9 ms·

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

88 points by avyfain 10y ago

ckastner 10y ago
CB reserves currently play a central role in payment systems. If two parties need to settle a transaction but hold deposits at different banks, the payment requires a transfer of funds between the two banks. Banks net out such transfers and settle the residual amount using CB reserves as the medium of exchange. 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. As a risk-free, interest-bearing asset, CBcoin would be preferable to bank deposits (and even paper currency, presuming anonymity concerns were addressed), encouraging households and firms to convert their bank deposits into CBcoin deposits. In effect, retail payments (and securities transactions) would no longer have to be mediated by banks, as the funds would be transferred directly from one party’s CBcoin account to another’s. A disintermediated payment system could gradually replace the current centralised system and its associated credit and liquidity risks (see BIS (2003)). The main benefit to CBcoin account holders would be access to cheap and fast peer-to-peer transactions. This sounds like all of the benefits of a centralized currency -- most importantly, stability and regulation -- with all of the benefits of current decentralized currency endeavours (Bitcoin, etc.). Assuming anonymity concerns are addressed, as they highlight. The impact on the banking system, however, would indeed be substantial. Providing payment services is a significant source of revenue for banks.
- mfairbank 10y ago
  I mostly agree, but the first big concerns that come to my mind are to do with security and how mistakes are fixed. With my (private) bank, I feel confident that improper withdrawals can be reversed, not least because I've successfully achieved such a result in the past. But if one day I check my CBcoin balance and it's not correct? Do I complain directly to the central bank? It strikes me that competent dispute resolution is not something that can be built overnight (though I suppose it could be absorbed from the top private banks). Edit: grammar
  - jackgavigan 10y ago
    > It strikes me that competent dispute resolution is not something that can be built overnight (though I suppose it could be absorbed from the top private banks). What do you mean by "absorbed from the top private banks"?
    - mfairbank 10y ago
      Well it's all a bit vague in my mind, but the idea was that if a central bank coin is introduced, and if it achieves widespread use and popularity such that it becomes the default demand deposit mechanism, that the central bank could purchase the dispute resolution units from the private banks that presumably no longer have a use for them. The systems and human capital expertise to perform the functions would still exist, but it would be a question of whether they would be willing to work in the public sector instead of the private, and if the public sector could effectively manage them such that their performance remains acceptable.
  - celticninja 10y ago
    From the description it sounds as if charge backs would be entirely possible given the suggested centralization aspect of the coin. Dispute resolution is relatively simple solution, especially as many banks will no longer require that sort of service.
  - celticninja 10y ago
    From the description it sounds as if charge backs would be entirely possible given the suggested centralization aspect of the coin. Dispute resolution is relatively simple solution, especially as many banks will no longer require that sort of service.
- wmf 10y ago
  "The benefits of current decentralized currency endeavours" are in the eye of the beholder; GBPcoin probably won't be good for buying drugs, it won't triple in value in one year, and it isn't deflationary Austrian money. But for normal payments I agree.
  - ckastner 10y ago
    > GBPcoin probably won't be good for buying drugs If they solve the anonymity problem (such that they can replace paper currency, which can also be entirely anonymous), then I'd expect that you could buy anything you want with it. Subject to anti-money-laundering rules, of course, which usually apply to larger transactions. > it won't triple in value in one year That doesn't have much to do with the currency, but with the market, and volatility works both ways.
    - wmf 10y ago
      From their perspective, anonymity is the problem. Cash is only legal because it's grandfathered in. If cash was invented in 2009 it wouldn't be legal.
      - irln 10y ago
        I would also argue that the inability to impose negative interest rates on cash is an even bigger problem from their perspective than anonymity.
        mfairbank 10y ago
        Eliminating physical cash is not necessary to impose negative interest rates, even quite steep ones. By modifying the exchange rate between physical cash and bank deposits, the economic incentive to hoard physical cash is removed, allowing the central bank to impose an interest rate of their choice while still allowing citizens the flexibility of using their preferred payment methods over short time horizons. This piece[0] produced by the International Monetary Fund delves into the details about the steps banks will take to implement the necessary changes. [0] http://www.imf.org/external/pubs/ft/wp/2015/wp15224.pdf http://www.imf.org/external/pubs/ft/wp/2015/wp15224.pdf
