Central bank digital currency: the end of monetary policy as we know it?

July 26, 2016 7:39 AM

I argue that taken to its most extreme conclusion, [central bank digital currency] issuance could have far-reaching consequences for commercial and central banking – divorcing payments from private bank deposits and even putting an end to banks’ ability to create money. By redefining the architecture of payment systems, CBcoin could thus challenge fractional reserve banking and reshape the conduct of monetary policy.
posted by Chrysostom (15 comments total)

Slightly off-topic, but fascinating blog you linked here that I had no idea of. A sort of Bank of England "just spitballing here" blog, confirming that the BoE is not only one of the oldest but one of the more engaged central banks in the World.

The recent Haldane BoE speech (BiS recent speeches) made me wish that this level of intellectual engagement was evident in any of the electoral government of the UK, which has devolved into retrograde tribalism of the worst order, usually based on third-rate intellects and/or pure cynicism.
posted by C.A.S. at 7:55 AM on July 26, 2016

Pure garbage pretending to be something other than the usual cryptocurrency rubbish. Not a word on the myriad catastrophic problems of cryptocurrencies, all the usual "we can have banking services without banks!" promises. And all for what? To replace retail banking with a single central bank. Leaving aside the question of why a nation's central bank would want to engage in retail banking, does this guy really think it's a good idea to have literally one bank handling every account in the country that isn't a loan?

Cryptocurrency remains a solution in search of a problem that isn't "how do we buy and sell things that are illegal to possess", but I have to admit that there is one thing about this proposal which is unique: where usually cryptocurrency is aimed at making it impossible to track who's got what and claims to radically empower (early adopting) individuals, this essay proposes to transfer power away from individual actors and to the Fed. I wonder if the author appreciates the irony.
posted by Pope Guilty at 8:11 AM on July 26, 2016 [7 favorites]

Have you heard of a guy called Ron Pa...
posted by Damienmce at 8:14 AM on July 26, 2016 [6 favorites]

It's hard to imagine any central bank embracing the benefits of a cryptocurrency before they figure out how to manipulate and control it centrally. I mean... they're central banks.
posted by rokusan at 8:41 AM on July 26, 2016 [2 favorites]

As I understand the argument, cryptocurrency doesn't actually enter into it - the key idea being speculated about is giving the general public access to the central bank's balance sheet. It doesn't matter whether that's done with cryptocoins or check books.
posted by PMdixon at 8:47 AM on July 26, 2016 [3 favorites]

Yeeeeaaaahhhh, I don't think "What if the Fed issued Flooz" is any less asinine a proposal.
posted by Pope Guilty at 8:59 AM on July 26, 2016 [3 favorites]

Apologies if I missed the link, but the BoE research paper on this goes into a lot more depth.

One thing the essay mentions which is definitely easier with a CBDC than other methods is negative interest rates. If people adopt a CBDC preferentially to "old" money, the central bank can control the interest on it directly, rather than by the indirect methods used today. The sweetener for users is a mix lower transaction costs and reduced credit risk.
posted by crocomancer at 9:10 AM on July 26, 2016 [1 favorite]

Does anyone outside America or rural England still use checkbooks (chequebooks)?

I mean, we're celebrating being damn near the last nation on earth to add chip-and-pin to our credit cards.
posted by rokusan at 9:14 AM on July 26, 2016 [1 favorite]

awesome, thanks! a subject dear to my heart :D
(fed/fiat/CBcoin previously: Platform Cooperatives: Money as a (Public) Service ;)

also btw...
-Accelerating Financial Inclusion with National Digital Currencies
-Central banks want to issue national digital currencies, but are countries ready?

viz. taler, aadhaar
cf. 'the hardest problem in banking'

If households and firms were given access to CBcoin accounts at the CB, banks' dominant role as providers of payment services would be called into question.

fedwire for all!

An end to traditional banking?

death of banks :P

A new framework for monetary policy?

"as an aside, helicopter money might be politically and logistically easier if we had something like universal postal banking"

essentially a 'plain vanilla'* public option for banking :)

In a recent paper, Barrdear and Kumhof use a DSGE model that accommodates fractional reserve banking to study the macroeconomic consequences of CB digital currency issuance.

"Countercyclical CBDC price or quantity rules, as a second monetary policy instrument, could substantially improve the central bank's ability to stabilise the business cycle."

so like NGDP targeting, progressive taxation, negative interest rates,* and helicopter money[1,2,3] would all be easier to implement with 'CBcoin' towards the solution of the (very big) problem of aggregate demand management, which austerity and near-zero to going negative interest rates around the world kinda tell you current monetary and fiscal policy isn't working out so well.

