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Well, the current system as you describe is a two-level system with your bank in between; a CBDC allows you to "have an account" directly with the central bank

Well, the current system as you describe is a two-level system with your bank in between; a CBDC allows you to "have an account" directly with the central bank directly and make/receive payments without needing a retail bank intermediary. It also enables central banks to achieve policy goals that they could not earlier - for example, in the last big crisis all the quantitative easing did not result in as much actual lending to people in the economy as central banks expected; the retail banks between you and the CB had other interests. A CBDC enables a central bank to inject money in the economy directly to people and companies, bypassing the major retail banks.

riffraff 6y ago
I feel the payment side is pretty relevant here: governments and central banks are starting to realize that as currency dematerilializes the VISA, MasterCard etc of the world are going to drain a significant part of the economy, which they would rather keep, being in the business of, well, managing those currencies.
dageshi 6y ago
Hmmm, wouldn't the CBDC be safer than any other place to put your money? So in a crisis, wouldn't you sell everything and put it in the CBDC including potentially government bonds precisely at the time the government probably needs to borrow cheaply? That seems like a recipe for disaster to me.
- danialtz 6y ago
  Indeed, financial stability and crisis models are the transformation studies several central banks and also stablecoins like Celo undertake to understand how introduction a new monetary instrument would solve some issues and affect others. Short answer is it’s too early to say since it’s a tech-push innovation sped up by demand-push of pandemic and global players.
adament 6y ago
I think if we want to argue that central banks will soon be pushing for CBDCs to let people have accounts directly with the central bank we need to argue why they at the same time are opposing* narrow banks, which to me seems to be a different technical tool achieving an equivalent goal? * At least the Fed seems to be: https://www.bloomberg.com/opinion/articles/2019-03-08/the-fed-versus-the-narrow-bank?utm_source=url_link https://www.bloomberg.com/opinion/articles/2019-03-08/the-fe...
- notahacker 6y ago
  The main reason the Fed is rejecting this is that it doesn't want to give banking privileges to entities which don't perform the core function of commercial banks from the Fed's point of view (lending) and really dislikes the idea of the public getting reasonably high interest rates for zero risk and zero contribution to the economy for reasons discussed in your article. If that's proposed as a goal for CBDCs, they won't happen (at least not without far more significant reform of regulations and incentives surrounding lending) In theory, CBDCs could be just a back end representation of the existing financial system for more efficient settlement though, which would be a different technical tool to achieve the Fed's current goal. That looks considerably more likely to happen than removing financial intermediaries from the picture.
  - adament 6y ago
    I agree. In which case I think the question as posed in a sibling thread is central: How do CBDCs differ from the current digital settlement system already available at several central banks? The sibling thread mentions the Bank of England and the Danish central bank has a similar digital settlement system. Is it “just” a fancy term for a technical upgrade or is there a substantive difference in function?
  - jrs235 6y ago
    I assume the FED is rejecting it because the owners of the FED are the member banks which stand to lose from this implementation.
povik 6y ago
I see. But then again I am a bit confused by this text in the report on digital euro[0], which was recently posted on HN. “While the Eurosystem would always retain control over the issuance of a digital euro, supervised private intermediaries would be best placed to provide ancillary, user-facing services and to build new business models on its core back-end functionality. A model whereby access to the digital euro is intermediated by the private sector is therefore preferable.“ That sounds like a bank to me. But I guess it must be so that the relationship between the central bank and intermediary will be different. I struggle to find the defining features of these CBDCs so that it is more than empty branding. I guess you might sum it up as “bringing the central bank and currency-users closer thanks to modern technologies”? [0] https://www.ecb.europa.eu/euro/html/digitaleuro-report.en.html https://www.ecb.europa.eu/euro/html/digitaleuro-report.en.ht...
- danialtz 6y ago
  Accounts at central banks is only one model of CBDC, called Direct CBDC, which is to my knowledge much less preferred way than a hybrid apparoach (like what’s there today), for several reasons: - managing a complexity of nation-wide banking for Central Banks is quite early at this stage, being a traditionally a government portion known mostly for policies and economics than cutting edge tech deployment. - CBs want to keep stability, and breaking down a current model of banking by introduction of a new FIAT model is not one of them There are key needs and major requirements additionally for the CBDC that are documented in the latest BIS and ECB reports.
- nmlnn 6y ago
  It's the branding that they need to get rid of cash. Playing it off as an analogue to digital switch, rather than the removal of transaction freedom and privacy.
zmk_ 6y ago