- joe_the_user 10y ago
  So the reason for central creating an institution which would end their present source of power would be what, in particular? Edit: Fractional reserve banking is generally seen as a good thing by many economists. Many believe this allows central banks to stimulate and throttle the economy, ending recessions and leveling off bubbles. Why would central banks do anything to undermine this?
  - neffy 10y ago
    The claim made in the Economic Textbooks that the central bank controls the banking system is mostly incorrect - in fact most of the things you'll read in economic textbooks about the banking system are provably incorrect which is a large part of the issues with current economic theory - and with economists employed by central bank attempting to control the banking system. From an economics point of view, what they are essentially proposing is to modify the banking system so that it resembles their models. Their models are stylised, highly simplified, and have to be massively "callibrated" in order to match economic observations at all, and even then can only usually do so between financial crashes. (The part of economics that analyses business cycles hasn't discovered the Nyquist theorem yet.) The best guess at what would result of this, is all the problems of centralised control, and none of the advantages of the existing system. Another way to think about it is a bunch of complete maniacs being allowed to run experiments on the live production system without any testing. Although hopefully it won't come to that.
    - zubat 10y ago
      Virtual worlds already deal in this level of centralization. It's not unprecedented and economists have gotten great data from studying those. They have persistent, naturally occurring interactions with real world macroeconomies via item trading. Long story short, it's absolutely within reach to reorganize finance to resemble game design. That doesn't mean it's risk free - but success is possible and even likely with due diligence.
      - neffy 10y ago
        No virtual world has loans, or a banking system. But I would totally support creating one that does and letting economists loose on that.
- nyolfen 10y ago
  sounds like you should read up on Taler: https://taler.net/ https://taler.net/ (anonymity is a primarily utility for criminals/tax evaders) I don't expect central governments to jump ship primarily because of the arbitrary authority that tax auditing, among other powers, that it gives them, though
  - al_chemist 10y ago
    > anonymity is a primarily utility for criminals/tax evaders And terrorist and child predators, right?
tim333 10y ago
I'm not sure their CBcoin as I understand it would affect monetary policy much. Much of that related to the banking system and people depositing money to get interest and others borrowing it for mortgages and similar. Saving and borrowing won't go away with cryptocurrency so policy as to how much money is available to borrow and so on will still be there.
acd 10y ago
Some argue that free banking without central banks was a very stable period. https://mises.org/library/free-banking-theory-history-and-laissez-faire-model-0 https://mises.org/library/free-banking-theory-history-and-la... A question will arise to who owns what if there ever is a derivative bubble? Will we get digital currency decentralised made by hackers then? Here is a visual representation of different types of money and markets. http://money.visualcapitalist.com/all-of-the-worlds-money-and-markets-in-one-visualization/ http://money.visualcapitalist.com/all-of-the-worlds-money-an...
- neffy 10y ago
  Not those who lived through it I suspect. http://www.jstor.org/stable/2338493?seq=1#page_scan_tab_contents http://www.jstor.org/stable/2338493?seq=1#page_scan_tab_cont...
- runeks 10y ago
  It is a fact that both interest rates and the price level were exceptionally stable during the international gold standard, which lasted roughly from 1870 to 1900. This 30 year period showed a stability in both interest rates and the price level that has never been seen since. Now, whether this was due to the gold standard, or whether the reason was one (or more) of the other trillions of factors that are different between now and then, we cannot say.
  - forgetsusername 10y ago
    >It is a fact that both interest rates and the price level were exceptionally stable during the international gold standard, which lasted roughly from 1870 to 1900. A fact? Here's a sample of inflation from that period: 1878: -15% 1879: -10% 1880: 20% 1881: -5% 1882: 8% 1883: -2% And on and on...what exactly was "stable" about that period? Compare that to, say, the 30 years from 1986 to today. http://www.multpl.com/inflation/table http://www.multpl.com/inflation/table
    - runeks 10y ago
