A revolution is pending in finance, and the world is only beginning to realize it. Financial institutions will have to take a radically different approach to information technology just to stay in business. Bullish Global, a crypto firm, is planning to go public this year, with an expected valuation of $9 billion. Circle Internet Financial, the company behind stablecoin, is also planning to be publicly listed, as is cryptocurrency platform Bakkt Holdings. Financial markets are difficult to predict, but at this point, 12 years after Bitcoin, it’s hard to argue that this is a bubble.
Ask yourself a question. Why shouldn’t finance and payments be as easy as sending an email? Anyone who grew up on computer games and texting probably thinks that running a financial system should be equally frictionless and cheap, especially if there existed a mature central bank digital currency. There’s no reason money can’t be transferred via simple communication. Due to the large amount of money at stake, there would need to be higher levels of security than with email. But some mix of bioscans, multi-factor authorization and hardware security (more than a password) ought to suffice. These safeguards shouldn’t cost very much once they are in place.
One vision is that governments and central banks will run these systems, making governments and central banks far more important in finance. For many institutions, private banks would not be needed to get access the payments system, and so the role of private banks would shrink. The central bank in turn would have more funds to deploy, and inevitably it would apply some amount of discretion to those funds.
If the role of government is to expand, and if private banks are to suffer, it would create significant issues of the sort that the US political system is often not very good at resolving. The US Federal Reserve has made it clear it won’t create a digital currency without approval from Congress, but Congress is notorious for being slow or even unable to act, especially on issues involving the US government’s role in the American economy.
And these squabbles are not purely partisan. Given the US government’s record with technology—remember the botched rollout of the Obamacare website?—can we be so sure that a central bank digital currency would be hack-proof and well-functioning from the start?
In a remarkably honest yet radical speech last month about stablecoins, Fed Governor Randal Quarles argued that current payments systems already incorporate a great deal of information technology— and they are improving rapidly. The implication is that a central bank digital currency, or a CBDC, is a solution in search of a problem.
Quarles also suggested that the Fed tolerate stablecoins, just as central banking has coexisted and indeed thrived with numerous other private-sector innovations. Stablecoins can serve as a private-sector experiment to see if individuals and institutions truly desire a radically different payments system, in this case based on crypto and blockchains. If they do, the system can evolve by having some but not all transactions shift toward stablecoin.
There need not be any ‘do or die’ date of transition requiring a perfectly functioning CBDC. But insofar as those stablecoins can achieve the very simple methods of funds transfer outlined above, market participants will continue to use them more.
Quarles argued that with suitable but non-extraordinary regulation of stablecoin issuers, such a system could prove stable. He even seems to prefer the private-sector alternative: “It seems to me that there has been considerable private-sector innovation in the payments industry without a CBDC, and it is conceivable that a Fed CBDC, or even plans for one, might deter private-sector innovation by effectively ‘occupying the field’.” In essence, Quarles is willing to tolerate a system in which privately-issued dollar equivalents become a major means of consummating payments outside of the Fed’s traditional institutions. Presumably capital requirements would be used to ensure solvency.
For many onlookers, even hearing of innovation in finance raises worries about systemic risk. But perhaps the US would do better by letting information technology advance than trying to shut it down. And if you are afraid of instability, are you really so keen to see foreign central bank digital currencies fill up this space?
If you are still sceptical, ask yourself two final questions. First, which has been more innovative on these issues: the private sector or the public sector? Second, how realistic are the prospects that Congress takes any effective action at all? This is now a world in which radical monetary ideas are produced and consumed like potato chips. I say, pass the bag.
Tyler Cowen is a Bloomberg Opinion columnist. He is a professor of economics at George Mason University
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