Central banks eye dangers of e-currencies

The central bankers' bank is cautious about national e-currencies Keystone

Replacing cash with national digital currencies could threaten bank runs in times of economic stress, says the Bank for International Settlements (BIS). This is music to the ears of e-cash opponents, such as UBS chief economist Daniel Kalt.

BISExternal link, the Basel-based “bank of central banks” organisation, laid out its thoughts in a paperExternal link to be presented to next week’s G20 meeting of finance ministers in Buenos Aires.External link It refers to the theoretical concept of centrally produced digital cash as “central bank digital currencies” – or CBDC.

If CBDC were to be issued direct to the masses, it could encourage people to empty their bank accounts and jump into the new safe haven asset in the event of another financial crisis, the report states.

“A CBDC could allow for ‘digital runs’ towards the central bank with unprecedented speed and scale. Even in the presence of deposit insurance, the stability of retail funding could weaken because a risk-free CBDC provides a very safe alternative.”

Compare and not-so-contrast with a recent blog post (in German)External link from UBS’s Kalt, which predicts a similar bank run during a recession. 

“The public’s reaction would be clear: everyone would immediately withdraw their bank savings and transfer them to the SNB’s [Swiss National Bank] extremely secure e-franc accounts, with the result that the banking system would begin to shake. This would probably lead to a storm, as banks would not be able to lend to SMEs, which would further exacerbate the recession.”

Kalt’s blunt blog post was inspired by recent calls for an e-franc in Switzerland. 

But all is not lost for the champions of digital cash. BIS also points out some likely plus points for introducing central bank “printed” e-money, particularly for countries such as Sweden where cash is going out of style.

For a start, moving financial transactions to distributed ledgers, such as blockchain, could reduce costs and increase efficiencies, the report states. Such technology could also help the financial system track illicit money flows, it adds.

In addition, the report predicts minimal impact on monetary policy under most circumstances. But the key message from BIS to G20 ministers next week is “wait and see”.