Will the Bank of Mexico create its central digital currency?

Given the current context and the intentions of many central banks to issue a digital currency, it is likely that Banxico will issue a digital peso in the medium to long term. The rise of cryptocurrencies in the world has sparked the discussion about the convenience of central banks issuing their digital currency and Mexico does not escape from it, but is it viable a digital peso, or a dollar or euro with these characteristics?

The emergence of this type of instrument would force other nations to follow the same path. "Given the current global context outlined both the reflection on the convenience of issuing a digital currency and the intentions of many central banks, it is likely that Banxico will issue a digital peso in the medium or long term," considered the direction of Economic Studies of Citibanamex.

The Bank for International Settlements surveyed 66 central banks -21 from developed economies and 45 emerging ones (Banxico did not participate)-, where 80% said they were investigating the issue, while half added that they had begun to carry out pilot programs. Some 10% said they were likely to issue a central digital currency in the short term (up to 3 years) and 20% in the medium-term (up to 6 years)," details Citibanamex.

Recently, the president of the European Central Bank (ECB), Christine Lagarde, indicated that she had the intuition that within two to four years a digital euro could be issued. "Banxico should develop its reflection and promote it in a general way, including participants in the financial system and Congress itself, as it could potentially substantially change the design of the financial system, in addition to the fact that changes in the laws would be required," warns Citibanamex.

Financial inclusion, especially in developing countries, as well as the use of smartphones in many countries would make it attractive for the population to access a digital currency. "The central bank already issues a digital/electronic currency, but it is of restricted use, concentrated in banks (banks' deposits in the central bank itself), and therefore alien to the general population," Citibanamex stresses.

Another point in favor of a central digital currency is that it would facilitate transactions that cash cannot do, it could also make monetary policy more efficient. If the accounts of individuals and companies paid an interest rate, the movements of the interest rate set by the central bank would have a greater effect, in addition to the traditional one where banks play a privileged role.

One of the aspects that have not been defined is the opening of this type of accounts or how it should be done, as well as the issue of whether foreigners could access such accounts, as part of the universal access to central digital currency. "The more access to foreigners, the more it supports the currency of the region or the country, as there would be flows that demand those accounts. In contrast, in the case of strong currencies, it can create vulnerabilities in countries with less strong currencies, especially when they are in situations of uncertainty or crisis," notes Citibanamex.

Another dilemma is related to the "banking disintermediation" it may cause. A migration of bank accounts to digital currency would alter business models, with the financial stability risks that this may generate. "The effect on the Mexican monetary and financial system will depend on the design of the MDBCs: the international weight of the country where they are issued, amounts, limits per person/company, access by non-residents of those countries where they are created, international agreements", considers the financial institution.