REMARKS BY JAVIER GUZMÁN CALAFELL, DEPUTY GOVERNOR AT THE
BANCO DE MÉXICO, ON "SOME CONSIDERATIONS ON CENTRAL BANK
DIGITAL CURRENCIES". THE OMFIF FOUNDATION-FEDERAL RESERVE BANK
OF ST. LOUIS SYMPOSIUM "THE NEXT DECADE OF FINANCE: ASSESSING
PRIORITIES AND IMPLICATIONS FOR SOCIETY, POLITICS AND ECONOMICS".
Washington University in St. Louis, Missouri, July 9, 2019.1
Before starting, I would like to express my sincere gratitude towards the
organizers for their invitation to be part of this session's panel.
Historically, technological progress has been a major factor shaping the way in
which societies, both within and between, interact across a myriad of
dimensions. Of course, economic and financial relationships are among those
more swiftly and deeply affected by the ensuing changes. The speed that this
process has gathered in recent years, at the dawn of what some have dubbed
the "Fourth Industrial Revolution",2 has had remarkable implications for our
financial systems, from the way they function and their structural
characteristics, to the nature of the partaking agents.
Naturally, this has underlined the importance that central banks, both in their
role as participants and authorities in financial markets, remain aware and
vigilant of the current state, as well as foreseeable trends, of relevant
technologies. The objective should be to timely and orderly adapt to, and also
benefit from, developments in this front.
An element that has been receiving increasing attention recently relates to the
possibility of officially issuing electronic counterparts to (physical) cash, in
what have generically been termed "Central Bank Digital Currencies" (CBDCs).3
Although still in a very early stage of development, and for the most part within
an experimental framework, a few central banks have already taken material
steps in this direction, exploring the potential viability of CBDCs with different
attributes and characteristics. Among the noteworthy cases are those of the
e-Krona and the e-Peso pilot programs developed by the central banks of
Sweden and Uruguay, respectively, as digital alternatives that would coexist
with cash as legal tender in their corresponding jurisdictions.4
Further to the desire to learn about CBDCs and their implications at this stage,
central bank interest in these instruments has been kindled by a combination
of factors. One of the most important, particularly among some advanced
economies, is the protracted decline in the use of cash and the consequent
need to adapt to this situation.5 In addition, the possibility that privately-
provided electronic means of payment take place in a context of poor
competition, has in some cases stimulated central banks' interest in CBDCs.
Further to the above, a number of other possible advantages of CBDCs have
been identified. The potential to enhance the safety of the payments system
through a back-up given mounting operational risks in some segments, or its
cost effectiveness, by saving on the distribution of cash, are included among
them. In other instances, particularly amongst emerging market and
developing economies, CBDCs are seen as a means to ameliorate outstanding
gaps in financial inclusion of important segments of their populations.
Moreover, depending on their specific design, such as the level of transaction
traceability (or, conversely, anonymity), CBDCs could also help counter the
proliferation of illegal activities.
Notwithstanding the appeal that CBDCs may gather on the basis of these and
other favorable attributes, important negative implications must be
acknowledged as well. In general, these relate to the potential effects on the
role that central banks play in a wide array of activities, some of them closely
related to their core functions in the economy. In particular, the issuance of
CBDCs could lead these institutions to operate directly in the intermediation
of financial resources with the public.
Naturally, such abrupt deviations from the traditional role of central banks
carry important risks. At the center of these concerns lie the potential
implications for the private financial sector.
First, should CBDCs become entrenched as a close substitute of, or a superior
alternative to, commercial deposit accounts (which would very likely be the
case if they are designed as account-based and interest-bearing), the amount
of resources effectively intermediated by the private financial sector could be
curtailed. Adding to the contraction in the supply of loanable funds derived
from retail depositors opting to hold CBDCs instead of bank accounts, loan
demand could be affected too as a result of banks' attempts to preserve
margins by increasing their lending rates. Moreover, as banks face a drop in
the relatively stable component of funding represented by retail deposits,
regulatory requirements in place may force them to cut back on credit or hold
a higher proportion of liquid assets, either of which would result in less
resources available for lending.
Secondly, the stability of the financial system may face important challenges.
These would derive partly from the riskier pool of debtors and investment
projects that banks could be financing in scenarios of higher equilibrium rates
as the one described above. Furthermore, in extreme cases, system-wide bank
runs triggered by episodes of stress could be facilitated by the swift and
frictionless convertibility of bank deposits into risk-free and liquid assets such
as CBDCs.
In other areas, the implications of CBDCs are uncertain:
 In regards monetary policy, the main channels of the transmission
mechanism may strengthen if, for instance, CBDCs enhance financial
inclusion or push further down the effective lower bound on interest rates.6
However, the possibility of dislocations in the financial system as the ones
described above, or the potential for changes in the characteristics of the
demand for money as a result of the availability of CBDCs, poses risks to the
efficacy (and efficiency) with which monetary policy transmits to the rest
of the economy.
 As for financial inclusion, even though in principle it should be favored by
the introduction of CBDCs, there may be instances in which remaining
barriers (such as a lack of access to the required technologies, a strong
resistance to adopt them or simply a strong preference for cash) may leave
individuals out of the financial and payments system.
 Although carefully-designed and rightly-implemented CBDCs reduce its
likelihood, the materialization of operational risks remains a possibility. This
could translate into a burden for the reputation (and credibility) of the
central bank.

Striking a right balance between the anonymity and traceability of
transactions using CBDCs may prove elusive. At one extreme, full
anonymity, while protecting user privacy, may facilitate the execution of
illegal activities. At the other end, perfect traceability may hinder interest
in CBDCs from users who, for personal and perhaps completely legitimate
reasons, prefer to keep part of their transactions unrecorded.
