Central Bank Digital Currencies

Michael Lloyd

Description

The advent of digital stablecoins and the continuing decline of cash are prompting central banks across the world to explore developing their own digital currencies. Although few have launched so far, the potential for central bank digital currency (CBDC) promises a revolution in banking.

Michael Lloyd considers the opportunities and threats that the arrival of CBDCs will have for commercial banking and the world’s monetary system. The choices facing central banks regarding the use, design and technology of digital currencies are examined as well as the potential impacts on consumer security and privacy.

Introduction

1. Central banks consideration of retail and wholesale CBDCs

2. The domestic monetary and legal implications of CBDCs

3. Choices of technology for CBDCs

4. The impact on the commercial banking sector

5. The impact of CBDCs: the regional and international nexus

6. The future of money: the next decade

Appendix

Sujets

• Public Policy
• Banking
• Economie gestion
• Bank
• Monetary economics
• General officer
• Economics
• Business
• General
• Finance
• Banks

Informations

• Publié par: Agenda Publishing
• Date de parution: 08 juin 2023
• Nombre de lectures: 0
• EAN13: 9781788216333
• Langue: English
• Poids de l'ouvrage: 4 Mo

Extrait

Aso by Mîcae oyd and pubîsed by Agenda

Brîtîs Busîness Bankîng: he Faîlure of Fînance Provîsîon for SMEs

CENTRAL BANK DIGITAL CURRENCIES The Future of Money

MICHAEL LLOYD

© Mîcae oyd 2023

hîs book îs copyrîgt under te Berne Conventîon. No reproductîon wîtout permîssîon. A rîgts reserved.

Fîrst pubîsed în 2023 by Agenda Pubîsîng

Agenda Pubîsîng îmîted PO Box 185 Newcaste upon Tyne NE20 2DH www.agendapub.com

ïSBN 978-1-78821-632-6

Britis Library Cataloguing-in-Publication Data A cataogue record or tîs book îs avaîabe rom te Brîtîs îbrary

Typeset by JS Typesettîng td, Portcaw, Mîd Gamorgan Prînted and bound în te UK by 4edge

CONTENTS

ïntroductîon

1. Retaî and woesae CBDCs  he cangîng envîronment or monetary payments  he response o state reguators  Current monetary system arcîtecture and woesae CBDCs  Concusîon

2. Domestîc monetary and ega împîcatîons  Pubîc money vs prîvate money  he probem o stabecoîns  he reguatory îabîîty network  he rîsks rom te potentîa întroductîon o prîvate money  ïmpîcatîons o retaî CBDCs or cîtîzens  Desîgn optîons or CBDCs  Consumer access to te CBDC  ega împîcatîons  Monetary poîcy împîcatîons  Cross-border payments  Concusîon

3. Tecnoogy  Centra vs decentraîzed databases  Dîstrîbuted edger tecnoogy  Bockcaîn  Commercîa tecnoogy coîces or centra banks  Smart contracts and programmabîîty  CBDC desîgn optîons and tecnoogy patorm coîces

1

9 10 13 17 20

23 24 26 28 30 32 34 37 39 43 46 48

51 51 53 57 60 62 63

v

CONTENTS

Reguatory îabîîty network Cross-border payments Concusîon

4. ïmpact on te commercîa bankîng sector  Commercîa bankîng  CBDCs and te commercîa bankîng system  Commercîa bank reactîon to CBDCs  he roe o credît card provîders  Oter monetary system reorm optîons  Assessment o reatîve împacts  Concusîon

5. he regîona and înternatîona nexus  he new goba poîtîca economy  Cîna  he Unîted States  EU dîgîta euro  Competîng CBDCs  Dîgîta currency areas  Cross-border wCBDC deveopment  A goba dîgîta reserve currency/unît o account  Concusîon

6. he uture o money: te next decade  Money în te dîgîta age  Reormîng domestîc monetary systems  he roe o dîstrîbuted edger tecnoogy  Poîtîca economy and socîety  A goba perspectîve

Appendîx 1: Retaîl CBDC case studîes Appendîx 2: Wolesale CBDC: cross-border examples References Index

vi

68 70 73

75 75 78 81 87 88 89 92

95 96 101 105 107 109 110 113 114 116

119 121 122 123 124 125

129 135 143 155

INTRODUCTION

Money îs amost as od as uman cîvîîzatîon. A monetary tokens, bank notes or exampe, are a orm o “ïOU”, expressîng a socîa reatîon between credîtor and debtor (ïngam 2004; Dodd 2014). he îstorîca orms wîc money as taken ave varîed and te concept îtse as been studîed across many scîentîIc and pîosopîca dîscîpînes. he roe and aocatîon o money în te mutîar- îous orms o socîa, cutura, economîc and poîtîca organîzatîon as aways been crucîa în înLuencîng te structures and unctîonîng o tose organîza- tîona and socîeta orms. ït îs broady accepted, rom îstorîca and antropoogîca studîes (Gayer 1937), tat Iat money arose by te state îssuîng credît-tokens wîc were used by te state to purcase goods and servîces (încudîng te mîîtary means to Igt wars) and te state îssued tose credît-tokens în payment o taxes by cîtî- zens. ïn tîs manner te state’s pubîc monetary spere subsumed te exîstîng prîvate credît networks, provîdîng a guaranteed monetary ancor. Money îs not a pysîca object, but rater a system o recordîng account set- tements denoted în a commonnotîonalunît o account. Money îs not a com- modîty, weter ît îs pysîca money (cas) or dîgîta money. uîgî Eînaudî (Gayer 1937: 265) îndîcates te îstorîca evîdence:

