Digitalization on Financial Services and Implications for Monetary Policy in Thailand
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Thematic Study 2018 Digitalization on Financial Services and Implications for Monetary Policy in Thailand Thitima Chucherd Natta Piyakarnchana Bovonvich Jindarak Acharawat Srisongkram Suparit Suwanik Thiti Tosborvorn Thosapon Tonghui Thanaphol Kongphalee Aniya Shimnoi Monetary Policy Group, Bank of Thailand December 2018
Motivation Financial innovation has been evolved over time in parallel with technological development e.g. e-Payment, e-Wallet, digital currencies e.g. high-speed internet, smartphones, information technology, block chain, and digital ledger technologies (DLT) 1980s Social media Cellphone Smartphone Barter Gold/coin Paper Money e-Payment Cryptocurrency 618 AD 2010s 1960s 1970s 1980s 1990s 2000s 2010s 2020s Personal computer 1G 2G 3G 4G 5G 2000s Internet wolrd-wide-web WiFi 1960s e-Payment has become increasingly important in most countries Change in value of non-cash payment/GDP countriessignificantly during 2016-2010 (times) Change in volume of non-cash payment/GDP during 2016-2010 (times) 2 Remark: size of bubble = value of non-cash payment/GDP in 2016 Sources: BIS statistics on payments and financial market infrastructures in the CPMI countries (Red Book statistics), Bank of Thailand
Scope of study A taxonomy of money Electronic/Digital Central bank-issued Universally accessible Virtual currency Peer-to-peer Bank deposit, Reserve Mobile money, accounts e-Money Electronic payment Deposited CBDC Local (e-Payment) currency (wholesale) currency • payment method has been accounts Digital currencies developed and widely used, Crypto- • An asset stored in electronic commonly linked to either CBDC form that can serve essentially (retail) currency the same function as physical bank or the 3rd party account (wholesale) currency, namely, facilitating Retail e-payment Cash Crypto- payments transactions Card payments currency Internet and mobile banking Commodity e-money e-money money Crypto-currency CBDC Source: BIS (2017) ‘Digitalization’ in this paper 3
Objectives, Research questions, and Methodolody Objectives This paper aims to evaluate the impacts of digitalization in financial services on monetary policy in Thailand: 1. Understanding new development and trends pertaining to the digitalization including e-Payment and digital currencies and assessing its potential to permanently replace cash 2. Analyzing the implications for transmission and effectiveness of monetary policy Research questions Methodology e-Payment e-Payment • How much retail e-Payment could substitute cash usage in Thailand? - Literature review • How would e-Payment affect monetary aggregates, central bank's - Descriptive and empirical analysis balance sheet, velocity of money, money multiplier? How would this • Monetary statistics affect the transmission of monetary policy or monetary operations? • Substitution effect between Digital currencies cash and e-Payment (GMM) • How would the emergence of private digital currencies affect transmission • Monetary policy effectiveness of monetary policy in 5 traditional channels? with and without e-payment (FAVAR) • What are the policy options available to central banks, and how Digital currencies would this change the transmission of monetary policy? - Literature review - Scenario analysis 4
Outline Part I e-Payment I.I Development of cash usage behaviors and challenges in Thailand I.II Empirical analysis of e-Payment and monetary policy 5
Part I e-Payment Development of cash usage behaviors and challenges in Thailand Daily transactions in Thailand are mostly in cash Teenager and early working-aged groups are more welcome to non-cash usage esp. mobile/internet banking Cash usage in selected countries e-Payment survey in Thailand (2017) Cash usage (classified by age groups) Cash usage Cash usage 18-29 Country Period (% of (% of value) Non-cash transactions) 30-39 Cash 40-49 Thailand 2017 93 - 50-59 Euro area 2014–2016 79 54 Greece 2015–2016 88 75 60+ No. of monthly transactions for each person Italy 2015–2016 86 68 0 50,000 100,000 150,000 200,000 250,000 Germany 2014 80 55 e-Payment usage (classified by age groups) France 2015–2016 68 28 ATM transfer Debit card payment Credit card payment Finland 2015–2016 54 33 Internet banking Mobile banking Netherlands 2016 45 27 18-29 UK 2016 44 15 US 2016 31 8 30-39 Denmark 2017 23 16 40-49 Sweden 2018 13 - 50-59 Norway 2017-2018 11 6 60+ Sources: Retail payment services 2017 Report, Norges Bank 0% 20% 40% 60% 80% 100% Survey of e-payment usage in Thailand in 2017, Payment Policy Department, Source: Survey of e-payment usage in Thailand in 2017, Payment Policy Department, Bank of Thailand Bank of Thailand 6
