Central Banks’ Digital Currencies Plans Herald Biggest Innovation Since Paper Money


If Facebook has its way, it won’t be long before an American student in China can pay for a latte with a wave of his or her cellphone in a digital currency immediately credited to the vendor, just like cash.

This isn’t a payment that subsequently travels the winding path of other cellphone payments, creating a document trail back to a bank account. That system dates back to the 19th century but only now is on the verge of being replaced: Crypto-currencies are spearheading a revolution in the very nature of money in the biggest innovation since paper currency was introduced.

Paper, rock – digital

Banknotes, at first issued by any commercial bank and later only by central banks, supplanted coins and bullion in the 17th and 18th centuriesOpens a new window because they were more convenient. No longer. Now we’re ready for the next step.

Facebook’s proposal to create a digital currency available to its 2.4 billion members as well as the billions who use credit cards and other payments systems, could itself trigger this shift. National central banks, alarmed at the prospect that private crypto-currencies such as Facebook’s Libra could end their monopoly on issuing currency, are planning to compete with digital versions of their own money.

The key to crypto-currencies is the blockchain technology that was introduced to power bitcoinOpens a new window in 2009. Also known as distributed ledger, this technology locks any transaction into an irreversible block visible to all, eliminating the need for third-party verification currently provided by running money through an account at a bank supervised by a central bank.

Obsolete structure

Wonder why it takes days for a check to clear or a week for an international transfer? Our archaic banking system keeps this obsolete structure in part so each party can collect some interest along the way. That could end in the wake of Facebook’s announcement in June that, together with a consortium of payments giants, they would launch a “stablecoin.”

A stablecoin differs from a pure crypto-currency such as bitcoin by being backed by traditional assets such as cash or securities. Whereas bitcoin is ‘mined’ out of nothingness according to a complex algorithm and only has intrinsic value, stablecoins can be ‘minted’ or ‘burned’ in exchange for real-world assets.

Threat or challenge?

However, they’re similar in that transactions are self-verifying thanks to blockchain technology, or modified blockchainsOpens a new window in the form of payment platforms subject at some point to government oversight.

National governments and financial regulators oppose Facebook’s plan, claiming it would facilitate money laundering. Facebook, however, has promised it will ensure anti-money-laundering safeguards.

Some far-sighted monetary policymakers see Libra as a challenge. Benoît Cœuré, executive board member of the European Central Bank, in September described the Facebook announcement as a “wake-up call,” alerting central banks they must alter radically the way they do business.

Bank of England governor Mark Carney argues that central banks must prepare for a digital currency backed by one or more existing fiat currencies. These national currencies are under the sole control of central banks which, since the abandonment of the gold standard in 1971, can increase or decrease the supply of money.

Ending dollar dominance?

The US Federal Reserve has not been leading these debates, largely because other central banks would welcome a weakening in the dominance of the US dollar in trade and finance, which they see as a legacy of American economic hegemony in the post-World War II years.

China particularly is keen to undermine the dollar, which it regards as an obstacle to achieving economic parity with, or even to surpassing the US. The People’s Bank of China has announced that a digital version of its renminbi currency will be in circulation within a few months, though it has cautioned it will need to take AMLOpens a new window  precautions.

A shift to virtual currencies and blockchain-based payments will eliminate the role of banks as middlemen in the current payment system. JP Morgan, which has repeatedly shown itself to be the world’s leading banking digital innovator, has already anticipated this future by creating its own stablecoinOpens a new window , the JPM Coin, available only to the bank’s institutional customers.

The dollar’s dominance is more than a historical curiosity. One broad money definition puts the total amountOpens a new window of dollars in global use at $80 trillion, by far the world’s biggest pool of liquidity and backed by its biggest economy.

Digital currencies may change the way we spend money but they won’t unseat the dollar any time soon.