Interview on CBDCs with James Pomeroy, Global Economist, HSBC

Could you please tell our readers a bit about your professional background and how does your experience tie into topics such as CBDCs, stablecoins, and crypto (maybe)?

I’m a global economist at HSBC, so I’m looking at these topics from an economist’s perspective. So, while a lot of the analysis focuses on technological issues, I spend my time thinking about what these forms of digital money could mean for payments and monetary policy – and, crucially, whether they will make our lives better.

What are the top three benefits of CBDCs? How about risks and unknowns of these money?

For me, the biggest benefit is if they can help get people banked. Giving people access to digital payments is one of the easiest wins that the global economy can achieve over the next decade. The impact could be absolutely huge, both in terms of economic growth and lifting people out of poverty. In the emerging world, this could be done by making digital payments more accessible, cheaper, or both – thus helping the world accelerate away from cash.

In terms of other benefits, streamlining payments in any economy is a huge boost. All of the transaction costs disappearing would be a nice lift for economic activity. It could make the cost of everything we buy cheaper and that could help to fuel a bit more economic growth. It may seem small, but if businesses get an extra few percent on each sale to go into profits, or to cut prices, that can make a material difference when you add it all up.

And finally, I am excited by the idea of programmable money. If we can directly pay people government payments using CBDCs, that’s helpful, but if we can make those payments have qualities such as having expiry dates, or only being able to be used in certain ways, that would transform the way we think about direct stimulus to the economy. That’s particularly relevant in this pandemic era where we’ve had payments to households in the US. What if you could use this as a policy tool even more easily? And if you could make sure that these payments could only be spent on, say, food in the next 3 months? That could be possible in a few years’ time, and I think that’s quite exciting.

In terms of the risks and unknowns – I guess technology is clearly the biggest headwind to some of this happening easily and quickly. Many of the big risks that CBDCs could pose to the banking system are less likely to be an issue if we have an indirect model (rather than banking directly with the central bank) as you don’t have those same risks with bank runs or having to compete for deposits. These are huge risks that have been highlighted by many – but if a CBDC is distributed via the banks then they are smaller concerns than they could be. The biggest challenge could be adoption. Plenty of people don’t like the idea of using digital central bank money.

Bank of Korea Governor Lee Ju-yeol says once central bank digital currencies (CBDC) are introduced, the demand for cryptocurrencies like Bitcoin fall. How do you comment on this?

CBDCs are likely to be the best form of payment you can get: fast, efficient, secure – and therefore they may lower demand for all alternative forms of payment. But it’s not a direct competitor for what Bitcoin is providing today. I think the bigger impact will be on traditional electronic payments and cash. Many Bitcoin investors discuss its value as a store of value rather than a means of payment. And so, a CBDC needn’t mean less demand for Bitcoin. You could see a bigger impact on cryptocurrencies used primarily for payments – but I think the implications are far greater for paper money.

Germany’s Bundesbank tested a blockchain-based settlement interface for electronic securities. The test demonstrates that new technologies and conventional payment systems can work to settle securities in central bank money without relying on a central bank digital currency (CBDC). How does the prospect of a Digital Euro look like for local central banks in Europe?

Europe (aside from Sweden) is some way behind on this, largely because of how much cash is still used in the likes of Germany and Italy. It may well be that in Europe more progress is made in the wholesale space than the retail space, as a result. That can be exciting, too, in terms of streamlining the financial system, but the implications of a retail CBDC are more interesting to most people.

What role does Facebook Diem play in these projects? How has Facebook’s announcement of Diem influenced the discussions/projects around CBDCs?

It’s woken central banks up. In theory, stablecoins could be a very useful means of payment for the global economy – fast, secure, and cheap – if people are willing to use them. This could determine how quickly some of the other central banks work on developing their own CBDCs. It will be interesting to see how widely stablecoins such as Diem are adopted in the coming years.

About James Pomeroy