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Central Banks in a Cashless World

With cashless transactions rapidly replacing physical cash, central banks have an opportunity to serve the public interest by providing or shaping the infrastructure on which digital-payment systems are built. But to do so effectively, they will have to abandon outdated assumptions and re-imagine their own roles.

LONDON – Economics has always had a strange and much-debated relationship with money. For a long time, economists – including Nobel laureates like Merton Miller and Franco Modigliani – regarded money merely as a medium of exchange. But by building on the work of John Maynard Keynes and Hyman Minsky, economists have since moved beyond a narrow focus on the quantity of money to consider its structural influence on the real economy and the financial system.

A structural understanding of money and finance becomes even more important in an increasingly digitalized and cashless world, because there is a growing need for policymakers to operate not just as market fixers but as proactive market shapers. A cashless world not only changes people’s relationship with money and creates new opportunities for how it is managed or even conceived; it also puts new pressure on central banks to reimagine their role and become more innovative.

While plenty of attention has been devoted to experiments with central bank digital currencies, an even more important intervention is to create and shape a new digital infrastructure around interoperable payment systems. Given the structural component of capital, this can increase bank competition, inclusion, and accessibility, and possibly offer new tools for managing economies in the face of crises.