Speech Future of Money
Assistant Governor (Financial Markets)
Address via Telepresence Robot to Camp Alphaville
Thanks very much to Izzy Kaminska for allowing me to grace the stage from the other side of the world and to Kate Mackenzie (an Alphaville alumnus) for getting the Australian presence at Camp Alphaville up with me and my fellow Bronte resident, John Hempton.
And Izzy, this shows robots can be a force for good. The telepresence robot saved me 48 hours travelling time and all the carbon emissions that go with that. Though if telepresence robots really take off, a few airlines will be out of business which would be more in keeping with Izzy's thesis.
It is a privilege to be opening the batting at Camp Alphaville though these days it seems any old Australian can open the batting for England. An Australian central banker appearing via robot talking about the future of money is very much an overture for today's conference with topics to come including ‘Central Banks and their Jedi Mind Tricks’, ‘FX Wars’ and ‘China up Shibor Creek’. I would very much add a question mark to that last topic.
David Birch, who is going to be on the panel shortly, recently wrote that once again we are talking about a cashless society. I would like to pick up on the words ‘once again’. The death of cash has been foretold many times over the decades. As Mark Twain might say, cash has turned up at its own funeral quite a few times. Notwithstanding many innovations in payments technology, cash is hanging in there. Another paper-based transactions medium, cheques, are clearly on the way out, but cash doesn't seem to be going that way yet.
David goes on to talk about a world of lots of exchanges and lots of currencies, a veritable Tower of Babel of currencies. In that world, someone needs to be Douglas Adams' babelfish. And I would see central banks as playing that role (though I would say that of course).
So what do we want from money? We want it to be a medium of exchange and a store of value. For both of those functions, trust is absolutely critical. Because money is an inter-temporal store of value, I need to know it's going to have value tomorrow and that other people are going to accept it. In that sense, money is a bit like a bubble; it only has value as long as someone else believes it has value. But fiat money has a bit more going for it than that. It has value in part because it is backed by the power of the state to tax. That has been true for centuries, as money has evolved from sea shells to gold to fiat money.
So what is the threat of digital disruption to this world? For something like bitcoin, I need to ask whether I can trust the algorithm. Can I trust the security? It relies on reputation rather than regulation. The experience over the past year or so shows up a few problems with that.
An important question to think about (at least for a central banker) is whether digital disruption is a micro story or a macro story. There may be digital disruption at the micro level to the payments system, but that may not have macro implications. The transmission mechanism might change, but that is always the case and something that is always on the radar for a central bank. So there may be transitions between different payments media with minimal macro consequences.
There may also be a lot of changes in payments mechanisms at the cutting edge, which may be picked up by the twitterati, but I am not so sure about your average punter. Technology is very much about diffusion: how far and how fast. Both of those two elements are critical in determining the extent of disruption.
In a world of competing currencies and competing payments mechanisms, as I said earlier, reputation is key. I am not sure it would be a stable equilibrium to have multiple currencies all circulating side by side. Gresham's Law would suggest that one will win out (and not necessarily the best one). I would think that one system's reputation would trump the others and that most people would really only be interested in understanding and verifying the reputation of one currency, certainly not too many more than that.
In this context it is interesting to think about Scotland. Scotland in the 18th and 19th century was near the libertarian ideal of free banking, though obviously it didn't last. The Scottish independence vote is coming up in a few months. If that gets up, it has been suggested that Scotland might no longer be part of the pound, or at least get any seigniorage from it. In that world, if the Scots are scratching around for a new currency, they can try digital currencies. The rest of us could watch for a few years and see how that natural experiment goes.
So to conclude, I think the digital threat to the future of money is very much a micro story, not a macro one. More electronification seems certain, though even then, I can see cash hanging in there. I am not willing to say ‘no future for cash’, or book a ticket for its funeral on my mobile payments device. The macro story is a clearer picture. The transmission mechanism might change, but the principles and overall framework are likely to remain intact for a while to come.