As digital currency use continues to expand, concerns are being raised about the viability of commercial banks.
The sobering thought was expressed during a panel discussion hosted by Managing Director of the International Monetary Fund (IMF) Christine Lagarde at the IMF/World Bank 2019 Spring Meetings in Washington on Wednesday.
Introducing the topic Money and Payments in the Digital Age, Lagarde said it was agreed that cash usage was decreasing in many countries, citing Sweden where now only 13 per cent of transactions were still being done using cash.
In the US, about 22 per cent of transactions are done still using cash, and about double that for China.
“The role of banks as providers of payment services is being challenged and banks are going to have to adapt to survive or possibly disappear,” predicted Largarde.
“Central banks are going to be in a tough place because they are going to have to decide what they do, cash, no cash? Central bank digital currency or not, maybe,” she said, as she pointed out that several central banks were examining the possibility of establishing central bank digital currencies.
However, while all members of the panel agreed digital currencies would become even more pervasive, Executive Board Member of the European Central Bank (ECB) Benoît Coeurê said he believed banks would not be challenged.
“I am quite convinced that banks will stay. They are all here to stay because we are in an eco-system and we need competition. So it is the spur of competition and the spur of innovation that will help all of us work better and reap the benefits of this innovation,” said Coeurê.
However, he said it was important that banks prepare themselves for the future and the possible changes they will have to make.
He said despite whatever system emerges in the financial space, it was the duty of central banks and governments to ensure that the financial system remained safe, efficient, stable and trusted while providing infrastructure and a facilitating environment.
“We know that banks are being disrupted, they are being disrupted in a sense from below from all kinds of disruptors – start ups of non-banks providing payment services – and they are also being disrupted from the top by these big techs that want to provide payment services in their own environment,” he pointed out.
“So whoever wins that race will be welcomed, and we are very much in favour of competition . . . we are very mindful of this risk and we want to be sure that we keep the right mix between private money and public money and there is room for both,” he insisted, while adding that some money would have to remain “central bank money” such as that for settlements.
Jeremy Allaire, Chief Executive Officer and Co-Founder of crypto finance company Circle, said he believed central banks and digital currencies could co-exist.
“I think the interesting thing, from our perspective, is how do you take central bank money and tokenise it and let it get all the benefits of the crypto currency which is the reach of the internet, the speed of the internet, the scale of the internet, the security, cost efficiency . . . but still have that underlined based on the major reserve currency,” he said.
Allaire said he suspected that once people got the taste of using digital currency “they wouldn’t want to go back” to using banknotes.
While agreeing that there was need for more standards and greater governance and regulation of digital currencies globally, he said “The end goal needs to look more like the open internet like what we have today.”
As Barbados joins other major global players in expanding the financial technology (fintech) space, Government introduced a regulatory sandbox late last year with the view of developing a regulatory framework for such firms in the financial services sector.
Kenya is one country that has implemented a digital currency – the M-Pesa. Governor of the Central Bank of Kenya Patrick NJoroge said it has been successful since its introduction some 12 years ago.
“There was a demand for that,” he said, pointing out that regulations were introduced in 2013 to supervise that industry.
Njoroge pointed to the need for central banks to remain credible so they did not go out of existence.
“At the end of it, the central banks, the only reason they operate is because of trust, meaning credibility. So if we are not credible as central banks we are done, I mean we are out of the business,” he warned.
At the same time, he said given the challenges associated with internet-based transactions including issues of power outages and online fraud, “old fashion currency” will still have a place.
One of the world’s largest banking and financial services institution – JP Morgan Chase – has already taken the decision to introduce a digital token used by clients to settle institution to institution payments – its JPM Coin.
Sarah Youngwood, Chief Finance Officer of Consumer and Community Banking Segment of JP Morgan Chase, said that bank welcomed competition.
“We believe that it has been wonderful to see the application of the ledger technology in many different ways . . . we welcome the competition as long as the activities of the competition get regulated and as long as it is solving customers’ issues,” she said.