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I have already argued that the future of money and banking is digital.
This means, to me, the future of central banking is also digital.
Thus, the future is also about central bank digital currencies (CBDCs).
Without CBDCs, “central banks will not be able to maintain their monopoly over money creation, and their governments may be eclipsed geopolitically.” So writes Piroska Nagy Mohacsi, a visiting professor at the London School of Economics and Political Science, in Project Syndicate.
There are many problems and issues concerning the use of CBDCs, but they likely will be dealt with as the innovation progresses, and it’s actually put into use. This is the process that is confounding a lot of the financial community as money and finance become digital.
There are three issues that I would like to address today.
First, going digital will mean that “business” will be conducted very fast.
Second, going digital will end the possibility of “bank runs.”
Three, going digital will be necessary to maintain a country’s position in the reserve-currency competition.
All of these issues are crucial to the investment community and how they will handle their business.
Fast Service
We have already glimpsed the impact that digital speed can have on the banking system.
All we have to do is to look back to March 2023 and the failure of the Silicon Valley Bank.
The narrative on this failure is that depositors, using internet capabilities, were able to move their money so fast that Silicon Valley Bank was forced into a position where it would have had to sell “under-water” bonds in order to cover the outflows of funds from deposit accounts.
In the past, banks had many different ways to slow down people that were trying to obtain money from their accounts, and this gave the banks sufficient time to find ways to generate the cash to cover the withdrawals.
For example, a bank could require a three-day wait for a customer to obtain their monies.
But, as the whole financial system becomes more and more digital, building delays into the banking system seems less and less amenable.
If money and finance become digital, then competition is going to result in “doing business” in faster and faster ways. If that is what the technology allows, then competition is going to drive things into the most efficient form.
And, one thing to add to this. The future of money and banking is not going to just be limited to depository institutions like commercial banks. Finance is going to take on many forms. We have FinTech organizations, Decentralized Finance (DeFi) organizations, and Deep Finance organizations.
And, my guess is that there will be more and more finance-based organizations that will build into the evolving financial world.
We are working in a world of radical uncertainty, and no one really knows what the future of money and banking is going to look like.
Competition is going to be fierce, and competition through innovation is going to be the driver.
Full-Reserve Banking
The second issue has to do with “bank runs.”
This is what happened to Silicon Valley Bank…they experienced a bank run.
How do we stop bank runs?
Well, we could have 100 percent reserve banking.
This answer was proposed during the 1930s as a result of the bank runs on commercial banks connected with the Great Depression.
The idea here is to separate the payments system from the credit system. Something like this has been suggested, and it was called “the Chicago Plan” because of its association with a group of economists that primarily came from the University of Chicago.
The essence of the program is to require commercial banks to keep 100 percent of their deposits in reserves, both demand deposits as well as other deposits.
As Piroska Nagy Mohacsi writes in the article cited above, there would be no credit or liquidity risks to the CBCDs. They would be a perfect substitute for deposit insurance.
“In the case of Silicon Valley Bank and the mid-size banks that followed in its wake, the U.S. Federal Reserve and the Treasury stepped in to guarantee even those deposits above the statutory $250,000 threshold, thus creating an implicit backstop for all deposits at all banks nationwide. In doing so…they have already instituted one major component of a CBDC.”
Thus, the depositors to a bank would face no risk of losing their deposits and, consequently, there would be no justification for a “bank run.”
The concern over depositors demanding an immediate response to a request for a withdrawal would be non-existent.
The International Role
Finally, there is the global competition for maintaining reserve-currency status.
Some believe that the country that creates the optimal CBDC will dominate all others in terms of having the number one world reserve currency.
Ms. Mohacsi presents the following viewpoints.
The Federal Reserve believes that it must “preserve the dominant international role for the dollar.”
The European Central Bank has concluded that “the first objective of a digital euro would be to help Europe achieve strategic independence.”
And, then there is China. China wants to be Number One.
CBDCs, Ms. Mohacsi suggests, can support the international role of a currency in several ways.
1. It will allow for faster, cheaper international transactions.
2. It can support the whole digital finance structure of the country in the world.
3. It can assist in a country maintaining its own domestic monetary sovereignty and effectiveness.
The role a country can play in world finance will be dependent upon how it builds and controls its digital system.
The Future
A lot hinges on what the central bank and the government do with respect to moving further into the world of digital money and finance.
That world is going to happen.
What it ultimately will look like, no one knows.
But, as Ms. Mohacsi suggests… IT IS DECISION TIME!
I believe that investors must really keep an eye on what is happening in this space because what happens with respect to CBDCs is going to affect just about everything else when it comes to money and finance.
I believe investors may look at things going on in this area as not really significant when it comes to the overall picture of the economic world.
The problem with this attitude is that how money and finance are structured serves as the foundation of the economic world.
Ms. Mohacsi concludes: “Governments (and investors) that fail to keep up with technological trends will find themselves increasingly at the mercy of forces they cannot control.”