Sweden is probably the most advanced in considering an "e" currency and so far the proposals have been of keeping the two-tier system, i.e., you still have an account with a bank.
- mbrock 6y ago
  The riksbank seems to be advocating an "e-krona" where each citizen would use a state-issued digital identity to directly use central bank money as a means of payment similar to physical cash, no?
  - zmk_ 6y ago
    They have not decided whether e-krona would be a 'account-based' (like you say) and a competing/backup payment system. Or a 'value-based' where it's 'stored on a card'. At the same time they do not want to impact lending facilities of banks so if they go with the first option they will most likely deemphasize it considerably to keep deposits in traditional banks. The 2nd option seems to me like a total fail, similar to what Chipknip was in the Netherlands. The main motivation for the ekrona seems to be the move away from cash, but Sweden has been cashless for a long time now (between Swish and cards).
sjtindell 6y ago
I read somewhere that in the US some banks took the QE money and put it back into their accounts with the Fed where it collected interest. Rather than lend it out, they essentially got paid just to hold it. There’s an economic argument saying that it made them safer, etc. but it doesn’t sound quite right to me.
- adament 6y ago
  While I am not familiar with the story you are referring to, it does not sound weird to me. Given that QE works by the central bank buying risky assets (initially government bonds), presumably the banks received the QE money by selling higher yielding(given that even during QE the rate curve was mostly upward sloping) government bonds to the federal reserve than the interest rate they earned by depositing said money at the federal reserve. This would seem an irrational move from the banks unless they had some additional use for the cash compared to the government bonds?
- neilwilson 6y ago
  Banks don’t lend out money from central banks. Never have. Banks can only store reserves in accounts at the central bank because only banks can have such accounts. What they get is money from the central bank in interest for holding those reserves and that effectively subsides lending a bit - at least until the interest rate drops so low that people are tempted to draw out cash
- hogFeast 6y ago
  This is actually complex. But QE, in most cases but not all (for example, QE3) involved the purchase of assets from the non-bank sector, not purchases from banks (in the US, banks do not hold a large amount of US govt securities). When QE did involve the purchase of assets from banks (i.e. QE3 with MBS/ABS purchases, and in the EU where banks held a lot of govt debt) then it did lead to increase lending but the effect varied significantly (for example, in the EU the effect was tiny because most banks in the region are functionally insolvent). So QE is not thought to have any particular effect on bank lending, and is generally not used with that aim in mind now. I think this was thought to be true in 2008 but we know now that it has no/little effect (i.e. QE is mainly effective through portfolio rebalancing). And central banks that did try to increase bank lending (the UK in the mid-2010s, and the ECB...always) use other techniques (i.e. FLS, LTRO...which, iirc, are direct lending to commercial banks by central banks...I think, I don't follow this stuff closely anymore). Just generally too, if commercial banks are holding a lot of govt debt then that is usually a sign of problems elsewhere (i.e. the EU).
goBackwards00 6y ago
Rewriting legislation would also enable that. But why not partake in a massive real engineering project? It’s not like the environment cares! It’s just there. Again, we already have solutions. What happened to tech people’s DRY and KISS, don’t be clever, mantras? Legislative capture is the engineering problem. Forcing Machiavellian machinery on society seems to be the only answer our dimwitted hierarchy can ever come up with. It’s Jesus! Obviously it’s capital trade! Obviously it’s statistical! Never, obviously it’s just people and I’m merely one of them. How much longer is the aristocracy (including this scene since it’s wealthier than most and leverages that to export its expectations on others) expecting billions facing environmental collapse to nod and smile for a bunch of “godheaded” normies? You all are LARPing nonsense in a very subtle way. Contorted language and made up objects conjured by clearly senile, puerile, selfish, ignorant leaders. Controlling governments directly is the only real solution to any problem you bring up due to the never ending issue of legislative capture. For a forum of supposedly bright, clever minds, repetitively iterating on the edge of what societies leaders “allow” seems self defeating and lazy. If the result of all this work for a mercantile scoreboard exacerbates a real problem, technical engineering is a non-solution. You all are risking your future by putting the next generation in a even more precarious position. Ageism & guilt by association to our contemporary economic agency is going to bite the grown ups of today in their twilight years. Look how indifferent we are about cohorts that statistically fall off our radar. What the hell are they going to care about a bunch of gerontocrats who make up a smaller percent of the population than the 20-30yos and their young? Obviously the environmental concerns for them are not there in you, tacitly supporting this. And I am doing my part to make this happen by explaining this to kids, my own and others; when we’re old, shovel us into the bay. We’ll have earned for being the first form of society to leave behind such a mess.

