Does the Singleness of Money Really Need to be Defended by a CBDC?
Originally Published on Tabb Forum August 02, 2024
https://tabbforum.com/opinions/does-the-singleness-of-money-really-need-to-be-defended-by-a-cbdc/
One popular argument central bankers have put forward in favor of CBDCs has been the need to protect “the Singleness of Money.” In this article, Martin Walker, Director of Banking and Finance at the Center for Evidence-Based Management, explores the "Singleness of Money" concept and provides analysis.
There have been many reasons put forward for adopting or at least considering adoption of a Central Bank Digital Currency (CBDC). The ever changing set of imperatives for adopting CBDCs is one of the things that feeds the belief that a CBDC is a solution in search of problem, if not, a cheap way for central banks to give the impression of being innovative.
Before the Covid era, CBDCs were seen as a way to break the Lower Zero Bound of interest rates to facilitate ever more imaginative forms of monetary stimulus. During the Covid pandemic, the need to get rid of disease spreading physical currency became popular. Not to mention other reasons for a CBDC that periodically wax and wane in popularity such as reducing financial exclusion, more efficient payments, improved capital markets infrastructure and even facilitating AI to help Central Banks understand the economy better.
More recently the popular argument central bankers have put forward for CBDCS has been the need to protect “the Singleness of Money.” The basic idea is that a dollar (or any other currency) should be worth the same whether it exists as a balance at a commercial bank account, as a physical note or as central bank reserves.
“A strong anchor is needed to protect the singleness of money, monetary sovereignty and the integrity of the financial system[i].” Fabio Panetta, ECB 2022
“…, our main motivation for a retail CBDC would be to promote the Singleness of Money by ensuring that the public always has the option of going into fully functional central bank money that can be used in their everyday lives.” – Andrew Bailey, Bank of England 2023
Perhaps the most vigorous defender of the “Singleness of Money” has been the Bank for International Settlements, though strangely they were not particularly concerned before 2022 (see chart).
What is the Singleness of Money and why is it considered under threat? The tone in much of the CBDC related literature coming out of central banks and related institutions can easily give the impression that “Singleness of Money” is some kind of economic law or moral imperative that any society would be reckless to undermine. However, going back to one of the original documents that mention the concept, “The role of central bank money in payment systems”[ii], published by the BIS in August 2003, the concept is neither. The document had two main themes.
The first was the need for central bank money to be used in payment systems, particularly high value payment systems between banks and second was to support the belief that different forms of the same currency are convertible at par i.e. the “singleness of money”. The two ideas were closely intertwined. A payment system that allows payments to be sent from Bank A to Bank B via a transfer of funds at central bank reserve accounts has the benefit of reducing systemic risk and counterparty party risk. Since central bank money is free from credit risk and central bank reserves are one of the most liquid forms of money, it also has the benefit of creating the impression that a Euro (or dollar) in Bank A has the same value as a euro in Bank B.
A reasonable concept but one focused on same-day payments. So, what do central bankers think is threatening it?
The first concern, expressed here by Fabio Panetta of the ECB in 2022, is the public becoming confused about the meaning of money by new forms of digital payments and asset. “…if we don’t act, we will also see increasing confusion about digital money. Crypto-assets are a case in point. Unbacked crypto-assets, for example, cannot perform the functions of money
The second was related to the diminishing use of physical cash in many economies, which apparently will undermine the role of central bank money as an anchor of value for other forms of money.
“The only form of state money available to the public at present – physical cash – is declining in use and usability. And as the Libra announcement highlighted, new, non-bank players could potentially exploit technological advance to offer new forms of money and new payment systems and services. Against this backdrop, my view is that it is likely to be necessary to issue central bank money in digital form to support confidence in money, particularly in stress, and to ensure the singleness of money.”[iii] – Jon Cuncliffe, Bank of England 2023
Do these concerns make sense either in terms of the original concept of the Singleness of Money or more generally in relation to the smooth operation of banking and payments?
The risk that the public could became confused by cryptocurrencies or the like, seems a particularly weak argument. Cryptocurrencies have existed for 15 years and made little to no impact on core payments processing or banking. Largely restricted to uses such as speculation and ransomware. Except in countries with strict currency controls and/or high inflation there is little sign of them ever having any impact. However, a close technological cousin of cryptocurrencies are the stablecoins, which could be considered more of a threat. Stablecoins are designed to preserve parity with a specified fiat currency, based on the backing of a basket of assets.
At time of writing, the total supply of the major stablecoins is in excess of $150 billion. A very large number but the largest stable coin issuer, Tether, would not make it into the list of the world’s top 100 banks, if measured by assets. It would not even be listed amongst the top 30 US banks. The uses of stablecoins also tend to be very specialised, such as supporting cryptocurrency trading, circumventing restrictions on having deposits in US dollars or sending US dollars internationally. The costs of converting to or from stablecoins and the risks of holding them, give no obvious reason for the ordinary person or business to hold them. Though some forms of stablecoin are regulated, their advantages soon crumble if their issuers are regulated on the same basis as payment providers and banks.
The second concern, that the diminishing use of physical cash will stop central bank money being an anchor of value, seems of little relevance to the large value payment systems that use central bank reserves for settlement of inter-bank liabilities. The declining use of cash in no way removes the need for central bank money in payment infrastructure. Not to mention Central bank reserves will continue to exist (in huge quantities) even if the use of cash were to almost disappear.
As Peter Bofinger and Thomas Haas recently wrote “All that is required for the safeguarding of the role of public money in a digital economy is the need for the banks to use and to hold reserves with the central bank.”[iv] There are strong arguments for keeping the use of central bank money in payments infrastructure but that has never really been under question. Countries where electronic payments have almost entirely replaced cash payments show no sign of developing a rash of “Wild Cat[v]” banks and there is no obvious reason why that would happen.
The idea of Singleness of Money is far more limited than many central bankers imply. The idea only makes sense in terms of same day payments in the same currency. Ultimately the different forms of money in any given currency do have very different characteristics in terms of liquidity (i.e. ability to convert into central bank money), time value and credit risk. This is reflected in different interest rates payable on funds held with different banks and differing costs of credit protection.
A better term for “Singleness of Money” is perhaps “Illusion of Fungibility”[vi] because ultimately only central banks are able to enforce the belief that all forms of money have the same value, at least on the day of the payment (day “T”). They need to not just provide a mechanism for settling inter-bank payments using central bank money but all act as the liquidity provider of last resort.
The current arguments for a CBDC typically assume central bank money is the best form of money. Until the era of Quantitative Easing and other monetary experiments, central bank money (whether paper or digital) largely acted as a lubricant to economic activity. It existed in relatively small amounts relative to overall economic activity. For instance, over the last 20 years there has been have seen an enormous expansion of the Euro System’s balance sheet, both in terms of Euro notes in circulation and Euro balances in central bank reserve accounts (see Figure 2).
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