The benefits of a global digital currency — Antonio Fatás, Beatrice Weder di Mauro

Economists have reacted negatively to the prospect of Facebook's Libra cryptocurrency. This column, part of the VoxEU debate on the future of digital money, outlines how if we focus exclusively on the efficiencies a currency like Libra brings to payment, there are arguments in its favour. A global digital currency provided by central banks may be preferable, but a private version would offer many of the same benefits....

The Libra operates on a fixed exchange rate with reference to floating national currencies.

In response to the high volatility of Bitcoin and other cryptocurrencies, developers have created 'stable coins', currencies whose value is tied to a traditional currency. Libra belongs in this category. Economists are familiar with fixed exchange rates, so this is not new. The stability of Libra is guaranteed by a redemption mechanism supported by assets that back the value of the currency in circulation. This mechanism, used by other stable coins, is equivalent to a currency board.

Libra is global, so it is pegged to a basket of currencies. There are precedents in this for fixed exchange rates, although it is not common for currency boards.3 Of course, fixing the value of Libra to a basket of currencies implies that its value will fluctuate relative to any single currency.

Owing to efficiencies and to preempt rivals, something like this is almost certain to happen and central banks are already discussing it. To say that this a "disruptive technology" would be an understatement. But the alternative is attempting to criminalize use of digital currencies in order to preserve the current system, and that is impractical. What remains to be determined is what it is going to look like and who is going to be in control.

I don't see Facebook owing it. That would just add to the present issues around monopoly and anti-trust. Eventually, the digital world is going to be publicly controlled. How that is going to transpire will involve major issues in the future.

ConclusionTaking the Libra proposition at face value, we made the best economic case we could by focusing on it as a means of payment, domestically and internationally. We wanted to understand whether the potential benefits of a means of payment could compensate for the risks of holding a volatile asset. Our estimates suggest that the overall risk of holding a global currency may not be large for plausible exchange rate volatility and risk aversion. On the other hand, the potential gain in lowering transaction costs in retail cross-border payments and even local payments are large.

While a global currency may be desirable, this currency does not have to be Libra. There are many other concerns not discussed here, such as privacy, data control, operational risk, regulatory consequences, or dominance. In his speech at the 2019 Jackson Hole conference (Carney 2019), Carney discussed the benefits of a global currency that would be provided by a network of central banks, which he called a Synthetic Hegemonic Currency. But, without a coordinated effort by policymakers and regulators to create this currency, a private solution such as Libra might end up partially fulfilling this need.

VOX.EU
The benefits of a global digital currency

Antonio Fatás, Beatrice Weder di Mauro

See also at VOX.EU

Libra: The known unknowns and unknown unknowns

Barry Eichengreen

The rise of digital currency
Tobias Adrian, Tommaso Mancini-Griffoli

The Future of Digital Money
Stephen Cecchetti, Antonio Fatás

Rohan Grey On Digital Currency, Privacy, And Modern Monetary Theory — David Beckworth interviews Rohan Grey

Rohan Grey is a legal scholar and the research director of the Digital Fiat Currency Institute. He joins the show today to make the case for digital legal tender. David and Rohan also discuss privacy issues related to digital currency, getting the public onboard with a digital currency proposal, modern monetary theory, and how it is different than mainstream economics....

Audio and transcript.

Seeking Alpha
Macro Musings Podcast: Rohan Grey On Digital Currency, Privacy, And Modern Monetary Theory

David Beckworth interviews Rohan Grey

Michael Kumhof and Clare Noone — Central bank digital currencies - design principles and balance sheet implications

This paper sets out three models of central bank digital currency (CBDC) that differ in the sectors that have access to CBDC. It studies sectoral balance sheet dynamics at the point of an initial CBDC introduction, and of an attempted large-scale run out of bank deposits into CBDC. We find that if the introduction of CBDC follows a set of core principles, bank funding is not necessarily reduced, credit and liquidity provision to the private sector need not contract, and the risk of a system-wide run from bank deposits to CBDC is addressed. The core principles are: (i) CBDC pays an adjustable interest rate. (ii) CBDC and reserves are distinct, and not convertible into each other. (iii) No guaranteed, on-demand convertibility of bank deposits into CBDC at commercial banks (and therefore by implication at the central bank). (iv) The central bank issues CBDC only against eligible securities (principally government securities). The final two principles imply that households and firms can freely trade bank deposits against CBDC in a private market, and that the private market can freely obtain additional CBDC from the central bank, at the posted CBDC interest rate and against eligible securities.

