Editorial

1.1 Preface

Under the development of information technology, various forms of digitized payment instruments are becoming more widely used. In addition to credit cards, debit cards and e-money, many “mobile” payment instruments available through mobile phones and smartphones are being introduced and rapidly growing. Especially in emerging and developing economies, mobile payment instruments are expected to contribute to “financial inclusion” through providing payment services to wide-array of people without relying on brick and mortar infrastructure. Indeed, some mobile payment instruments, such as Alipay, WeChatPay and M-Pesa, have grown very rapidly and are now widely used as daily payment tools.

In addition, since the introduction of Bitcoin in 2009, more than 1,500 types of crypto-assets have been issued, mainly through Initial Coin Offering (ICO). Accordingly, there are growing interests in possible impacts of digital currencies and crypto-assets on central banking, especially on the effectiveness of monetary policy, as well as on capital markets.

1.2 Digital currencies and their possible impacts on central banking

This section illustrates the possible impacts of digital currencies and crypto-assets on central banking and monetary policy, with classifying various forms of digital payment instruments into three categories.

The first type of digital payment instruments are those denominated by sovereign currency units such as USD, EUR and JPY, and issued by commercial banks (depository institutions) or accompanied by the transfers of bank deposits.

There are various payment instruments in this category. For example, credit cards and debit cards can be categorized in it in a sense that they issue instruction to transfer bank deposits. As a mobile payment instrument, Swish in Sweden is also in this group.

These instruments may not seriously affect the effectiveness of monetary policy. Indeed, various payment instruments such as checks, credit cards and debit cards have already been issued as the liabilities of commercial banks or as the tools issuing instructions to transfer bank deposits. There has been little evidence, nevertheless, that the transmission mechanism of monetary policies has substantially affected by them.

The second type of digital payment instruments are those denominated by sovereign currency units and issued by non-bank entities. Many of mobile payment instruments recently issued, such as M-Pesa, PayPal, Alipay and WeChatPay, can be categorized in this group.

These instruments can be regarded as offering wide-scale netting services for customers, and they might raise some issues to be considered from the viewpoint of monetary policy. For example, monetary aggregates are traditionally the sum of liabilities of banks. In this regard, if many people become to use non-bank liabilities for daily payments, they might destabilize the relationship between monetary aggregates and economic activities. Also, from the perspectives of payment system stability and financial stability, central banks may need to consider how to effectively monitor the activities of non-bank payment service providers offering mobile payment services. Nonetheless, these issues are manageable through, such as, reviewing the definition of monetary aggregates and monitoring frameworks. In sum, digital payment instruments may not seriously hamper the effectiveness of monetary policy, as long as they are denominated by the domestic sovereign currency unit.

The third – and most extreme – case is that crypto-assets, which are not denominated by sovereign currency units, overwhelm sovereign currencies and are widely used directly for daily transactions. This imaginary case is similar to the situation where foreign currencies are widely used instead of domestic sovereign currencies, such as “dollarization.” In such a case, the effectiveness of monetary policy aiming to control domestic sovereign currencies can be substantially impaired.

Nonetheless, it is extremely unlikely that crypto-assets are widely used instead of sovereign currencies. If central banks continue to promote the convenience and efficiency of payment infrastructures, the general public may not have much incentive to use crypto-assets instead.

In sum, as long as the central bank maintains it credibility and its sovereign currencies are utile and accessible, its monetary policy can be effective also under the on-going digitization of payment instruments.

1.3 Economics of crypto-currencies

Indeed, crypto-assets are now mainly used as speculative investment tools. They are not widely used as daily payment instruments, and their market size is limited at this juncture. According to the Google search data (Figure 1), especially in 2017 many people “googled” the word of “price” with the word “Bitcoin,” instead of the words “exchange” and “mining.”

There are several reasons why it is difficult for ordinary people to use crypto-assets for daily payments. Needless to say, huge price volatility of crypto-assets hinders it to be widely used. The value of any medium of exchange should be stable. No one wants to use an instrument whose value is expected to increase. No one wants to receive an instrument whose value is expected to decrease.

More fundamentally, any payment instrument should be supported by “trust,” which is the most fundamental element. Nonetheless, creating trust is costly. In this regard, many central banks have already established their own trust, based on institutional frameworks guaranteeing their independence from the government, reliable track-record of low inflation, and reliable operations. As long as the central bank maintains its own trust, it can issue its sovereign currencies as its liabilities with extremely low marginal costs.

On the other hand, crypto-assets need to establish their own trust from scratch. For example, Bitcoin needs huge amount of electricity for “mining” calculation, which can be regarded as the cost for creating trust. In order for crypto-assets to be widely used, they need to compete with the established trust of the central bank, and the central bank may have great advantage in this competition.

Needless to say, if the central bank loses its trust from the public, crypto-assets might have a chance to be used instead of the sovereign currencies. Even in such as case, however, foreign sovereign currencies are more likely to be used rather than crypto-assets.

1.4 Crypto-assets and capital market

Since total market capitalization of crypto-assets at the end of September 2018 is estimated to be a few hundred billion USD, which is far smaller than other financial assets, they may not have substantial impacts on global capital markets. Nonetheless, central banks are required to continuously monitor the developments of crypto-asset markets. Moreover, there are a couple of issues to be considered in relation to the transactions of crypto-assets.

As counterparty currencies against Bitcoin, JPY is now one of the heavily used currencies in Bitcoin transactions. It is often said that Japanese people prefer holding safe assets, such as cash and insured bank deposits. Nonetheless, the fact the JPY is the most heavily used currency in Bitcoin transactions implies that some people tend to take high risks in their investment activities.

This fact raises challenges to Japanese authorities and the central bank. Indeed, in Japan how to provide private-based “risk money,” such as equities, has long been a part of important policy agenda. Bitcoin transactions with JPY imply that the shortage of risk-money may not be fully attributable to people’s risk-averse sentiments. In this regards, there would be some room that more efforts to enhance the utility and the efficiency of Japan’s capital markets contribute to enhancing the provision of risk money.

From the perspective of maintaining market integrity, it would also be important not to make crypto-asset markets impair the investors’ confidence to overall capital markets. In this regard, financial authorities are required to make effective communication with consumers and investors in order to make them understand the characteristics and risks in crypto-asset investments.

In addition, especially in 2017 many new types of crypto-assets were issued through ICOs. Many of ICOs seemed to be used in order to circumvent securities regulation. Such developments of ICOs might imply the necessity to re-assess the regulatory framework on fundraising through issuing securities, such as IPOs, and to consider the best possible framework for supporting the developments of new industries while protecting investors and consumers.

1.5 Conclusion

In an on-going digitization of payment instruments, central bank monetary policy will remain to be effective, although there will be some issues to be considered, such as how to effectively monitor new entrants in payment services, and how to assess the developments of monetary aggregates. Regarding crypto-assets, as long as the central bank sovereign currencies and its infrastructure are trustworthy and convenient, crypto-assets are very unlikely to be used for daily transactions.

Central banks need to continue making efforts to enhance reliability and utility of their own sovereign currencies and to promote the effectiveness of their infrastructure. Such efforts may contribute to reduce the risks of destabilizing payment, settlement and financial stability under the on-going digitization of payment instruments.