Central Banks Will Jump-Start the Decentralization of Money

The first phase of a transition toward a true "Money of the people" will be implemented by central banks themselves, striving and competing to remain relevant in a post-crisis, post-trust, digitally connected global economy.

To be sure, official enthusiasm for central bank-issued digital currency, or CBDC as it has become known, has waned somewhat as the old guard of central banking has dug in its heels.

At the Bank of England, which spearheaded research into the idea three years ago, Governor Mark Carney has lately warned of financial instability if his institution were to directly provide digital wallets to ordinary citizens - a change that would, in effect, give everyone the same right to hold reserves at the central bank as regulated commercial banks.

The Bank of International Settlements - a kind of international club for central banks - has echoed Carney's concerns, as have other officials.

Why hold your money at risky, friction-laden institutions paying near-zero interest when you can store at zero risk with the central bank itself and trade it automatically with other fiat digital wallet holders?

This would be an addition to the central bank toolkit for managing money supply, which currently hinges on a combination of a policy rate imposed on banks' reserves and interventions in the two-way market for buying and selling government securities with banks.

A separate CBDC interest rate would provide a means to calibrate the flow of money between banks and digital fiat wallets, potentially within a long-term plan to gradually shift it from the former to the latter without overly disrupting the system.

As Sheila Bair, the former Chair of the Federal Deposit Insurance Corp., argued in a recent op-ed, this new interest rate tool could enhance monetary policy, as central banks could use it to either stimulate or cool the economy.

It's different for developing-world central banks.

Central banks can't put the cryptocurrency genie back in the bottle.