      I stand corrected. I included inflation when I shouldn't have. My claim is true for interest rates, however. Here's one chart: http://www.businessinsider.com/us-treasury-yields-at-historic-lows-2014-11?r=US&IR=T&IR=T http://www.businessinsider.com/us-treasury-yields-at-histori... We have a 100-year long period here, starting around 1820, where interest rates basically moved within a band of 3-6%. The 100 years following that are a very different story. Here we see the interest rate move from 2% to 15% and back to 2% in 75 years, from 1945 to now.
Suncho 10y ago
Digital currency calls into question the role of traditional commercial banking. If you don't need to store your money in a bank anymore then what service do banks provide to their depositors? I've been imagining for a while now that commercial banks will eventually start looking more like investment intermediaries. You only put money in the "bank" if you're willing to take on some risk.
- irln 10y ago
  This is spot on. > banks will eventually start looking more like investment intermediaries As you stated if you divorce payments from lending they are simply investment intermediaries. I'd argue that today the payment systems versus lending mechanisms are completely independent and yet TBTF banks are protected via CB from failing as if the two (payment systems and lending) were inseparable.
- dnautics 10y ago
  it's also worth mentioning that the current generation digital currency only functions because it's got a field-tested decentralized trust model. That's a pretty new thing. It's nice to have a corporate entity that you can trust will handle your transactions and won't (usually) absocond with your assets.
- deleted 10y ago
  [deleted]
- repsilat 10y ago
  > what service do banks provide to their depositors? Risk. That is, banks should pay more interest (or have less-negative rates) than the CB currency, because 1. They're riskier. They can have solvency problems and liquidity problems (mitigated by the CB and the law, now and in the future to varying extents) 2. They want your money to lend to other people at yet higher interest rates. If they don't have reserves they can't make loans and they go out of business, so they pay you a premium for your deposits.
  - irln 10y ago
    > They want your money to lend to other people at yet higher interest rates. If they don't have reserves they can't make loans and they go out of business, so they pay you a premium for your deposits. As I understand it banks don't use deposits to back-up lending. There are folks in HN more knowledgeable then myself that may correct me, however, banks leverage Tier 1 capital to create loans. Deposits are the result of the loans and not vice versa. So banks aren't paying you interest because they need your deposits in order to lend. [1] http://www.cnbc.com/id/100497710 http://www.cnbc.com/id/100497710 [2] http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf http://www.bankofengland.co.uk/publications/Documents/quarte...
seanalltogether 10y ago
"divorcing payments from private bank deposits and even putting an end to banks’ ability to create money." Are there economists that support the idea of stopping the creation of new money? I assumed this was an underlying requirement of a health currency? New value is created every day by thousands of different sources, and the currency needs to be able to expand at the same rate.
- irln 10y ago
  > I assumed this was an underlying requirement of a health currency? You've just identified the most difficult problem facing the financial world today: how to expand the money supply at a rate that's fair to all market participants. market participants === us
- questionx 10y ago
  Most of the forces driving new money creation doesn't seem to be about new value. The new money created benefits investment schemes for the privileged and to sustain Keynesian policies by the government. Neither are inherently necessary for a growing economy. And there are other alternative ideas that are reasonable tools to expand the money supply if needed.
- dnautics 10y ago
  > New value is created every day by thousands of different sources, and the currency needs to be able to expand at the same rate. Why does the currency need to expand at the same rate? You could also have the real value of the currency appreciate. Before you say, 'that's deflationary' - many countries had large swaths of time when their currency was deflationary with little or no ill effect to the population, and increasing standards of living.
  - gnopgnip 10y ago
    Deflationary currency discourages spending, increases the value of debt, causes people to hoard cash, and potentially causes wage unemployment.
bubbleRefuge 10y ago
I'm going to go the other way. I'd like to see the federal reserve provide cheap/simple free checking and savings accounts to the public with debit cards in order to force banks to add value above that.
- johncolanduoni 10y ago
  I'd rather not hand my money over to one of the few organizations (i.e. the US government) whose cyber security practices are even worse than banks.
  - pessimizer 10y ago
    It's the US Government holding on to your US dollars. I'm pretty sure that no matter how bad their security is, you won't lose a dime.