Books and pampets and statutes o te nînt to te eîgteent cen- tury are unînteîgîbe î one does not bear în mînd te dîstînctîon be- tween money o account or îmagînary money and efectîve or coîned money. Usuay, te money o account was caed îbra, îvre, îra. Men kept accounts, drew înstruments o debt, sod and bougt goods and securîtîes and property rîgts în îmagînary money, wîc tey never saw. Coîns ad strange names, tey poured înto eac country rom a parts o te word, were god and sîver and a sîver dresses, were mînted at ome or by oreîgn prînces. hey made no dîference to peo- pe wo contînue to tak and negotîate and keep accounts în îbras.

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CENTRAL BANK DIGITAL CURRENCIES

hîs account îndîcates te îrreevance o a “commodîty-based” money and te necessîty o avîng a “unît o account” based monetary system. he cryptocurrency Bîtcoîn afords a modern demonstratîon o te înerent paradox în commodîty-based money. ït as a strîcty controed caîn în suppy (vîa as-mînîng) and a maxîmum îmît on creatîon over tîme (21 mîîon coîns). However, ît as aîed as a means o payment because o te extreme varîabîîty în îts prîce reatîve to oter commodîtîes, încudîng god, and în îts excange rate wît natîona currencîes. he dîference between a “Bîtcoîn system” and a “unît o account” settement system îs tat te ormer neîter provîdes a u baance seet o debîts and credîts nor, crucîay, a cearîng system or nettîng baances. ïts dîstrîbuted edger system sîmpyrecordscredît transers, to ensure proo o payment and securîty, entîrey wîtîn îts cosed system. Bîtcoîn does not ave a unît o account monetary system unctîon. Jan Krege expaîns te essence o te natîona centra bank medîated system în provîdîng te u accountîng tat Bîtcoîn acks:

ï înstead o îndîvîdua accounts a partîcîpants în te system ad ac- counts wît a centra bookkeeper wo woud keep track o te debîts and credîts în number unîts o account, te overa accounts woud a- ways baance, but tere woud stî be îndîvîdua îmbaances tat now coud be automatîcay compensated by te centra bookkeeper. ï te bookkeeper îs aso te sovereîgn îssuer o îbra notes or mînts god îbra coîns tey can arrange or te approprîate debts and credîts în terms o notes or coîns în te accounts o debtors and credîtors. But sînce tese are book entrîes, te notes and coîns need not actuay be transerred or even exîst. ïn act, tey coud be done away wît (or burîed în a vaut or et under te sea … în tîs socîa accountîng money o account sys- tem, credîts baances ave vaue î tey can be used to extînguîs debts încurred în te productîon o goods and servîces. (Krege 2021: 13)

he centra bookkeeper îs, o course, te centra bank. Subsequent îstorîca deveopment ed to te exîstîng compex monetary system în a modern capîtaîst economy. Noneteess, te credîtor–debtor re- atîonsîp îs stî at te eart o te economîc deveopment structures, aîed to te monetary payment and settement mecanîsm underyîng economîc ex- cange. ït îs împortant to recognîze tat money,în îtse, as no întrînsîc vaue. he monetary system serves te utîmate economîc purpose o encouragîng te depoyment o te pysîca resources o and and uman resources to opeuy productîve ends. Hence, underyîng te monetary system are tree acknowedged and essen- tîa unctîons: (1) as a medîum o excange(accepted payment or goods and

