
Central bank digital currency: the end of monetary policy as we know it? - avyfain
https://bankunderground.co.uk/2016/07/25/central-bank-digital-currency-the-end-of-monetary-policy-as-we-know-it/
======
ckastner
_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.

~~~
mfairbank
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).

Edit: grammar

~~~
jackgavigan
_> 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"?

~~~
mfairbank
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.

------
seanalltogether
"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.

~~~
zanny
> New value is created every day

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.

~~~
lmm
> 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.

------
Suncho
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.

~~~
repsilat
> 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.

~~~
irln
> 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.

[1] [http://www.cnbc.com/id/100497710](http://www.cnbc.com/id/100497710) [2]
[http://www.bankofengland.co.uk/publications/Documents/quarte...](http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf)

~~~
repsilat
When you get a mortgage, three things happen:

1\. You acquire a large debt to the bank,

2\. The bank gives you a bunch of money,

3\. You give that money to someone else.

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.

------
tim333
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.

------
acd
Some argue that free banking without central banks was a very stable period.
[https://mises.org/library/free-banking-theory-history-and-
la...](https://mises.org/library/free-banking-theory-history-and-laissez-
faire-model-0)

A question will arise to who owns what if there ever is a derivative bubble?
Will we get digital currency decentralised made by hackers then?

Here is a visual representation of different types of money and markets.
[http://money.visualcapitalist.com/all-of-the-worlds-money-
an...](http://money.visualcapitalist.com/all-of-the-worlds-money-and-markets-
in-one-visualization/)

~~~
runeks
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.

~~~
forgetsusername
> _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._

A fact?

Here's a sample of inflation from that period:

    
    
      1878: -15%
      1879: -10%
      1880: 20%
      1881:  -5%
      1882: 8%
      1883: -2%
      

And on and on...what exactly was "stable" about that period? Compare that to,
say, the _30 years_ from 1986 to today.

[http://www.multpl.com/inflation/table](http://www.multpl.com/inflation/table)

~~~
runeks
I stand corrected. I included inflation when I shouldn't have.

My claim is true for interest rates, however. Here's one chart:
[http://www.businessinsider.com/us-treasury-yields-at-
histori...](http://www.businessinsider.com/us-treasury-yields-at-historic-
lows-2014-11?r=US&IR=T&IR=T)

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.

~~~
dragonwriter
Well, yes, when interest rates are manipulated to control inflation, the
latter becomes more stable and the latter becomes less stable.

This is not surprising, its obvious. I'm kind of baffled by the implied
premise that stable _interest rates_ are preferable to stable _inflation_ ,
though.

~~~
runeks

        > 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.

[1] [http://www.economics-
charts.com/cpi/cpi-1800-2005.html](http://www.economics-
charts.com/cpi/cpi-1800-2005.html)

------
bubbleRefuge
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.

~~~
johncolanduoni
I'd rather not hand my money over to one of the few organizations (i.e. the US
government) whose cyber security practices are even worse than banks.

~~~
pessimizer
It's the US Government holding on to your US dollars. I'm pretty sure that no
matter how bad their security is, you won't lose a dime.

