Hyun Song Shin on CBDCs and the Future of Central Banking

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:15)

And I'm Joe Weisenthal.

Tracy Alloway (0:17)

Joe, I feel like it's an interesting time to be a central bank.

Joe Weisenthal (0:24)

I mean, yeah, it always is, but I think particularly interesting right now because the scope of new challenges, new economic conditions, new forces on sort of like how banking and money and markets work, lots of new stuff right now, lots of new territory.

Tracy Alloway (0:42)

Yeah, so not only are central banks responding to an exceptionally unusual economic crisis in the form of a global pandemic, which basically led to the shutdown of the entire economy last year, but they're not now all reacting sort of differently to the recovery. So for instance, we saw the Fed coming in more hawkish than expected last week, but it's still basically on hold for the foreseeable future. You have Brazil delivering successive rate hikes to deal with inflation.

China is sort of winding down some of its easy monetary policies. The ECB hasn't even started tapering or even talking about tapering at this moment in time. So you have all these central banks sort of going off and doing their own thing, trying to respond to this very new environment.

And in the meantime, you also have some very interesting ideas floating around on the nature of money. So it's sort of like the very fundamentals of being a central bank.

Joe Weisenthal (1:45)

Yeah, that's true.

I hadn't really like thought about it and sort of those kinds of crosswinds. I mean, you're absolutely right, like sort of like unprecedented. You know, I guess there's a sense in which the COVID crisis hit everyone the same way at the same time, basically. Like it kind of had this big shutdown effect, but the recovery is very different with different conditions. So it's like, okay, everyone turns off everything for a few months, and now we're trying to turn it back on again.

And some countries have had different fiscal policies. Some countries have had different trajectories of the virus itself.

Some countries have like different underlying economic conditions that change the nature of the recovery. So there's that. And so then you get the splintering of policy outcomes as you talk about. Plus again, you know, the rise over the last year of like different thoughts about money, particularly cryptocurrencies. We have the Chinese digital currency, which is like people talked about for a long time, but is actually out. That's raising all kinds of new questions. So yeah, just numerous things all hitting at the same time.

Tracy Alloway (2:50)

Yeah, it's a lot for central bankers to wrap their heads around. But we are going to try to do exactly that today. And we have the perfect person to discuss these broad themes with, you know, the outlook for central banks and also how central banks are dealing with new approaches towards money, including cryptocurrencies.

We're going to be speaking with Hyun-Song Shin. He's the economic advisor and head of research at the Bank for International Settlements and also a previous Odd Lots guest. So, Hyun, thank you so much for coming on.

Hyun Song Shin (3:21)

It's really great to be back.

Tracy Alloway (3:23)

So I guess just to begin with, I sort of wanted to zero in on the central bank digital currencies idea because it does feel like over the past year, this is an idea that is gaining a lot of momentum. We've seen a lot of banks issue papers about it, including the BIS.

One of the things I want to ask is, are we seeing more talk about CBDs because of the economic environment that we're in? Has the pandemic sort of accelerated interest in central bank digital currencies because we're perhaps not using as much cash and we need a whole lot more liquidity in the financial system?

Hyun Song Shin (4:06)

I think it's a bit broader than that, Tracy. I think there has been a broad trend in the thinking about the monetary system at central banks. I think it's been accelerated certainly by the pandemic and the advent of touchless systems and so on, contactless systems and so on. But I think it's broader than that. And I think it's a result of the importance of, I would say, the importance of data in the digital economy.

I think the vast troves of data, that's probably the most important feature of a digital economy. And that poses a couple of questions on the way that the monetary system works. I think one has to do with competition. I think here the discussion about big techs and finance very much dovetails into this. So if you have network effects, whereby the more users flock to a particular platform, the more incentive there is for others to flock to that platform, then the data has this property that it actually is a very important resource and the payment system itself can be prone to concentration. For example, in China, the two big companies have a 94% share of the mobile payment market.