The Emerging Revolution of Digital Currencies:
a Technological Opportunity for Rebalancing the International Monetary System
Robert Triffin International - Centro Studi sul Federalismo, July 2020
Technological innovations in payment systems are in a very fast and accelerating development that could affect deeply the conditions for ensuring financial stability and conducting monetary policy as well as the efficiency of the currency services for all citizens, including some geopolitical aspects to ensure less dependency from the dominance of US credit cards and the threat from Chinese and US Big Tech firms.
This strategic aspect and the implication for monetary policy and financial stability, joined to the attractive appetite of private sector for reaping the huge benefits from cost reductions and new smart functionalities for monetary payments, will force central banks to take over and regulate, but very probably to issue “Central Bank Digital Currencies” - CBDC - in close public-private partnerships with financial operators. The issuance of these CBDC will indeed – under conditions of interoperability - pave the way for a genuine “transmutation” of central bank monies from a local to a cheap and safe multilateral mean of settlements, in addition to the financial innovation and new functionalities provided by digital technologies.
Amazingly, CBDC could resolve the real obstacle posed by settlement risks (credit and liquidity risks) and the need to pass successively through multiple intermediaries and controls for acceding to Foreign central bank moneys. Indeed, the present cumbersome working modalities of the Forex will be radically simplified thanks to the “tokenization” applied to CBDC, resulting from some improved forms of permissioned “Distributed Ledger Technology” (DLT) i.e. not decentralized one, which allows for erasing resident - non-resident segmentation in international payments: DLT transfers instantaneously, peer-to-peer, payments or financial assets (like a “token”) digitally protected through a code. This safe technology not only skips all intermediary controls and implied delays required by the traditional sequencing of cross border payments (“PvP”), it also permits to conduct Forex transactions in digitalized central bank moneys (CBDC) like domestic payments.
The thesis we sustain in this paper has three related components:
1) the revolutionary improvement brought about by DLT with CBDC in financial integration required imperatively a global compatibility - or even a multilateral harmonization - arrangement for ensuring the interoperability of all national CBDC. This arrangement or coordination initiative between central banks and financial operators has also to be implemented as soon as possible for making possible during a transition period the working of the present Forex with the peer-to-peer DLT transactions. Such an initiative – whose operational technical modalities should still to be elaborated – needs to make compatible the automatic “tokenization” of CBDC implied by the use of DLT process with the traditional interbank Forex.
2) the most obvious and easiest way would be through the generalization of automatic conversion of all exchange-rate operations into e-SDR, which corresponds to the creation of an automatic virtual global clearing union. Anyway, such a centralized clearing should occur for benefitting fully from the advantage of tokenization of CBDC, making cross border transactions as cheap as domestic payments.
3) Inevitably, these new modalities will generate the conditions making possible and cost-reducing the issuance by the IMF of the e-SDR, first as a short-term overdraft facility for each central banks for smoothing the operational settlements on the Forex, but triggering the tangible opportunity to proof the costless availability of the missing lever for managing the global liquidity as a public good with an IMF acting as the multilateral LOLR by issuing/withdrawing e-SDR through the Forex.
Thus, the old Keynes/Triffin plans for establishing a rational system for global liquidity management more favourable to macroeconomic stability, could become at hands as a consequence of technological revolution in payment systems in order to ensure interoperability and full benefit of CBDC, ensuring central banks control of multilateral payment system in a more stable world.