Central Bank Digital Currencies are coming | Hacker News Reader

Central Bank Digital Currencies are coming

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Are these proposed central bank “digital currencies” anything more than a centralised or federalised database of who-owns-how-many?

And if so, how does that differ from what we have now? That is, in a European country, I have an account with my bank, and my bank has an account with the central bank (or the two interact in some other way).

My understanding of the current system is limited, I merely know some large portion of the issued currency today is without physical representation.

Well, the current system as you describe is a two-level system with your bank in between; a CBDC allows you to "have an account" directly with the central bank directly and make/receive payments without needing a retail bank intermediary.

It also enables central banks to achieve policy goals that they could not earlier - for example, in the last big crisis all the quantitative easing did not result in as much actual lending to people in the economy as central banks expected; the retail banks between you and the CB had other interests. A CBDC enables a central bank to inject money in the economy directly to people and companies, bypassing the major retail banks.

I feel the payment side is pretty relevant here: governments and central banks are starting to realize that as currency dematerilializes the VISA, MasterCard etc of the world are going to drain a significant part of the economy, which they would rather keep, being in the business of, well, managing those currencies.

Hmmm, wouldn't the CBDC be safer than any other place to put your money? So in a crisis, wouldn't you sell everything and put it in the CBDC including potentially government bonds precisely at the time the government probably needs to borrow cheaply?

That seems like a recipe for disaster to me.

Indeed, financial stability and crisis models are the transformation studies several central banks and also stablecoins like Celo undertake to understand how introduction a new monetary instrument would solve some issues and affect others. Short answer is it’s too early to say since it’s a tech-push innovation sped up by demand-push of pandemic and global players.

I think if we want to argue that central banks will soon be pushing for CBDCs to let people have accounts directly with the central bank we need to argue why they at the same time are opposing* narrow banks, which to me seems to be a different technical tool achieving an equivalent goal?

* At least the Fed seems to be: https://www.bloomberg.com/opinion/articles/2019-03-08/the-fe...

The main reason the Fed is rejecting this is that it doesn't want to give banking privileges to entities which don't perform the core function of commercial banks from the Fed's point of view (lending) and really dislikes the idea of the public getting reasonably high interest rates for zero risk and zero contribution to the economy for reasons discussed in your article. If that's proposed as a goal for CBDCs, they won't happen (at least not without far more significant reform of regulations and incentives surrounding lending)

In theory, CBDCs could be just a back end representation of the existing financial system for more efficient settlement though, which would be a different technical tool to achieve the Fed's current goal. That looks considerably more likely to happen than removing financial intermediaries from the picture.

I agree. In which case I think the question as posed in a sibling thread is central: How do CBDCs differ from the current digital settlement system already available at several central banks? The sibling thread mentions the Bank of England and the Danish central bank has a similar digital settlement system. Is it “just” a fancy term for a technical upgrade or is there a substantive difference in function?

I assume the FED is rejecting it because the owners of the FED are the member banks which stand to lose from this implementation.

I see. But then again I am a bit confused by this text in the report on digital euro[0], which was recently posted on HN.

“While the Eurosystem would always retain control over the issuance of a digital euro, supervised private intermediaries would be best placed to provide ancillary, user-facing services and to build new business models on its core back-end functionality. A model whereby access to the digital euro is intermediated by the private sector is therefore preferable.“

That sounds like a bank to me. But I guess it must be so that the relationship between the central bank and intermediary will be different.

I struggle to find the defining features of these CBDCs so that it is more than empty branding. I guess you might sum it up as “bringing the central bank and currency-users closer thanks to modern technologies”?

[0] https://www.ecb.europa.eu/euro/html/digitaleuro-report.en.ht...

Accounts at central banks is only one model of CBDC, called Direct CBDC, which is to my knowledge much less preferred way than a hybrid apparoach (like what’s there today), for several reasons: - managing a complexity of nation-wide banking for Central Banks is quite early at this stage, being a traditionally a government portion known mostly for policies and economics than cutting edge tech deployment. - CBs want to keep stability, and breaking down a current model of banking by introduction of a new FIAT model is not one of them

There are key needs and major requirements additionally for the CBDC that are documented in the latest BIS and ECB reports.

It's the branding that they need to get rid of cash. Playing it off as an analogue to digital switch, rather than the removal of transaction freedom and privacy.

Sweden is probably the most advanced in considering an "e" currency and so far the proposals have been of keeping the two-tier system, i.e., you still have an account with a bank.

The riksbank seems to be advocating an "e-krona" where each citizen would use a state-issued digital identity to directly use central bank money as a means of payment similar to physical cash, no?

They have not decided whether e-krona would be a 'account-based' (like you say) and a competing/backup payment system. Or a 'value-based' where it's 'stored on a card'. At the same time they do not want to impact lending facilities of banks so if they go with the first option they will most likely deemphasize it considerably to keep deposits in traditional banks. The 2nd option seems to me like a total fail, similar to what Chipknip was in the Netherlands. The main motivation for the ekrona seems to be the move away from cash, but Sweden has been cashless for a long time now (between Swish and cards).

I read somewhere that in the US some banks took the QE money and put it back into their accounts with the Fed where it collected interest. Rather than lend it out, they essentially got paid just to hold it. There’s an economic argument saying that it made them safer, etc. but it doesn’t sound quite right to me.

