Tag Archives: Reserves for all

“Blockchain from a Central Bank Perspective”

An excellent conference organized by the Monetary Law Forum Switzerland focused on blockchain use cases from a central bank perspective. Program, links to slides.

I discussed the macroeconomic perspective and argued for “reserves for all.”

Some related links: Nivaura and Allen & Overy (backing Nivaura). OTC Swiss Blockchain, by Roman Bischoff.

“Kunden sollten zwischen Sichtguthaben und elektronischem Notenbankgeld wählen können (Let People Choose Between Deposits and Reserves),” NZZ, 2017

NZZ, August 17, 2017. HTML, PDF. Longer version published in Ökonomenstimme, August 21, 2017. HTML.

  • The Vollgeld initiative may point to a problem but it does not propose a viable solution.
  • Even with Vollgeld, the time consistency friction with its Too-Big-To-Fail implication would persist.
  • A more flexible, liberal approach appears more promising.
  • It would give the general public a choice between holding deposits and reserves.
  • Financial institutions and central banks around the world are pushing in that direction.

How Problematic Is a Large Central Bank Balance Sheet?

On his blog, John Cochrane reports about a Hoover panel including him, Charles Plosser, and John Taylor.

Cochrane focuses on the liability side. He favors a large quantity of (possibly interest bearing) reserves for financial stability reasons. Plosser focuses on the asset side and is worried about credit allocation by the Fed, for political economy reasons. Taylor favors a small balance sheet. Cochrane also talks about reserves for everyone, but issued by the Treasury.

How Does the Blockchain Transform Central Banking?

The blockchain technology opens up new possibilities for financial market participants. It allows to get rid of middle men and thus, to save cost, speed up clearing and settlement (possibly lowering capital requirements), protect privacy, avoid operational risks and improve the bargaining position of customers.

Internet based technologies have rendered it cheap to collect information and to network. This lies at the foundation of business models in the “sharing economy.” It also lets fintech companies seize intermediation business from banks and degrade them to utilities, now that the financial crisis has severely damaged banks’ reputation. But both fintech and sharing-economy companies continue to manage information centrally.

The blockchain technology undermines the middle-men business model. It renders cheating in transactions much harder and thereby reduces the value of credibility lent by middle men. The fact that counter parties do not know and trust each other becomes less of an impediment to trade.

The blockchain may lend credibility to a plethora of transactions, including payments denominated in traditional fiat monies like the US dollar or virtual krypto currencies like Bitcoin. An advantage of krypto currencies over traditional currencies concerns the commitment power lent by “smart contracts.” Unlike the money supply of fiat monies that hinges on discretionary decisions by monetary policy makers, the supply of krypto currencies can in principle be insulated against human interference ex post and at the same time conditioned on arbitrary verifiable outcomes (if done properly). This opens the way for resolving commitment problems in monetary economics. (Currently, however, most krypto currencies do not exploit this opportunity; they allow ex post interference by a “monetary policy committee.”) A disadvantage of krypto currencies concerns their limited liquidity and thus, exchange rate variability relative to traditional currencies if only few transactions are conducted using the krypto currency.

Whether blockchain payments are denominated in traditional fiat monies or krypto currencies, they are always of relevance for central banks. Transactions denominated in a krypto currency affect the central bank in similar ways as US dollar transactions, say, affect the monetary authority in a dollarized economy: The central bank looses control over the money supply, and its power to intervene as lender of last resort may be diminished as well. The underlying causes for the crowding out of the legal tender also are familiar from dollarization episodes: Loss of trust in the central bank and the stability of the legal tender, or a desire of the transacting parties to hide their identity if the central bank can monitor payments in the domestic currency but not otherwise.

Blockchain facilitated transactions denominated in domestic currency have the potential to affect central bank operations much more directly. To leverage the efficiency of domestic currency denominated blockchain transactions between financial institutions it is in the interest of banks to have the central bank on board: The domestic currency denominated krypto currency should ideally be base money or a perfect substitute to it, directly exchangeable against central bank reserves. For when perfect substitutability is not guaranteed then the payment associated with the transaction eventually requires clearing through the traditional central bank managed clearing mechanism and as a consequence, the gain in speed and efficiency is relinquished. Of course, building an interface between the blockchain and the central bank’s clearing system could constitute a first step towards completely dismantling the latter and shifting all central bank managed clearing to the former.

Why would central banks want to join forces? If they don’t, they risk being cut out from transactions denominated in domestic currency and to end up monitoring only a fraction of the clearing between market participants. Central banks are under pressure to keep “their” currencies attractive. For the same reason (as well as for others), I propose “Reserves for All”—letting the general public and not only banks access central bank reserves (here, here, here, and here).

Banking on the Blockchain

In the NZZ, Axel Lehmann offers his views on the prospects of blockchain technologies in banking. Lehmann is Group Chief Operating Officer of UBS Group AG.