Bank of England
Central bank digital currencies - design principles and balance sheet implications
Michael Kumhof and Clare Noone

See also

Understanding the changing role of central banks and the novel policies they have pursued recently is absolutely essential for analysing many economic, financial and political issues, ranging from financial regulation and crisis, to exchange rate dynamics and regime changes, and QE and prolonged low interest rates. This book features contributions by many of the world’s leading experts on central banking, providing in accessible essays a fascinating review of today’s key policy and research issues for central banks. Luminaries including Stephen Cecchetti, Takatoshi Ito, Anil Kashyap, Mervyn King, Donald Kohn, Otmar Issing, Hyun Shin and William White are joined by Charles Goodhart of the London School of Economics, whose many achievements in the field of central banking are honoured as the inspiration for this book.

The Changing Fortunes of Central Banking discusses the developing role of central banks and the policies they pursue in seeking monetary and financial stabilisation, while also giving suggestions for model strategies. This comprehensive review will appeal to central bankers, financial supervisors, academics and economists working in think tanks.

Bruegel
The changing fortunes of central banking

Philipp Hartmann, European Central Bank & CEPR; Haizhou Huang, China International Capital Corporation and Dirk Schoenmaker, Erasmus University, Bruegel & CEPR

China Daily — PBOC inches closer to digital currency China Daily

The People's Bank of China, China's central bank, has completed trial runs on the algorithms needed for digital currency supply, taking it a step closer to addressing the technological challenges associated with digital currencies, according to a top official associated with the project.

Yao Qian, director-general of the Institute of Digital Money at the PBOC, said China's central bank has successfully designed a prototype that can regulate the supply of its future digital fiat currency.

The successful simulation of money supply paves the way for the central bank to become the future sole regulator and policymaker governing the value of digital fiat currency, said Yao.

Digital fiat currencies are the digital forms of a sovereign currency that is backed by the central bank.

Unlike Bitcoin or other digital money issued by the private sector, the digital fiat currency has the same legal status as the Chinese yuan, the only fiat currency issued by the People's Bank of China.

There is no timetable for the introduction of the currency, but once introduced, China is likely to become the first country that would deploy a digital fiat currency....

The rapid development of the electronic payment sector and thriving private digital currencies have made it imperative for China's central bank to move quickly in digital finance.

Looking ahead, deploying the digital fiat currency is expected to be smarter and more intelligent compared to the payment providers using existing currencies, such as Alipay, according to Yao.

Ecns.cn
PBOC inches closer to digital currency

China Daily

Christine Lagarde — Central Banking and Fintech—A Brave New World?

I would like to consider the possible impact of three innovations—virtual currencies, new models of financial intermediation, and artificial intelligence.

Some of these innovations have already found their way into our wallets, smartphones, and financial systems. But that is only the beginning.

Are you ready to jump on my pod and explore the future together? As one of your fellow Londoners—Mary Poppins—might have said: bring along a pinch of imagination!

1. Virtual currencies

Let us start with virtual currencies. To be clear, this is not about digital payments in existing currencies—through Paypal and other “e-money” providers such as Alipay in China, or M-Pesa in Kenya.

Virtual currencies are in a different category, because they provide their own unit of account and payment systems. These systems allow for peer-to-peer transactions without central clearinghouses, without central banks.

For now, virtual currencies such as Bitcoin pose little or no challenge to the existing order of fiat currencies and central banks. Why? Because they are too volatile, too risky, too energy intensive, and because the underlying technologies are not yet scalable. Many are too opaque for regulators; and some have been hacked.

But many of these are technological challenges that could be addressed over time. Not so long ago, some experts argued that personal computers would never be adopted, and that tablets would only be used as expensive coffee trays. So I think it may not be wise to dismiss virtual currencies.Better value for money?

For instance, think of countries with weak institutions and unstable national currencies. Instead of adopting the currency of another country—such as the U.S. dollar—some of these economies might see a growing use of virtual currencies. Call it dollarization 2.0.

IMF experience shows that there is a tipping point beyond which coordination around a new currency is exponential. In the Seychelles, for example, dollarization jumped from 20 percent in 2006 to 60 percent in 2008.

And yet, why might citizens hold virtual currencies rather than physical dollars, euros, or sterling? Because it may one day be easier and safer than obtaining paper bills, especially in remote regions. And because virtual currencies could actually become more stable.

For instance, they could be issued one-for-one for dollars, or a stable basket of currencies. Issuance could be fully transparent, governed by a credible, pre-defined rule, an algorithm that can be monitored…or even a “smart rule” that might reflect changing macroeconomic circumstances.