While I am not familiar with the story you are referring to, it does not sound weird to me. Given that QE works by the central bank buying risky assets (initially government bonds), presumably the banks received the QE money by selling higher yielding(given that even during QE the rate curve was mostly upward sloping) government bonds to the federal reserve than the interest rate they earned by depositing said money at the federal reserve. This would seem an irrational move from the banks unless they had some additional use for the cash compared to the government bonds?

Banks don’t lend out money from central banks. Never have.

Banks can only store reserves in accounts at the central bank because only banks can have such accounts.

What they get is money from the central bank in interest for holding those reserves and that effectively subsides lending a bit - at least until the interest rate drops so low that people are tempted to draw out cash

This is actually complex. But QE, in most cases but not all (for example, QE3) involved the purchase of assets from the non-bank sector, not purchases from banks (in the US, banks do not hold a large amount of US govt securities).

When QE did involve the purchase of assets from banks (i.e. QE3 with MBS/ABS purchases, and in the EU where banks held a lot of govt debt) then it did lead to increase lending but the effect varied significantly (for example, in the EU the effect was tiny because most banks in the region are functionally insolvent).

So QE is not thought to have any particular effect on bank lending, and is generally not used with that aim in mind now. I think this was thought to be true in 2008 but we know now that it has no/little effect (i.e. QE is mainly effective through portfolio rebalancing). And central banks that did try to increase bank lending (the UK in the mid-2010s, and the ECB...always) use other techniques (i.e. FLS, LTRO...which, iirc, are direct lending to commercial banks by central banks...I think, I don't follow this stuff closely anymore).

Just generally too, if commercial banks are holding a lot of govt debt then that is usually a sign of problems elsewhere (i.e. the EU).

I can half answer that and hope somebody can complete the story.

What you have in your bank account is not digital cash. It's effectively a note that the bank owes you cash.

This may sound like a technical detail but as far as I understood without physical money there would be no bank accounts. That's what I always wondered about: how could an economy go 100 percent electronic banking, if banking is built on the existence of physical cash?

This is the missing link. With those accounts you actually would be able to own electronic cash.

That said I have no idea how this would work in practice. Maybe you would have the payment option to pay with this electronic cash. But why would you pick one over the other?

> What you have in your bank account is not digital cash. It's effectively a note that the bank owes you cash.

Yes.

> as far as I understood without physical money there would be no bank accounts.

I'm not sure why that would be the case. I've never withdrawn a physical dollar from my bank account.

> how could an economy go 100 percent electronic banking, if banking is built on the existence of physical cash? This is the missing link.

I don't think that's the point of CB digital currency. The point of CB's digital currency is to reduce the indirection between policy and business/consumer behavior.

NB: this includes both fiscal and monetary policy. So e.g. provides a mechanism to cut the retail banks out of things like covid relief funds.

Right, and also provides a mechanism to directly punish political opponents.

Bitcoin is not 'electronic cash' as you define it here - it's a shared ledger - there are no coins. The only difference with a current account at your bank is central ledger vs distributed consensus ledger.

Also why would a bank require physical cash? Banking is based on savings and loans, debt and credit, not cash. The money in your bank account is not backed by real coins somewhere in a vault.

There's a big difference. The bank is able to create money from thin air when you deposit funds, thanks to fractional reserve banking. Banks typically only need to hold 10% (or less) of total funds deposited. The rest they loan out, which always finds its way back into the banking system, so that effectively, banks are able to loan out about 10x what their depositors have in their accounts.

Holding Bitcoin, on the other hand, is more like gold in that there is only so much of it.

The amount of bitcoin on the ledger is increasing all the time, it has not reached the limit yet. This is also defined by software rules which can be changed.

Money today is already 'mostly digital'.

And yes, your bank doesn't have all the money required to pay everyone out at the same time. That's 'fractional reserve lending'.

But at the same time, the money it does have is not all cash.

[1] https://en.wikipedia.org/wiki/Money_supply

Cash is also not cash by that definition. A dollar bill is what is called a banknote, which represents that the bank (or really the government) owes you a dollar.

The benefits are not that obvious and visible in a European country.

In general, there are benefits and drawbacks:

- efficiency: well, despite having a fast transaction time the machinery behind banking system is old and in-efficient, scary even to think how it’s still working. Cross-border is another major friction.

- flexible monetary policies and tools: e.g. directly depositing relief money into the accounts of people in crisis times, or negative interest rates.

- financial inclusion: not everywhere people are banked and part of socioeconomic circle to receive benefits, e.g. African countries or small portion of modern world, where banking is privileged. In theory, one does not need a whole banking backend to store coins, as seen by crypto world.

- innovation backstop: the new currency could act as a settlement layer for the known stability model of money in a country to create new tools (asset chains, etc) or automate them at much lower cost.

Of course, it comes with a risk (from CB’s perspective) of disintermediation of banking system, technological challenges, privacy concerns, etc.

> And if so, how does that differ from what we have now?

1) One important difference is counterparty risk: the balance of your bank account is not really backed by anything, it is only a liability of the bank. If the bank goes bust then you are left with nothing (except for any amounts covered by government deposit guarantee schemes). This would not be an issue for an account at the ECB because they can't go bust.

On the other hand, the ECB has already said that they would put limits in place to avoid bank runs where everybody converts their commercial bank deposits into digital euro.