88 points by avyfain 10y ago

CB reserves currently play a central role in payment systems. If two parties need to settle a transaction but hold deposits at different banks, the payment requires a transfer of funds between the two banks. Banks net out such transfers and settle the residual amount using CB reserves as the medium of exchange. 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. As a risk-free, interest-bearing asset, CBcoin would be preferable to bank deposits (and even paper currency, presuming anonymity concerns were addressed), encouraging households and firms to convert their bank deposits into CBcoin deposits. In effect, retail payments (and securities transactions) would no longer have to be mediated by banks, as the funds would be transferred directly from one party’s CBcoin account to another’s. A disintermediated payment system could gradually replace the current centralised system and its associated credit and liquidity risks (see BIS (2003)). The main benefit to CBcoin account holders would be access to cheap and fast peer-to-peer transactions. This sounds like all of the benefits of a centralized currency -- most importantly, stability and regulation -- with all of the benefits of current decentralized currency endeavours (Bitcoin, etc.). Assuming anonymity concerns are addressed, as they highlight. The impact on the banking system, however, would indeed be substantial. Providing payment services is a significant source of revenue for banks.

mfairbank 10y ago
I mostly agree, but the first big concerns that come to my mind are to do with security and how mistakes are fixed. With my (private) bank, I feel confident that improper withdrawals can be reversed, not least because I've successfully achieved such a result in the past. But if one day I check my CBcoin balance and it's not correct? Do I complain directly to the central bank? It strikes me that competent dispute resolution is not something that can be built overnight (though I suppose it could be absorbed from the top private banks). Edit: grammar
- jackgavigan 10y ago
  > It strikes me that competent dispute resolution is not something that can be built overnight (though I suppose it could be absorbed from the top private banks). What do you mean by "absorbed from the top private banks"?
  - mfairbank 10y ago
    Well it's all a bit vague in my mind, but the idea was that if a central bank coin is introduced, and if it achieves widespread use and popularity such that it becomes the default demand deposit mechanism, that the central bank could purchase the dispute resolution units from the private banks that presumably no longer have a use for them. The systems and human capital expertise to perform the functions would still exist, but it would be a question of whether they would be willing to work in the public sector instead of the private, and if the public sector could effectively manage them such that their performance remains acceptable.
- celticninja 10y ago
  From the description it sounds as if charge backs would be entirely possible given the suggested centralization aspect of the coin. Dispute resolution is relatively simple solution, especially as many banks will no longer require that sort of service.
- celticninja 10y ago
  From the description it sounds as if charge backs would be entirely possible given the suggested centralization aspect of the coin. Dispute resolution is relatively simple solution, especially as many banks will no longer require that sort of service.
wmf 10y ago
"The benefits of current decentralized currency endeavours" are in the eye of the beholder; GBPcoin probably won't be good for buying drugs, it won't triple in value in one year, and it isn't deflationary Austrian money. But for normal payments I agree.
- ckastner 10y ago
  > GBPcoin probably won't be good for buying drugs If they solve the anonymity problem (such that they can replace paper currency, which can also be entirely anonymous), then I'd expect that you could buy anything you want with it. Subject to anti-money-laundering rules, of course, which usually apply to larger transactions. > it won't triple in value in one year That doesn't have much to do with the currency, but with the market, and volatility works both ways.
  - wmf 10y ago
    From their perspective, anonymity is the problem. Cash is only legal because it's grandfathered in. If cash was invented in 2009 it wouldn't be legal.
    - irln 10y ago
      I would also argue that the inability to impose negative interest rates on cash is an even bigger problem from their perspective than anonymity.
      - mfairbank 10y ago
        Eliminating physical cash is not necessary to impose negative interest rates, even quite steep ones. By modifying the exchange rate between physical cash and bank deposits, the economic incentive to hoard physical cash is removed, allowing the central bank to impose an interest rate of their choice while still allowing citizens the flexibility of using their preferred payment methods over short time horizons. This piece[0] produced by the International Monetary Fund delves into the details about the steps banks will take to implement the necessary changes. [0] http://www.imf.org/external/pubs/ft/wp/2015/wp15224.pdf http://www.imf.org/external/pubs/ft/wp/2015/wp15224.pdf
joe_the_user 10y ago
So the reason for central creating an institution which would end their present source of power would be what, in particular? Edit: Fractional reserve banking is generally seen as a good thing by many economists. Many believe this allows central banks to stimulate and throttle the economy, ending recessions and leveling off bubbles. Why would central banks do anything to undermine this?
- neffy 10y ago
  The claim made in the Economic Textbooks that the central bank controls the banking system is mostly incorrect - in fact most of the things you'll read in economic textbooks about the banking system are provably incorrect which is a large part of the issues with current economic theory - and with economists employed by central bank attempting to control the banking system. From an economics point of view, what they are essentially proposing is to modify the banking system so that it resembles their models. Their models are stylised, highly simplified, and have to be massively "callibrated" in order to match economic observations at all, and even then can only usually do so between financial crashes. (The part of economics that analyses business cycles hasn't discovered the Nyquist theorem yet.) The best guess at what would result of this, is all the problems of centralised control, and none of the advantages of the existing system. Another way to think about it is a bunch of complete maniacs being allowed to run experiments on the live production system without any testing. Although hopefully it won't come to that.
  - zubat 10y ago
    Virtual worlds already deal in this level of centralization. It's not unprecedented and economists have gotten great data from studying those. They have persistent, naturally occurring interactions with real world macroeconomies via item trading. Long story short, it's absolutely within reach to reorganize finance to resemble game design. That doesn't mean it's risk free - but success is possible and even likely with due diligence.
    - neffy 10y ago
      No virtual world has loans, or a banking system. But I would totally support creating one that does and letting economists loose on that.
nyolfen 10y ago
sounds like you should read up on Taler: https://taler.net/ https://taler.net/ (anonymity is a primarily utility for criminals/tax evaders) I don't expect central governments to jump ship primarily because of the arbitrary authority that tax auditing, among other powers, that it gives them, though
- al_chemist 10y ago
  > anonymity is a primarily utility for criminals/tax evaders And terrorist and child predators, right?