Part I e-Payment Development of cash usage behaviors and challenges in Thailand e-Payment usage in Thailand still be in the early stage esp. Internet/mobile banking Value of payment per each transaction has been declined recently reflecting greater adoption of e-Payment in daily use Billion transactions 4 No. of retail payment Life cycle of payment services ATM or branches Transactions 3 internet and mobile Introduction Growth Saturation Decline 2 cards 2018 Credit card Cheque ATM Transfer e-Money 2008 Debit card 1 Credit card 0 Debit card Counter Transfer Credit Transfer ATM 2550 2552 2554 2556 2558 2560 Internet banking Cheque Trillion baht Mobile banking 40 Value of retail payment e-Money Cash services 30 e-Money at branch Thailand 20 10 Transactions Introduction Growth Saturation Decline 0 2018 EFTPOS (mainly card payment) 2550 2552 2554 2556 2558 2560 Terminal Giros 2003 Terminal Giros Value of retail payment / transaction Thousand baht Interbet banking ATM Thousand baht 200 Credit card Mail-based Giros 3 cards Debit card 150 e-Money Giros paid 2 100 Mobile banking at counter internet and mobile (RHS) 1 50 Cheque e-Money PC/Internet Giros 0 0 2550 2552 2554 2556 2558 2560 Norway Source: Gresvik and Owre (2003), Rungsun Hataiseree (2008), and author’s estimates. 7 Source: Bank of Thailand
Part I e-Payment Development of cash usage behaviors and challenges in Thailand Cash transaction has declined continuously consistent with decelerating growth of cash in circulation Growth of payment services Cash in circulation (classified by holders) Internet&Mobile Trillion baht % 2.0 Currency held by Depository Corp. 85 electronic Debit card Currency held by Gov. e-Money Currency outside DCs & Gov. 83 1.5 Share of Currency outside DCs & Gov. (แกนขวา) Credit card 2557 81 Counter tranfser 2558 1.0 semi ATM tranfser 2559 79 2560 0.5 Cheque 77 manual Counter withdraw 0.0 75 ATM withdraw 2550 2551 2552 2553 2554 2555 2556 2557 2558 2559 2560 -10% 0% 10% 20% 30% 40% 50% 60% 24 CIC growth CIC to GDP (%) RHS 10 Cash deposit and withdrawal 20 9 Billion baht 40,000 Cash deposit Cash withdrawal 16 30,000 12 Avg. = 9.2% 8 20,000 8 Avg. = 5.3% 10,000 7 0 4 - 10,000 0 6 - 20,000 - 30,000 -4 5 2550Q1 2550Q3 2551Q1 2551Q3 2552Q1 2552Q3 2553Q1 2553Q3 2554Q1 2554Q3 2555Q1 2555Q3 2556Q1 2556Q3 2557Q1 2557Q3 2558Q1 2558Q3 2559Q1 2559Q3 2560Q1 2560Q3 H2/2557 H1/2558 H2/2558 H1/2559 H2/2559 H1/2560 H2/2560 H1/2561 8 Source: Bank of Thailand
Part I e-Payment Monetary statistics Despite slowdown in cash usage, velocity of money and money multiplier in Thailand are quite stable 2.5 Monetary aggregate (seasonally adjusted) 25 Growth of monetary aggregate trillion baht. 18 %YoY 2.0 Broad (RHS) 20 16 Broad CA 14 1.5 Narrow 15 12 Avg. 8.6% Narrow 10 1.0 10 8 6 0.5 5 CIC 4 Base Avg. 5.3% 0.0 0 2 2000Q1 2003Q1 2006Q1 2009Q1 2012Q1 2015Q1 2018Q1 0 2001Q1 2004Q1 2007Q1 2010Q1 2013Q1 2016Q1 3.00 Velocity of money 0.30 times Money multiplier 14 1.7 2.50 Broad (RHS) 0.25 1.6 13 0.20 1.5 Broad (RHS) 12 1.4 11 2.00 0.15 10 Narrow 1.3 9 0.10 1.2 1.50 1.1 8 Base 0.05 1.0 Narrow 7 1.00 0.00 0.9 6 2000Q1 2003Q1 2006Q1 2009Q1 2012Q1 2015Q1 2018Q1 2000Q1 2003Q1 2006Q1 2009Q1 2012Q1 2015Q1 2018Q1 9 Source: Bank of Thailand and authors’ calculation
Part I e-Payment Monetary statistics Unlike Sweden, cash in circulation continuously declines and velocity of money rises fast Transition towards a cashless society in Sweden Cash/GDP Velocity of M0 Velocity of M1 SEK bil. Velocity of M2 Velocity of M3 Source: Dalebrant (2016) 10