riffraff 6y ago

I feel the payment side is pretty relevant here: governments and central banks are starting to realize that as currency dematerilializes the VISA, MasterCard etc of the world are going to drain a significant part of the economy, which they would rather keep, being in the business of, well, managing those currencies.

dageshi 6y ago

Hmmm, wouldn't the CBDC be safer than any other place to put your money? So in a crisis, wouldn't you sell everything and put it in the CBDC including potentially government bonds precisely at the time the government probably needs to borrow cheaply? That seems like a recipe for disaster to me.

danialtz 6y ago
Indeed, financial stability and crisis models are the transformation studies several central banks and also stablecoins like Celo undertake to understand how introduction a new monetary instrument would solve some issues and affect others. Short answer is it’s too early to say since it’s a tech-push innovation sped up by demand-push of pandemic and global players.

adament 6y ago

I think if we want to argue that central banks will soon be pushing for CBDCs to let people have accounts directly with the central bank we need to argue why they at the same time are opposing* narrow banks, which to me seems to be a different technical tool achieving an equivalent goal? * At least the Fed seems to be: https://www.bloomberg.com/opinion/articles/2019-03-08/the-fed-versus-the-narrow-bank?utm_source=url_link https://www.bloomberg.com/opinion/articles/2019-03-08/the-fe...

notahacker 6y ago
The main reason the Fed is rejecting this is that it doesn't want to give banking privileges to entities which don't perform the core function of commercial banks from the Fed's point of view (lending) and really dislikes the idea of the public getting reasonably high interest rates for zero risk and zero contribution to the economy for reasons discussed in your article. If that's proposed as a goal for CBDCs, they won't happen (at least not without far more significant reform of regulations and incentives surrounding lending) In theory, CBDCs could be just a back end representation of the existing financial system for more efficient settlement though, which would be a different technical tool to achieve the Fed's current goal. That looks considerably more likely to happen than removing financial intermediaries from the picture.
- adament 6y ago
  I agree. In which case I think the question as posed in a sibling thread is central: How do CBDCs differ from the current digital settlement system already available at several central banks? The sibling thread mentions the Bank of England and the Danish central bank has a similar digital settlement system. Is it “just” a fancy term for a technical upgrade or is there a substantive difference in function?
- jrs235 6y ago
  I assume the FED is rejecting it because the owners of the FED are the member banks which stand to lose from this implementation.

povik 6y ago

I see. But then again I am a bit confused by this text in the report on digital euro[0], which was recently posted on HN. “While the Eurosystem would always retain control over the issuance of a digital euro, supervised private intermediaries would be best placed to provide ancillary, user-facing services and to build new business models on its core back-end functionality. A model whereby access to the digital euro is intermediated by the private sector is therefore preferable.“ That sounds like a bank to me. But I guess it must be so that the relationship between the central bank and intermediary will be different. I struggle to find the defining features of these CBDCs so that it is more than empty branding. I guess you might sum it up as “bringing the central bank and currency-users closer thanks to modern technologies”? [0] https://www.ecb.europa.eu/euro/html/digitaleuro-report.en.html https://www.ecb.europa.eu/euro/html/digitaleuro-report.en.ht...

danialtz 6y ago
Accounts at central banks is only one model of CBDC, called Direct CBDC, which is to my knowledge much less preferred way than a hybrid apparoach (like what’s there today), for several reasons: - managing a complexity of nation-wide banking for Central Banks is quite early at this stage, being a traditionally a government portion known mostly for policies and economics than cutting edge tech deployment. - CBs want to keep stability, and breaking down a current model of banking by introduction of a new FIAT model is not one of them There are key needs and major requirements additionally for the CBDC that are documented in the latest BIS and ECB reports.
nmlnn 6y ago
It's the branding that they need to get rid of cash. Playing it off as an analogue to digital switch, rather than the removal of transaction freedom and privacy.

zmk_ 6y ago

Sweden is probably the most advanced in considering an "e" currency and so far the proposals have been of keeping the two-tier system, i.e., you still have an account with a bank.