2

INTRODUCTION

servîces); (2) as a store o vaue (avaîabe uture purcasîng power); and (3) as a measure o vaue/a unît o account (agaînst wîc goods and servîces are measured and deerred payment o debt îs accepted). ït îs tîs ast unctîon on wîc te prevîous two unctîons rest and tat acts as te bedrock o a modern capîtaîst economy. he state, în te orm o a centra bank, guarantees te cur- rency tat ît îssues and spends and accepts as payment o taxes, Ines, and ees (so-caediatmoney), and acts as te natîon’s bookkeeper, provîdîng settement o debts and credîts. Currenty, commercîa banks create oans to prîvate cîtîzens and companîes wîc te centra bank matces wît reserves or te banks. Bank accounts are ten used to acîîtate payments, usîng tîs prîvate money guaranteed by te centra bank, îssued to te reguated bankîng sector. he government aso as an account wît te centra bank, wîc ît uses to pay or îts expendîture on goods and servîces, and aso unîquey, îssues urter înterest-bearîng sovereîgn debt as requîred. hîs debt may be purcased by te prîvate sector, and any surpus îs purcased by te centra bank. ïn tîs man- ner, provîdîng tere îs suicîent conIdence în te Iat currency as a measure o vaue, and te probîty and stabîîty o te commercîa banks îs estabîsed, te economîc and socîa unctîonaîty o te country îs maîntaîned. he centra bank provîdes te ancor or te modern monetary system, wît addîtîona support to te prîvate Inancîa system beîng provîded by arrange- ments, suc as prudentîa Inancîa reguatîon (încudîng Base înternatîona reguatîon on banks’ odîngs o tîered equîty capîta) and deposît însurance to protect retaî consumers. Oter prîvate orms o money (ïOUs) can and do exîst, but tey are unîkey to be wîdey accepted, as currenty îs te case wît “stabecoîns”, even toug tese crypto-assets are înked to te vaue o a Iat currency, îke te US doar. ïn guaranteeîng a Iat currency, te roe o te centra bank îs crucîa, as te Inan- cîa înstîtutîon tat îs a country’s monopoy banknote îssuer, manages te do- mestîc money suppy, sets înterest rates, and acts as te “ender o ast resort” to commercîa banks. he centra bank aso serves as a cearîng ouse or te Ina settement o payments – ît îs te banker’s bank. Many centra banks aso ave supervîsory and reguatory powers to ensure te sovency o commercîa banks and te wîder Inancîa system, or înstance, te Bank o Engand’s Prudentîa Reguatîon Autorîty (PRA). However, te advent o prîvate dîgîta currencîes (so-caed “cryptocurren- cîes”) may în uture treaten te stabîîty o te current monetary system, based on Iat currencîes. hîs potentîa as awakened centra bank înterest în îssuîng a retaî dîgîta currency, and în împrovîng te eicacy o cross-border payment vîa extensîon o te exîstîng woesae dîgîta currencysystem. Retaî dîgîta cur- rencîes îssued dîrecty to îndîvîdua cîtîzens, eîter to accompany, or potentîay

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CENTRAL BANK DIGITAL CURRENCIES

to repace, paper currencîes and coînage are beîng consîdered by centra banks. he decîne o te use o cas în deveoped countrîes (and some deveopîng countrîes) as been anoter motîvatîng actor în consîderîng te întroductîon o retaî dîgîta currencîes. As researc by te Bank o ïnternatîona Settements (BïS) – an înternatîona orum or monetary poîcy dîscussîons and acîîtatîng Inancîa transactîons or centra banks – states:

ïn jurîsdîctîons were access to cas îs în decîne, tere îs a danger tat ouseods and busînesses wî no onger ave access to rîsk-ree cen- tra bank money. Some centra banks consîder ît an obîgatîon to pro- vîde pubîc access and tat tîs access coud be crucîa or conIdence în a currency. A CBDC coud act îke a ‘dîgîta banknote’ and coud uI tîs obîgatîon. (Cenet al.2021: 66)

ït îs unsurprîsîng tat, în our încreasîngy dîgîtaîzed socîety, te creatîon o centra bank eectronîc money îssued dîrecty to te genera pubîc îs beîng ac- tîvey consîdered. he concept o a “centra bank dîgîta currency” (CBDC) was proposed decades ago by Nobe aureate James Tobîn (Auer 2020). However, dîscussîon o CBDCs as încreased notîceaby sînce 2016 not east wîtîn te centra bankîng raternîty îtse and wîtîn severa natîona governments. hese dîscussîons ave been precîpîtated by te rapîd expansîon o prîvate dîgîta cur- rencîes, especîay stabecoîns, wose vaue îs înked to Iat currencîes, oten te US doar. Researc înto te potentîa o centra banks estabîsîng teîr own retaî dîgîta currencîes, compementîng prîvate retaî payment systems, îs beîng ac- tîvey pursued by around 90 per cent o centra banks across te word (Kosse & Matteî 2021). he detaîed researc învoves tecnîca and economîc consîdera- tîons, învovîng assessment o te împîcatîons or natîona monetary poîcy and te commercîa bankîng sector. However, adoptîon o a CBDC wî generate a varîety o împacts on commercîa banks and on te genera pubîc. Retaî CBDCs, wît a dîrect reatîonsîp between te centra bank and te pubîc, woud be a major step orward în te încreasîngy dîgîta economy. he structure o poîtîca economy may be sîgnîIcanty atered as a resut. he canges wî make transparent te key îssues concernîng credît and money în socîety – tat îs te împortance o maîntaînîng trust between debtor and cred- îtor, and te key roe o centra banks în provîdîng cîtîzens’ utîmate trust în te probîty and Inaîty o Inancîa payments în natîona and oter wîder regîona jurîsdîctîons. Any ateratîon to te current monetary system arrangements wî requîre te maîntenance o pubîc conIdence. To date, ony our centra banks, tose o Cîna, Nîgerîa, te East Carîbbean Currency Unîon, and te Baamas, ave aunced and are actîvey pîotîng or

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