Just a year ago, this conversation was all about the cipher set: Bitcoin and its multiple evolutions. Since then, we have moved on. Now, we must consider eMoney, a new form of digital currency that may be more destructive.
Today, I will define eMoney and then discuss its impact in a closed economy. I think it can be very popular – but it can pose significant risks. The policy to deal with these risks is like a tricky magic trick, you will see a synthetic version of the Central Bank Digital Currency (CBDC), which has various advantages related to full service, we are in the recent International Monetary Fund Research has been carried out in organizational publications.
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While eMoney brings key benefits to cross-border payments, it can pose a risk to the stability of international payment systems, and it can also boost dollarization.
As policymakers, we must turn our attention to the international monetary system, to new solutions (including technology solutions), and to strengthen global cooperation by maintaining the role of the IMF as a vulnerable and opportunistic system manager.
What is eMoney?
eMoney is a means of payment and a value store fully supported by fiat money, which is the digital equivalent of a prepaid card. According to my definition, eMoney can be issued as a token or account, settled in a centralized or decentralized manner. Therefore, eMoney also includes a “stable currency” version that is fully supported or mortgaged by fiat money, which some call “digital fiat currency”. eMoney can be easily and instantly effective through applications on the phone, transactions between individuals and businesses.
Think of China's WeChat payment and Alipay, M-Pesa in Kenya, Bitt.com in the Caribbean, and Coinbase and Circle dollar coins. It is rumored that other major technology companies will soon launch their own eMoney form. So far, various forms of electronic money cover more than 25 currencies, and this number is growing rapidly, and the adoption rate is impressive. For example, in Kenya, 90% of the population over the age of 14 uses M-Pesa; in China, eMoney has a transaction volume of $18.7 trillion, exceeding all transactions handled by Visa and MasterCard worldwide. In addition, many carriers now offer debit cards that can be used with stable currency, making it an effective payment method for most merchants.
Advantages of eMoney
Why is eMoney adopted so quickly and extensively? First, because its value is stable relative to legal tender. For some encrypted coins, the exchange rate is 1 to 1 (or very close). In fact, eMoney works in exactly the same way as a strict monetary committee, and each unit's eMoney is fully supported by fiat currency. You hold funds in advance for your eMoney and your funds are stored in a trust account.
But why use eMoney instead of legal tender?
First of all, convenience. eMoney is better integrated into our digital lives and is typically released by companies that fundamentally understand user-centric design and integration with social media.
Second, transaction costs. Transfers in eMoney are almost cost-free and instant, so they are usually more attractive than credit card payments or bank-to-bank transfers.
Third, trust. In some countries where eMoney is rapidly evolving, users trust not only banks, but also telecommunications and social media companies.
Fourth, the network effect. Considering the introduction of eMoney's social media and other digital economy giants with a large installed base, new payment services can spread quickly through powerful network effects.
eMoney may come to your phone near you. What follows is a world of convenience, no cost, and instant payment. Sounds optimistic, but there are issues related to customer protection, payment system security, and ultimately financial stability.
The first risk is the value of eMoney. If it is issued on top of funds held in a trust account, eMoney may suffer a large loss of wealth. We know how the destructive devaluation of the monetary committee failed.
The second risk is the security of the trust account. Although implied “trust,” funds can be invested in risky or non-current assets or as collateral. Converting electronic money into legal tender may not always be feasible.
The third risk is eMoney's interoperability, which affects market competitiveness. We have previously noticed a strong network effect on payments. If eMoneys published by different providers are not interoperable, only the largest providers can survive. Even regulations that stipulate common technical standards cannot solve the problem. Make it easier for mobile phones from different providers to communicate with each other. In the case of eMoney, interoperability requires a common billing platform, a way to transfer funds seamlessly, cheaply, and securely between trusted accounts. Unless the corresponding amount of fiat money is transferred from my provider's trust account to your currency, you will not be able to redeem the e-currency of the fiat currency I sent you.
Addressing the risks of eMoney: The potential role of the central bank?
Although eMoney has grown unstoppable in front of us, the main risks are rising. How do we solve these problems?
One way is for the central bank to participate. As policy makers, we will face tough choices. But we must make them.
Of course, BOC can provide eMoney providers with access to their reserve accounts under strict conditions. Through effective supervision, the central bank can check whether the electronic money issuance is fully supported, and the risk ranks first. In addition, eMoney holdings will become more secure and mobile for customers, especially if bank accounts are protected from other creditors of eMoney providers. This will solve the second risk and reduce the trouble of claiming funds.
Finally, the central bank will ensure interoperability between eMoneys issued by different providers by providing a common settlement platform between trust accounts, reducing risk three.
Please note that other risks will be introduced. Most notably, if some depositors tend to hold eMoney, there is a risk of potential and partial disintermediation of commercial banks. But let us leave it to the discussion.
Dear colleagues, I would like to draw your attention to the fact that although we focus on mitigating risks – protecting consumers and financial stability, all worthy of praise – but we have inadvertently created CBDC! The new version, which we call "synthetic CBDC."
Yes, if the e-money provider can use the client's funds as a central bank reserve, and if the funds are protected by other creditors, the e-mail user can hold and trade the central bank's debt through the proxy. Is this not the definition of CBDC?