Part I e-Payment Substitution effect on demand for money Our empirical study also shows that e-Payment usage in Thailand slightly substitutes cash If Thai people use 1% more for retail e-Payment, demand for money will decline by 0.05 - 0.1% However, e-Payment shows smaller impact on cash compared to economic activities and opportunity cost Macroeconomic + CEI variables Currency in circulation Opportunity cost - 3-m deposit interest rate SET return (CIC) e-Payment usage - Internet/mobile card payment e-Money (value) Model I Model II Model III Model IV Coincident economic index 0.497 *** 0.517 *** 0.491 *** 0.211 * ST interest rate -0.012 *** -0.014 *** -0.012 *** -0.013 *** Retail e-payment -0.058 ** Card payment -0.089 *** Internet and mobile banking -0.054 ** e-money 0.023 SET return -0.085 *** -0.090 *** -0.083 *** -0.087 *** C 0.060 *** 0.060 *** 0.059 *** 0.048 *** Adjusted R-squared 0.393 0.344 0.394 0.358 Source: Authors’ calculation Remark: This study employs generalized method of moments (GMM) approach, using monthly data from Jan10 to Jun18 11 ***, **, * = statistical significance at 0.01, 0.05, and 0.1 respectively All variables, except for deposit rates, are in real terms and expressed in log with the first-difference form
Part I e-Payment Literature reviews Past studies in e-Payment and implication on monetary policy are mostly descriptive and focus in digital money Growing use of digital money could lessen central bank’s ability to control money supply under monetary targeting framework. However, it will not affect monetary policy under inflation targeting Area of study Implications for monetary policy Monetary - Reduce central bank’s control over money supply and complicate monetary operation operation under monetary targeting due to higher and more volatile velocity of money and money multiplier (Neda popovska-Kammnar 2014, Qin 2017) Central bank - Decline in CIC led to smaller amount of asset-backed currency and smaller size of central bank’s independence balance sheet that could affect monetary operation (Barentsen 1997, Rogoff 2014) - Decline in CIC could lessen seigniorage that could affect central bank’s revenue to pursue its mission (Fung et al 2014, BOK 2005). However, no central bank reported that its balance sheet has been effected from decline in CIC (BIS Survey 2000) Monetary policy - Credit channel e-money will turn cash usage in deposit transfer that could promote money creation process transmission (ธรรมรักษ์ 2011, Payment system insight 2013) - Information-based lending could facilitate greater credit approval (นันทวัลลิ์ 2018) - Digital money issuer (non-bank) and disintermidiation (Lagard, 2017) - Exchange rate channel e-Payment supports international trade via e-commerce. However, buyers and sellers might reduce their FX risk by using foreign currencies for domestic spending (dollarization). If this behavior becomes more popular, policy rate could have smaller impact on domestic spending (only via its local currency) - Asset price channel e-Payment reduces transaction cost that could make money demand more sensitive to interest rates (flatter money demand curve). When policy rates change, demand for money will adjust faster 12 (IMF, 2004)
Part I e-Payment Monetary policy implication Monetary Greater use of e-payment in Thailand has no direct impact on monetary operation under inflation operation targeting using short-term interest rate as operational target. However, it will affect central bank under monetary targeting framework since velocity of money and money multiplier are more unpredictable Monetary targeting framework (1998-2000) Inflation targeting framework (2000 - present) 2) BOT will adjust interest rate corridor Interest rate following new policy rate Assess economic activities and 1) MPC hikes policy rate S1 economic outlook S0 3) The demand for Ultimate target: GDP and Price (PY) i1 reserve curve shifts Estimate upward consistence velocity of money (V) D1 with the new from MV = PY i0 i0 liquidity Specify i=intermediate target: management D0 D0 behavior Money Supply (M = PY/V) Estimate money R0 Reserve balance R1=R0 multiplier (m) Excess Autonomous • CIC from M = mB reserve factors (e-Payment Specify operational target: not significantly Standing facilities affected this part Monetary Base (B = M/m) yet) Required • Government reserve OMOs deposit • FX intervention Increase or absorb: • Other factors to achieve operational target via R/P or swap Demand for reserves Supply of reserves 13 Source: FAQ issue 32 (Roong Mallikamas, 2554)