So in many ways, virtual currencies might just give existing currencies and monetary policy a run for their money. The best response by central bankers is to continue running effective monetary policy, while being open to fresh ideas and new demands, as economies evolve.

Better payment services?

For example, consider the growing demand for new payment services in countries where the shared, decentralized service economy is taking off.This is an economy rooted in peer-to-peer transactions, in frequent, small-value payments, often across borders.

Four dollars for gardening tips from a lady in New Zealand, three euros for an expert translation of a Japanese poem, and 80 pence for a virtual rendering of historic Fleet Street: these payments can be made with credit cards and other forms of e-money. But the charges are relatively high for small-value transactions, especially across borders.

Instead, citizens may one day prefer virtual currencies, since they potentially offer the same cost and convenience as cash—no settlement risks, no clearing delays, no central registration, no intermediary to check accounts and identities. If privately issued virtual currencies remain risky and unstable, citizens may even call on central banks to provide digital forms of legal tender....

IMF

Central Banking and Fintech—A Brave New World?
Christine Lagarde, IMF Managing Director
Bank of England conference, London | September 29, 2017

Timothy B. Lee — It looks like China is shutting down its blockchain economy

Looks like the central bank (PBOC) is asserting its control of currency.

As Yves Smith says, "prosecution futures."

Ars Technica
It looks like China is shutting down its blockchain economy

Timothy B. Lee

Alex Gray — Finland has created a digital money system for refugees

MONI has developed a prepaid debit card that circumvents the need for a bank account or identity papers. The card is linked to a unique digital identity stored on a blockchain – the same technology that underpins Bitcoin and other digital currencies.

Two years ago, MONI partnered with the Finnish government to provide refugees with their monthly allowance, which until then had been paid in cash....

World Economic Forum
Finland has created a digital money system for refugees

Alex Gray

Ellen Brown — Central Bank Digital Currencies: A Revolution in Banking?

Hypothetical at t his point but the people that are in a position to do it and talking about it.

Web of Debt Blog
Central Bank Digital Currencies: A Revolution in Banking?

Ellen Brown

Marilyn Tolle — Central bank digital currency: the end of monetary policy as we know it?

Central banks (CBs) have long issued paper currency. The development of Bitcoin and other private digital currencies has provided them with the technological means to issue their own digital currency. But should they?

Addressing this question is part of the Bank’s Research Agenda. In this post I sketch out how a CB digital currency – call it CBcoin – might affect the monetary and banking systems – setting aside other important and complex systemic implications that range from prudential regulation and financial stability to technology, operational and financial conduct

I argue that taken to its most extreme conclusion, CBcoin issuance could have far-reaching consequences for commercial and central banking – divorcing payments from private bank deposits and even putting an end to banks’ ability to create money. By redefining the architecture of payment systems, CBcoin could thus challenge fractional reserve banking and reshape the conduct of monetary policy.…

Bank of England — Bank Underground
Central bank digital currency: the end of monetary policy as we know it?

Marilyne Tolle

John Barrdear and Michael Kumhof — The macroeconomics of central bank issued digital currencies

Abstract

We study the macroeconomic consequences of issuing central bank digital currency (CBDC) — a universally accessible and interest-bearing central bank liability, implemented via distributed ledgers, that competes with bank deposits as medium of exchange. In a DSGE model calibrated to match the pre-crisis United States, we find that CBDC issuance of 30% of GDP, against government bonds, could permanently raise GDP by as much as 3%, due to reductions in real interest rates, distortionary taxes, and monetary transaction costs. Countercyclical CBDC price or quantity rules, as a second monetary policy instrument, could substantially improve the central bank’s ability to stabilise the business cycle.

Key words: Distributed ledgers, blockchain, banks, financial intermediation, bank lending, money creation, money demand, endogenous money, countercyclical policy. 

  Bank of England
Staff Working Paper No. 605: The macroeconomics of central bank issued digital currencies
John Barrdear and Michael Kumhof

Reuters — China's central bank plans to launch its own digital currencies

China's central bank wants to launch its own digital currencies to cut the costs of circulating traditional paper money and boost policymakers' control of money supply, the People's Bank of China (PBOC) said on Wednesday.

A PBOC research team set up in 2014 to look into digital currencies should make preparations for launches, according to a central bank statement posted on www.pbc.gov.cn.

"The team ... should set up a clearer strategic target for launching digital currencies, overcome the key technological barriers ... and aim for an early launch of the central bank's digital currencies," the PBOC said.

