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Abstract
Rich countries’ central bank digital currencies (CBDCs) and Facebook’s stablecoin constitute risks to developing countries. Foreign CBDCs risk facilitation of capital flight. Novi, Facebook’s wallet for WhatsApp risks countries’ domestic payment systems moving offshore. This article presents the analytical framework for assessing these risks by analyzing payment system dynamics in the framework of the theory of the monetary circuit applied to the international hierarchy of money. It quantifies the US and dollarized Ecuador’s pyramid of liabilities to demonstrate the impact of payment systems on the potential of banks’ money creation. While a domestic CBDC or a potent bank-money payment system can help to increase significantly the potential of money creation in a dollarized economy, the offshoring of domestic payment systems by substituting local currencies with foreign stablecoins such as Facebook’s Diem and its Novi wallet reduces the potential of money creation. It strongly encourages countries low in the hierarchy of money to engage in a diverse set of regulations to mitigate these risks preemptively and proactively regulate to promote a dynamic payment system without the risk of currency substitution.
Acknowledgments
This article ties selected issues of a highly demanding state-of-the-art applied research agenda on payment systems, capital flows and financial deregulation led by the late Professor Eugenia Correa at UNAM’s Faculty of Economics. I am very thankful for her research guidance over the last few years, especially her full-fledged introduction to the theory of the monetary circuit. I would also like to thank brave policymakers willing to issue bold regulation of financial giants. I am especially thankful to Alicia Girón, Marcia Solorza, Sergio Cabrera, Wesley Marshall, and José Déniz for their insightful comments throughout my research and two anonymous referees for their helpful and insightful suggestions. Thanks to DGAPA-UNAM PAPIIT IN300921 for research fellowship. All errors remain the author’s own.
Notes
1 I refer to the 30 banks designated by the Financial Stability Board as "systemically important banks at the global level" (Financial Stability Board Citation2020).
2 Shadow money (such as money market funds), cryptocurrencies (such as stablecoins) should also be identified in the international hierarchy of money. For cryptocurrencies as reserve assets in payment systems, see Arauz (Citation2021).
3 Automatic Clearinghouses have surged as proprietary message protocols for real-time clearing of retail payments among banks (including ATM transactions, debit and credit cards, and remittances) but generally settle their net accounts with deferred wholesale SWIFT transactions.
4 If new loans are required for other agents or to account for interest and profits, the bank creates money and makes it possible for a previous circuit to close based on a new circuit such as a consumer loan to be repaid by a future salary or a loan to an intermediate-goods firm that must sell inputs to the original firm. Each loan has a term-sheet with partial amortizations, and new circuits can provide liquidity to the system to cover these partial repayments. At the moment of circuit closure, circuits can instead be extended and amplified or rolled over, as is common place in corporate finance. (Solorza Citation2005).
5 Banks can also borrow money from non-banks in capital markets, but because the bank needs reserves, the settlement of the capital market transaction actually requires a transfer of reserves from another bank.
6 While cross-border payments for imports may be related to export-oriented production and hard currency inflows may occur at a later date, non-import outgoing capital flows are pure outflows.
7 The statistics published by the BIS and the FSB cover the world's 70 largest banks.
8 Although JP Morgan is a private institution it leads the International Standards Organisation CBDC Working Group (International Standards Organisation Citation2021)
9 Despite its etymologically correctness, the term xenodollar has not stuck in the mainstream and is sometimes referred to as offshore dollar (which is confused with secrecy jurisdictions or tax havens) or Eurodollar (which attributes a European characteristic to a more general term). In Latin America, bank accounts denominated in dollars are referred to as dollarized accounts. Most recently, the cryptocurrency “dollar stablecoin” term has been used to refer to the dollars in the El Salvador Chivo wallet. Finally, a prominent financial publication in Ecuador has labelled them as “ecuadólares” (Spurrier Citation2021).
10 It is interesting to note that less than 0.8% of the amount represented by Fed-issued notes circulate in Ecuador.
11 This paper was written before El Salvador’s launch of bitcoin as legal tender and of the government issued Chivo wallet. The Chivo wallet is not issued by the Central Bank, but it closely resembles a CBDC. The initial government purchase of bitcoin was a loss of reserves for El Salvador. However, the domestically issued Chivo wallet is a domestic payment system that replaces dollar notes and bitcoins with government issued liabilities: xenodollars and xenobitcoins. Chivo xenodollars must be backed 100% at the central bank (Banco Central de Reserva de El Salvador Citation2021). If the wallet is successful in withdrawing dollar notes from circulation, it may increase international reserves.
Additional information
Notes on contributors
Andrés Arauz
Andrés Arauz, PhD (c), is a doctoral fellow in financial economics at Universidad Nacional Autónoma de México, Mexico City, Mexico. He is a former central bank director and a Senior Research Fellow at the Center for Economic and Policy Research.