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: 9781788216340
• Langue: English
• Poids de l'ouvrage: 2 Mo

Extrait

Also by Michael Lloyd and published by Agenda
British Business Banking: The Failure of Finance Provision for SMEs

© Michael Lloyd 2023
This book is copyright under the Berne Convention.
No reproduction without permission.
All rights reserved.
First published in 2023 by Agenda Publishing
Agenda Publishing Limited
PO Box 185
Newcastle upon Tyne
NE20 2DH
www.agendapub.com
ISBN 978-1-78821-632-6
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Typeset by JS Typesetting Ltd, Porthcawl, Mid Glamorgan
Printed and bound in the UK by 4edge
CONTENTS
Introduction
1 . Retail and wholesale CBDCs
The changing environment for monetary payments
The response of state regulators
Current monetary system architecture and wholesale CBDCs
Conclusion
2 . Domestic monetary and legal implications
Public money vs private money
The problem of stablecoins
The regulatory liability network
The risks from the potential introduction of private money
Implications of retail CBDCs for citizens
Design options for CBDCs
Consumer access to the CBDC
Legal implications
Monetary policy implications
Cross- border payments
Conclusion
3 . Technology
Central vs decentralized databases
Distributed ledger technology
Blockchain
Commercial technology choices for central banks
Smart contracts and programmability
CBDC design options and technology platform choices
Regulatory liability network
Cross- border payments
Conclusion
4 . Impact on the commercial banking sector
Commercial banking
CBDCs and the commercial banking system
Commercial bank reaction to CBDCs
The role of credit card providers
Other monetary system reform options
Assessment of relative impacts
Conclusion
5 . The regional and international nexus
The new global political economy
China
The United States
EU digital euro
Competing CBDCs
Digital currency areas
Cross- border wCBDC development
A global digital reserve currency/unit of account
Conclusion
6 . The future of money: the next decade
Money in the digital age
Reforming domestic monetary systems
The role of distributed ledger technology
Political economy and society
A global perspective
Appendix 1: Retail CBDC case studies
Appendix 2: Wholesale CBDC: cross-border examples
References
Index
INTRODUCTION
Money is almost as old as human civilization. All monetary tokens, bank notes for example, are a form of “IOU”, expressing a social relation between creditor and debtor (Ingham 2004; Dodd 2014). The historical forms which money has taken have varied and the concept itself has been studied across many scientific and philosophical disciplines. The role and allocation of money in the multifarious forms of social, cultural, economic and political organization has always been crucial in influencing the structures and functioning of those organizational and societal forms.
It is broadly accepted, from historical and anthropological studies (Gayer 1937), that fiat money arose by the state issuing credit-tokens which were used by the state to purchase goods and services (including the military means to fight wars) and the state issued those credit-tokens in payment of taxes by citizens. In this manner the state’s public monetary sphere subsumed the existing private credit networks, providing a guaranteed monetary anchor.
Money is not a physical object, but rather a system of recording account settlements denoted in a common notional unit of account. Money is not a commodity, whether it is physical money (cash) or digital money.
Luigi Einaudi (Gayer 1937: 265) indicates the historical evidence:
Books and pamphlets and statutes of the ninth to the eighteenth century are unintelligible if one does not bear in mind the distinction between money of account or imaginary money and effective or coined money. Usually, the money of account was called libra, livre, lira. Men kept accounts, drew instruments of debt, sold and bought goods and securities and property rights in imaginary money, which they never saw. Coins had strange names, they poured into each country from all parts of the world, were gold and silver and half silver dresses, were minted at home or by foreign princes. They made no difference to people who continue to talk and negotiate and keep accounts in libras.
This account indicates the irrelevance of a “commodity-based” money and the necessity of having a “unit of account” based monetary system.
The cryptocurrency Bitcoin affords a modern demonstration of the inherent paradox in commodity-based money. It has a strictly controlled chain in supply (via hash-mining) and a maximum limit on creation over time (21 million coins). However, it has failed as a means of payment because of the extreme variability in its price relative to other commodities, including gold, and in its exchange rate with national currencies. The difference between a “Bitcoin system” and a “unit of account” settlement system is that the former neither provides a full balance sheet of debits and credits nor, crucially, a clearing system for netting balances. Its distributed ledger system simply records credit transfers, to ensure proof of payment and security, entirely within its closed system. Bitcoin does not have a unit of account monetary system function.
