PUBLIC AND PRIVATE MONEY CAN COEXIST IN THE DIGITAL AGE.

• Author: Adrian, Tobias

We value innovation and diversity--including in money. In the same day, we might pay by swiping a card, waving a phone, or clicking a mouse. Or we might hand over notes and coins, though in many countries increasingly less often.

Today's world is characterized by a dual monetary system, involving privately issued money--by banks of all types, telecom companies, or specialized payment providers--built upon a foundation of publicly issued money--by central banks. While not perfect, this system offers significant advantages, including innovation and product diversity, mostly provided by the private sector, and stability and efficiency, ensured by the public sector.

These objectives--innovation and diversity on the one hand, and stability and efficiency on the other--are related. More of one usually means less of the other. A tradeoff exists that countries--central banks especially--have to navigate. How much of the private sector to rely upon, versus how much to innovate themselves? Much depends on preferences, available technolog)', and the efficiency of regulation.

So it is natural, when a new technology emerges, to ask how today's dual monetary system will evolve. If digitalized cash--called central bank digital currency---does emerge, wall it displace privately issued money or allow it to flourish? The first is always possible, by way of more stringent regulation. We argue that the second remains possible, by extending the logic of today's dual monetary system. Importantly, central banks should not face a choice between either offering central bank digital currency, or encouraging the private sector to provide its own digital variant. The two can coincide and complement each other--to the extent central banks make certain design choices and refresh their regulatory frameworks.

Public-Private Coexistence

It may be puzzling to consider that privately and publicly issued monies have coexisted throughout history. Why hasn't the more innovative, convenient, user-friendly, and adaptable private money taken over entirely?

The answer lies in a fundamental symbiotic relationship: the option to redeem private money into perfectly safe and liquid public money, be it notes and coins, or central bank reserves held by selected banks.

The private monies that can be redeemed at a fixed face value into central bank money become a stable store of value. Ten dollars in a bank account can be exchanged into a ten-dollar bill accepted as legal tender to settle...