Innovation in central banking often starts in small markets. New Zealand was the first country to formally adopt inflation targeting as we now know it in 1990. Today the Bahamas and Cambodia lead China in piloting central bank money in electronic form.
However, few realise it was Finland that pioneered the world’s first central bank digital currency. The experiment has some important lessons for those feverishly trying to figure out how revolutionary CBDCs will be, including the UK, which joined the club just last month with a new taskforce.
Finland introduced the Avant Card in December 1992, long before Bitcoin came into existence. It could be loaded with up to 500 euros ($602) in today’s terms and was rechargeable. According to Aleksi Grym, an economist at the Bank of Finland, central bankers were convinced this system would quickly displace cash.
However, consumers found it difficult to use. Retailers were frustrated to have to add extra point-of-sale equipment. Finland’s central bank ended up selling the card to a group of banks that shut it down in 2006.
Today Avant Cards can be found on eBay for $10 — hardly digital gold. It turns out that displacing the efficiency and convenience of modern credit card networks, and now their digital brethren, is incredibly hard. Most consumers value the reassurance that their money is safe in the bank if they lose their debit or credit card, which wasn’t true with these bearer instruments.
It is revealing that today Finland has chosen the digital slow lane for reconsidering a CBDC despite being the most cash-lite country in the world with just 3% of transactions undertaken in cash.
This leads to another key lesson: Before major central banks issue tokens at scale, there needs to be a far deeper assessment of the impact on financial stability and monetary policy and whether they increase the potential for bank runs. This, not a technical judgment about the efficiency of rival payments systems, is what will determine how large central banks will act.
After all, access to central bank money has traditionally been the preserve of domestic regulated banks. The age of the blockchain could open it up directly to other businesses, a huge taboo to break. What would that mean for the banking system, especially in a world where cash is far less important? Deposit flight in times of stress is far from a theoretical risk. The International Monetary Fund totted up 124 systemic banking crises from 1970 to 2007. Even though post-crisis reforms make banks far stronger, liquidity scares will happen.
To address this, pilot projects have limited the amount of funds available or gated the ability to move money, as with the Bahamas’ sand dollar. But creating expensive new payment systems just for transactions of up to 3,000 euros, as the European Central Bank has suggested, is unlikely to be worthwhile. Central banks may even see their control over monetary policy transmission diluted, as Denis Beau, deputy governor of the Bank de France, recently pointed out.