A Norwegian central bank official raised alarm over the possibility of central bank digital currencies spurring possible instability in the financial system, joining a chorus of global officials urging caution on moving forward with digital currency proposals.
Ida Wolden Bache, deputy governor at Norges Bank, said in public remarks Friday that Norway hopes to offer its own digital currency under a regulatory scheme favorable to protecting the stability of the system.
“We want to be prepared to be able to introduce a [central bank digital currency] if the payment system develops in a different direction than we can foresee today,” said Bache.
Norges Bank, which disclosed plans to create a digital currency in 2017, is seeking to ensure that there is limited impact on the country’s banking system. With private companies offering new currencies and rapidly advancing payment technologies, Bache expressed concern that the central bank could be left behind if it doesn’t innovate to match the times.
“The consequences a CBDC could have for the financial system depend entirely on its design,” said Bache. “If CBDC replaces cash, banks’ balance sheets will not be affected — the public will simply replace one claim on the central bank with another. If the public replaces bank deposits with CBDC, the consequences for the financial system could be more severe. Banks’ access to deposit funding could be reduced and banks’ funding costs could rise.”
This issue could be compounded in the event of a financial crisis, because the ease of moving digital currencies and bank operations could cause heavy volatility in bank deposits.
“With the introduction of CBDC, digital bank runs might occur more easily and with greater speed,” she said, adding that Norway’s banks have not had any such events in a long time. “Avoiding digital bank runs are therefore an important factor to consider when designing CBDC.”
Bache said that central banks need to adjust to a world where cash is largely an afterthought, and may even die out. She referenced a study conducted by Norges Bank in October that said that only 4% of payments in the Scandinavian country are made using cash, maintaining depressed levels from the spring. The share of cash payments is lower in Norway than any other country, according to Bache.
Numerous countries and territories have considered or are developing a central bank digital currency. The Bahamas became the first to do so in October. China is moving quickly to develop a so-called digital yuan, and Russia is developing a “digital ruble.” The Swiss central bank is working with the Bank for International Settlements to pilot a digital currency, and the European Central Bank has considered following suit.
Contactless payments, via smartphone apps, digital wallets and online shopping, have experienced a corresponding rise and now account for three out of four payments in Norway, according to Norges Bank.
The deputy governor also cited the need for ample regulation in payment services, especially toward major tech companies.
“Some companies such as Amazon, Apple and Facebook also control shopping and social network platforms, often offering services on the platform in competition with other operators. This allows these technology companies to regulate and restrict competition — including in the payments arena,” Bache said.
U.S. Senator Elizabeth Warren, D-Mass., flagged this issue during her short-lived 2020 presidential campaign, saying that technology companies should not both offer retail platforms and sell goods on them, due to the competitive disadvantage it puts other companies selling on those same platforms.
“There is a risk that users will be locked in and that the range of payment options will be reduced over time,” said Bache. Interoperability across systems and operators merits continued focus.”
She also mentioned that, like social networks, the payments market has network effects that favor companies with a wide reach, and that regulators should scrutinize the biggest payment providers over competition concerns.
“Like several other central banks, Norges Bank is considering whether to expand its role as payment system operator,” said Bache. “We are now exploring whether real-time payments should be settled directly in Norges Bank. This would give us greater opportunities to influence developments.”