2) Another difference would be that moving deposits between different banks requires clearing and settlement between those banks, which slows everything down. Digital euros could in principle be transferred directly.

On the other hand, the ECB has mentioned that digital euro transactions might still be handled by banks, and that there might still be some form of settlement.

3) A digital euro account might give you direct exposure to the ECB policy interest rates. (Unfortunately the deposit interest rate is currently negative.)

Digital euro would have to be handled by the national central banks to avoid pooling. The ECB is a bit different as it has another level of hierarchy in the banking system.

Imagine this as an open API that everybody can use to transact using the currency of the gov.

It’s little more than a current account at the central bank rather than a commercial bank.

Which of course removes bank solvency risk - just like cash

Very simply: monetary policy works by getting banks/private sector to do things they wouldn't otherwise do. Digital currency removes banks from the equation. Instead of banks creating money by lending, central banks would create money.

This is, however, a simplification. Central bankers like this idea because it gives them more control. Most people should be suspicious of this idea for the same reason.

You are exactly correct. These "digital currencies" are simply new types of bank accounts where retail consumers can hold money at central banks. They are no more digital than any other bank account.

They have absolutely nothing to do with crypto either.

Do you have a source for that? If I'm not mistaken it was talked around here in the past about them taking the wallets and keys portion from cryptocurrencies.

The closest thing we have in the US is this proposed legislation: https://www.congress.gov/bill/116th-congress/senate-bill/357...

If you read it I think its pretty clear that whatever they are talking about is totally unrelated to crypto.

But just thinking through it, the properties of crypto are the polar opposite of what a central bank wants out of the monetary system.

The last 80 years since Bretton woods has been the story of the US trying to centralize global markets around the dollar. The last thing they want is something that is either distributed or permissionless.

If you read the wiki for CBDCs it acknowledges this at the end after paying a bunch of lip service to how they were "inspired" by crypto.

https://en.m.wikipedia.org/wiki/Central_bank_digital_currenc...

> In contrast to cryptocurrencies, a central bank digital currency would be centrally controlled (even if it was on a distributed database), and so a blockchain or other distributed ledger would not be required or useful - even as they were the original inspiration for the concept.[24][25

Cryptocurrencies showed that you can keep all money in a single database. I wonder if those CBDC databases have any integrity controls. Can the administrator simply change account balance and nobody will even notice?

Summary of the biggest problem with digital currency managed by central banks:

Central banks can use negative interests in order to force people to buy stuff. In the current system people would just withdraw cash in order to avoid negative interest rates if they are too high/low. In the future people will be forced to pay the interests or buy stuff. Governments want to use this mechanism in order to control the economy.

If digital currencies managed by central banks really do get approved, it is like being forced to use Facebook.

The technical term for what you're referring to is demurrage, i.e. when money that is sitting unused automatically, in any account, has fees applied to it. It's similar to "inflation", but instead of making new money, you take people's existing money. https://www.investopedia.com/terms/d/demurrage.asp

That's what I like about CBDC's: They will incentivize more people to use non CBDC's than those who use them now the harder they try to enforce negative interest on savings on their CBDC's.

If you had negative interest rates with digital currencies, then everybody buys stocks. This happens even without digital currencies.

Point taken, but it might be a bit better than literally being forced to use Facebook, if the Libra currency becomes ubiquitous. Governments controlling the economy doesn't sound too bad if the alternative is one or two huge companies controlling the economy.

It doesn't have to be approved, central bank is the authority to issue currency, digital or not, it should be thought of as a more economical, convenient replacement for hard cold cash, rather than a replacement for decentralized currencies.

This seems to you like a problem, but its actually a major plus for central banks since it gives them a tighter control on economic policy, its actually been touted as one of the major benefits.

Yes it would suck if the value of your money suddenly decreases, but say the central banks wants to subsidize low income groups or small businesses or green tech, they can do that directly digitally without it worrying the money goes to the wrong people / or taken advantage of by the banks, like what we saw with the pandemic

That being said, there are always pros and cons of a centralized entity gaining more control

Anyone care to extrapolate or provide reading material on what would be the imminent consequences of X % of money supply being in cripto and out of the reach of banks. Especially in today's economy of low interest rates I wonder what happens in first Y amount of years as X goes from negligible to significant. What are the better works written on impact of increase of crypto usage on economy and society moving from this point.

Negative rates only work against the bond market. It's not being applied against against cash balance. In large part negative rates drain money out of fixed asset funds that are typically people's retirement funds.

Negative rates will in majority be harming the boomers reducing their pensions. They are legally forced to be in these investment systems. Boomers who don't even think they can quite retire are going to watch their investments shrink. Why is that happening? Because they didnt invest enough and have been believing they will live off the younger generations. They ran up huge debts and expect the millennials to pay.

That's literally impossible. Intergenerational debt is not possible and the boomers now sit there wondering why they cant retire when they planned to do so; despite not saving enough for retirement.

How can boomers simultaneously be sitting on all the wealth and ‘not have saved’ enough?

This argument makes no sense.

As far as I can see, the boomers just expected there to be continued economic growth in good faith, since that is what they experienced and younger generations have found finding this isn’t true.

Why isn’t it true? Very little to do with boomers mentalities, and much more to do with how economic growth has shifted outside the US.

That is absolutely the result of US political decisions, but much more the fault of economists and politicians rather than “Boomers” as a whole.

