Monday, October 9, 2017

Central Bank Digital Currency and the Future of Monetary Policy - (Bordo & Levin)

A thank you to Robert Pringle for pointing me to this article by Michael Bordo and Andrew Levin. It is another look at the potential future prospects for central bank digital currencies that I think is a more realistic approach than many I see out there in various media. Below are a couple of excerpts (underline is mine).

"A number of major central banks are actively exploring the initiation of sovereign digital currencies. In this analysis, we consider how a central bank digital currency (CBDC) can transform all aspects of the monetary system and facilitate the systematic and transparent conduct of monetary policy. Building on a long strand of the literature in monetary economics, we formulate a set of overarching design principles. In particular, we find a compelling rationale for establishing a CBDC that serves as a stable unit of account, a practically costless medium of exchange, and a secure store of value. In particular, the CBDC should be interest-bearing, and the central bank should adjust that interest rate to foster true price stability. "

. . . .

"In contrast, a number of central banks are actively exploring the initiation of sovereign digital currencies that would serve as legal tender and could be used by anyone. In contrast to bitcoin, the value of the central bank’s digital currency would be fixed in nominal terms. Moreover, the central bank’s digital currency could be implemented using an account-based system, thereby avoiding the resource-consuming “mining” operations involved in generating virtual currencies like bitcoin. Allowing private individuals and firms to hold accounts directly at the central bank is by no means unprecedented; indeed, a number of major central banks have had these sorts of arrangements in the past."

My added comments: 

A few key points from this article (and ideas we have covered here on this blog):

- they talk about accounts that individual private citizens can hold at central banks

- the central bank digital currency should pay interest (but could also go negative in times of systemic duress)

- the central bank digital currency should not use "resource-consuming "mining" operations

- they call for issuance of the currency based on demand from the public and using a rules based system

Added note:

Central bank critics and cynics will see this paragraph in this article:

"As discussed in Goodfriend (2016), the launching of a central bank digital currency can be accompanied by an accelerated obsolescence of paper currency. Indeed, once the central bank’s digital currency is widely used as a form of electronic payment, the demand for holding paper currency and coins would quickly diminish, especially if deposits and withdrawals of cash are associated with substantial fees by the central bank and private financial institutions. Of course, those individuals who preferred to engage in relatively anonymous transactions would remain free to use virtual currencies or other forms of payment."

and will surely view this proposal as an attack on the use of cash and financial privacy in financial transactions. 

However, society is already moving in this direction for the most part, so perhaps this will become more accepted by the public over time. Most of the younger generation is already used to using some form of electronic payment for just about everything.

Also, if smaller, less material cash transactions many people would still use for regular business were exempt from such fees, most people probably would not notice a lot of difference in how they do things now. The issue of financial privacy is likely to be a hot topic of debate for sure regardless. 


  1. If people are able to hold accounts at the central banks, seems that would make the local and regional banks obsolete. The central bank has also been known to acquire mortgages and commercial loans from the big banks to keep the big banks afloat.

    1. Good point. This is a concern that the central banks studying this idea have raised themselves.