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EM central banks assess promise and peril of CBDCs


While the impending advent of central bank digital currencies (CBDC) has the potential to offer emerging markets a fresh toolkit for stability it could also exacerbate financial system risk, experts have warned.

Adopting CBDCs would see the cost of switching between currencies decline sharply and administrative friction all but disappear. The result will be a world where market movements occur at a much faster pace, limiting central banks’ policy options, Princeton economist Markus Brunnermeier said on a panel entitled Central Bank Digital Currencies and the International Monetary System at this week’s annual meetings.

Emerging markets, already at the mercy of volatile capital flows, could find contagion a greater threat than ever. Their own local investors, meanwhile, will find it easier to abandon the domestic currency in favour of another curency.

Yet CBDCs could also be a force for stability. Not least through creating a new stock of safe assets for investors. In a fragile EM banking system, worried investors and depositors would be able to move their funds from local lenders into the national CBDC — rather than out of the country. The central bank would then be able to channel this influx of funds back into local banks facing temporary liquidity pressures but otherwise solvent, Brunnermeier said.

“If you don’t have a CBDC, then people might run into another currency,” he said. “That’s actually, in my view, much more dangerous.”

Brunnermeier believes that in the future, currency runs will be a far greater threat to small developing and emerging markets than bank runs. As such, CBDCs would offer these economies a local safe haven asset for investors to retreat into. But this touches on one of several major design questions occupying policymakers: whether non-residents would be allowed to hold their digital currency.

Grappling with the many opportunities and potential dangers inherent in CBDCs has become a key issue for central banks across the globe. A recent IMF survey of its 190 member states revealed that 141 were somewhere between working on their own digital currency and considering how to prepare for the wider adoption of CBDCs.

Nizar Chadded, deputy director general of Development & Oversight of Payments at the Central Bank of Tunisia, said possibilities around financial inclusion, cashless transactions and improved transparency prompted his central bank to launch a CBDC taskforce

“But on the other side, we know that behind CBDC there are many risks that threaten monetary policy, data privacy and financial stability,” he added, while sitting on another panel, entitled Getting Started with CBDC: Practitioners’ Views.

Central banks that opt to sit on the sidelines, meanwhile, risk missing out on influencing the rules and frameworks that will help determine how CBDCs are used. First movers will have “inordinate influence” in setting CBDC norms and standards, said Neha Narula, director of MIT Media Lab’s Digital Currency Initiative.

China’s e-CNY is already setting an expectation that although the central bank will not store user data, it would easily be able to access and aggregate user data held at commercial banks, Narula added.

“If privacy from the central bank itself is not taken seriously as a first order concern, then the door is open for states to use CBDC as a form of monitoring and enforcement against their own citizens,” she said.

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