Home>news>Central Bank Digital Currency and Monetary Policy

There are arguments for and against Central Bank Digital Currency, ‘ideas are great on paper’ but full reform is indeed much more complicated that one might think. During my research, I have enjoyed exploring the idea of Fedcoin along with things like Futarchy her are some thought-provoking quotes that got me thinking in more detail on the topic of Central Bank Digital Currency.

Central Bank Digital Currency and Monetary Policies of the future

Maybe (Obama,2016) is right, if we want a better politics, ‘’it’s not enough to just change a Congressman or a Senator or even a President; we have to change the system…” Maybe Futarchy, introduced by Hanson could be even used as a model to help us decide if economic freedom would decline if we had CBDCs. I certainly agree that ‘speculators have a much stronger incentive to eliminate price biases that vary over shorter terms and that are independent of the few aggregate price dimensions that command a “risk premium.” (Hanson, R. 2000)

Whilst highlight by Ben Broadbent, that ‘it seems very unlikely that, to any significant extent, we’ll ever be paying for things in bitcoins, rather than pounds, dollars or euros’(Broadbent, B. 2016, Central Banks and Digital Currencies — Bank of England) What remains apparent is that bitcoin or maybe the technology itself, may ‘‘have the potential to challenge government supervision of monetary policy by the disruption of current payment systems and the avoidance of existing regulatory schemes.” (Borroni, A, 2016)

The Fedcoin proposal delights me like stated by Former Fed Governer K Warsh “Not that it would supplant and replace cash,”, “but it would be a pretty effective way when the next crisis happens for us to maybe conduct monetary policy.” (K. Warsh)What I don’t understand is why we feel like we need to get burned again before we act. The global economy and its citizens do not need another 2008!

With the idea that commercial banks would suffer as a consequence of an CBDC as presented by (Winkle.R. 2015 — Deutsche Bank) , I personally think it is time for revolution on that front. Banks have not been doing customers many favours. I warm to the idea that something like Fedcoin would bring ‘’stability, scalability, and security and demonstrate this technology’s potential to be the country’s financial backbone’’(Gupta, Lauppe, Ravishankar — Yale, 2017)

I do however remain conscious of the negative points raised by research done by the Bank of Canada and agree ‘any security breaches of its digital currency could potentially negatively affect the central bank’s reputation when it carries out its other functions such as conducting monetary policy and financial stability policy’ (Fung.B & Halaburda H, 2016 — Bank of Canada — Central Bank Digital Currencies: A Framework for Assessing Why and How)

Central Bank Digital Currency

Stability of Central Bank Digital Currency

Stability and regulation should remain in focus when it comes to Central Bank Digital Currency. ‘‘Central banks have spent hundreds of years learning how to keep the value of money stable’’ Warsh and irrespective how things go, it remains certain that whilst open to the technology at hand, ‘’Proper regulation of these entities will remain a pillar of trust’’ (Christine Lagarde, IMF 2018)

I look forward to seeing what China will bring forward on the Central Bank Digital Currency front in the year ahead.

Pros and Cons of a Central Bank Digital Currency

Pro’s Bitcoin as a CBDC would allow:

– A secure transfer without double spend

– No need for a bank account for transfers

– All transactions can be viewed publicly

– Transactions can be anonymous

– Transactions are not limited to the country to country

– Transaction is instant

– There is no centralized body

– Currency is securely stored

– CC a global currency

Cons — Bitcoin as a CBDC limitation:

– Limited supply

– Difficulties with regulation

– Difficulties with adoption

– Misses a trusted centralized regulated body distributing funds

– Doesn’t follow legal approvals like AML and KYC

– Price fluxuations

General Pros and cons of a Central Bank Digital Currency

Pros of a CBDC:

– Lower transaction cost

– Direct access to an account (not via commercial bank)

– People could hold digital legal tender

– Changes the function of commercial banks — maybe a more customer-centric focus

– Accounts open to all

– Fast system

– No need for intermediaries for transfers

– Governance over the ledger

– Easier international transfers and handling (efficiency)

– Better risk management

– Immediate (more immediate) book balance

– Less expensive printing costs

Cons of a CBDC

– Cyber attacks on centralized wealth

– Retail / Commercial banks would have to reposition themselves (adopt or diet)

– Would struggle with an anonymity that CC offers

– Would be challenged with a broad number of users

– KYC and AML will fall on CB

– Challenges with cross boarder management

– Monetary policy would need to change

– The function of Interest rates would need to be assess

– CB wouldn’t be the lender of last resorts