Governments and financial institutions are increasingly warming to the idea of introducing Central Bank Digital Currencies (CBDCs) - central banks' digital tokens, pegged to a country's fiat money, and controlled and backed by the authorities in ways they never could other money they issue.
There's a lot to like about that if you're banks and governments, but opponents of CBDCs keep warning that the same doesn't apply to regular citizens, whose privacy, personal data safety and true ownership of their assets may be better served by decentralized solutions.
And while these debates are ongoing, the idea of pairing CBDCs and digital IDs, and if need be, pushing them onto a reluctant population, is something central bankers are now coming up with as well, as evidenced during the 2022 International Monetary Fund (IMF)/World Bank Group (WBG) Annual Meetings.
Cecilia Skingsley, head of the Innovation Hub at the Bank for International Settlements (BIS), agreed with other speakers who said introducing a CBDC is not a "universal solution" and should instead come together with digital IDs, "in a package."
Skingsley framed this as the need to advance "digital literacy" where locking people's sensitive data into digital ID should come first.
The entire process of digitization, but also the more complex and far-reaching digitalization of everything, which would eventually result in "digital society" is not without its problems, and Skinsley paid lip service to it by saying that the process raises "a lot of questions about data privacy."
But, Skingsley also said this is something that politicians should decide on.
"This is not a role for me as a central banker but having a possibility to actually choose how much digital footprints you want to leave I think is a good starting point," the BIS Innovation Hub head said in reference to privacy concerns around digital money and other related issues.
And while that sounds like Skinsley favors allowing citizens some choice, her other statements during the panel suggest that "pushing society" in a desired direction is also a good idea.
And that kind of behavior by central authorities would be "boldness" which Skinsley compared to society having to be pushed into adoption of the use of electricity, or sewage systems in the past.
"I think we need to be a little bit bold here right in the sense that we shouldn't get in the way of the private sector, but I think sometimes in history you have to push society into to new equilibriums," said the banker, adding:
"Predecessors did that when it came to building electricity, sewage system, and the likes. Hugely welfare enhancing. Now we want to do it again with money, and it would be good for banks as well when society takes its steps."
IMF’s deputy managing director Bo Li lauds CBDC's ability to control what people buy
At the IMF-World Bank Annual Meeting on Friday, the IMF’s deputy managing director, and former deputy governor of the People’s Bank of China, Bo Li, said CBDCs would help financial programmability.
“A CBDC can allow government agencies and private sector players to program, to create smart contracts, to allow targeted policy functions,” he explained.
Li explained that a CBDC can be programmed and targeted for a specific use like welfare payments, food stamps, and consumption coupons.
“This potential programmability can help government agencies to precisely target their support to those people that need support,” he continued to explain.
Li also explained how institutions could take advantage of CBDC data by following the model of Chinese Communist Party where “non-traditional data can be very useful for financial service providers to give me a credit score.”
"...In China, because I personally experience it, right. Because those transaction data can be utilized by service providers in credit underwriting in the sense that you know - those transaction data in terms of how many coffee I drink every day where I buy coffee. Do I use Uber every day? And what kind of working hours I have," Li said.
According to Cato Institute’s Center for Monetary and Financial Alternatives policy analyst, Nick Anthony, Li’s comments mean the government could use a digital currency to “precisely control what people can and cannot spend their money on.” A programmable currency could also allow governments and financial institutions to control who has access to money.
In a paper published earlier this year, Anthony warned that “a CBDC would erase what little financial privacy still exists in the United States.”
IMF ponders ways to end people's hesitancy to move away to cash
One of the speakers at the 2022 International Monetary Fund (IMF)/World Bank Group (WBG) Annual Meetings, Kristalina Georgieva, IMF's managing director, has revealed that this financial institution doesn't like people using cash and wants to change that preference.
And while some rights and consumer protection groups as well as citizens might now be trying to understand why this would be IMF's policy - the IMF, too, wants to "understand" some people's "strong preference for cash."
