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.
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).
> 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"?
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.
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.
"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.
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.
...and 15bn EUR banknotes. If you think about it, they all have a serial number and it's easy to track them with a mere bigdata database. Most banknotes change hands only once before being registered in a bank again. The others are all suspicious. Keeping your money for a few months? Not a crime by itself but in most situations it's linked with laundering. Withdrawing every week from your ATM and cashed by the same drug dealer? They probably won't scream it over the roofs, but the FBI probably already uses this technique to track criminals.
If you think it's hard to track patterns in banknotes, it's ok, but it's less hard than tracking every single CB transaction across the world.
According to the reference in [0]: "As at the end of June 2013, there are 197,800 ATMs in use on the [Chinese] mainland, of which 100,700 or 55.28% have been upgraded with the serial number enquiry function. According to schedule, by late 2015, the serial number of every Rmb100 note withdrawn from banks by members of the public can be traced."
Banks don't track which sn they are handing out each time. So, on deposit you just know the starting bank. And that's only if the depositing bank tracks sn which is far less common than you might think. Banks are more than happy to put deposited money back into circulation without that overhead.
The linked article, by a central bank employee, explicitly notes that users of cash value its anonymity:
> 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.
While governments might not prefer anonymous payment methods to exist, they can still recognize that much of the money-using public appreciates anonymous payments at least some of the time.
> While governments might not prefer anonymous payment methods to exist, they can still recognize that much of the money-using public appreciates anonymous payments at least some of the time.
To the extent that "governments" don't like anonymous payment methods, that's mostly law enforcement/security agencies.
Central banks basically recognize that anonymous payments mechanisms will exist, and prefer that central bank currency fill that role, since the more non-central-bank money is used in practice, the less predictable effect central bank monetary policy has.
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.
Wow, I didn't imagine the possibility of creating a different exchange rate for cash versus deposits. Surely this could not be implemented by the US central bank without new legislation? Many thanks for the reference to the IMF publication...just the TOC makes the hair on my neck stand on end :)
That is a bit silly. First of all cash is just a medium of exchange that we have refined to the most frictionless method possible. Without it we would just be exchanging some other tokens of value. Secondly Not everywhere has access to the tech that we do, such as credit cards and ATMs, ApplePay and Android Pay. A lot of the world relies on cash, so it would be ridiculous to suggest it would be illegal.
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?
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.
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.
> 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.
You mean like NIRP and QE? -_-'
Like you said, these guys live in an textbook economic fantasy world.
This is not proposing the end of fractional reserve banking. Money supply expansion happens through credit, and credit isn't going away any time soon.
The problem is that the normal "transmission mechanism" of monetary policy is to encourage credit, and both the commercial world and consumers are in a state where they either don't want or don't need credit.
(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
"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.
Not necessarily, and you may be conflating demand for a currency (which controls its valuation and exchange rate) with economic productivity in an economy.
Its not so much, I imagine, about stopping the creation of money - the economic fundamentals behind why inflation is good are obvious. The promise of digital currencies going forward is the hopeful removal of human irrationality from the process.
Would you prefer to trust the Federal Reserve, with all its own internal goals and motivations, to print money "honestly", or would you rather have an algorithm that adjusted the block payout rate to maintain constant 1% inflation in the monetary base, relative to monetary velocity? IE, when the money slows down, which implies money is being hoarded because its value is rising, you print more to offset it, and when money speeds up you reduce the printing speed to try to keep the velocity stable.
> Would you prefer to trust the Federal Reserve, with all its own internal goals and motivations, to print money "honestly", or would you rather have an algorithm that adjusted the block payout rate to maintain constant 1% inflation in the monetary base, relative to monetary velocity? IE, when the money slows down, which implies money is being hoarded because its value is rising, you print more to offset it, and when money speeds up you reduce the printing speed to try to keep the velocity stable.
At the moment I'd rather have a (democratically accountable) human in the loop. I don't have anything like the level of confidence in economic theory to trust any argument that 1% is the "right" level of inflation for all time. If there are unforseen shifts in the economy and we end up thinking that (say) 10% inflation is the best thing to do at the moment, I'd rather we had the capability to do that.