If younger generations think they can improve their lot by draining ‘money’ from Boomers, we are going to have a different problem, since the value of anyone’s money is determined by the current health of the economy. Yes a few millennials will be able to displace a few boomers from their decaying houses, but we’ll still have a bunch of sick old people to take care of somehow and an unproductive economy.

>How can boomers simultaneously be sitting on all the wealth and ‘not have saved’ enough?

I don't believe my argument is that boomers are sitting on all the wealth. That's the problem.

Who owns the most wealth is just a matter of who has died. The older the generation, the more likely they own significant wealth. Silent and older generations used to own >78% in 1989 and has been declining since. The boomers peaked around 55% several years ago and are now declining. Millenials are more wealthy today than ever before.

https://www.federalreserve.gov/releases/z1/dataviz/dfa/distr...

Today: Silent gen, 17%, Boomers, 53%, millenials, 25%.

The Boomers needed to save significantly more and be up in the >75% range before their retirement. The very problem is that the boomers aren't sitting on all the wealth.

>As far as I can see, the boomers just expected there to be continued economic growth in good faith, since that is what they experienced and younger generations have found finding this isn’t true.

To be of this position you would not need to run deficits. Governments and others would not be in this much debt. In fact if you were to debt adjust the wealth figures. I bet there would be an even worse scenario. The boomers didn't save enough and were busy running up debt living outside their means.

>That is absolutely the result of US political decisions, but much more the fault of economists and politicians rather than “Boomers” as a whole.

Well this is happening in virtually all countries. Note: I'm not an American nor am I in the USA.

Your argument also seems to want to blame politicians and economists rather than the people whom they represent. That's incorrect, these are decisions that the boomers made. If they outsourced the decisions poorly, the blame still lays with the boomers.

>If younger generations think they can improve their lot by draining ‘money’ from Boomers,

This is the reality of intergenerational equity. 1 generation cannot indebt the next one. The boomers as they retire will depend on younger generations to service their needs. That labour cost will automagically adjust to service the debt.

At the end of the day, that's exactly what negatives rates represent. The older you are, the more likely you have a low risk pension portofolio. Which means you will be in negative rates. The money is draining from the boomers right now. Google the 'real yields of bonds are negative' as they are often lower than inflation.

>we are going to have a different problem, since the value of anyone’s money is determined by the current health of the economy. Yes a few millennials will be able to displace a few boomers from their decaying houses, but we’ll still have a bunch of sick old people to take care of somehow and an unproductive economy.

We are seeing this in other aging countries like Japan and South Korea. Seniors are largely speaking ending up in poverty. It also creates a new problem of 'silver crime' whereas the seniors basically have to go back to work or start stealing.

Also yes, you are correct about that. The labour shortage of 2030 is set in stone. There wont be enough people to service the elderly or really any skilled trade will be quite short. Therefore wages increase but as we already established, the pensions are shrinking under inflation and negative rates. Seniors wont be able to afford to take care of themselves.

“Your argument also seems to want to blame politicians and economists rather than the people whom they represent. That's incorrect, these are decisions that the boomers made. If they outsourced the decisions poorly, the blame still lays with the boomers.“

Only if your goal is to create an arbitrary division between generations using the concept of blame.

As far as I can see there is literally no amount of money the Boomers could have ‘saved’ that would have made any difference if there isn’t enough surplus value (not money) generated in the present day economy to service their needs.

This has nothing causal to do with generational debt - that is just a symptom.

It has everything to do with economic decisions made by politicians and economists, around education and trade policies, that leave the US (and many other economies) in a weak position.

You can certainly argue that whoever was around to vote for these policies is responsible for them, but that’s a weak position.

Voting is too coarse grained to assign that level of responsibility to the group.

Individual political and economic decisions are in fact important, not who happened to be a certain age when the decisions were made.

one frightening prediction I've heard is that we will have parallel economies. One for UBI consumer serfs who receive a monthly stipend that expires at the end of each month, another for people who work and receive payment perhaps in other independent currencies, and another, which already exists, for the very wealthy who hold wealth primarily in tangible assets like real estate and fine art. This will either fail spectacularly or it will be the beginning of an even more rigid caste system.

Very worrying for a system like this to be produced and executed by institutions who have proven time and again that things like human dignity, civil liberties and a chance at upward mobility are no longer relevent.

California already has laws for creating landed gentry (prop 13 inheritance)

And now Google is going to be leasing land to its employees. Which I find terrifying

Eh? Details?

The "UBI consumer serfs" already exist in Germany, because the government only pays you benefits if you don't have any property. The moment you start saving up your money, they stop payments and demand you to live from your savings instead.

But is that not a good way to encourage people to work and produce goods/services? UBI isn't there so you can live a comfortable life off the taxpayers, but as a safety net for accidents, bad luck and other unfortunates so that they don't die. But once they're back on their feet, they should be capable of restarting their productive life and no longer need social welfare.

You shouldn't be forced to obliterate your retirement savings because you fell on hard times. Welfare should never be set up in a way that incentivizes people to be financially irresponsible.

A better way of encouraging them to work is to not retract the support as quickly as currently done when there is a job. A lot of things are free (like GEZ for example) when you live on social security, but cost money when you have a job. Thus, you might actually be worse off financially. Even if you had 30% more money, is it really worth that small number to get up every morning at 6 am? A better encouragement would be to phase out government support over a longer span of income.