Part I e-Payment Monetary policy implication Central bank Despite more popular use of e-Payment in Thailand, cash still grows and seigniorage has not declined yet. independence The BOT’s balance sheet expands overtime from FX reserve accumulation. However, decline in cash could impact BOT balance sheet by changing structure of liabilities with greater composition of interest-bearing liabilities from OMOs and smaller portion of cash (non-interest bearing) with lower seigniorage Assets Liabilities Bn THB BOT’s balance sheet Seigniorage 8,000 ลลบ. Foreign assets Current account Asset 0.06 (CA) 2 6,000 0.05 1 Domestic Domestic assets Notes issued asset 0.04 3 4,000 0.03 … OMOs 0.02 1 Customers convert their cash to 2,000 0.01 prepaid e-money (less cash usage) Net interest rate income International assets 0.00 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2 E-money issuers are required to 00 deposit prepaid cash at the bank Open Market Operations Source: Bank of Thailand balance sheet (CUR) Payment system Act B.E. 2560 said that the e-money 2,000 (BOT Bond, BRP) Monetary seigniorage issuers have to deposit the float to the commercial bank ∆ − only e-money spending purpose = 4,000 Equity Under excess liquidity condition, Banknotes in circulation % of GDP 3 banks will deposit this extra 6,000 1980-1985 1999-2001 2006-2017 liquidity in CA at BOT and invest 0.3 0.1 0.08* in OMOs to earn interest income Liability and equity 8,000 Source: Bank of Korea (2005) Source: Bank of Thailand and authors’ calculation 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 * Bank of Thailand and authors’ calculation 14
Part I e-Payment Monetary policy implication Transmission MP ST rate LT rate Mechanism bank lending bank reserves Supply of loan total demand balance sheet asset prices wealth Interest rate diff. exchange rate expectation Channels Effectiveness of monetary policy Interest rate Status quo depending on Banks’ balance sheet, the elasticity of interest rate on demand for deposits and the competition in banking sector. Credit Slightly more effective 1. Banks can reduce cash operation and allocate larger amount of money kept in bank accounts for lending 2. Digital banking help facilitate banks to gain benefit from information-based lending Asset price More effective Saver can switch their saving into various forms of financial assets easily with lower transaction cost Exchange rate Tend to be more effective e-Payment facilitates cross-border capital flows movement and promotes e-commerce transaction across countries. Exchange rate could be more volatile by greater volume of transactions Expectation Status quo depending on business and households' views on economic outlook and policy rate path 15
Part I e-Payment Observed Variables Monetary policy implication Baseline model Alternative model Empirical study of MP transmission mechanism in Thailand Inflation, CEI, RP Inflation, CEI, RP, e-Payment Factor-Augmented Vector Autoregressive (FAVAR) model: 113 Unobserved Variables Ft F Consumption and investment 11 = ф L t-i + νt Yt Yt-i Production, Expectation and Labor indicators 22 Real estate and Price indicators 18 where Ft = unobserved vector (k x 1) Interest rates 22 Exchange rate 7 Yt = observed vector (m x 1) Money and credit quantity aggregates 10 ф L = coefficient matrix of lag order External sector and capital flow 7 ν t = error term (zero mean with constant covariance matrix) Government sector 7 Stock price, Oil price, Global policy rates 9 Total 113 Impulse response of selected variables to policy rate shock (+100 basis points) Base model Alternative Model 16 FAVAR with 3(4) Observed Variables, 5 Factors and 1 lags. Sample: 2006M1-2018M6. The result shows Median and 90% Confidence Interval Source BOT Staff’s calculations
Part I e-Payment Monetary policy implication Impulse response of selected variables to policy rate shock (+100 basis points) 17 FAVAR with 3(4) Observed Variables, 5 Factors and 1 lags. Sample: 2006M1-2018M6. The result shows Median and 90% Confidence Interval Source BOT Staff’s calculations
