The future of money: How the digital revolution is transforming currencies and finance by Eswar S Prasad
The book covers the latest fashion in payments – central bank digital currencies (CBDC). Essentially digital cash that a central bank issues. The author says the “era of cash is drawing to an end, and that of central bank digital currencies has begun.” An exciting conclusion to a book which seeks to make a case for a CBDC but doesn’t quite persuade.
The author takes the reader, possibly a touch slowly, through the basics of money and finance, before looking at the recent “FinTech” developments and the creation of cryptocurrencies. He then sets out the case for CBDCs, before exploring the ramifications of his conclusion that CBDC is nigh!
The first parts of the book are vital, if a bit long. We are at a point where cash use for payments is reducing. More people are reliant on using commercial money for payments than ever. Firms are using new technologies to provide innovative financial services for consumers and businesses that were not possible in the analogue era. Cryptocurrencies and crypto assets are novel but mostly flawed as a means of payment. So what do you do?
The author concludes that central banks minting digital currencies instead of paper currencies is the way forward. Or at least he tries. But I am not persuaded he has done all the thinking to conclude that is the case. I daresay this is a feature of being the first to the printing press with a big book on the big central banking issue of the day. For instance, one of the economic attractions of issuing a CBDC is that it could allow central banks to transmit monetary policy directly to the economy. A nice way of saying any change in interest rates could hit a consumer’s digital wallet straight away, whether up or down. Paving the way for negative interest rates to force people to spend and stimulate a flagging economy. But try doing that in real life. As the author says, negative interest rates “hurt savers, especially pensioners and older savers… negative interest rates are therefore considered politically toxic.” The author does not explain why politicians would give central banks the freedom to go below zero. I expect politicians in the WEIRD (Western, Educated, Industrialised, Rich and Democratic) world to explicitly forbid central banks from paying interest on CBDC balances, making any CBDCs more like paper cash and removing one of the most significant monetary advantages of the whole exercise.
There are several other tricksy issues in a CBDC. A few are privacy, cyber risks, impact on credit creation, and the impact on weaker economies (why hold a weaker currency if you can hold a digital dollar). At the dystopian end of the telescope, a CBDC could lead to the end of the fungibility of money. Theoretically, a central authority could restrict what a particular digital pound could buy. For example, a person on welfare could only spend their welfare payment on food or rent. Those who worry about government waste may salivate at such a prospect, but I urge caution. If you can constrain the use of one digital pound, you can constrain the use of all of them. Who knows what the next government would decide to circumscribe. To give the author credit, he acknowledges many of these problems. But, he still concludes that we can wait no longer and must step boldly into the era of digital money. As Marx could have said: “The central bankers have nothing to lose but their chains. They have a world to win.”
The Lord Meyricks 