That's not a UBI then is it? Isn't the point of a UBI to give it to everyone universally regardless of their specific situation?

Yeah it's not UBI, but it still gives rise to a set of people described by "UBI consumer serfs". Who are basically locked in, because even if they got a job, they'd likely be worse off than before, having to pay for more things that were free previously, and having much larger personal costs (having to get up at 6 am every day).

Yes my point was that that wouldn't happen with a real UBI as it wouldn't go away if they got a job or started saving money.

What do you expect when governments do everything in their power to penalize savers and make debt ever easier to obtain and service? Delayed gratification and sacrifice are anathema to the government. Individuals with long time horizons and the ability to acquire assets will continue to get more and more wealth while marginal people suffer.

It may come across as snark, but I happen to believe this quote of Bill Hicks truly captures most of my thoughts on the subject.

“Rock stars against drugs – that's what we want, isn't it? Government-approved rock-n-roll? Woo! We're partying now!”

The entire reason for crypto is the already ridiculous level of control exerted over various gatekeepers. How do I know? I am part of the system.

> The entire reason for crypto is the already ridiculous level of control exerted over various gatekeepers. How do I know? I am part of the system.

Can you elaborate on the "ridiculous level of control over various gate-keepers"?

I assume credit card processors blocking transactions on, say, porn sites.

Or maybe foreign money transfers?

Sure. None of it is secret.

There are regulations in place that enforce specific agenda under the guise of AML, fraud, sanctions, etc. For banks and MSBs type businesses that typically are covered under BSA. But even if you think you are not covered by BSA, there is always FinCEN, where OFAC's strict liability is a pretty big stick.

That was high level, but during a more recent conference I participated in ( ages ago now, but on that particular subject ), the discussion of AML professionals suggested something along the lines of 'we can already identify those illicit transactions, why can't we just stop them' ( and to a large degree it is true; your credit card, your bank, your msb knows to large degree what you are buying and what you may be into based on those purchases ). That particular conversation was about CBD products, which at the time were on a weird legal ground.

I want you to think about it. Your bank is already capable of deciding a specific type of product is bad for you. Has been for a while and there are people would like to have a say on what is bad. And they are gaining ground.

My point is, there is already sufficient amount of control each gate keeper has. All it really needs is a request from government to start gate keeping.

Hope this answer the question. There are obviously things I should not be talking about on a public forum and company specific info I can't talk about.

For sure. The government could easily freeze the funds or spending of any individual at any time. The hooks are already there. It tends to be used sparingly today, but for sure, that slippery slope will likely devolve into something Orwellian. Big brother is watching your spending.

The systems being proposed here have absolutely nothing to do with crypto currencies, blockchain, bitcoin, or anything tokenized. They are simply reshuffling of rules about how central bank reserve accounts work.

The thread directly references that the main idea for this came from Libra, a crypto digital currency that is backed by a blockchain. So I don't know where you're coming up with that.

European banks recently started toying with the idea of passing down negative interest rates to customer bank deposits, so that banks are less squeezed by reserves yielding negative returns (breaking the typical bank business model).

Just think, if CBDCs pass down the negative interest rates to everyone's cash, inside or outside of banks. That's not a currency I would be happy to hold.

And that's the very goal of the monetary policy. Pushing you to invest into something riskier (including selling the currency).

I did not hear of this, but this is interesting. Doubly so given that in the old country, you are required to have a bank account to run a business ( as I understand it, that requirement technically does not exist in US -- technically ). So now apart from fees that require specific amount of balance, negative interest rate will ensure people won't hold too much.

I think I read somewhere an Austrian bank is already charging negative interest rates on customer accounts (-0.5% IIRC).

What is the difference between a digital currency and the digital money I see in my bank account online? It feels to me like I already transfer money digitally when shopping with a credit card.

Later on that twitter thread he shares a poll by the IMF [0] where they ask you how will you be sending money to a family member in 5 years. The possible answers are cash in envelope, money transfer service, digital currency or other. Are venmo and similar services not already using a digital dollar?

[0]https://twitter.com/RaoulGMI/status/1317836130788757504/phot...

At least in the case of the Digital Euro, one of the explicitly documented goals for the scheme is to alleviate dependence on US payment processors within Europe

(that's buried somewhere in https://www.ecb.europa.eu/pub/pdf/other/Report_on_a_digital_... )

A lot of existing digital money is more akin to a widely-redeemable voucher issued by a private company than it is to physical cash. You're free to use it in ways that are sanctioned by that issuing company, but if you want to do something like spend it with a competitor, you might run into road-blocks.

In places like the US, this feels like an academic difference, but that's because non-bank digital payments haven't really consolidated yet.

In Kenya, where one mobile phone company (Safaricom) has a 98.8% market share of digital payments, the situation is very different- effectively on private company has a monopoly on money. They can and do use this monopoly power to their advantage.

A CBDC attempts to shift money back to being a public good like physical cash, by guaranteeing interoperability between issuers, rather than everyone paying with casino chips.

There is a key difference in nature, with some practical consequences.

You don't have money in your bank account, the bank has a debt toward you. When you wire money or pay with a credit card, it triggers a chain of intermediaries to move that debt. It is costly in part because of the counterparty risks. In most countries, an individual however is protected from a bank default up to a certain amount.

