Olli Rehn: Central Bank issued digital cash
Speech by Mr Olli Rehn, Governor of the Bank of Finland (at time of speaking Deputy Governor of
the Bank of Finland), at the seminar on "Central Bank Issued Digital Cash", Helsinki, 13 June
2018.
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Ladies and Gentlemen, Dear Colleagues,
It is a pleasure for me to open the second session of the seminar on Central Bank Issued Digital
Cash. This session asks what would be a rational and justified reason for central banks to
pursue digital cash.
Today's seminar is part of a trio of events this week, partly academic and partly for a wider
audience in the financial sector. This seminar is for central bankers only, since we wanted to
facilitate open and possibly frank discussions, with no any need for official statements.
We have also chosen different colour codes for the three events.
I'm not sure if the yellow colour of our badges has been deliberately chosen to indicate a yellow
card, i.e. to be warned due to a foul. Maybe some people see that even a discussion about a
digital central bank currency is dangerous play. But here today we won't be afraid of discussion.
In fact, virtual currencies or crypto assets, as we prefer to call them today, already emerged on
central banks' radar screen many years ago. Since then, central banks, other authorities and
academics have studied the phenomenon and published analyses on it. When the market turned
into a highly speculative one, both financial supervisors and central banks issued warnings. In
our view, virtual asset creation and trade should be regulated in the same way as other tradeable
assets. It is important to protect consumers and prevent fraud.
Originally, promoters of virtual assets like Bitcoin claimed they would provide an alternative to
banks' payment systems and change the whole financial system. Even if virtual assets currently
don't have the capacity to fulfil the original vision, they did bring to the surface two very interesting
issues: the potential of blockchain technology, and the future role of central bank money in the
modern financial infrastructure.
The discussion on the future use of central bank money, whether physical cash or digital, has
emerged and even intensified recently, especially in countries where the role of cash in society
has been declining.
This raises several pertinent and difficult questions:
What would happen if physical cash really vanished? How would it affect central banks, the
financial industry and society as a whole? What will legal tender mean in the future? How will
monetary policy and financial stability change if perfectly safe central bank cash were to
disappear? If physical cash were to become obsolete, should central banks still be involved in
providing central bank money to the public - perhaps in a digital form?
These are indeed relevant questions, even if the issuance of euro cash still continues to grow.
This seminar aims to contribute to the contemporary debate and increase our understanding of
these questions.
Against this background, let me focus on three topics that the central banks must in my view
carefully analyse.
1. What is the role and meaning of legal tender and the need for some form of generally
available and usable central bank money for members of the public?
The historical background of legal tender lies in times when different monies circulated and, for
the sake of stability, one of them had to be classed as legal. That gave central banks the power
to create unlimited liquidity in their own currency, useful for financial stability. However, as the
Bank of Finland Legal Unit concluded in its survey, this concept is surprisingly vague today, at
least in retail payments.
There are several reasons for this. In some countries, legal tender stands for the common
fallback, if no other payment instrument is agreed upon. In some countries legal tender means the
mandatory acceptance of cash for payment e.g. in retail. In the U.S., where it reads on dollar bills
that they are "legal tender for all debts", there is no mandatory requirement to accept them in the
purchase of goods and services.
2. How can we maintain the ability of official oversight to ensure the safety and - under the dual
threats of fragmentation and monopolization - the efficiency of payment systems?
As I mentioned earlier, the payments market is in turmoil with all the new initiatives. Some of
them are just user interfaces, but also completely new transmission mechanisms are being
introduced to the market.
This development entails some potential problems for the oversight of payment systems. First,
while consumer choice is a positive thing, fragmentation may increase uncertainty about
trustworthy services. It may become impossible for supervisors to monitor all players, and for the
overseers to ensure the robustness of the overall payment system.
Another problem may arise from the fact that more and more service providers are non-banks
that are not accustomed to regulatory requirements and may prefer to stay outside the oversight
domain. The end-game may look like the free banking era, when competing private banks were
printing their own banknotes, and it was hard to keep track of their value. In such a situation, at
least, the reintroduction of legal tender in the form of digital cash might become a serious issue.
Robust payment systems are a crucial backbone of modern economies. We must be able to
safeguard their functioning also in the future.
About a week ago, Europe experienced a short hiccup in the Visa payment card network. Even if
the technical problem was solved in less than 10 hours, it showed how vulnerable our daily lives
have become. When 75% of payments are not working, a lot of uncertainty and losses are
created. The event reminded us that, to ensure resilience, we need parallel safe infrastructures
that can be scaled up, if the normal network is failing.
Today, we still have cash. If or when cash is no longer used to the extent that it can be easily
scaled up, other alternatives will be needed. One line of analysis contemplates whether some
alternative means of payment could or should be provided by central banks.
3. How are the efficiency of monetary policy and the objectives of macroeconomic and financial
stability to be maintained, if all money is issued by private parties, all of which are not necessarily
even banks?
Central bankers are often considered conservative. But work in central banks has had to
continuously adapt to meet the challenges of a changing environment. The tasks of price
stability, financial stability and oversight of payment and settlement systems tend to change and
take on new forms, but the core content endures.
This capability to adapt has been evident since 2008, when, during the financial crises, central
banks were able to think 'out of the box' and create new monetary policy tools to fulfil their task.
The outcome was not just new monetary policy tools, but also stronger macroprudential
supervision and, in Europe, the creation of Banking Union.
Bearing that in mind, it is entirely reasonable to expect that the central banks will be able to adapt
to the changing financial and payment landscape also when the driver is not a recession, but a
technological revolution.
Dear Friends,
I trust your discussions today will be interesting and substantive, and that you will have new
insights with you when travelling back home. Sharing both understanding and open questions,
being able to work together in the future and take action jointly, all these will be ever more vital
when our common field of work is transformed in so many ways.
I wish you a successful seminar.