Synthetic CBDC has significant advantages over the full version in previous presentations, with its central bank creating tokens or providing accounts to the public. Synthetic CDBC outsources several steps to the private sector: technology selection, customer management, customer screening and monitoring, including "know your customer" and AML / CFT (anti-money laundering and counter-terrorism financing) purposes, compliance and data management – Source of all significant costs and risks. The central bank is only responsible for settlement between trust accounts, as well as supervision and close supervision including electronic banking issuance. If done right, it will never need to provide loans to e-money suppliers because their liabilities will be fully covered by the reserves.
Synthetic CBDC is essentially a public-private partnership that encourages competition among e-money suppliers and retains comparative advantage. The private sector focuses on innovation, interface design and customer management. The public sector is still focused on supporting trust.
The complexity of an open economy
Things can get complicated when considering cross-border payments.
Clearly, eMoney can bring huge benefits to cross-border payments, and cross-border payments are often slow, opaque, and expensive. Once assets are moved to the blockchain (that is, free delivery and payment are allowed), eMoney's token can also facilitate cash payments in cross-border financial transactions. But these benefits must be weighed against the risks.
An example might help to understand the above issues. It is easy for a person in Zurich to transfer the Swiss Franc electronic money to a friend in Italy. Marlis clicks on a button and Francesco gets the money. But suppose Francesco wants to receive euro-based eMoney. To simplify the problem, assume that both use the same platform. Then, Pay-n-Chat Switzerland will extract Marlis's Swiss Franc account and use Pay-n-Chat Italy credit to issue the euro based on eMoney to Francesco.
The only problem is that Francesco's eMoney is now supported by the Swiss National Franc's Swiss Franc reserve. Obviously, this is purely fictitious: I don't suggest that the SNB actually does this.
Just as in the popular fight against the Mole game, the risk of our previous burial is now rising again.
Is Francesco's eMoney fully supported? Yes, Pay-n-Chat can continue to hedge its foreign exchange risk. But it is hard to become more transparent now.
Transparency is the key to trust, and trust is the key to user use.
The redemption risk has also reappeared. What happens if Francesco wants to exchange his euro for his eMoney? Pay-n-Chat Italy may be able to use the European Central Bank to withdraw reserves, or through Pay-n-Chat Switzerland can sell the Swiss Francs of the Euro and send it to Pay-n-ChatItaly. It is cumbersome, expensive, and can be slow. This is exactly what these companies are trying to avoid.
So what can Pay-n-Chat do? Focus on the large and relatively balanced capital flows of major currencies to maximize the match between eMoney and local currency reserves. But this may mean the division of the international payment system, just like laying highways and ignoring rural roads, which lead to many smaller countries in the world.
Another risk that reappears is market competitiveness. In our case, Pay-n-ChatItaly extends the credit line to Pay-n-Chat Switzerland, which is just an accounting skill that balances the company's accounts. However, if the transfer involves two separate entities, there is a credit risk. Obviously, if they are still in the same company, the transfer will be cheaper.
In most cases, because other countries' financial systems are more susceptible to exchange rate shocks and the central bank is limited in providing liquidity, in the context of dollarization, the IMF is concerned that countries lose control of monetary policy. Dollarization is thought to inhibit financial development and long-term growth.
Dollarization is facing difficulties in most countries. If the bank does not provide a foreign currency account, the transaction cost of purchasing foreign currency is usually very high, and the transaction is limited and the storage is cumbersome and risky. In fact, many countries do not provide foreign currency clearing and settlement services.
The availability of foreign currency-based eMoney can reduce some of the barriers to dollarization. eMoney makes Forex storage easier, safer and cheaper. And, importantly, it can greatly facilitate foreign currency transactions. In addition, it can significantly reduce the cost of remittances, thereby increasing foreign exchange inflows.
eMoney can cross national borders, will it lead to the end of a weak currency? This will certainly put more pressure on countries with weak institutional and policy frameworks. We may face even more distinct differences: a country’s monetary sovereignty is either successful or taken over by foreign eMoney.
The role of the IMF
Everyone is asking the IMF to take action – we want to prevent the loss of monetary autonomy and the excessive dollarization caused by foreign eMoney, and technical assistance requests in this area have been on the rise in both quantity and urgency. We must be prepared to answer these appeals.
Clearly, the IMF can also help it analyze and understand future scenarios and assess how policy choices can favor more attractive policy choices.
In order to support the international payment system, the IMF's convening power may be more needed than ever before. But this time, in addition to the IMF, there are new technologies.
For example, the risks and shortcomings of cross-border payments we discussed earlier can be overcome by strengthening collaboration between countries. What does this mean for central banks that support eMoney suppliers to expand their cross-border payments in their home countries? What if they settle the transaction by exchanging reserves with each other? Of course, we can only draw conclusions after further analysis of the benefits and risks of these bold actions.
Can international agencies such as the IMF promote these businesses by running a common platform, sharing credit risk or at least guiding and supervising? Or can you create a new eMoney with one basket of legal currency one-to-one support? Some people call this eSDR or dSDR.
Obviously, this is still hypothetical. For the global financial architecture, the next few years will be especially exciting! (Digital Economy and Society)