But that's not to meet them half way in some sort of compromise going forward - it's to create better campaigns to change people's mind on this issue.
It's not really rocket science - those who prefer cash prefer not to have banks and governments track every step of their financial activity (that also reveals lifestyle and behavioral patterns). In other words, they prefer privacy - and they also may not like getting cut off from their money at their government's whim.
But Georgieva, formerly an EU and World Bank bureaucrat, doesn't really bring up any of these basic concerns, and is looking for answers in other places.
"Is it lack of trust in the (digital) payment service providers? Is it a preference for informality, is it difficulty to access services? Or it is that it costs a little bit more for people for whom every penny counts?," she wondered, and continued:
"We need to understand that so we can then make a proper information provision that covers for people - how not using cash is better to protect yourself against crime and how if you use digital money you can graduate from payments to credit and that of course enhances financial inclusion."
One thing IMF's "capacity development experts" do understand and don't hide is that there is often a strong preference for cash despite the availability of digital wallets like that developed by the EU, and of mobile money.
But people unwilling to let go of cash is not the only problem the IMF is facing as it implements its agenda - another is hesitancy to use centralized and government-controlled Central Bank Digital Currencies (CBDCs).
IMF Deputy Managing Director Bo Li singled it out as one of the challenges in introducing CBDC, and suggested that while the IMF is yet to fully understand what drives that hesitancy among both customers and merchants, he has a solution.
"We need a better understanding of what's the cause, what's driving that hesitancy. One way to solve it relates back to our data question - that is if we can create enough value, if by joining this ecosystem if consumer can enjoy a lot more financial services, if they can get credit, they may be willing to join the ecosystem," said Li.
This IMF official thinks that the same goes for merchants.
"If they can provide more service and if you can if they can earn a profit they're going to be willing to join this ecosystem. So I think one way to solve this hesitancy is to create value by utilizing the data," Li said.
IMF praises India's controversial digital ID system, Aadhaar
The International Monetary Fund (IMF) praised India’s digital ID system, Aadhaar. The IMF supports digital IDs as they are key in the development of central bank digital currencies (CBDCs). Asked about the expectation of India taking the presidency of G20 next year, IMF director Kristalina Georgieva praised the country's “digital access” enabled by Aadhaar. “India deserves to be called a bright spot on this otherwise darkening horizon because it has been a fast-growing economy even during these difficult times,” said Georgieva, in a press conference. “But most importantly this growth is underpinned by structural reforms, among them the remarkable success in digitalization in India from digital ID to providing all services and support on the basis of digital access.” She added that due to its “position of strength” in digitalization, India could spearhead “digitalization, including digital money.” “We know that we need regulation of crypto. We know that we need to get some more attention to cross border payments and how we are proposing public investment in the infrastructure of a cross border payment platform,” Georgieva added. However, Aadhaar has faced criticism in India, especially for excluding welfare access. Additionally, there is an ongoing legal battle to prevent it from becoming mandatory. Deputy directors of IMF’s Fiscal Affairs Department Paolo Mauro praised India’s cash transfer systems. “From India there is a lot to learn,” he said. “It is a logical marvel how these programs that seek to help people who are at low-income levels reach literally hundreds of millions of people. “There are programs that target specifically women. There are programs that target the elderly, farmers. Perhaps the interesting part is that in these examples, there is a lot of technological innovation. “In the case of India, one thing that is striking is the use of the unique identification system, the Aadhaar. But in other countries, also, there is greater use of sending money through mobile banking to people who actually do not have a whole lot of money, but they have a cell phone.” IMF’s Fiscal Affairs Department director Vitor Gaspar noted that the IMF is working on a “very ambitious program of application of new technologies and digitalization to public administration,” called gov tech. He added that the IMF is “collaborating with India in that context as one of the most inspiring examples of the application of technology to solve very complicated issues of targeting support to the people who need it most.”