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Central Bank Digital Currency and Governance: Fit for Purpose? CIGI Papers No. 250 — April 2021 Central Bank Digital Currency and Governance: Fit for Purpose? Pierre L. Siklos CIGI Papers No. 250 — April 2021 Central Bank Digital Currency and Governance: Fit for Purpose? Pierre L. Siklos About CIGI Credits The Centre for International Governance Innovation (CIGI) is an independent, Managing Director of Digital Economy Robert Fay non-partisan think tank whose peer-reviewed research and trusted analysis Publications Editor Susan Bubak influence policy makers to innovate. Our global network of multidisciplinary researchers and strategic partnerships provide policy solutions for the digital Publications Editor Lynn Schellenberg era with one goal: to improve people’s lives everywhere. Headquartered Graphic Designer Brooklynn Schwartz in Waterloo, Canada, CIGI has received support from the Government of Canada, the Government of Ontario and founder Jim Balsillie. À propos du CIGI Le Centre pour l’innovation dans la gouvernance internationale (CIGI) est un groupe de réflexion indépendant et non partisan dont les recherches évaluées par des pairs et les analyses fiables incitent les décideurs à innover. Grâce à son réseau mondial de chercheurs pluridisciplinaires et de partenariats stratégiques, le CIGI offre des solutions politiques adaptées à l’ère numérique dans le seul but d’améliorer la vie des gens du monde entier. Le CIGI, dont le siège se trouve à Waterloo, au Canada, bénéficie du soutien du gouvernement du Canada, du gouvernement de l’Ontario et de son fondateur, Jim Balsillie. Copyright © 2021 by the Centre for International Governance Innovation The opinions expressed in this publication are those of the author and do not necessarily reflect the views of the Centre for International Governance Innovation or its Board of Directors. For publications enquiries, please contact [email protected]. This work is licensed under a Creative Commons Attribution — Non-commercial — No Derivatives License. To view this license, visit (www.creativecommons.org/licenses/by-nc-nd/3.0/). For re-use or distribution, please include this copyright notice. Printed in Canada on Forest Stewardship Council® certified paper containing 100% post-consumer fibre. Centre for International Governance Innovation and CIGI are registered trademarks. 67 Erb Street West Waterloo, ON, Canada N2L 6C2 www.cigionline.org Table of Contents vi About the Author vi Acronyms and Abbreviations 1 Executive Summary 2 Introduction 4 CBDC: Tailwinds and Headwinds 11 CBDC: Governance Matters 19 Conclusion: Where Do We Go from Here? 21 Works Cited 24 Appendix About the Author Acronyms and Pierre L. Siklos is a CIGI senior fellow. He has Abbreviations held seven visiting researcher positions at central banks in European and Asian countries, including AEs advanced economies Germany, Hong Kong, Hungary and Japan. Pierre has also held more than 20 visiting fellowships ATMs automated teller machines at leading academic institutions, such as the BCRA Banco Central de la República Argentina International School of Economic Research in Siena, Italy; Oxford University in the United Kingdom; and BIS Bank for International Settlements Princeton University and the Hoover Institution, Stanford University, in the United States. BRICS Brazil, Russia, India, China and South Africa He has a particular interest in central bank independence, the governance models of CBDCs central bank digital currencies central banks and the challenges that arise in an interdependent world. To that end, he has COVID-19 coronavirus disease 2019 compared and contrasted how European models EMEs emerging market economies of integration differ from those in Asia. His work in applied time series analysis and monetary G20 Group of Twenty policy focuses on inflation and financial markets. GFC global financial crisis Pierre teaches macroeconomics at Wilfrid Laurier University and is a visiting professor at the IMF International Monetary Fund Westfälische Wilhelms-Universität Münster in Germany. He is a former chair of the Bundesbank ISO International Organization Foundation of International Monetary Economics for Standardization at Freie Universität in Berlin, Germany. He is also a research associate at Australian National University’s Centre for Macroeconomic Analysis in Canberra, and a research fellow at the C. D. Howe Institute. Pierre is the former managing editor of the North American Journal of Economics and Finance. Pierre earned his Ph.D. in economics from Carleton University and his M.A. in economics from the University of Western Ontario. He is fluent in English, French and Hungarian. vi CIGI Papers No. 250 — April 2021 • Pierre L. Siklos ability of individuals and firms to transact locally and globally. Progress needs to