Digital currency for the freedom to quaff a pint

Singapore

IF, in time, beer drinkers get penalised on their credit scores, could a state-backed digital currency stand in between to solve this bias?

The managing director of the International Monetary Fund Christine Lagarde lobbed this analogy to convince central banks to explore the issuing of digital currencies.

The debate comes as the Monetary Authority of Singapore has told The Business Times that it would be "conservative" on this front, even as central banks in Canada, China, Sweden, and Uruguay are considering launching their versions of such currencies.

Speaking at the Singapore FinTech Festival on Wednesday, Ms Lagarde said a state-backed digital currency could solve the trade-off issue between financial integrity and privacy.

"Imagine that consumers of frozen pizzas and beer are associated with higher mortgage defaults than those who consume organic broccoli and exquisite wine," she said. "What do you do if you have a craving for pizza and beer, but do not want your credit score to drop? You wouldn't go for broccoli. You would go for cash."

But in this data economy and an increasingly cashless society, businesses may use data to force people to behave in a certain way, against their own choices.

Against that backdrop, Ms Lagarde asked if central banks might be able to design digital currency so that users' identities would be checked against customers' due diligence procedures and transaction records.

"Identities would not be disclosed to third parties or governments unless required by law. So when I purchase my pizza and beer, the supermarket, its bank and marketers, would not know who I am. The state might not either, at least by default," she said.

But anti-money laundering and terrorist financing controls would still run in the background. If a suspicion is flagged, the design of such a state-backed digital currency should make it possible for regulators to "lift the veil of anonymity and investigate".

"This setup would be good for users, bad for criminals, and better for the state, relative to cash. Challenges remain. My goal, at this point, is to encourage exploration," she said.

Ms Lagarde also argued financial inclusion could get a boost from the use of state-backed digital currency as the overall use of cash is reduced, excluding certain segments of the global population in the digital drive.

"Digital currency offers great promise, through its ability to reach people and businesses in remote and marginalised regions. We know that banks are not exactly rushing to serve poor and rural populations," she said.

"This is critical, because cash might no longer be an option here. If the majority of people adopt digital forms of money, the infrastructure for cash would degrade, leaving those in the periphery behind."

While governments can subsidise cash usage in those areas, such a move also means that "economic life in the periphery would become disconnected from the centre".

The central bank could also issue digital currencies as a backup for payments, as the market is increasingly concentrated on a few dominant players. Private players may however put too few dollars in security, underestimating the cost of systemic failure.

"Without cash, too much power could fall into the hands of a small number of outsized private payment providers. Payments, after all, naturally lean toward monopolies - the more people you serve, the cheaper and more useful the service," Ms Lagarde observed.

"Regulation may not be able to fully redress these downsides. A digital currency could offer advantages, as a backup means of payment. And it could boost competition by offering a low-cost and efficient alternative."

She acknowledged that digital currencies could make bank deposits less attractive, creating pressure on the banking system. Still, she said, banks can compete with higher interest rates and better services.

"What about the risk of bank runs? It exists. But consider that people run when they believe that cash withdrawals are honored on a first-come-first-serve basis," she pointed out.

"Digital currency, instead, because it can be distributed much more easily than cash, could reassure even the person left lying on the couch."

Amid this, she also flagged doubt that new actors in the payments market such as e-money or crypto players are right to call for the state to back down. "I am not entirely convinced. Proper regulation of these entities will remain a pillar of trust," she said.

But as questions over the role of the state in providing money emerge at this historic turning point, she urged authorities to look into the case for digital currencies "seriously, carefully, and creatively".

"Technology will change, and so must we. Lest we remain the last leaf on a dead branch, the others having decided to fly with the wind."

In a recent BT interview, MAS managing director Ravi Menon said digital tokens as private money would complicate the monetary system. He also noted in January that a central bank issuing digital currencies would "completely disintermediate the banks", though he did not rule out the idea.

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