Tag Archives: Central bank digital currency

“Money Creation, Bank Profits, and CBDC,” VoxEU, 2021

VoxEU, February 5, 2021. HTML.

Based on CEPR DP 15457, I assess possible implications of the introduction of retail CBDC for bank profits. The model implies annual implicit subsidies to U.S. banks of up to 0.8 percent of GDP during the period 1999-2017.

John Cochrane about CBDC and Me

Writing about CBDC, John Cochrane makes it clear that he is in favor. He links to my work and writes

Dirk Niepelt has written a lot about CBDC theory, including reserves for all in 2015, a recent Vox-EU summary and papers,  here with Markus Brunnermeier a JME paper “CBDC coupled with central bank pass-through funding need not imply a credit crunch nor undermine financial stability,” a follow up including “The model implies annual implicit subsidies to U.S. banks of up to 0.8 percent of GDP during the period 1999-2017.”  Here  “reserves for all” “does not affect macroeconomic outcomes,”

“Dirk Niepelt im swissinfo.ch-Gespräch (Interview with Dirk Niepelt),” swissinfo, 2020

Swissinfo, December 14, 2020. HTML, podcast.

We talk about CBDC, the Swiss National Bank, whether CBDC would render it easier to implement helicopter drops, and how central bank profits should be distributed.

The Economist on CBDC and Disintermediation

The Economist discusses the risk of CBDC-induced bank disintermediation. Their summary of the 2019 paper by Markus Brunnermeier and myself:

If people prefer CBDCS, however, the central bank could in effect pass their funds on to banks by lending to them at its policy interest rate. “The issuance of CBDC would simply render the central bank’s implicit lender-of-last-resort guarantee explicit,” wrote Markus Brunnermeier of Princeton University and Dirk Niepelt of Study Centre Gerzensee in a paper in 2019. Explicit and, perhaps, in constant use.

“CBDC: State of Play, Practical Challenges, Open Issues,” SUERF Webinar, 2020

SUERF Webinar “CBDC: State of play, practical challenges, open issues” with Ulrich Bindseil (ECB) and Morten Bech (BIS). Moderated by Dirk Niepelt. December 4, 2020, 2 pm.

“Monetary Policy with Reserves and CBDC: Optimality, Equivalence, and Politics,” CEPR, 2020

CEPR Discussion Paper 15457, November 2020. PDF (local copy).

We analyze policy in a two-tiered monetary system. Noncompetitive banks issue deposits while the central bank issues reserves and a retail CBDC. Monies differ with respect to operating costs and liquidity. We map the framework into a baseline business cycle model with “pseudo wedges” and derive optimal policy rules: Spreads satisfy modified Friedman rules and deposits must be taxed or subsidized. We generalize the Brunnermeier and Niepelt (2019) result on the macro irrelevance of CBDC but show that a deposit based payment system requires higher taxes. The model implies annual implicit subsidies to U.S. banks of up to 0.8 percent of GDP during the period 1999-2017.

Central Banks Have Accepted a Future Retail CBDC

Recent indications:

Related recent developments:

“Digital Money, Payments and Banks,” CEPR/IESE Report, 2020

Discussion of Antonio Fatás’ chapter in Elena Carletti, Stijn Claessens, Antonio Fatás, Xavier Vives, The Bank Business Model in the Post-Covid-19 World, CEPR/IESE report, London, June 2020. PDF.

Antonio’s chapter offers a rich overview of the dramatic changes in the world of money and banking that we have seen in recent years. I focus on two themes: the nature of money and how it relates to these developments, and the government’s response to the structural changes we observe.

I discuss the price of money, its fundamental value, store-of-value bubble, and liquidity bubble components; the opaque legal tender concept and the absurd situation that governments outlaw the use of government money (contrary to what some theories would imply); the role of trust in a world without cash; and the substitution of money by smart contracts tied to a database.

And I comment on the many facets of digitalization; the time lag between the origination of new business models and regulatory catch-up; and on central bank digital currency as a key element of structural change in the financial system.

“Reserves For All? Central Bank Digital Currency, Deposits, and their (Non)-Equivalence,” IJCB, 2020

International Journal of Central Banking. PDF.

This paper offers a macroeconomic perspective on the “Reserves for All” (RFA) proposal to let the general public hold electronic central bank money and transact with it. I propose an equivalence result according to which a marginal substitution of outside money (e.g., RFA) for inside money (e.g., deposits) does not affect macroeconomic outcomes. I identify key conditions for equivalence and argue that these conditions likely are violated, implying that RFA would change macroeconomic outcomes. I also relate the analysis to common arguments found in discussions on RFA and point to inconsistencies and open questions.