be made to clarify, Executive Summary via effective regulation and supervision, the limitations of a CBDC’s use across borders and The ongoing coronavirus disease 2019 (COVID-19) ensure conflict resolution mechanisms are in place pandemic has shone a light on digital forms of domestically to prevent governments from abusing payment. At central banks, this has given rise to the potential for CBDC as a form of fiscal policy. what has since been called central bank digital currency (or currencies; CBDCs). At a minimum, Central banks should investigate the public’s CBDC has the potential to replace the traditional views about the value that households place on role of notes and coins in circulation. However, the means-of-payment and the store-of-value CBDC also creates the possibility that additional functions of money. There is too little clarity at services provided through digital technology present about the aims of CBDC in this connection. can be added. At the global level, CBDC can ease Next, it is difficult to argue that a central bank the burden and costs of transacting in different should be responsible for the data generated currencies, thereby facilitating, if not encouraging, thanks to a CBDC; this may overburden central cross-border payments. The latter is deemed a banks. Any privacy or related legislation should priority issue of the Group of Twenty (G20). clearly outline the responsibilities of the central bank in this regard. In principle, a CBDC brings This paper addresses three main issues: Should us close to the world of “helicopter money.”1 the data-gathering activities of central banks be Therefore, the list of limitations on lending separated from other central banking activities? provided by a central bank needs to be revisited Do current governance arrangements, limited and the location of accountability for digital to G20 economies, constrain the introduction interventions by a central bank clearly spelled out. of CBDC? And how is central bank autonomy impacted, or our understanding of the concept Finally, cross-border and settlement systems may influenced, by the creation of CBDC? well prove to be one of the main battlegrounds for the makeup and deployment of CBDC. Concerns There are many tailwinds and headwinds swirling over cross-border payments — a G20 priority in around the deployment of a CBDC. These are listed 2020 — are simply another means of highlighting and discussed below. They are used as the basis for the role of sovereignty, together with the race to constructing a heat map that shows how receptive become the first to deploy a CBDC. At a time when G20 economies are to a CBDC. Next, a survey of the concept of fiduciary duty (i.e., acting in the best central bank legislation, which represents just interests of another party, especially when it is a one piece of the governance puzzle that policy foreign country) is in retreat, it is conceivable that makers must confront, clearly suggests that, while roadblocks to the spread of digital currencies will some of the feared excesses from the uses that increasingly emerge. The fiduciary obligation is a CBDC can be put to are likely exaggerated, too even more pressing for select advanced economies few legal mechanisms are in place to argue that (AEs) since cross-border digital currency holdings the world is ready for the widespread adoption will likely reside in a few internationally accepted and use of CBDC. Hence, existing central bank currencies (for example, the US dollar, the euro). legislation is not entirely fit for purpose in response to the potential introduction of a CBDC. As well, policy implications are drawn and suggestions for going forward are provided. Clearing and settlement systems need to be flexible enough, not only to cover traditional financial institutions but also to deal with the emergence of financial technology (fintech) and other types of digital platforms that may offer digital financial services. Moreover, initially, a CBDC 1 Milton Friedman (1969) used the example of a helicopter dropping should serve primarily as a means of payment money to illustrate the demand-inducing potential of a cash drop. and reduce the existing frictions that limit the Critically, however, the effectiveness of such a policy is entirely dependent on the assumption that the policy would never be repeated. Central Bank Digital Currency and Governance: Fit for Purpose? 1 topping the list, at least they do according to a recent survey conducted by the Bank Introduction for International Settlements (BIS) (see, for example, Boar, Holden and Wadsworth 2020).6 Monetary authorities around the world remained behind the scenes in discussions about payments Yet, governance- and data collection-related issues, technologies until the debate shifted to the for example,
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