding demand for money, central banks would be able to respond more directly and more swiftly through a central bank-issued digital currency.
At the same time, blockchain technology could support faster, auditable and more transparent settlement systems, while dramatically reducing settlement costs and avoiding logjams from single points of failure.
But the shift to central bank-issued digital currencies is mired by several challenges — some of which the coronavirus pandemic has unwittingly helped to address.
For starters, the concern that central banks are ill-equipped to provide loans directly to businesses and consumers is no longer as relevant, especially since the line between the U.S. Treasury Department and the Federal Reserve has been blurred.
While we’re digitizing currencies, how long more before we can digitize travel?
Loans to small businesses and checks sent directly to millions of Americans ultimately have their roots in the Fed’s purchasing of bonds issued by the U.S. government, which obfuscates the distinction between U.S. government bonds and just printing money.
And Japan has been doing that for the better part of a decade already, with limited consequences.
As it stands, the Bank of Japan holds as much as 43% of the Japanese government’s outstanding bonds.
Then there’s the issue that once central banks issue their own digital currencies, depositors will choose to deposit directly with the central bank instead of with commercial banks, particularly in uncertain times.
But policies such as deposit insurance, as well as the fact that central bank deposits would not be interest bearing, plus more conservative capital requirement ratios at the banks of most rich countries, would address this issue.
As long as commercial banks make it attractive for depositors to deposit their money (digital or otherwise) with them, then there is less risk that they will be left out of the digital currency revolution.
What is a danger however is that if commercial banks need to compete with central banks for depositors, they will need to offer higher interest rates, which will have roll on effects in terms of hunting for yield and the rates at which they make loans as well — rising interest rates could slow business growth and yield hungry banks may pile on more risk.
The PBoC is well aware of these limitations and thus far has not made the digital yuan directly available to the public, but rather as a medium of settlement between the PBoC and commercial banks — a feature which in and of itself may increase transparency in the Chinese banking system and enhance stability.
The PBoC envisages a 2-tier system — the central bank will create the digital yuan and issue it only to large financial institutions and the four largest state-owned banks, which will then trickle down the digital yuan to China’s 1.4 billion citizens — so basically exactly the same as cash, just digital.
The incremental approach of the PBoC is understandable — moving straight to a direct issuance of digital yuan from the PBoC to the people would be too much of a leap for now, but given the nature of a central bank-issued digital currency, could be an eventuality.
And while a traceable digital currency helps authorities to fight money laundering, corruption, tax evasion and terrorist financing, close surveillance and scrutiny of individuals’ transactions by a government will be an affront to the sensitivities of those living in liberal democracies, who are used to robust privacy laws.
However, given the many civil liberties have already been placed under pressure by the coronavirus pandemic, particularly contact tracing, that governments gain the ability to monitor our money flows, may just add to an already long list of how our lives are becoming increasingly less private.
Privacy issues aside, China has pushed ahead with its digital yuan.
That Congress would consider something similar was reflected in early drafts of the coronavirus stimulus package suggests that the prospect of a digital dollar is no longer taboo.
Considering that we’ve digitized so much of our lives, and of late that has included personal interactions, isn’t it time we started digitizing our currencies as well?