Part I e-Payment Future trend of e-Payment Exponential growth of Role of foreign Crypto and its substitution effect e-Payment usage and non-bank on e-Payment usage payment policy e.g. Alipay, Wechat Regulatory and supervisory Consumer behavior Disintermediation role for private digital Large-scale competition money issuers Promoting digital payment amid an increasing role of non-bank and FinTech • Streamline laws and regulations to support innovations • Build Interoperable Payment Infrastructures to support all sectors and further development • Enhance cross-border payment efficiency • Strengthen cyber resilience to maintain stability and trust • Increase adoption as well as improve literacy for a sustainable development “With the amount of electronic money still very small …, the effect on monetary policy is not yet absolutely determinable. However, the central banks and economists must try to anticipate the effects before it becomes more significant. ” Reynolds G. and Stephen F. (2013) Electronic money and monetary policy 18
Outline Part II Digital currencies II.I Current situation and looking ahead II.II Policy options 19
Part II Digital currencies Definitions and current situation Definitions Digital Currency (DC) An asset stored in electronic form that can serve essentially the same function as physical currency, namely, facilitating payments transactions (BIS 2015) Crypto-currency • a separate sub-class of digital currencies, with their distinguishing feature depending on the consensus mechanism applied for updating the ledger (Barrdear and Kumhof, 2016) Crypto-currency => Non-fiat backed currency Current • Crypto-currency performs very poorly the 3 functions of money situation (Ali et al., 2014) Medium of exchange: very few merchants accept them Unit of account: ambiguous as some merchants adjust prices according to exchange rate fluctuations vis-à-vis fiat currencies Store of value: more volatile than national currency pairs 20
Part II Digital currencies Scenario analysis Uses of Digital Currency (not mutually exclusive) I. Wholesale (B2B) Means of exchange II. Retail (B2C and C2C) III. New Asset Class Note: limit scope to exclude lending/borrowing of digital currencies 21
Part II Digital currencies Scenario I: Wholesale Scenario I: Wholesale • Digital currencies are popular among businesses, Implications for Monetary Policy Transmission while regular people still use cash at large Transmission channels Scenario I (Wholesale) • DLT’s efficiency and traceability prompt some Interest rate Status quo businesses to adopt crypto as their means of exchange Credit Status quo • This has already happened in some business Asset price Status quo sectors, e.g. Ripple Exchange rate Status quo Possibility: Very likely Expectation Status quo How to get here? • We’re already here! • If people trust this alternative system more, then more businesses will move here 22
Part II Digital currencies Scenario II: Retail Scenario II: Retail Implications for Monetary Policy Transmission • Digital currencies become a popular means of Transmission Scenario II (Retail) payment in everyday transactions due to their channels ease of use and side benefits like tracking expenses, information-based lending, etc. Interest rate Less effective: smaller portion of monetary instrument is affected 1. Pegged to THB => e-payment alike by interest rate 2. Non-pegged to THB => we focus on this case Credit Less effective: less demand for THB credit • Spectrum: Various degree of popularity and Asset price Less effective: smaller portion of functions of money people’s wealth is affected by MP Possibility: Likely Exchange rate Less effective: improvement of (without central bank’s intervention) entrepreneur’s competitiveness How to get here? via THB exchange rate is lessened • Non-banks are more superior than banks in creating the required network effects Expectation Indeterminate 23
Part II Digital currencies Scenario III: New Asset Class Scenario III: New Asset Class Implications for Monetary Policy Transmission • Digital currencies become digital assets instead Transmission Scenario III channels (New Asset Class) o e.g. cryptocurrencies, no longer functioned Interest rate Status quo as means of exchange, become a conventional asset like stock, gold, or other Credit Status quo commodities Asset price Indeterminate: Possibility: Likely • more asset choice for people How to get here? to invest in (Hawkins 2017) • Cryptocurrencies cannot become means of • the value of digital assets exchange depend on their properties. • The market becomes thicker, reducing the Exchange rate Status quo volatility of the asset Expectation Status quo 24
