There are certain technologies that are characterised as General Purpose Technologies (GPTs). These are technologies, like electricity or the computer, that have a very large economic impact: often at a national or global level. They are characterised by their broad usefulness and applicability to different sectors and applications; they are, in some sense, platforms or enablers on which economic value is built. The computer or electricity are good examples of GPTs.
Whilst perhaps not obvious or intuitive, money is also a General Purpose Technology (GPT) and is arguably one of the first technologies that humans invented; fulfilling the functions of store of value, unit of account, and a medium of exchange. Man invented “money” in order to enable trade and solve a number of challenges, such as the coincidence of wants problem where, in a barter economy, a buyer who owned chickens but wanted milk might find that the man with the milk didn’t want the chickens but wanted beef. Hence, the invention of money provided a mechanism to solve this coincidence of wants problem in an efficient way as now money could be used as the medium of exchange.
As with the computer and electricity, it has also undergone constant change and evolution: we no longer, for example, use shells or precious metals as currency and even paper – itself an innovation of the 13th century – is progressively being replaced by digital transactions and digital forms of money.
The appearance of various forms of digitised money in recent years is therefore simply the natural continuation of a long arc of innovation that goes back many centuries. The discussions of Central Bank Digital Currencies (CBDCs) should be viewed in this context.
Blockchain is believed to be, like artificial intelligence, another General Purpose Technology that will have transformational impact across economies. Much of that impact is through the concept of "tokenisation" where assets, such as gold, real estate, or securities, are represented as programmable tokens on a distributed ledger that can be bought, traded, and used as collateral digitally. This is allowing existing financial markets to be reimagined in more liquid and efficient ways; and also for new markets to be created for asset classes where there has historically been limited liquidity or access. Switzerland's SIX Digital Exchange is one example of a market that has been developed as a green-fields tokenised asset market.
The tokenisation of assets and the development of these new markets promises more efficient Delivery versus Payment (DvP) trade settlement: where the title to a security moves atomically with payment and, by doing so, mitigates the counter-party risks that have often led to expensive intermediaries, rent-seeking, and other market inefficiencies. However, whilst the tokenisation of assets represents the "delivery leg", how will the "payment leg" take place in this market?
The development of tokenised forms of money is therefore a possible response to this: as an enabler of atomic DvP settlement and a broad range of other use cases and value creation opportunities that flow from the tokenisation of assets.
Much of this payments innovation will happen in the private sector through the development of technologies such as tokenised bank deposits (which arguably offer a much less disruptive and more effective instrument than stable coins), stable coins, or other forms of instrument; however, to enable this innovation, there may still be a need for a digitally native form of Central Bank money (i.e. a Central Bank Digital Currency).
Firstly, the Principles of Financial Markets Infrastructure (PFMI) principles requires (#9) that financial markets should conduct their settlements in central bank money. Therefore, it stands to reason that if markets are going to be tokenised, there is value in exploring the most efficient and effective for transactions in these new digital markets to be settled in central bank money.
Secondly, there are private sector innovations that are likely to be enabled by a CBDC. For example, tokenised deposits are a promising technology that banks could introduce but, given they are claims on the issuing bank, there is a consideration of the "singleness of money" that may arise if one bank is perceived as financially less secure than another and this is then priced into the token value. The ability to settle using a wholesale CBDC would be one mechanism by which this risk can be mitigated.
Thirdly, returning to the original point of money as a General Purpose Technology and building on the previous observation, the creation of a CBDC could, like the invention of prior forms of money, be viewed as a platform: an enabler of innovations that we may not be able to foresee yet and, by doing so, incremental economic value will be created through the lowering of transaction costs, new efficiencies, and the enablement of entirely new products and instruments.
As such, perhaps the strongest argument for the exploration of CBDC may be as a public good. This certainly seems to be the view of the Bank of England as eloquently evidenced in their recent update on the Digital Pound initiative which articulates how a Digital Pound could enable new innovations by introducing the technology platform but also enabling a new market to convene around it. As part of this, standards would be set that would enable new and existing firms to innovate products and services that interact with this new payments technology whilst, at the same time, leading to new data being captured and being leveraged in new ways.
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