Bank of Korea: Digital currency could change society
Digital currency can shape society through micropayments, privacy and by changing the role of banks.
It reportedly focuses a lot of attention on how digital currency could impact society and the economy, as part of ongoing research on how central bank digital currency (CBDC) could work. The gist is that money is complicated, hypothetical digital money is even more complicated, and that more research is needed to assess the impact digital currency could have.
In particular, it points at some of the ways digital currency could change society and the economy.
Digital currency makes micropayments feasible, the report says. It's easy to overlook the significance of this.
Micropayments are widely regarded as payments of as little as one cent, or even less, and finding a way of making them work has been a goal since the creation of the Internet. Unfortunately, all attempts at getting it done so far have failed, and it's always been something of a missing piece of the Internet.
IBM, for example, created a micropayments division in 1999. It never went anywhere, but a full twenty years later the invention of digital currency saw IBM take another run at it on a much larger scale.
All along, micropayments have always been something of a missing piece of the Internet, and their absence has probably directly contributed to the consolidation of the Internet under advertising giants. Without it, websites couldn't directly charge their global users tiny amounts, and veered towards advertiser-driven revenue models instead. Then ad blockers came in, and people were forced to start looking at alternative revenue models.
In some cases they found them in digital currencies. Twitch, for example, created its own digital currency (Twitch Bits) in 2016, in part because its users needed a way of supporting their favourite streamers with micropayments. So, one of the impacts of CBDC is that micropayments become possible everywhere, which opens up a lot of ways of getting creative with payments.
There's also the question of payment speed. The Bank of Korea report says digital currency probably won't do much to speed up its already near-instant domestic payments, but other countries with less-developed digital infrastructure could feel more of an impact. In Australia, transferring money to someone else's bank account at a different local bank can still take a couple of days. The money won't move on weekends either.
While the ability to make instant, free micropayments anywhere in the world is naturally a good thing, it could (and probably will) still have unpredictable impacts which central banks need to consider. For example, whether lowering the barriers for international payments will see more money flowing in or out of the country, and how this could impact the economy.
One question central banks are probably asking themselves is whether cryptocurrencies will see wide enough adoption start creating these results, even without CBDC.
The impact of anonymity
The Bank of Korea research also notes that when used on a distributed ledger, CBDC could limit anonymity. It puts it forward as an advantage, but from some angles there are more arguments to be made in favour of more anonymity rather than less. In this case, the usefulness of CBDC relative to other types of currency depends on the situation.
It's worth noting that in theory digital currencies on distributed ledgers can simultaneously be more private and more public than traditional money.
They can be more private because you can make encrypted digital transactions without any third parties having eyes on it, and they can be more public because you can print transactions on a public ledger for the whole world to see.
This could be useful, as different situations call for more of one or the other, and there's a school of thought which holds that the ideal digital currency will inevitably have to be able to do both.
For example, public transaction records could be perfect for transparently tracking public funds to help ease corruption, or for automatically maintaining a provable record of charitable donations for bragging rights and better proof of tax deductible donations. Meanwhile, private transactions could be much more suited to everyday consumer transactions.
The extent to which this digital currency impacts society in the context of privacy will all depend on which direction it goes.
Economic stability and the role of banks
One of the bigger impacts of a central bank digital currency might be how it will affect the role of retail banks, and how that in turn will affect financial stability. In assessments last month, the Bank of Korea posited that CBDC could create liquidity shortages and push up interest rates.
The reason being, people would perceive the BoK-backed CBDC to be much safer than holding their deposits at local commercial banks, and so would withdraw funds from those banks. Then in turn the bank money supply would drop, and they would raise interest rates in response. In this way, CBDC could end up harming consumers and the economy.
The Bank of England encountered similar issues in its own CBDC examination, and so it suggested the most meaningful way forward would be to start considering more specific CBDC models for an understanding of how it would impact its economy. The options it initially assessed included one where the central bank itself issued CBDC direct to consumers, one where it issues it to retail banks as an intermediary and one where the CBDC itself is kept out of the hands of citizens.
In this way, CBDC is a broad category that encompasses a wide range of economic models, and it's almost impossible to work out exactly what to expect until you know what kind of model you're talking about.
For large, economically complex countries like England and South Korea, investigating CBDC will have to be a very extensive process. For smaller countries, it's a bit easier to boil down the pros and cons.
South Korea is still in the exploratory phase of CBDC, but other countries are building it already.
Disclosure: The author holds ETH at the time of writing.