Part II Digital currencies Scenario III: Summary of Scenarios Transmission Scenario I Scenario II Scenario III channels (Wholesale) (Retail) (New Asset Class) Interest rate Status quo Less effective Status quo Credit Status quo Less effective Status quo Asset price Status quo Less effective Indeterminate Exchange rate Status quo Less effective Status quo Expectation Status quo Indeterminate Status quo 25
Part II Digital currencies Bottom line How to deal with these scenarios then? • Doing nothing? • e-Payment? • Stricter investment regulations on digital currencies? • CBDC as a policy tool? • If CB offers competing products that would enhance consumers’ retail payment experience, that would curb retail use of non-bank wallets 26
Part II Digital currencies Central Bank Digital Currency (CBDC) What are CBDCs? “central bank-issued money that combine cryptography and DLTs” (BBVA) Why are central banks considering them? o Digitize cash to improve efficiency in payments (BIS) o Develop a new monetary policy tool to overcome zero-bound interest rates (BBVA, BIS) o Maintain access to central bank money given increasing competition from private DCs and e-payment (BBVA, BIS) o Maintain control over financial conditions (BBVA, BIS) 27
Part II Digital currencies Central Bank Digital Currency (CBDC) Design features Types of CBDC under consideration Limited Accessibility Universal • Design of each case is based on their purpose Interest-bearing • Operational aspects will be disregarded for brevity Zero Non-zero Anonymity Identified Anonymous Continuity 9 to 5 24 / 7 3 Design options of CBDC Objective Accessibility Interest-bearing Example Design “A” For Interbank Settlement Restricted : Wholesale Unremunerated Project Inthanon Design “B” Similar to cash Universal : Retail Unremunerated E-Krona Design “c” Policy Tool Universal : Retail Remunerated ??? 28
Part II Digital currencies Assessment Framework Analysis of impact on MP transmission will focus on how each case would affect balance sheet composition of each agent, in terms of both quantity (q) and price (p) Key assumptions 1) Supply of CBDC is controlled by the central bank through a market-based mechanism whereby cash/assets are exchanged for CBDC tokens in-kind. 2) No change in MP framework (IT). Policy rate is the main policy tool (no QE). Transmission Mechanism Balance Sheet Asset Liability 29
Part II Digital currencies CBDC Designs CBDC Designs Design A: Wholesale CBDC Design B: Unrenumerated Retail CBDC Design C: Renumerated Retail CBDC 30
Part II Digital currencies Design A – Wholesale CBDC Wholesale CBDC is unlikely to affect MP transmission because it does not contend with the two-tier banking system and is just a change in infrastructure intended to improve efficiency of RTGS systems (BIS, 2018). Central bank Comm. Bank Non-bank Bond Reserves Loans Borrowing Deposits Borrowing Bond Deposits Bond Others International reserves - CBDC Reserves Other debt Other assets - CIC Cash - CBDC Equity Other debt - Cash CBDC Equity Other assets Other assets Implications for Monetary Policy Transmission MP Transmission channels Case A – Wholesale CBDC Interest rate Status quo Credit Status quo Asset price Status quo Exchange rate Status quo Expectation Status quo 31
Part II Digital currencies Design B – Unrenumerated retail CBDC Unrenumerated Retail CBDC might affect MP transmission during stress because it is a safe asset that could be considered a ‘safer’ alternative to bank deposits. Central bank Comm. Bank Non-bank Bond Reserves Loans Borrowing Deposits Borrowing Bond Deposits International reserves - CBDC Bond Others Reserves Other debt Other assets - CIC Cash - CBDC Equity Other debt CBDC - Cash Equity Other assets Other assets Implications for Monetary Policy Transmission Channels Case B – Unrenumerated retail CBDC Interest rate Status quo Credit Status quo (except during stress: Shift from deposits to CBDC could impact bank funding and credit provision especially during stress periods (bank runs).) During normal times however, such shift is unlikely since deposits still pays interest. Asset price Status quo Exchange rate Status quo Expectation Indeterminate (but might lead to higher ELB due to less carrying cost of ‘cash’) 32