Cash is directly minted by the central bank. In a trustless manner, if you exchange goods and services for cash, the settlement is instantaneous. Legally, this cash can be used anywhere in your country.

For everyday use, it might not change habits overnight, but it will have a long term impact on the financial infrastructure.

digital currency without physical existence would lower the cost of transanction, and your wallet doesn't have to be hosted with a bank, it is local on your devices.

The fact that the account would be a liability on the balance sheet of the central bank, not the retail bank who you hold the account with.

As you correctly point out, these accounts are no more or less digital than your current bank account.

I make the bet that "traditional" banks will steer to go cashless in the near future and start charging all kind of fees for things you never had to pay for back when you could hold money in your hand. This is why the utopia of a decentralized currency would be so needed and will be fought all the way.

Side-note: I don't like the environmental impact of BTC, but I don't like being a victim of banks (who tend to have a terrible impact on the env in their own ways).

ICYMI, earlier this year, the cLabs team wrote this paper that outlines not just how CBDCs can increase the efficiency of the global financial system, but also how it creates a new transmission channel for monetary policy.

https://celo.org/papers/cLabs_CBDC_Velocity_v3.pdf

The Bank of England has been using a digital currency for years. When British banks settle up overnight, nothing physical is moving around. I'm pretty sure the same would be true of any developed country.

There are different types of CBDCs with various focus areas, e.g. wholesale CBDC (banking innovation, similar to what you mentioned) and Retail CBDC. The CBDC model that is gaining increasing momentum, despite expectations, is the retail CBDC, which due to some form of overlap with banking innovation, retail payment innovation and cryptocurrencies (as the extreme) makes it a hot debate topic. The interesting observation here is that numerous Central Banks are passing the “debate” phase and some already getting ready to release aka “production grade”, e.g. China.

That is not the same thing. Having addresses with private keys that are the sole permission needed to make transfers is much different from having a bank account that the bank transfers electronically for you.

How? Maybe it is because I live in Denmark where I would claim we are close to a de facto digital currency: a large group(most people under 40) use credit cards or a phone based payment solution for all purchases, use a phone based solution for settling smaller (<3,000$) amounts between persons, and use online banking platforms for transferring larger amounts. We are charged negative interest rates on deposits if they total more than 50,000$. Sure underlying this we have a physical currency, but for many it is more a historical curiosity than a practical consideration in day to day life.

While I understand the technical differences, I cannot see why from a policy perspective the government or the central bank would be interested in a cryptocurrency like solution? Rather with the current system and Know Your Customer regulation for the banking system, they have tighter control with money transfers since they are all ultimately between bank accounts tied to named entities. I think it is more likely that we abolish physical cash than migrate to a more decentralised currency.

Why this dichotomy between "non-physical cash" and "decentral currency"? These things are linked, but strictly speaking you don't have to choose between them.

Abolishing physical cash does not imply migrating to a decentralised currency. But migrating to a decentralised currency is probably only possible by abolishing physical cash; I don't see gold coins coming back.

So, how is it different to have your money controlled by a private key, and nobody having the power to seize those money? Ask every single person that has had their account frozen. Whether you think it happens for just reasons or not, surely you agree that it isn't the same as having an ecosystem of digital centrally issued money? Not just issued, but also seized, through courts and police.

Yes but exactly because the decentralized currency is much more difficult to control and explicitly circumvents parts of current banking regulations, I have a hard time fathoming that policy makers and central banks would advocate decentralized currencies. The post that I was replying to seemed to suggest that CBDCs would be decentralized or in some way inherently different from the centralized digital settlement of transfers that exists in many countries today, and I want to understand why that should be the case? Why would CBDCs work more like decentralized cryptographic currencies than the current financial system?

I am not passing a judgment on whether decentralized currencies are good, but I do not understand why central banks would move in that direction.

That sounds a bit like Canada's LVTS [1]. On the retail side we also briefly played with something called MintChip [2].

[1] https://en.m.wikipedia.org/wiki/Large_Value_Transfer_System

[2] https://en.m.wikipedia.org/wiki/MintChip

I loved the discussion with Professor Richard Werner on a podcast lately. He talked about what the European Central Bank is planning and what this means for us as consumers and explains why CBDCs really mean for us.

Here's the full interview

https://youtu.be/OdYmdKUiQNw

Could you summarize what his thoughts are?

Sure, I'll do my best and hope I'm recalling this correctly.

1. Central banks are regulators, they set the monetary policy that commercial banks must follow

2. Debt is largely created by commercial banks

3. Now the regulator (ECB) wants to be the only creator of debt, thus the regulator is now in direct competition with those it regulates

4. ECB wants to wipe out all the banks and have the pie to itself.

5. Central banks say one thing but their actions often say another

6. CBDCs are not new or revolutionary. Currency is already largely digital and so is debt creation. The only difference here is that the central bank wants to now be the main bank. So the entire public will all bank with one bank. Everyone will have an account at the central bank rather than at a commercial bank of their choice.

7. History tells us this doesn't bode well. This model was run in the Soviet Union and failed terribly. The Central Banks think they are smarter this time but they will fail.

8. Community, non-profit banks are proven to be much better for the economy. Germany had this for a long time which is why it weathered the GFC of 2008, however those community banks are also now being wiped out which means it will struggle to weather this recession successfully.

9. China had a policy change in 1978 which resulted in more community banks and this has contributed significantly to their economic rise.