 Should the adoption of CBDCs be successful and not, at least to a significant
extent, offset by a commensurate decline in physical coins and banknotes
in circulation, the central bank's balance sheet would be expanded. This
could imply additional financial risks for the monetary authority as its
exposure to the banking system and other security issuers increases while,
depending on the size of the expansion, distortions akin to those observed
in financial markets linked to the quantitative easing programs of recent
may not be ruled out.
 The issuance of CBDCs is not free of legal uncertainties either. Further to
the legislative reforms that would be required to equip central banks with
the authority to issue this sort of money in the vast majority of
jurisdictions,7 it remains unclear how much of a burden account-based
CBDCs would imply for these institutions should they become bound by law
to comply with existing regulations (such as those related to anti-money
laundering and combating the financing of terrorism, or AML/CFT). In
addition, given CBDCs legal tender status, difficulties may arise regarding
its enforcement, as not necessarily every agent in the economy will have
available the means to accept it at all times.

Lastly, there is a broad consensus in the community regarding the need for
further research on, and careful consideration of, the potential implications
of CBDCs for interest rates, exchange rates and other asset prices in
general, including the relative price between the digital and physical
versions of a given currency.8
Beyond the above-noted issues, there is an additional element that must be
carefully taken into consideration to evaluate whether the adoption of CBDCs,
in any of its plausible variants, is recommendable as the next iteration of
official fiat money: would there be a relevant contribution of CBDCs to the
existing payment infrastructure? In other words, is there a business case for a
particular central bank to embark on this endeavor? Clearly, the answer to this
question will depend crucially on the defining characteristics of the economy,
especially the level of development and other key features of the
corresponding payment systems.
In Mexico's case, electronic inter-bank payments are nowadays mainstream
amongst significant segments of the population thanks in large to the success
of SPEI, Banco de México's flagship system launched in 2004, as it allows users
to transfer funds in a safe, cost-effective and nearly-instant manner, on a 24/7
basis. SPEI represents today the most important element of the financial
market infrastructure in the country, in view of the volume and value of the
transactions it executes, both at the retail level and between financial
institutions, firms and the government, as well as its importance for other
components of the overall system.9
One recent overhaul that is worth noting is the forthcoming launch of CoDi, a
new request-to-pay functionality for electronic payments currently in a pilot
stage, developed by the Banco de México to allow for cashless retail
transactions via mobile devices. As it runs on SPEI's infrastructure, payments
through CoDi will be safe, quick and available at all times, with the added
benefit of being free of any charge or fee. In addition, it is expected that CoDi
will foster competition in the financial sector, increase financial inclusion and
contribute to the combat of illicit transactions. CoDi is scheduled to be fully
operational by the last quarter of this year.
Mexico's payments system also features other options provided by private
sector institutions. Among these, and as in other economies, credit and debit
cards remain the most widely used payment method other than cash in
Mexico, with nearly half of all retail electronic transactions cleared with these
instruments.10 In conjunction with the above, some aspects of Mexico's
financial regulatory framework have been adapted to the new landscape
brought about by ongoing developments in the FinTech sector. Of particular
relevance for the payments system is the recently-issued regulation of
electronic payment funds institutions (e-money issuers), as they are now
required to operate in a financially safer and more transparent manner,
allowing them to serve in turn better-protected customers.
In spite of the above-noted advances, electronic payment systems in Mexico
face important challenges. Chief among them is the strong bias towards the
use of cash for transaction purposes in the economy, explained to a significant
extent by a high prevalence of illegal activities.11 Such a marked preference for
this means of payment is illustrated, for example, by the fact that nearly two
thirds of salaried workers receive their remunerations in cash, while virtually
all purchases under MXN 500 (roughly equivalent to USD 25) are paid for with
coins and banknotes. Adding to the above, cash use in Mexico goes well
beyond what might be explained by existing gaps in terms of access to formally
provided financial services as, for instance, over 60% of individuals who do not
use their debit cards cite simply preferring cash as the main reason not to do
so.
Under circumstances like these, the case for CDBCs is less obvious. First, the
payments features of digital currencies are satisfactorily covered by systems
already (and soon-to-be) in place. Second, thinking of a CBDC as a "back-up"
does not make much sense either, as the main pieces of the payment systems
are handled by the central bank. Third, a major decline in the demand for cash
is unlikely to take place in the near future, and it is difficult to expect that the
issuance of CBDCs will alter ongoing trends in a significant way. The
reputational risks embedded in an entirely anonymous CBDC, especially if it
involves unidentified individuals setting up accounts at the central bank, make
this a questionable option. But a CBDC design with anything less than full
anonymity is likely to dent interest among the general public.
Nonetheless, it is important to stress that arriving at firm conclusions of
general applicability regarding the merits of CBDCs is difficult, as expected and
realized outcomes will depend, in a major way, on the specific design features
of the CBDC at hand,12 as well as on the characteristics of the countries'
economies and in particular of their payment systems. Even though the subject
has raised substantial attention from the part of central banks in recent years,
the above-noted lack of clarity is reflected in the fact that none of these
institutions has adopted such an instrument on a permanent basis, and the
prospects for an important number of them doing so within a reasonable
timeframe are bleak.
This is not to say, however, that the subject of CBDCs and all the issues
surrounding it should be disregarded. Quite the contrary. The number and
nature of the pending question marks underlines the relevance of continued
efforts to satisfactorily understand this matter as well as its potential
consequences, even more so in the context of a rapidly evolving environment
where changing circumstances and new technological and market
developments may warrant further action in this direction. In any event, while
we have to be open and attentive to new technologies, it is also true that we
need to be cautious in adopting them, especially when, as in the case of CBDCs,
we are dealing with an issue with potential major implications and still many
unknowns.