Part II Digital currencies Design C – Renumerated retail CBDC Renumerated Retail CBDC could affect MP transmission significantly as it gives central banks stronger control over domestic financial conditions through the CBDC interest rate (policy rate). Central bank Comm. Bank Non-bank Bond Reserves Loans Borrowing Deposits Borrowing Bond Deposits International reserves - CBDC Bond Others Reserves Other debt Other assets - CIC Cash - CBDC Equity Other debt CBDC - Cash Equity Other assets Other assets Implications for Monetary Policy Transmission Channels Case C – Renumerated retail CBDC Interest rate More effective: Bank rates would become more sensitive to changes in the policy rate to prevent deposit flight (CPMI, 2017) and minimize opportunity costs. The policy rate would act as a interest rate floor/ceiling (Meaning et al, 2018). Credit Less effective: Mass conversion from deposits to CBDC would affect bank’s lending capacity (Stevens, 2017; BIS, 2018). Asset price More effective: Changes in policy rate directly affects wealth. Exchange rate Status quo Expectation More effective: No ELB allows central banks to send strong policy signals through 33 extreme rate cuts, especially in the down cycle (Stevens, 2017)
Part II Digital currencies Summary of the implications of CBDC designs Channels Design A Design B Design C (Wholesale) (Unrenumerated Retail) (Renumerated Retail) Interest rate Status quo Status quo More effective but may cause one-time shift in bank rates Credit Status quo Status quo Less effective (except during stress) Asset price Status quo Status quo More effective Exchange rate Status quo Status quo Status quo Expectation Status quo Indeterminate More effective 34
Part II Digital currencies Are retail CBDCs really the solution to the autonomy problem? Disintermediation of commercial banks / emergence of narrow-banking • Retail banking would face direct competition from central banks narrow banking with the result threat to aggregate credit (BBVA, 2017) Validity of ELB argument • Negative interest rate policy (NIRP) not be politically feasible. • Eliminating larger bank notes to increases costs of holding cash lowers ELB (Rogoff, 2016; Engert, 2017) Financial stability implications • Banks may engage in high risk lending to offset higher funding cost (BIS, 2018) • CBDCs allow for ‘digital runs’ towards the central bank with unpredecented speed and scale (BIS, 2018) Autonomy problem • Loss of seigniorage income might not an issue for some central banks (Engert, 2017) • Unlikely that cryptocurrencies will completely replace fiat currencies unless there is massive lost of trust in the central bank. Central banks must maintain trust through credible policies (He, 2018)
Part II Digital currencies Bottom line • With increasing competition from private DCs would force central bank to move towards CBDCs. • However, central banks must carefully weigh the implications for financial stability and monetary policy of issuing each case of CBDC. Issues for consideration Case “A” Case “B” Case “C” Perform full functions of money Able to compete with retail crypto-currencies - Net Impact on MP transmission mechanism Status quo Status quo More effective Financial stability issues - - • Narrow banking • Moral Hazard
Conclusion e-Payment & Digital Currencies e-Payment • How much retail e-payment could substitute cash usage in Thailand? Small substitution effect • How would e-payment affect monetary aggregates, central bank's balance sheet, velocity of money, money multiplier? How would this affect the transmission of monetary policy or monetary operations? Not yet observe any negative impact from e-Payment on monetary operation in the transition toward less-cash society. E-payment trend strengthens MP transmission via credit and asset price channels. Digital Currencies • How would the emergence of private digital currencies affect transmission of monetary policy in 5 traditional channels? Most likely affect through credit and asset price channels (depends on each scenario) • What are the policy options available to central banks, and how would this change the transmission of monetary policy? e-Payment, Regulations, CBDC
“Central banks must maintain the public’s trust in fiat currencies and stay in the game in a digital, sharing, and decentralized service economy.” Dong He Deputy Director, IMF Monetary Policy in the Digital Age, June 2018
Thank you 39
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