Lithuania Central Bank Statement

Author: IFLR Correspondent | Published: 24 Sep 2019
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The amount of cash in circulation is declining in some countries. At the same time, we are witnessing the rise of electronic payment methods in retail transactions. Although these are often more convenient and efficient than cash, such digital means of payment are controlled by commercial agents. This could mean that one day – even if it seems like a distant prospect – every single person may have to register with a private entity just to participate in the trade of goods and services.

In the long term, such trends may lead to increased levels of financial exclusion. We still have vulnerable groups which, for one reason or another, are underbanked or do not use electronic payment instruments in their current form. Moreover, should private payment systems fail in case of a systemic disruption, we could find ourselves having no adequate alternative to save the day.

This is where the idea of central bank-issued digital money comes in, a concept widely referred to as Central Bank Digital Currency (CBDC). Importantly, it would differ from traditional reserve accounts. The retail version of the CBDC would be available universally: by complementing or replacing paper banknotes and coins, it would ensure people's continued access to secure and reliable central bank money.

CBDCs could have important and, perhaps, desirable implications for a wide array of policy areas. Some say that issuance of an interest-bearing retail CBDC could improve the transmission of monetary policy – if indeed it is used widely. For instance, it may strengthen the pass-through of policy rates, or alleviate the effective lower bound constraint.

The issue here is that the retail CBDC could become more attractive relative to a claim on a private bank. Being a safe asset and bearing no liquidity or credit risk, it might essentially substitute for bank deposits. In the extreme scenario, CBDCs could encourage 'digital' bank runs, which could occur at an unprecedented speed and scale.

As a consequence, central banks may see their roles fundamentally changed, to the point where they may have to extend credit to the economy. Although central bankers tend to be competent officials, I have to admit that market forces are generally more efficient in allocating resources.

Despite these considerations, we at the Bank of Lithuania do not reject the potential that the CBDC can carry. Yet, at this point we remain cautious.

Going forward, we will take into account the possible alternatives. The Bank of Lithuania already provides an effective payments infrastructure called CENTROlink. The system supports 24/7 instant payments and is accessible to all operators, including fintech companies. By creating a level playing field for different types of market participants, we aim to encourage competition and, indeed, financial inclusion.

In some sense, such developments limit the potential benefits of the retail CBDC. We therefore feel the need to acquire a better understanding of risks and added value of the CBDC. Notably, research carried out by international organisations, such as the IMF or standard-setting bodies, could play an important part in this regard.

 

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