(On the beat in London…OTRB)
FIRST DRAFT
Voice Note: Settlement Costs
Factoid: The Riksbank apparently decided to plug into the European T2S settlement system rather than develop its own system as it was more cost-efficient to do so. This is despite the Swedish krona obviously not being in the eurozone. I did not know that. Details need to be fact-checked.
Voice Note: CBDC Developments
Central bankers working on CBDCs seem convinced that public concerns about digital currencies undermining transaction privacy can be overcome; they believe a middle ground will be achievable technologically. I am less convinced. Thus far central banks are proposing tiered solutions, which means privacy will only be assured for small transactions while larger transactions will have to be fully KYC/AMLed. They also favour joined-up approaches and interoperability across whatever CBDCs and systems are developed. This doesn’t tie very well in my mind with the politicisation of finance. Or the fact that we have now effectively ejected Russia from organisations that monitor and supervise central banking and banking and liquidity.
China is still in the central banking club, which means there is still interoperability with China — irrespective of whether their CBDC systems align with our own western values regarding privacy, consumer control and property rights. I think this is a blind spot. If China is interoperable with us but remains connected to Russia, freezing out Russia from our system won’t remove channels into it through China. So there seems to be a paradox related to the assumption that you can have interoperability and still freeze bad players out of the system. It all feels like cakeism.
It will take years for the west to deliver a proper CBDC, officials say. But I wonder if rationing or shortages might accelerate such developments? When you look at Kenya, the reality is that M PESA was born out of necessity related to civil confusion and chaos surrounding a disputed Kenyan election. This created the conditions for M PESA users to use the private alternative money system to reverse financial flows that would otherwise occur the other way around. I wonder if in a similar vein, rationing might accelerate CBDC development mainly because governments will hijack the system for their own ends?
Central bank officials are opposed to the idea of CBDCs ever being utilised as a rationing mechanism. If it happens it would be a political move not a central banking one.
Voice Note: Politicisation of Money
The central bank community seems to be missing how it’s being politicised. Central banks still see themselves as entirely independent entities, but clearly they are not given the speed with which the Russian central bank was expelled from the club. What’s also strange is their disregard for public concerns about CBDCs. This looks to have come about because of a lack of public engagement on the topic. The public thus feels frozen out of the decision-making process on how money will evolve digitally. This has given rise to all sorts of ridiculous conspiracy theories. The central banks, however, don’t seem that keen on engaging with the public to help them understand the pluses and minuses of CBDCs better. They don’t see it as their responsibility. They think it’s the responsibility of politicians to engage with the public on these topics. But that, ironically, creates a vacuum which sees nobody engaging with anyone and therefore developments continue to be deployed by technocratic entities — something that only fuels further public anxiety.
Crises often generate the means by which innovations are deployed more quickly than expected. I think central banks are failing to realise this. A good example, I think, is Ukraine, which is an innovation leader when it comes to digital ID, banking and government support applications. This includes identity-based mechanisms for distributing government funding to refugees abroad if certain conditions are met. The main Ukrainian government IT app is really one of the most sophisticated out there and it was born out of and accelerated by necessity.
Central banks seem to think that because technology can’t be stopped, and that it can be used for good or bad, it’s not up to them to suspend these processes. It’s up to them to help create checks and balances to make sure these systems are more often than not deployed as public goods. That might be a reasonable position overall. But it doesn’t change the fact that once Pandora’s box is opened, these tools will have the capacity to be utilised in really bad ways. This is especially the case if they get into the hands of authoritarian governments in the context of increasingly politicised rather than independent central banks.