Jan Kregel explains the essence of the national central bank mediated system in providing the full accounting that Bitcoin lacks:
If instead of individual accounts all participants in the system had accounts with a central bookkeeper who would keep track of the debits and credits in number units of account, the overall accounts would always balance, but there would still be individual imbalances that now could be automatically compensated by the central bookkeeper. If the bookkeeper is also the sovereign issuer of libra notes or mints gold libra coins they can arrange for the appropriate debts and credits in terms of notes or coins in the accounts of debtors and creditors. But since these are book entries, the notes and coins need not actually be transferred or even exist. In fact, they could be done away with (or buried in a vault or left under the sea … in this social accounting money of account system, credits balances have value if they can be used to extinguish debts incurred in the production of goods and services.
(Kregel 2021: 13)
The central bookkeeper is, of course, the central bank.
Subsequent historical development led to the existing complex monetary system in a modern capitalist economy. Nonetheless, the creditor–debtor relationship is still at the heart of the economic development structures, allied to the monetary payment and settlement mechanism underlying economic exchange. It is important to recognize that money, in itself, has no intrinsic value. The monetary system serves the ultimate economic purpose of encouraging the deployment of the physical resources of land and human resources to hopefully productive ends.
Hence, underlying the monetary system are three acknowledged and essential functions: (1) as a medium of exchange (accepted payment for goods and services); (2) as a store of value (available future purchasing power); and (3) as a measure of value/a unit of account (against which goods and services are measured and deferred payment of debt is accepted). It is this last function on which the previous two functions rest and that acts as the bedrock of a modern capitalist economy. The state, in the form of a central bank, guarantees the currency that it issues and spends and accepts as payment of taxes, fines, and fees (so-called fiat money), and acts as the nation’s bookkeeper, providing settlement of debts and credits.
Currently, commercial banks create loans to private citizens and companies which the central bank matches with reserves for the banks. Bank accounts are then used to facilitate payments, using this private money guaranteed by the central bank, issued to the regulated banking sector.
The government also has an account with the central bank, which it uses to pay for its expenditure on goods and services, and also uniquely, issues further interest-bearing sovereign debt as required. This debt may be purchased by the private sector, and any surplus is purchased by the central bank. In this manner, providing there is sufficient confidence in the fiat currency as a measure of value, and the probity and stability of the commercial banks is established, the economic and social functionality of the country is maintained.
The central bank provides the anchor for the modern monetary system, with additional support to the private financial system being provided by arrangements, such as prudential financial regulation (including Basel international regulation on banks’ holdings of tiered equity capital) and deposit insurance to protect retail consumers.
Other private forms of money (IOUs) can and do exist, but they are unlikely to be widely accepted, as currently is the case with “stablecoins”, even though these crypto-assets are linked to the value of a fiat currency, like the US dollar. In guaranteeing a fiat currency, the role of the central bank is crucial, as the financial institution that is a country’s monopoly banknote issuer, manages the domestic money supply, sets interest rates, and acts as the “lender of last resort” to commercial banks. The central bank also serves as a clearing house for the final settlement of payments – it is the banker’s bank. Many central banks also have supervisory and regulatory powers to ensure the solvency of commercial banks and the wider financial system, for instance, the Bank of England’s Prudential Regulation Authority (PRA).
However, the advent of private digital currencies (so-called “cryptocurrencies”) may in future threaten the stability of the current monetary system, based on fiat currencies. This potential has awakened central