tim333 10y ago

I'm not sure their CBcoin as I understand it would affect monetary policy much. Much of that related to the banking system and people depositing money to get interest and others borrowing it for mortgages and similar. Saving and borrowing won't go away with cryptocurrency so policy as to how much money is available to borrow and so on will still be there.

acd 10y ago

Some argue that free banking without central banks was a very stable period. https://mises.org/library/free-banking-theory-history-and-laissez-faire-model-0 https://mises.org/library/free-banking-theory-history-and-la... A question will arise to who owns what if there ever is a derivative bubble? Will we get digital currency decentralised made by hackers then? Here is a visual representation of different types of money and markets. http://money.visualcapitalist.com/all-of-the-worlds-money-and-markets-in-one-visualization/ http://money.visualcapitalist.com/all-of-the-worlds-money-an...

neffy 10y ago
Not those who lived through it I suspect. http://www.jstor.org/stable/2338493?seq=1#page_scan_tab_contents http://www.jstor.org/stable/2338493?seq=1#page_scan_tab_cont...
runeks 10y ago
It is a fact that both interest rates and the price level were exceptionally stable during the international gold standard, which lasted roughly from 1870 to 1900. This 30 year period showed a stability in both interest rates and the price level that has never been seen since. Now, whether this was due to the gold standard, or whether the reason was one (or more) of the other trillions of factors that are different between now and then, we cannot say.
- forgetsusername 10y ago
  >It is a fact that both interest rates and the price level were exceptionally stable during the international gold standard, which lasted roughly from 1870 to 1900. A fact? Here's a sample of inflation from that period: 1878: -15% 1879: -10% 1880: 20% 1881: -5% 1882: 8% 1883: -2% And on and on...what exactly was "stable" about that period? Compare that to, say, the 30 years from 1986 to today. http://www.multpl.com/inflation/table http://www.multpl.com/inflation/table
  - runeks 10y ago
    I stand corrected. I included inflation when I shouldn't have. My claim is true for interest rates, however. Here's one chart: http://www.businessinsider.com/us-treasury-yields-at-historic-lows-2014-11?r=US&IR=T&IR=T http://www.businessinsider.com/us-treasury-yields-at-histori... We have a 100-year long period here, starting around 1820, where interest rates basically moved within a band of 3-6%. The 100 years following that are a very different story. Here we see the interest rate move from 2% to 15% and back to 2% in 75 years, from 1945 to now.

