Fast-forward to today’s timeframe, and central banks are no longer ignoring the sector, rather they are diligently studying it and making speeches about it.
However, they still reference Bitcoin and cryptocurrency in general within the old paradigm that they have full control over. They talk about things like setting monetary policy, financial intermediation, and centralized control over money.
Longtime Bitcoin adherents view the blockchain-based finance as an entirely new paradigm, one which functions on a peer-to-peer basis, thus removal altogether the need for financial intermediation. This group of people wants to see “monetary policy” set by the market, and not a centralized group of bankers. In short, many people have come to Bitcoin to help take centralized power over money out of the hands of the few and place it into the hands of the many.
Benoît Cœuré, Member of the Executive Board of the ECB gave a speech yesterday at the International Center for Monetary and Banking Studies in Geneva. Here are some of his remarks that indicate central banks want the old paradigm to continue and not be replaced by a new financial paradigm:
The development of private digital tokens based on the blockchain technology, which is the theme of one of the two Geneva reports that we will discuss tomorrow, has generated a debate over whether central banks should issue a new liability – their own digital currency – to the general public. While the Geneva report focuses on blockchain’s impact on finance, I will consider the potential broader impact on the economy of central banks issuing new forms of money. Since the general public already holds central bank liabilities in the form of banknotes and coins, this is clearly a question of how.
But I will also consider who. In an environment of excess liquidity and new regulatory requirements for financial market participants, broadening access to the liability side of central banks’ balance sheets to parties other than banks may help better align financial conditions with the central bank’s intended stance.
Central bank digital currencies
Who has access to the central bank balance sheet, and how, is a debate that has been going on for hundreds of years. In the early years of central banking, this discussion was mostly about the optimal provision of money as a means of payment. The banks of Amsterdam and Hamburg, for example, which are now considered as having performed key central bank functions as early as the beginning of the 17th century, were created to provide giro deposits as an efficient and stable method for merchants to pay each other, greatly facilitating trade.
An anecdote from Sweden, where another early central bank was founded in the middle of the 17th century, demonstrates these benefits quite nicely. Coinage at that time was minted in copper but set to be the same value as silver. This meant so-called coins were the size of your dinner plates tonight. The largest one weighed just shy of 20 kilograms.
Clearly this was inconvenient for trade. Indeed, one tale tells of two thieves who tried to make off with 170 copper daler but couldn’t lift the coins above knee height. The Bank of Stockholm addressed this problem by issuing the first modern banknotes.
More generally, central bank liabilities provided a convenient means of payment to allow clearing and establish trust in the financial system. But debate raged in the 18th and 19th centuries over the relative merits of different central bank liabilities. The universal nature of banknotes, and the possibility to use them in a decentralised way, eventually made them the more important central bank liability.
But over time, technological advances, financial intermediation based on a stable bank-borrower relationship and the obvious inconveniences of currency – it can get lost, be destroyed or stolen – all led to banknotes gradually being superseded by bank deposits. Yet, repeated banking crises highlighted that commercial bank deposits were themselves vulnerable to runs, since banks’ assets are typically illiquid while their liabilities can be withdrawn at will.
This insecurity led central banks to gradually take on their role of lenders of last resort to avoid economically and socially disruptive banking crises, well before Henry Thornton (1802) and Walter Bagehot (1873) articulated their views on the subject.But others, most notably James Tobin (1987), wanted to go further, allowing not only banks to deposit funds at the central bank, but also individuals. Safety was his primary concern.
In many ways, this debate over the relative merits of banknotes and accounts, and over central banks and banks as main issuers of money, has once more returned.
With the recent fad about crypto assets, pioneered by bitcoin, the idea has been floated for central banks to issue their own digital currencies – let’s call them “universal reserves” – that would allow all individuals to hold central bank liabilities in the form of both banknotes and coins as well as electronic central bank reserves.
What distinguishes the discussion today from previous discussions, however, are three new facts:
The first is that we are seeing a dramatic decline in the demand for cash in some countries, in particular Sweden and Norway.
The second is that central banks today could make use of new technologies that would enable the introduction of what is widely referred to as a “token-based” currency – one based on a distributed ledger technology (DLT) or comparable cryptographic technology.
And the third “new” fact, at least from a long-term perspective, relates to the role of central banks in setting monetary policy, and more recently to the emergence of negative rates as a policy instrument and the consequences for the transmission of monetary policy.
Read the full speech here>>