New possibilities:

  • Higher efficiency; lower cost; more robustness and simpler processes; real-time clearing;
  • no need for intermediaries; information exchange without risk of interference
  • automated “smart contracts;” automated wealth management;
  • more control over transactions; better data protection;
  • improved possibilities for macro prudential monitoring.


  • Speed; scalability; security;
  • privacy;
  • smart contracts require new contract law;
  • interface between traditional payments system and blockchain payment system.

Lehmann favors common standards and he points out that this is what is happening (R3-consortium with UBS, Hyperledger project with Linux foundation).

Related, Martin Arnold reported in the FT in late August that UBS, Deutsche Bank, Santander, BNY Mellon as well as the broker ICAP pursue the project of a “utility settlement coin.” Here is my reading of what this is:

  • The aim seems to be to have central banks on board; so USCs might be a form of reserves (base money). The difference to traditional reserves would be that USCs facilitate transactions using distributed ledgers rather than traditional clearing and settlement mechanisms. (This leads to the question of the appropriate interface between the two systems posed by Lehmann.)

But what’s in for central banks? Would this be a test before the whole clearing and settlement system is revamped, based on new blockchain technology? Don’t central banks fear that transactions on distributed ledgers might foster anonymity?

Reserves For Everyone

On a new website, Aleksander Berentsen rejects the Swiss Vollgeld initiative. As an alternative, he suggests the Swiss National Bank should offer transaction accounts for everybody, in line with proposals I have made earlier (see here (2016), here (2015), here (2015)).

In the Handelszeitung (here and here), Simon Schmid reports.

“Elektronisches Notenbankgeld ja, Vollgeld nein (Reserves for All, But no Sovereign Money),” NZZ, 2016

Neue Zürcher Zeitung, June 16, 2016. PDF, HTML. Ökonomenstimme, June 17, 2016. HTML.

  • Vollgeld seems attractive because it decouples the supply of money from intermediation. By enabling everyone to use legal tender for electronic payments, electronic base money would satisfy a need.
  • Vollgeld would prevent bank runs, at least partly; render deposit insurance unnecessary and reduce moral hazard; could help stabilize the credit cycle; and would redistribute seignorage to the central bank.
  • But these objectives can be obtained with less intrusive means.
  • Moreover, a Vollgeld system would be hard to enforce. Banks and their clients would establish new means of payment to circumvent the regulation. And in times of crisis, the central bank would feel obliged to provide liquidity assistance and bail outs.
  • The central problem is not that private money is used for transactions; it rather is that the money’s users rely on the central bank to guarantee the substitutability of private money and base money. In a democracy, the central bank cannot credibly let large parts of the payment system go under.
  • A sudden, forceful change of regime does not offer a credible way out of this trap.
  • But letting the general public access central bank reserves without abolishing private money from one day to the other may open a path towards a new arrangement where the public learns to distinguish between private and base money and where only the latter is publicly guaranteed.

“Notenbankgeld für Alle? (Reserves for Everyone?),” NZZ, 2015

Neue Zürcher Zeitung, February 20, 2015. PDF, HTML. Ökonomenstimme, February 24, 2015. HTML.

  • Allowing the general public to hold reserves at the central bank could help reduce the risk of bank runs and the negative consequences of deposit insurance.
  • It would end the need to accept bank deposits as means of payment although they are not legal tender; this need arises due to prohibitions on cash payments, for tax reasons.
  • But it could also have negative consequences: Money and credit creation by banks would be undermined, with social costs and benefits.
  • Price stability and financial stability could be threatened during the transition period.
  • More technical questions would have to be addressed as well: They concern the payment system or the conduct of monetary policy.
  • Proposals to go further and to abolish cash are not convincing. One suggested benefit—more leeway for monetary policy makers—is over estimated: Negative rates can also be engineered (effectively) through fiscal policy, and they can fully be implemented with a flexible exchange rate between reserves and cash.
  • Another suggested benefit—better monitoring of tax dodgers and criminals—is also overrated; the fixed cost to circumvent the measure would deter minor illegal activity but not major one.
  • But abolishing cash would have severe negative consequences for privacy and could negatively affect financial literacy.
  • Enforcing an abolishment of cash would be difficult. In a free society, any reform to the monetary system is constrained by the requirement that money must remain attractive for its users.

“Reserves For Everyone—Towards a New Monetary Regime?,” VoxEU, 2015

VoxEU, January 21, 2015. HTML.

New proposals to phase out cash are set to revive an old debate. Contributions to this debate focus on two related but independent issues: granting the general public access to central bank reserves; and phasing out cash.

Abolishing cash is neither necessary nor sufficient. But allowing the public to hold reserves at the central bank could have substantial benefits. Technical questions need careful consideration.