Should PayPal be worried about your country’s central bank?

Should PayPal be worried about your country’s central bank?

Authorities in most countries may have no choice except to jump on the digital currencies bandwagon
The world of money is about to leap into the great unknown of central bank digital currencies. Will it land in a utopia of universal financial inclusion or crash into a dystopia of instability? Perhaps the experiment will upend banking as we know it, or turn out to be one big damp squib, unable to compete even with an existing private network like PayPal Holdings Inc?

Any of these outcomes are possible. Technology is enabling monetary authorities to give ordinary people access to a kind of electronic cash they have never had before. Digital money won’t feel new: It will offer instantaneity, just like PayPal, Alipay or WeChat Pay do. Like now, the purchasing power will sit in a smartphone wallet tied to a regular bank account, allowing funds to be swept in and out. But unlike now, the balance in the wallet will be sovereign liability. Just like cash.

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This difference will matter in case of bank runs. As you and a hundred others queue up to take all your savings out of a commercial institution that’s suddenly rumoured to be unsafe, you can buy a book online using your new electronic cash — that is, make a payment without debiting your bank account — and Inc’s bank won’t have to worry about getting remunerated.

A big relief? Let’s be reasonable. In a functioning 21st-century state, where there are no breadlines or snipers shooting from rooftops, no seller frets about small payments getting blocked because of bank failures. Deposit insurance takes care of that. Any advantage from possessing the mother of all money — one that extinguishes all claims of the merchant on you, yours on your bank, or the seller’s bank’s on your bank — is irrelevant. PayPal linked to a regular bank account works just fine in ordinary situations.

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Competitive pressures

But supply can create its own demand. Already the competitive pressures are mounting: the People’s Bank of China is expected to roll out its electronic yuan, e-CNY, as early as next year. If it doesn’t, then the Chinese might start using Bitcoin as a store of wealth and a means of payment. If the US Federal Reserve doesn’t respond, Americans might take to e-CNY, a direct claim on the People’s Bank of China. A new survey by the Bank for International Settlements shows that central banks are worried about residents shunning money they alone can print. “Widespread adoption of a foreign retail CBDC,” as BIS General Manager, Agustin Carstens, said in a recent speech, can be understood “as ‘digital dollarisation,’ or insert the currency of your choice here.”

It’s the prisoner’s dilemma and the quandary of how and whether to cooperate. No central bank has to issue its own digital cash if no other state or private actor introduces tokens that act like money. That fork in the road is already behind us, thanks to cryptocurrencies going mainstream. So authorities in most countries may have no choice except to jump on the bandwagon…Read more>>