Censorship Resistant Payment Technologies

On Coin Center’s blog, Matthew Green and Peter van Valkenburgh write:

Censorship resistance is the only way to guarantee that a digital asset truly is “bearer” and can be sent directly from one person to another without reliance on a third party. Cryptocurrencies achieve this property by making network participants (miners) compete for the power to add transactions to the ledger. Even if some miners wish to censor a transaction, we assume that others will not, particularly if it means they are forgoing fee revenue. A centralized digital dollar would not have competitive mining but if the role of the ledger-keeper was reduced to verifying zero-knowledge proofs then any refusal to perform that verification risks indiscriminately censoring users throughout the economy. If the Treasury became corrupt, it could degrade the performance of the network system-wide, but it would be difficult to selectively block certain individuals or surveil their activities.

None of these protections, however, are guaranteed, and new technologies always present unpredictable risks and unintended consequences. We must, therefore, preserve and defend physical cash and should never celebrate its demise. Cash, along with cryptocurrencies, is essential as a payment method of last resort that cannot be surveilled or controlled by corrupt governments or unscrupulous corporations.

Marshall Islands CBDC

The Marshall Islands CBDC project moves forward. Algorand, the project partner, reports that

blockchain for the world’s first national digital currency, the Marshallese sovereign (SOV), will be built using Algorand technology. The SOV will circulate alongside the US dollar and help the Marshall Islands efficiently operate in the global economy.

On the Future of Payments and Settlement

In its Quarterly Review, the BIS offers nice perspectives on the future of payments. Morten Bech and Jenny Hancock survey innovations in payments, and where the problems lie. Tara Rice, Goetz von Peter and Codruta Boar examine the fall in the number of correspondent banks. Morten Bech, Umar Faruqui and Takeshi Shirakami discuss cross border payments. Morten Bech, Jenny Hancock, Tara Rice and Amber Wadsworth discuss securities settlement. And Raphael Auer and Rainer Böhme explore design choices of a retail CBDC.

e-krona Pilot

The Riksbank starts a pilot project with Accenture to develop a technical solution for a retail e-krona.

Users shall be able to hold e-kronor in a digital wallet, make payments, deposits and withdrawals via a mobile app. The user shall also be able to make payments via wearables, such as smart watches, and cards.

The pilot runs for a year, on a distributed ledger, according to the Riksbank’s press release. More detailed information is contained in this note.

 

 

 

“Цифровые деньги и цифровые валюты центральных банков: главное, что нужно знать,” Econs, 2020

Econs (a non-profit project of the communications department of the Russian central bank), February 13, 2020. HTML.

Russian version of my VoxEU column on digital money and CBDC. What are we actually talking about? What do we know? And what should policymakers do? I discuss the following points:

  • Finance has been digital forever – what’s new about ‘digital money’?
  • Does the nature of money change?
  • What is central bank digital currency?
  • What is the link between CBDC and the blockchain?
  • Would CBDC have macroeconomic effects?
  • Would CBDC foster bank disintermediation and bank runs?
  • Why consider CBDC at all?
  • What opportunities does CBDC offer?
  • Where do the risks lie?
  • Do the opportunities justify the risks?
  • Do central banks have a choice?

“Digital Money and Central Bank Digital Currency: An Executive Summary for Policymakers,” VoxEU, 2020

VoxEU, February 3, 2020. HTML.

What are we actually talking about? What do we know? And what should policymakers do? I discuss the following points:

  • Finance has been digital forever – what’s new about ‘digital money’?
  • Does the nature of money change?
  • What is central bank digital currency?
  • What is the link between CBDC and the blockchain?
  • Would CBDC have macroeconomic effects?
  • Would CBDC foster bank disintermediation and bank runs?
  • Why consider CBDC at all?
  • What opportunities does CBDC offer?
  • Where do the risks lie?
  • Do the opportunities justify the risks?
  • Do central banks have a choice?

Digital Dollar Project

Accenture, the Digital Dollar Foundation, and FTI Consulting are pushing for a digital USD. They have formed the Digital Dollar Project

to advance exploration of a United States Central Bank Digital Currency (CBDC). The purpose of the Project is to encourage research and public discussion on the potential advantages of a digital dollar, convene private sector thought leaders and actors, and propose possible models to support the public sector. The Project will develop a framework for potential, practical steps that can be taken to establish a dollar CBDC.