---
*or as delong put it:* "Polanyi's teaching was... that there were three things, land, labor, and finance, that should not be turned into 'commodities' and thus subjected to allocation by the laws of the self-regulating market economy. And, Polanyi argued, if they were turned into 'commodities' and thus subjected to allocation by the laws of the self-regulating market economy, the result would be disastrous..."
posted by kliuless at 9:41 AM on July 26, 2016 [1 favorite]

Andrew Haldane is a poor man's Simon Johnson
posted by Reasonably Everything Happens at 9:57 AM on July 26, 2016

Dogecoin is still the best. Very cryptocurrency. Much wow.
posted by the uncomplicated soups of my childhood at 10:35 AM on July 26, 2016 [6 favorites]

Andrew Haldane is a poor man's Simon Johnson

Simon Johnson: The Financial System of the Future - "In this context, two relatively new interrelated ideas hold considerable appeal: that central banks should issue their own digital currency; and that financial transactions more broadly could be recorded on a decentralized ledger."*
posted by kliuless at 11:24 AM on July 26, 2016

The only digital currency worth caring about is CS:GO skins, IMO
posted by clorox at 11:47 AM on July 26, 2016 [1 favorite]

Free Lunch: Digital money is a public good - "Tolle usefully surveys the principal possible effects of e-cash. It would probably replace private transaction settlement systems; it would threaten the current business models of private banks; and it would enhance the ability of central banks to carry out monetary policy."

There is a tendency, in particular in press reports, to focus on one particular aspect of such proposals, which is to use the technology underlying bitcoin and other new digital currencies to implement official e-money. The WSJ’s article, for example, is entitled “The Central Bankers’ Bold New Idea: Print Bitcoins”. But this is a highly marginal aspect of the idea, and making it the central issue of interest is to conflate two quite distinct questions.

One is whether individuals and companies should have access to electronic cash that is official money (in essence, claims on the central bank) rather than private money (as in today, claims on private banks, or non-bank private claims, as in bitcoin). The other question is whether official e-money should be implemented by central banks’ adopting bitcoin-style technology (so-called “distributed ledgers” where a network of computers verifies transactions and holdings) or as it is today, through centralised registers held by the money issuers. Barrdear and Kumhof recognise this distinction but simply assert that distributed ledgers are the better solution in practical terms.

But there is no need to wait for bitcoin-like technology to create official e-money; it simply requires the central bank to accept deposits from individuals — or put differently, allow everyone to hold central bank reserves. If they did, the likely greater convenience, and certain greater security, of central bank deposits would probably crowd out private bank deposits as safe stores of value and means of payment.

Indeed this does not even rely on electronics. Non-physical official money could have been implemented centuries ago if central banks had just offered deposit facilities to the public like private banks do. It can be implemented today without institutional innovation simply by requiring private banks to back deposits 100 per cent with central bank reserves. Edward Prescott and Ryan Wessel examine such a system in a new paper and find that 100 per cent reserve banking has some very attractive properties, not least the impossibility of bank runs.

To repeat: the advantages of official e-money — settling transactions, securely storing value and managing monetary conditions can all be done at least as well by a central bank than by the decentralised private banking system — do not depend on the form of the e-cash (centralised or distributed ledgers). This is also clear from David Andolfatto’s discussion of the two ways of providing e-cash (the postscript and the comments in particular clarify that most of the advantages do not depend on bitcoin-like technology).

also btw...
Some Simple Basic Money, for Finance People :P

cheers!
posted by kliuless at 12:21 PM on July 26, 2016 [4 favorites]

We have no viable technological methods to prevent the banks from tweaking the money supply. A proof-of-work system like BitCoin cannot scale up large enough. And ordinary centralization trends have pushed BitCoin into being run by a few large mining pools anyways, so they could manipulate it if they wanted to. If you make CBcoin efficient by using notaries instead of proof-of-work, thus allowing it to scale up larger, then your notaries can obviously tweak the money supply if they want to.

We have built Taler so that basically anyone can roll out their own Visa whenever they like. It's purely a transaction system, no silly blockchain crypt-currency baggage. You can deploy an exchange to handle transactions in your favorite local currency, Euros, discount coupons, DogeCoins, whatever, with all GPLed code. Importantly, Taler transactions are truly anonymous for customers, not this pseudo-nonymous farce of privacy in BitCoin, but merchants can be deanonymized by the customer and exchange together, making the system unsuitable for extortion and tax evasion.
posted by jeffburdges at 5:07 PM on July 27, 2016