mbrock 6y ago
The riksbank seems to be advocating an "e-krona" where each citizen would use a state-issued digital identity to directly use central bank money as a means of payment similar to physical cash, no?
- zmk_ 6y ago
  They have not decided whether e-krona would be a 'account-based' (like you say) and a competing/backup payment system. Or a 'value-based' where it's 'stored on a card'. At the same time they do not want to impact lending facilities of banks so if they go with the first option they will most likely deemphasize it considerably to keep deposits in traditional banks. The 2nd option seems to me like a total fail, similar to what Chipknip was in the Netherlands. The main motivation for the ekrona seems to be the move away from cash, but Sweden has been cashless for a long time now (between Swish and cards).

sjtindell 6y ago

I read somewhere that in the US some banks took the QE money and put it back into their accounts with the Fed where it collected interest. Rather than lend it out, they essentially got paid just to hold it. There’s an economic argument saying that it made them safer, etc. but it doesn’t sound quite right to me.

adament 6y ago
While I am not familiar with the story you are referring to, it does not sound weird to me. Given that QE works by the central bank buying risky assets (initially government bonds), presumably the banks received the QE money by selling higher yielding(given that even during QE the rate curve was mostly upward sloping) government bonds to the federal reserve than the interest rate they earned by depositing said money at the federal reserve. This would seem an irrational move from the banks unless they had some additional use for the cash compared to the government bonds?
neilwilson 6y ago
Banks don’t lend out money from central banks. Never have. Banks can only store reserves in accounts at the central bank because only banks can have such accounts. What they get is money from the central bank in interest for holding those reserves and that effectively subsides lending a bit - at least until the interest rate drops so low that people are tempted to draw out cash
hogFeast 6y ago
This is actually complex. But QE, in most cases but not all (for example, QE3) involved the purchase of assets from the non-bank sector, not purchases from banks (in the US, banks do not hold a large amount of US govt securities). When QE did involve the purchase of assets from banks (i.e. QE3 with MBS/ABS purchases, and in the EU where banks held a lot of govt debt) then it did lead to increase lending but the effect varied significantly (for example, in the EU the effect was tiny because most banks in the region are functionally insolvent). So QE is not thought to have any particular effect on bank lending, and is generally not used with that aim in mind now. I think this was thought to be true in 2008 but we know now that it has no/little effect (i.e. QE is mainly effective through portfolio rebalancing). And central banks that did try to increase bank lending (the UK in the mid-2010s, and the ECB...always) use other techniques (i.e. FLS, LTRO...which, iirc, are direct lending to commercial banks by central banks...I think, I don't follow this stuff closely anymore). Just generally too, if commercial banks are holding a lot of govt debt then that is usually a sign of problems elsewhere (i.e. the EU).

goBackwards00 6y ago

Rewriting legislation would also enable that. But why not partake in a massive real engineering project? It’s not like the environment cares! It’s just there. Again, we already have solutions. What happened to tech people’s DRY and KISS, don’t be clever, mantras? Legislative capture is the engineering problem. Forcing Machiavellian machinery on society seems to be the only answer our dimwitted hierarchy can ever come up with. It’s Jesus! Obviously it’s capital trade! Obviously it’s statistical! Never, obviously it’s just people and I’m merely one of them. How much longer is the aristocracy (including this scene since it’s wealthier than most and leverages that to export its expectations on others) expecting billions facing environmental collapse to nod and smile for a bunch of “godheaded” normies? You all are LARPing nonsense in a very subtle way. Contorted language and made up objects conjured by clearly senile, puerile, selfish, ignorant leaders. Controlling governments directly is the only real solution to any problem you bring up due to the never ending issue of legislative capture. For a forum of supposedly bright, clever minds, repetitively iterating on the edge of what societies leaders “allow” seems self defeating and lazy. If the result of all this work for a mercantile scoreboard exacerbates a real problem, technical engineering is a non-solution. You all are risking your future by putting the next generation in a even more precarious position. Ageism & guilt by association to our contemporary economic agency is going to bite the grown ups of today in their twilight years. Look how indifferent we are about cohorts that statistically fall off our radar. What the hell are they going to care about a bunch of gerontocrats who make up a smaller percent of the population than the 20-30yos and their young? Obviously the environmental concerns for them are not there in you, tacitly supporting this. And I am doing my part to make this happen by explaining this to kids, my own and others; when we’re old, shovel us into the bay. We’ll have earned for being the first form of society to leave behind such a mess.