Throughout history, innovations in money have challenged and altered the structure of the financial system. Time and time again, innovations have given rise to debates about the risks they pose and the rewards they bring, as well as the role of central banks in building confidence in money.
Paper banknotes are a case in point. As they were easy to carry, they made commerce more straightforward. But their success did not come easily. Attempts by central banks to issue banknotes in the 17th century resulted in too many being issued and even defaults, raising questions about their effects on stability and, ultimately, on the credibility of the sovereign. Yet modern banknotes eventually enhanced the benefits of central banking for society at large.
Similar debates emerged with the rise of bank deposits in the 19th century. Advances in recording and communication technologies helped deposits become popular, consolidating the role of banks in money creation. But this also raised awareness that confidence in money depends on the stability of bank deposits, leading central banks to take on the role of lender of last resort.
In today’s discussion on the digitalisation of payments, these debates sound familiar. Some fear that digitalisation, if not properly governed, could crowd out cash over time, create instability and even threaten monetary sovereignty. Central banks are therefore considering whether they should innovate themselves, by offering sovereign money in digital form to the public at large.