Financial Stability and the Role of Central Banks: Evolving Payments Systems, Climate Risks and Financial Stability Risks

Abstract

Even though unregulated and decentralized platforms such as crypto assets are considered to have the potential to provide low-income earners with cheap banking alternative and “perhaps put pressure on banks to lower fees” (WSJ, 2019), its volatile nature, lack of consensual standards as regards its definition, and more importantly the lack of a centralized regulatory authority or governance in respect of regulatory and reporting procedures, has given rise to concerns. Such concerns gravitating in cases where particularly potentially systemic repercussions are generated by virtue of such assets being tied to government issues currencies or backed by governments.

The recent pandemic has further increased the trend towards declining cash activities and transactions. Even prior to the pandemic, there had been extensive discussions relating to preferences of introducing electronic means of payments which would be regulated by central banks – as opposed to private electronic money which are controlled by private actors – in view of growing concerns relating to the popularity of stable coins over de centralized platforms. As well as considering what measures and initiatives have been adopted by international bodies such as the Financial Stability Board, this paper also considers why the need for central bank digital currencies is becoming a popular consideration – as well as challenges and benefits presented through the use of decentralized platforms.

In accentuating the role of central banks in the future and current payments system, this paper also highlights its role in addressing climate risks – as well as financial stability risks – with the impact of Securities Financial Transactions on systemic risk, also being taken into consideration.