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Changing the game with digital money

Morten Bech, Head of CPMI Secretariat19 November 2019

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Game plan

Inefficiencies in money and payments: an emerging market perspective Central bank digital currencies as a solution The opportunistic bigtechs Concluding remarks

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Known inefficiencies in FMI: inclusion and cross-border payments

Cross-border retail payment arrangementsGlobal access (financial inclusion)

1 Respondents aged 15+ who report having an account (by themselves or together with someone else) at a bank or another type of financial institution or report personally using a mobile money service in the past 12 months. Sources: World Bank Global Findex Surveys 2011, 2014, and 2017;

0

20

40

60

2011 2014 2017

%

Adults with a bank account1

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Remittance volumes and costs are rising

…at still high average costs 1Decline in correspondent banking

75

80

85

90

95

100

12 13 14 15 16 17 18

%

Active corridorsActive correspondents

2

4

6

8

10

11 12 13 14 15 16 17 18

%

BanksTraditional money transfer firmsFinancial technology firms

Remittances volumes are rising

1 Average total cost for sending $200; figure adapted from The Economist (2019).Sources: National Bank of Belgium; SWIFT BI Watch; The Economist (2019); World Bank, Remittance Prices Worldwide; World Bank; BIS calculations.

0

150

300

450

600

91 94 97 00 03 06 09 12 15 18

USD bn

World inflows

Placing a higher burden on emerging market economies that rely on remittances

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Game changerAre Central Bank Digital Currencies the solution?

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Central bank digital currencies

Source: Bech and Garratt, BIS Quarterly Review, September 2017, adapted by CPMI-MC report (2018).

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Design choices

Existing central bank money Central bank digital currencies

CashReserves and

settlement balances

General purposeWholesale only token

token accounts

24/7 availability () ()

Anonymity vis-à-vis central bank () ()

Peer-to-peer transfer () ()

Interest-bearing () () () ()

Limits or caps () () ()

= existing or likely feature, () = possible feature, = not typical or possible feature.

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CBDC for all

The potential positives:

Safer deposit account

Lower barrier to entry/improving inclusion

Easier negative rates

Better competition for customer deposits

Easier cross-border payments

The considerations:

Feasibility Mandate/legal Cyber risk AML/CFT Logistics

Financial intermediation bank deposits Impact banks’ business models and

lending

Financial stability quicker bank runs vs safe deposits

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Wholesale CBDC

Experiments to date result in systems that look broadly similar to, and not clearly superior to, existing RTGS

But there might be a role to play if RTGS are not yet developed

Higher risks – DLTs are largely untested

Higher reward?

More work and experimentation needed

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Financial pain could be bigtechs’ gain

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Big techs are increasingly moving into mobile payments

1 Venmo is a mobile payments app owned by PayPal that integrates social media features. It is popular among college students in the US. 2 Calibra is the mobile wallet that will run on top of the Libra network. 3 M-Pesa (M for mobile, pesa is Swahili for money) is a mobile phone-based money transfer, financing and microfinancing service, launched in 2007.

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The need for speed - the back-ends are improving

Sweden mobile payments take-offDiffusion of fast payments 1 Use of fast payments

1 The dashed part of the lines corresponds to projected implementation.Sources: Bech and Hobijn (2007); Bech, Shimizu and Wong (2017); CPMI Red Book Statistics; FIS (2018); national central banks; World Bank Group; IMF.

21

22

23

24

25

0

1

2

3

4

10 11 12 13 14 15 16 17 18

% of GDP % of GDP

Card payments (lhs)Cash in circulationSmartphone app (Swish)

0

35

70

105

140

0

20

40

60

80

80 85 90 95 00 05 10 15 20

Number %

RTGS systemsFast payment systems

Years (time scale)

0

10

20

30

40

0 1 2 3 4 5 6 7 8 9 10 11

Number of transactions per capita

ChileDenmarkIndia

NigeriaMalaysiaMexico

SingaporeSwedenUnited Kingdom

Years after implementation

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New potential entry – global stablecoins

Front-end Back-end

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Stablecoins – bringing cryptos closer to money

0.0

0.5

1.0

1.5

2.0

Tether DAI Bitcoin1 Ether1

min-max rangemedian75th-25th percentile

1 Bitcoin nor Ether are ‘stablecoins’; they are included for reference.Sources: G7 WG Investigating the impact of global stablecoins (2019); Bullmann, D, J Klemm and A Pinna (2019).

A functional view of the stablecoin ecosystemVolatility

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A simple framework …

Reach Domestic Global

Paym

ents

infra

stru

ctur

e Overlay (Uses other

infrastructure to transact)

Stand alone

(Traditional infrastructure

and DLT)

1 Venmo is a mobile payments app owned by PayPal that integrates social media features. It is popular among college students in the US. 2 Calibra is the mobile wallet that will run on top of the Libra network. 3 M-Pesa (M for mobile, pesa is Swahili for money) is a mobile phone-based money transfer, financing and microfinancing service, launched in 2007.

P27

Reach

Domestic

Global

Payments infrastructure

Overlay

(Uses other infrastructure to transact)

Stand alone

(Traditional infrastructure and DLT)

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Hybrid - a ‘synthetic’ CBDC

Central Banks offer ‘eMoney’ providers access to their reserve accounts under a strict condition of 100% backing - IMF

‘Synthetic CBDC’ = Narrow banking Benefits:

Remove credit risk Retail services provided by private sector

Costs: Strict supervision required Reputation risk for Central Bank

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Concluding remarks

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Walk the talk

We need to improve the efficiency and inclusiveness of payment and financial services.

Central banks assess the relevance of issuing central bank digital currencies.

Public authorities consider most appropriate regulatory treatment of stablecoins and how existing regulatory frameworks can and should be applied.

The FSB and international standard-setting bodies assess how existing international principles and standards could be applied.

Maintain the high level of international coordination; ensure a level plaining field.

Changing the game with digital moneyGame planKnown inefficiencies in FMI: inclusion and cross-border paymentsRemittance volumes and costs are rising�Game changer�Are Central Bank Digital Currencies the solution?Central bank digital currenciesDesign choicesCBDC for allWholesale CBDCFinancial pain could be bigtechs’ gainBig techs are increasingly moving into mobile paymentsThe need for speed - the back-ends are improvingNew potential entry – global stablecoinsStablecoins – bringing cryptos closer to moneyA simple framework …Hybrid - a ‘synthetic’ CBDCConcluding remarksWalk the talk