Central Banks Zoom In on CBDC

According to a BIS press release, several leading central banks collaborate with the BIS on matters relating to the introduction of CBDC:

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Sveriges Riksbank and the Swiss National Bank, together with the Bank for International Settlements (BIS), have created a group to share experiences as they assess the potential cases for central bank digital currency (CBDC) in their home jurisdictions.

The group will assess CBDC use cases; economic, functional and technical design choices, including cross-border interoperability; and the sharing of knowledge on emerging technologies. It will closely coordinate with the relevant institutions and forums – in particular, the Financial Stability Board and the Committee on Payments and Market Infrastructures (CPMI).

The group will be co-chaired by Benoît Cœuré, Head of the BIS Innovation Hub, and Jon Cunliffe, Deputy Governor of the Bank of England and Chair of the CPMI. It will include senior representatives of the participating institutions.

Sand Dollar

The Central Bank of the Bahamas introduces CBDC, according to a press release (December 2019).

The intended outcome of Project Sand Dollar is that all residents in The Bahamas would have use of a central bank digital currency, on a modernized technology platform, with an experience and convenience—legally and otherwise—that resembles cash. It is expected that this will allow for reduced service delivery costs, increased transactional efficiency, and an improved overall level of financial inclusion. The anonymity feature of cash is not being replicated, although the Sand Dollar infrastructure would incorporate strict attention to confidentiality and data protection.

BIS Innovation Hub Centre in Switzerland

From the SNB’s press release regarding the newly established BIS Innovation Hub Centre in Switzerland:

The Swiss Centre will initially conduct research on two projects. The first of these will examine the integration of digital central bank money into a distributed ledger technology infrastructure. This new form of digital central bank money would be aimed at facilitating the settlement of tokenised assets between financial institutions. Tokens are digital assets that can be transferred from one party to another. The project will be carried out as part of a collaboration between the SNB and the SIX Group in the form of a proof of concept.

The second project will address the rise in requirements placed on central banks to be able to effectively track and monitor fast-paced electronic markets. These requirements are arising in particular from the greater automation and fragmentation of the financial markets, but also from the increased use of new technologies.

Thomas Jordan and Agustín Carstens signed the Operational Agreement on the BIS Innovation Hub Centre in Switzerland yesterday.

“Libra Paves the Way for Central Bank Digital Currency,” finews and WNM, 2019

My VoxEU column now also on finews and World News Monitor, September 17, 2019.

Digital currencies involve tradeoffs. Libra resolves them less favorably than other projects, and less favorably than CBDC.

When confronted with the choice between the status quo and a new financial architecture with CBDC, most central banks have responded cautiously. But Libra or its next best replica will take this choice off the table – the status quo ceases to be an option. The new choice for monetary authorities and regulators will be one between central bank managed CBDC on the one hand and – riskier – private digital tokens on the other. Central banks have a strong interest to maintain control over the payment system as well as the financial sector more broadly and to defend the attractiveness of their home currency. Nolens volens, they will therefore introduce ‘Reserves for All’ or promote synthetic CBDCs. In economics, things take longer than one thinks they will, as Rudi Dornbusch quipped, but then they happen faster than one thought they could.

“Libra Paves the Way for Central Bank Digital Currency,” VoxEU, 2019

VoxEU, September 12, 2019. HTML.

Digital currencies involve tradeoffs. Libra resolves them less favorably than other projects, and less favorably than CBDC.

When confronted with the choice between the status quo and a new financial architecture with CBDC, most central banks have responded cautiously. But Libra or its next best replica will take this choice off the table – the status quo ceases to be an option. The new choice for monetary authorities and regulators will be one between central bank managed CBDC on the one hand and – riskier – private digital tokens on the other. Central banks have a strong interest to maintain control over the payment system as well as the financial sector more broadly and to defend the attractiveness of their home currency. Nolens volens, they will therefore introduce ‘Reserves for All’ or promote synthetic CBDCs. In economics, things take longer than one thinks they will, as Rudi Dornbusch quipped, but then they happen faster than one thought they could.

“On the Equivalence of Private and Public Money,” JME, 2019

Journal of Monetary Economics, with Markus Brunnermeier. PDF.

When does a swap between private and public money leave the equilibrium allocation and price system unchanged? To answer this question, the paper sets up a generic model of money and liquidity which identifies sources of seignorage rents and liquidity bubbles. We derive sufficient conditions for equivalence and apply them in the context of the “Chicago Plan”, cryptocurrencies, the Indian de-monetization experiment, and Central Bank Digital Currency (CBDC). Our results imply that CBDC coupled with central bank pass-through funding need not imply a credit crunch nor undermine financial stability.