> or would you rather have an algorithm that adjusted the block payout rate to maintain constant 1% inflation in the monetary base, relative to monetary velocity
We have not yet found a consistent set of rules for setting monetary policy that work across the board. The problem is compounded for dual-mandate central banks such as the Federal Reserve. Even measuring inflation is a manual process - how would you code basket selection into your currency?
Until we have evidence of an optimal money growth rate, I want the system to be flexible.
>keep the velocity stable.
Velocity is, basically, a fudge factor in the PQ = MV equation (as in, it makes the formula work). Is there any research that points to stable velocity being optimal? I think it changes drastically over time.
I think you're on the right track, and "the system" could definitely use more transparency and objectivity. But I don't think there's any algorithm near ready for prime time. The economy is too complex.
> Would you prefer to trust the Federal Reserve, with all its own internal goals and motivations, to print money "honestly", or would you rather have an algorithm that adjusted the block payout rate to maintain constant 1% inflation in the monetary base, relative to monetary velocity?
I would prefer that people not have to create their own promissory notes during economic booms because it's impossible to create a legitimate loan due to the current monetary supply. You're begging for a black market currency at that point.
> 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.
Saving (as distinct from investment in productive things) is also bad for the economy. A small amount of buffer may smooth the working of the economy, but stored cash/assets are dead weight - it's better if people are spending immediately, keeping the cash circulating into productive things.
Not completely dead but close to it. To the extent that they provide funding for government infrastructure, business loans and the like, they're productive. But AIUI that link is pretty thin these days.
If investing in Treasuries and Savings accounts are considered hoarding or "dead money" that's +/-$13T to $19T depending upon how you look at it for Treasuries [1] and $8.6T for savings [2].
Inflationary currency encourages consumption (and environmental destruction), decreases the value of debt (and causes people to pursue unsustainable risk on leverage), and cheats low- and fixed- income wage earners out of the value of their earnings disproportionately compared to the wealthy, necessitating minimum wage increases, which creates sporadic wage unemployment, which is more disastrous than gradual wage unemployment.
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.
> 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.
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.
Why do you think banks care that much about depositors storing money in them?
The main way banks make money is by lending money, which also creates matching bank deposits. They do require some reserve-backed deposits for liquidity, capital adequacy ratios/reserve requirements, but not that much.
The main way banks make money is by lending money, which also creates matching bank deposits.
Yes. But this only works if the banking system, on average, holds onto the deposits it creates. This way of doing things would break down if everybody withdrew their deposits into cash every time they got a loan and everybody only transacted in cash. The same thing would happen if borrowers immediately withdrew their deposits into CBCoin.
> 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.
> 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.
Steps 2 and 3 usually happen at the same time, AIUI you don't actually have the money in your bank account.
Now, in the general case the "someone else" belongs to another bank. When "you" give them the money, your bank has to fork over a chunk of cash. They actually have to get that cash from somewhere. Either that have loads of spare money, or they have deposits, or they get loans themselves. If they get a loan they pay the loan rate (say the Fed funds rate), if they have deposits they presumably pay less.
On the other hand, if the "someone else" belongs to the same bank, the bank actually still needs to have some (though not as much) cash to support this -- that's the "fractional" in "fractional reserve lending". The loan to you is an asset, the other guy's balance is a liability, but the bank is legally required to have cash to support deposits, not just promises and collateral.
> "They want your money to lend to other people at yet higher interest rates."
Banks don't rely on existing deposits to make loans, the loans are backed by themselves, they're created out of nothing. I'd recommend this short video which shows how banks create money from loans:
> 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.
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.
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.
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.
>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.
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.
> I'm kind of baffled by the implied premise that stable
> interest rates are preferable to stable inflation, though.
I didn't mean to imply that. I think the two are inextricably linked.
With regards to achieving stable inflation, to me it just looks like we've flattened out the spikes, not gotten rid of them [1]. And, mind you, the two spikes at ~1865 and ~1914 were caused by wars. We can't exactly say we had either a world war or a civil war from 1965 to 1985.
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.
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.