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Central bank as we know it?

For centuries central bank has played an important role in formulating monetary policies and regulating the banking system of a country. It is responsible for maintaining financial sovereignty and economic stability and one of the important tools for this is currency. They are entrusted with the responsibility of regulating the supply and value of currency in that country considering general public welfare. It is the core of most of the socio-economic decisions.

For hundreds of years, central bank has offered bank notes and coins to the public. With time and improvements in technology the currency has evolved from metal coins to efficient paper notes and recently away from cash to plastic or virtual money. But like in Sweden, if cash stopped being the major form of transaction and being replaced by e-wallets will leave individuals and businesses relying heavily on private sector for access to money and payment methods. As in Pakistan most of the success in e-transactions is through telecoms as they conveniently link bank account to the user mobile number, making it popular.

This will unprecedently change the historical role of central bank as we know it. Thus, it is important to identify potential consequences of this paradigm shift and how the role of central bank can be redefined. In the coming years given the evolving nature of digital money and transaction methods government will have to make some hard choices.

What can any central bank do?

One option is to do nothing and just accept that public no longer has access to central bank money. This will potentially change the scope of the public sector limiting it as only a supervisor. As the payment markets will still have to be regulated in order to ensure secure, efficient and inclusive payment markets. Though this supervision will have to take new forms and spaces.

As central banks are seen among the most cautious and prudent institutions in any country. State Bank of Pakistan has not yet recognized digital currencies like cryptocurrencies as a legal tender. So, an alternative is that Central Bank introduces its own digital currency as a complement to existing cash. This is new and globally unexplored, however, number of central banks including Swedish Central Bank interested to dig deeper into this possibility. It would be digital but still require a one-to-one conversion with the regular currency stored locally in a bank account or e-wallet.

However, the scope and design of the digital currency entails many different concerns that need to be understood and discussed. For example, how will the volume of the demand for digital currency will define its impact on the overall financial system? How similar will be the digital currency to traditional currency? Will it earn interest rate or not? If it has zero-interest like cash then how will the changes in monetary policy such as expansions and contractions effect demand and supply of digital currency? On the contrary, if it does have an interest rate then it can act as a new policy tool for central bank.

On the other hand, for payment industry, government will need to provide the infrastructure for digital currency transactions to which payment service providers can connect and build services for end-users.


Thus, another important question is that do developing countries like Pakistan have adequate functioning technology to build such digital currency and vast payment mechanisms. The official regulations for EMIs are legally binding? Because we would require a legal mandate for regulating and supervising the new digital currency.

In early April, then finance minister Asad Umar, met up with State Bank of Pakistan (SBP) and Federal Investigation Agency at the ceremony where SBP launched regulations of Electronic Money Institutions (EMIs).This is a follow up action on the recommendations of Financial Action Task Force. He emphasised the significance of consumer trust in digital financial services and the modern economy. Pakistan has taken a first step towards adopting modern technology and digital central bank by formally launching regulations for Electronic Money Institutions (EMIs).

EMIs are the non-bank entities licensed by the central bank as an issuer of e-money to be used for digital transactions. They include instruments like e-wallets, prepaid cards and contactless payment methods. A recent study revealed that there are 27.3 million mobile wallet users in Pakistan with 87% year on year increase. Google, in a study, projected Pakistan as quickly becoming a digital-first country expectedly the fourth fastest growing digital economy by 2030. These regulations are complementary to the government efforts for enhancing ease of business and limiting money laundering and terror financing that rely on abusing digital platforms.

EMIs offer innovative, user friendly and cost-effective digital solutions and services that have the potential to revolutionize the entire financial system. Though, given assured due diligence through effective and resilient cybersecurity and policies. In addition, the industry requires clear and concise explanation of EMI regulations, licensing procedures, relevant governance arrangement and consumer protection.

Thus, even though public sector has dominated the money matters for a long time, private sector has also been an essential part to facilitate money as a store of value and efficient medium of exchange. Under this digitization, this role for private sector is even more enhanced. Thus, a gradual shift in power balance of this relationship provides an opportunity to create a safe, inclusive and efficient payment system for the future under the right supervision and regulatory framework.

With these formal regulations SBP aims to promote financial inclusion and transparency, reduce inefficiency and corruption and lead to economic revolution by issuing digital currency by 2025. Hence, it is important that all relevant stakeholders come together and start discussions on the questions mentioned above and broaden the research on monetary policy needs of Pakistan. Accessibility and affordability of digital financial services will promote a culture of e-commerce and transform current economy to a knowledge-based economy making financial services a major contributor to socio-economic prosperity.

The writer is a Research Associate — Sustainable Development Policy Institute (SDPI)

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