Suncho 10y ago

Digital currency calls into question the role of traditional commercial banking. If you don't need to store your money in a bank anymore then what service do banks provide to their depositors? I've been imagining for a while now that commercial banks will eventually start looking more like investment intermediaries. You only put money in the "bank" if you're willing to take on some risk.

irln 10y ago
This is spot on. > banks will eventually start looking more like investment intermediaries As you stated if you divorce payments from lending they are simply investment intermediaries. I'd argue that today the payment systems versus lending mechanisms are completely independent and yet TBTF banks are protected via CB from failing as if the two (payment systems and lending) were inseparable.
dnautics 10y ago
it's also worth mentioning that the current generation digital currency only functions because it's got a field-tested decentralized trust model. That's a pretty new thing. It's nice to have a corporate entity that you can trust will handle your transactions and won't (usually) absocond with your assets.
deleted 10y ago
[deleted]
repsilat 10y ago
> what service do banks provide to their depositors? Risk. That is, banks should pay more interest (or have less-negative rates) than the CB currency, because 1. They're riskier. They can have solvency problems and liquidity problems (mitigated by the CB and the law, now and in the future to varying extents) 2. They want your money to lend to other people at yet higher interest rates. If they don't have reserves they can't make loans and they go out of business, so they pay you a premium for your deposits.
- irln 10y ago
  > They want your money to lend to other people at yet higher interest rates. If they don't have reserves they can't make loans and they go out of business, so they pay you a premium for your deposits. As I understand it banks don't use deposits to back-up lending. There are folks in HN more knowledgeable then myself that may correct me, however, banks leverage Tier 1 capital to create loans. Deposits are the result of the loans and not vice versa. So banks aren't paying you interest because they need your deposits in order to lend. [1] http://www.cnbc.com/id/100497710 http://www.cnbc.com/id/100497710 [2] http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf http://www.bankofengland.co.uk/publications/Documents/quarte...

seanalltogether 10y ago

"divorcing payments from private bank deposits and even putting an end to banks’ ability to create money." Are there economists that support the idea of stopping the creation of new money? I assumed this was an underlying requirement of a health currency? New value is created every day by thousands of different sources, and the currency needs to be able to expand at the same rate.

irln 10y ago
> I assumed this was an underlying requirement of a health currency? You've just identified the most difficult problem facing the financial world today: how to expand the money supply at a rate that's fair to all market participants. market participants === us
questionx 10y ago
Most of the forces driving new money creation doesn't seem to be about new value. The new money created benefits investment schemes for the privileged and to sustain Keynesian policies by the government. Neither are inherently necessary for a growing economy. And there are other alternative ideas that are reasonable tools to expand the money supply if needed.
dnautics 10y ago
> New value is created every day by thousands of different sources, and the currency needs to be able to expand at the same rate. Why does the currency need to expand at the same rate? You could also have the real value of the currency appreciate. Before you say, 'that's deflationary' - many countries had large swaths of time when their currency was deflationary with little or no ill effect to the population, and increasing standards of living.
- gnopgnip 10y ago
  Deflationary currency discourages spending, increases the value of debt, causes people to hoard cash, and potentially causes wage unemployment.

bubbleRefuge 10y ago

I'm going to go the other way. I'd like to see the federal reserve provide cheap/simple free checking and savings accounts to the public with debit cards in order to force banks to add value above that.

johncolanduoni 10y ago
I'd rather not hand my money over to one of the few organizations (i.e. the US government) whose cyber security practices are even worse than banks.
- pessimizer 10y ago
  It's the US Government holding on to your US dollars. I'm pretty sure that no matter how bad their security is, you won't lose a dime.