10. The ECB is not the only central bank with such intentions. Most central banks around the world have the same intentions.

But all of these CB backed digital currencies aren’t like crypto. CBs will presumably be roots of trust and just maintain entries in a normal database.

Well, perhaps CBDC folks have learned a lot from Bitcoin and other cryptocurrencies, mostly on scaling and security, so literally not a database but abstract-wise a ledger like cryptos with different consensus and payment model.

CBDCs today are mostly based on trusted nodes, e.g. CBs and Banks, with the goal of transforming the current monetary “backend” into a digital automated way without losing the control. Think of it as breaking a monolith into a microservice world, which offers “innovation” and lower barrier to entry (underbanked) among other features.

Buy gold.

If CBDC issuance coincides with banning physical cash, what makes you think that they won't enforce capital controls on alternative currencies?

A "ban" on gold would only achieve multiplying the spot price by ten overnight. It would be the final signal that fiat currencies should be avoided at all costs.

... and incentivize people to smuggle their gold out of the country.

International trade is far too large these days to stop gold-smuggling.

Look at the great job we're doing with drug smuggling. Most cocaine enters the US hidden in shipping containers.

And there is precedent to this, see Executive Order 6102: https://en.wikipedia.org/wiki/Executive_Order_6102

There is a universe of alternative currencies. If people truly start trading gold its not going to stop until they barter in peas or clams

IMHO gold will hold value longer than their ability to enforce the ban.

The question is, will you live long enough to see the end of the ban. If you have children it may very well be worth it.

Yes, because the economy no longer has to pay Visa, Mastercard, etc 3% of every transaction. Buy stocks, you blockhead.

Worth reviewing the Banking for All Act, which could introduce a digital dollar: https://www.congress.gov/bill/116th-congress/senate-bill/357...

So.... I'm lost. What is a Central Bank Digital Currency?

The article he links is pretty corporate-speak. Can anyone translate? What's in the seeming boilerplate now that wasn't there before. Why are they excited about it and how does this mean they can do more stimulus?

tl;dr: more surveillance and financial oppression because corona.

A central bank digital currency is like the system China has in place now. International payments are a different and challenging issue for central banks because blackmailing, drug dealing, gun running, and hostage situations that occur between nations can not have their money cancelled by the opposing nation.

These "digital currencies" are simply new types of bank accounts where retail consumers can hold money at central banks. They are no more digital than any other bank account.

They have absolutely nothing to do with crypto either.

..are are they a "currency" in any augmented way, or is it just currency as it is now?

The only currency involved in a digital dollar is USD. There is no new currency proposed here.

The thing that makes an existing dollar digital is being in a new type of bank account that is held by the fed instead of a retail bank. So this is an new type of bank account, not a new type of currency.

I do a youtube channel on monetary issues and my last video was specifically on this topic. Feel free to check it out if you are interested

https://www.youtube.com/watch?v=n9qnhV9SAyg

I hope they make it work in a way where I don't have to get a PayPal account anymore.

They want to track everything you do in a totalitarian surveillance system which is already powered on. This was why I rejected bitcoin.... lack of anonymity.

There are many ways to tumble Bitcoin (e.g. Joinmarket), it is not very hard to stay anonymous. As long as you don't need to cash out, that is ;)

Honestly long overdue in my opinion. I've always thought of access to payment systems the same way as I think of clean drinking water. it's basic infrastructure and it should be available to everyone at as little cost as possible, both literal cost and hassle.

When I moved to the UK and healthcare basically worked by registering with a GP and that was it and I didn't have to deal with insurance any more it was extremely pleasant. I just want the same thing for payments tbh, just give me digital Euros, accepted everywhere and transfer it instantly between people.

This is the best explanation I have seen :

https://youtu.be/uX7VpTqXJhY

That’s very biased. Importantly the fed wallet is interest free, banks should compete with it in the same way they compete with cash under the mattress — by providing interest.

This is going to end up as a giant hyperledger failure. Once the committee forms on how to do "this" it will be mired in indecision and eventually collapse on itself.

These blockchain investors are some grade "A" con-artist. They can sell anyone on this crap.

This has absolutely nothing to do with block chain of you look at the actual legislation being proposed.

Time to find a new job Visa, Mastercard, Paypal, Square employees.

The Fed Digital Dollar will be a purchasing instrument that exists only in an app or website. They will be added and subtracted as the government sees fit. If, for example, the government should want to spike consumer spending, they need only tell you that your account will have a maximum value of $100 as of midnight. Either spend the rest or it will be deleted.

Show up at a political rally for a group that is currently out of favor, your balance is deleted. Break the speed limit and your balance is deleted. Be home by 10pm or your balance is deleted. Pledge 10% of your balance to the poltical party currently in power and you can buy yourself forgiveness on your next potential balance deletion.

Buy gold.

So what you're describing is the complete collapse of our current system of government. If the US becomes a failed state like you describe, turning into a totalitarian wasteland where not even the pretense of democracy is maintained, do you really think the secret police are going to let you buy things with gold?

The fed introducing a cryptocurrency will not cause the US to become a failed state, and if the US is on the path to becoming a failed state, then the federal reserve not introducing a cryptocurrency isn't going to change anything. You cant eat gold. Buy productive assets. If you think society is going to collapse like that into a totalitarian state, then, I dunno, move to some country that you think is not on the path to giving up democracy, or go full prepper and buy land and guns and stuff. Good luck holding off the US military though. Might be better to defect when you have the chance.

