Should digital currency and central bank be issued?

In July, I attended an annual seminar organized by the Peruvian Central Bank. The main themes were preparations for a next recession, global external imbalances, and digital currency. The author reported a current account imbalance in major countries / regions in 2060. Professor Roberto Rigobon at the MIT Sloan School of Management praised Facebook’s proposal for issuing the digital currency “Libra” as “excellently designed.”

The central bank of Uruguay introduced its digital currency (E Peso). The mechanism is similar to the M Pesa introduced in Kenya where bank accounts are not widespread. The only difference from M Pesa is that the currency issuer is a central bank, not a private IT company. There is no problem after the introduction with the remaining issue being the competition with bank deposits.

I watched a live broadcast of U.S. House of Representatives parliamentary testimony about Libra at my hotel. The overwhelming number of Members of the Congress were critical of Facebook. But some members expressed the view that this is one of the most exciting parliamentary testimony in this decade.

It was symbolic that the witness, Mr. David Marcus, said that China will issue, even if we do not issue a global digital currency. In fact, Mr. Mark Zuckerberg once said that Libra was inspired by “Wechat Pay” provided by the China’s Tencent payment service.

In China, private financial transactions such as Alibaba Group and Tencent, which are major internet providers, are all integrated into the central bank payment network. Consumer smartphone payments are also widespread, making it so easy for central banks to issue digital currency. The Swedish central bank will decide whether or not it will introduce the central bank digital currency in a year or two, but in reality People’s Bank of China may move faster.

Agustin Carstens, General Manager, Bank for International Settlements (BIS), took a step forward from traditional cautious attitude. At the press conference he mentioned that central banks should be ready to prepare for introducing digital currency. In addition, Mr. Mark Carney, Bank of England Governor, at a Jackson Hole Economic Policy Symposium in August, argued that the current international monetary system is overly dependent on the dollar, and the lack of liquidity in the dollar increases the scarcity premium of safe assets. As a result, the natural interest rate (equilibrium real interest rate) has declined. He proposed to construct a new framework based on “global synthetic currency” as a dominant currency, which combines multiple currencies, suitable for a multipolar world.

The global economy is going to be split into two digital economic zones, centered on the United States and China, similar to the pre-war Britain-centered sterling area and Germany-centered Reichsmark zone. Which will become dominant will depend on how the new international currency regime should be formed. Even though Libra has a seigniorage gain, there is no fiscal backing as a legal currency when the “Libra Society” faces the risk of bankruptcy.

Governor Carney has found it unsettled as to whether the private sector is responsible for issuing global digital currency or the central banks should take the lead. But the answer seems to me to be clear, since the Chinese digital currency is equipped with fiscal backing.

(The english translation of the article was published in the Nikkei morning edition 2019/09/06.)