Virtual currencies can also help boost transparency of economic activities and curb money laundering and tax evasions, it added.…

China leads the way.

Reuters
China's central bank plans to launch its own digital currencies

David Andolfatto — Bitcoin and central banking

David Andolfatto looks at the potential of digital currency and blockchain technology.

Mainly Macro
Bitcoin and central banking 

David Andolfatto | VP, FRBSL

Alex Tabarrok — Satoshi Nakamoto Nominated for Nobel Prize

Bhagwan Chowdhry, a professor of finance at UCLA, has nominated Satoshi Nakamoto, the creator of Bitcoin, for a Nobel prize in economics. It’s an excellent choice. Nakamoto made a fundamental breakthrough that combined cryptography and a distributed database to create the first decentralized cryptocurrency.…

Marginal Revolution
Satoshi Nakamoto Nominated for Nobel Prize

Alex Tabarrok | Bartley J. Madden Chair in Economics at the Mercatus Center and Professor of Economics at George Mason University

Don Quijones — Barcelona Threatens to Print Parallel Currency, Madrid Seethes

Barcelona will not be the first European city to launch such a scheme. Local currencies are all the rage these days. There could be as many as 3,000 forms of local money in use around the globe, says Community Currencies in Action, a global partnership promoting such schemes that is part-funded by the European Union’s Regional Development Fund. Which begs the question… 

Why’s the EU promoting parallel local currencies around the world?

Wolf Street
Barcelona Threatens to Print Parallel Currency, Madrid Seethes
Don Quijones

Izabella Kaminska — Tech-utopians

Izzy takes on the tech-utopians.

Handing power over to a corporate behemoth or silicon valley digital payments god is not the way to go. Don’t let technologists fool you into thinking they’re not just trying to recreate the old banking system before it was properly regulated.

Dizzynomics
Tech-utopians
Izabella Kaminska

BOE — The economics of digital currencies

Download PDF.

Bank of England Quarterly Bulletin 2014 Q3
The economics of digital currencies
Robleh Ali of the Bank’s Financial Market Infrastructure Directorate, John Barrdear of the Bank’s MonetaryAssessment and Strategy Division, and Roger Clews and James Southgate of the Bank’s Markets Directorate
h/t Mark Thoma at Economist's View

Ecuador to Adopt Digital Currency — Jessica Desvarieux interviews Bill Black

Video and transcript.

The Real News
Ecuador to Adopt Digital CurrencyJessica Desvarieux interviews Bill Black

BBC — News Ecuador gives details of new digital currency

The Ecuadorean government has released more details of its plans to create what it calls the world's first digital currency issued by a central bank. 

Central bank officials say the electronic money, as yet unnamed, will start circulating in December. 

The new money will be used alongside the existing currency in Ecuador, the US dollar. 

President Rafael Correa has said the digital currency will help those who cannot afford traditional banking. 

Central bank officials say the electronic money will be used to pay government bureaucrats in a "hygienic manner". 

The electronic currency is also designed to help poorer Ecuadoreans make and receive payments using mobile phone technology.…

BBC News
Ecuador gives details of new digital currency

Joe Weisenthal — Robert Shiller: Forget Bitcoin, Here's The Real Way Technology Can

Shiller has three inter-related ideas, and surprisingly they all spring forth from something that Chile did in the 1960s, when it created a quasi-currency called the UF that was designed to track inflation. If inflation rapidly accelerated, the UF would become more valuable against the Chilean Peso, allowing UF holders to maintain buying power. Goods (like one's rent check) could be priced in UF, so that the price could stay the same all the time, automatically adjusting with inflation.

Shiller proposes three ideas: First he thinks that other countries should adopt digital versions of the UF. He proposes calling them "baskets" reflecting the fact that their value will track a basket of goods. Then he suggests companies like Square and PayPal (at the forefront of digital money) should allow for automatic payments in these baskets, even across boarders, automatically adjusting for different currencies, etc.. And finally he proposes the creation of multiple baskets in each country, so that there could be one that reflects the needs of senior citizens (who buy different stuff than young people) and one that reflects young homeowners and so forth.

Business Insider
Robert Shiller: Forget Bitcoin, Here's The Real Way Technology Can
Joe Weisenthal

Emily Flitter And Douwe Miedema — Bitcoin hit by denial of service attacks as regulators prepare clampdown

Tighter regs coming.

Reuters
Bitcoin hit by denial of service attacks as regulators prepare clampdown
Emily Flitter And Douwe Miedema