All in chainlink.

These are not the cryptos you're looking for. You don't want ones that trade like currencies, you want ones that trade like stocks.

Unless you want to use them like a currency. Then you probably want ones that trade like a currency. Theres a reason you don't buy sandwiches with fractional google shares.

I actually very much would like the ability to do that.

It would be cool, but transactions are two way. Its technologically not gonna be too difficult to create a way to buy with stocks (cashapp could probably add the feature tommorow if they wanted) but its also about the other party's willingness to recieve payment in stocks. If the price is expected to go down, they're not going to want to receive it (inflation). If the price is going to go up, you're not going to want to part with it (deflation). But what if there was some sort of asset that had an agency backing it to try and control inflation and deflation to ensure that the value of the asset is stable over time, so it can be used as a currency? Wait a sec...

The mandate of the European Central Bank is to maintain price stability.

Raoul Pal says "They can give, for example, restaurant owners a direct payments for stimulus whilst at the same time, charging negative interest rates on larger savers".

But I don't see how this fits in the mandate of the ECB. Raoul Pal says "(if they get the powers by the Governments, which will come)". But that's a prediction, nothing more, and he doesn't further support it.

> The experience with pandemic emergency payments has brought forward an idea that was already gaining increased attention at central banks around the world, that is, central bank digital currency (CBDC). Legislation has proposed that each American have an account at the Fed in which digital dollars could be deposited, as liabilities of the Federal Reserve Banks, which could be used for emergency payments

https://www.clevelandfed.org/en/newsroom-and-events/speeches...

What I don't get is why wouldn't they be able to credit /debit regular bank accounts with money instead of creating a new "digital system"?

the most obvious case is that people don't have a bank account or are 'underbanked' in the US that amounts to about a quarter of the population[1]. I think covid has shown what a mess it is to get everyone their relief money. If everyone had a digital account with the FED it'd literally be a few clicks of a button.

[1]https://www.cnbc.com/2019/03/08/25percent-of-us-households-a...

Because central banks have no direct control over regular bank accounts? Regular bank accounts are not held at central banks (yet).

I'm fairly noobish at understanding all this stuff, but as I understand it there are severe structural issues with the existing banking system that make a completely new mechanism desirable. For example by depositing cash into traditional accounts, it is also equivalent to providing capital to traditional banks to loan from. It would therefore be difficult to supply cash to end users without also increasing the availability of credit, which may be undesirable for any number of policy reasons.

So that they can have restrictions on how the stimulus money could be spent.

Raoul Pal is a joke. He isn't right and only tries to sound smart. I would take what he says with a grain of salt.

So I've been tracking this fairly closely via the Banking for All Act and I think a lot of the issues around this are not what they seem to be although I think they signal a very profound shift in the world of monetary politics.

For one this has NOTHING to do with crypto currency. This also has NOTHING to do with any kind of technological advancement at all. There is really nothing particularly more digital about the digital currencies being proposed than any other electronic bank balance or credit card database line item. I think the word digital here is an attempt to sneak in some radical changes to how the federal reserve works under the guise of doing something to modernize banking in the world of cryptocurrency.

So then what is this about? What these digital currencies are about is the ability for normal people to hold deposit accounts that are held directly in the Central Bank although a normal commercial bank would still act as the custodian and you would still access them through your normal bank.

So why go through all of the trouble to do this? I think it's basically an admission that Quantative Easing era is over and that monetary policy in general has run its course and are no longer useful in the age of 0% interest rates while we still face deflation. By having normal people hold central bank accounts, they will be able to implement a new kind of policy that they have wanted the power to do for decades: hybrid fiscal / monetary policy where the monetary policy outcome is deposited directly into the account of a normal person, not a bank.

This is basically the Fed acknowledging that they are getting ready for MMT.

https://www.congress.gov/bill/116th-congress/senate-bill/357...

Edit: I'm getting downvoted on this, maybe because this seems conspiratorial but I don't think I'm really saying anything that speculative here. Look at the title of the article linked to in the attached tweet from the IMF: "A New Bretton Woods Moment". The people involved clearly see this as a time when they need to completely rework the international monetary system (which is what Bretton Woods was in the 40's)

The technology side is secondary. However, if it wasn't for cryptocurrencies, we wouldn't be discussing this topic today. Bitcoin has proven that it was possible to build an open financial infrastructure, and has inspired many similar projects.

The hybrid fiscal/monetary policy is an interesting perspective, especially in those times. My understanding of ongoing debates is that there is no clear strategy yet.

I mean read the text of the act that I linked to though. It's only about a page and a half long. And it has absolutely nothing to do with crypto. It's just a technicality around how existing bank accounts work.

Also I really disagree with that premise. This is fundamentally a monetary policy issue and we'd be in the same position whether crypto had come around or not. The only difference is they would have called it something else.

I agree with this, Central Banks will try to influence the public through military backed/forced digital currencies but considering that I’m not stupid, I’ll just move to another country that accepts Bitcoin and try to accumulate it in legal ways.

Their fiat system is about to crash and the exactly same people that caused the crash is saying that they will solve the problems they created through centralised digital currencies? Oh please, fool me once, shame on you. Fool me twice, you can't get fooled again.

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