Blockchain & Money: Session 15: Central Banks and Commercial Banking, Part 1 by M.I.T. Sloan School of Management with Professor Gary Gensler

Session 15: Central Banks & Commercial Banking, Part 1

• Session 15 Study Questions:
  • What strategic considerations should go into Central Banks thinking of expanding access to digital reserves through central bank digital currency (CBDC)?
  • How might design considerations–retail vs wholesale access; token or account based; interest bearing and level of service–weight in such decisions?
  • What are the challenges CBDCs might pose to commercial banking models, monetary policy implementation, payment systems resilience and financial stability?

• Session 15 Readings:
  • ‘Central Bank Digital Currencies’, BIS.
  • ‘The Future of Money: Digital Currency’, Garratt.
  • ‘Central Banks and Digital Currencies’, Broadbent.
  • ‘A Perspective on Electronic Alternatives to Traditional Currencies’, Camera.
  • ‘Bitcoin is Fiat Money, Too’, Economist.

Overview: Fiat Currency and Central Banking; Central Banking Approaches to Blockchain Technology; Payment System and Blockchain Technology Initiatives; Central Bank Digital Currency and the ‘Money Flower’; Conclusions.

• Fiat Currency
  • Represented by Central Bank Notes & Commercial Bank Deposits
  • Relies upon System of Ledgers
  • Accepted for Taxes
  • Legal Tender for All Debts Public & Private

• Central Banking Goals and Functions
  • Economic Policy Goals
    • e.g.–U.S. Federal Reserve so-called ‘Dual Mandate’: “promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates”
  • Manage Fiat Currency
    • Supply
      • Physical Cash and Monetary Base
      • Reserve and Capital Requirements
    • Price
      • Interest Rate Open Market Operations
      • Foreign Exchange Interventions
      • Exchange Controls
  • Oversee Fractional Banking System
    • Provide Reserves
    • Regulate and Supervise Banking System
    • Promote Safe and Efficient Payment System
    • Lender of Last Resort
  • Banker to the Government
    • Manage Foreign Exchange Reserves
    • Conduct Government Bond Auctions
    • Lender of Last Resort

• Central Banks, Cryptocurrencies, and Blockchain Technology
  • Monitor and Study
  • Restrict Use
  • Payment System Experimentation
  • Central Bank Digital Currency Initiatives

• Payment System ‘Pain Points’
  • Costs
  • Delayed Settlement
  • Chargebacks
  • Fraud
  • Privacy
  • Availability
  • Financial Inclusion
  • Cross Border Payments
  • Centralization of Ledgers
  • Complexity

• Public Sector General Payments Initiatives
  • European Union–Target Instant Payment Settlement & Payment System Directive II
  • India–Immediate Payment Service
  • U.K.–Updated Real-Time Gross Settlement System & Open Banking
  • U.S.–Faster Payment Task Force

• Central Bank Digital Currency:
  • Central Banks Currently Issue Digital Reserves to Commercial banks
    • and Physical Tokens (Cash and Coin) to Public
  • Commercial Banks Provide Digital Currency (Deposits) to Public
    • Essentially a form of Intermediated CBDC
  • Private Sector is Experimenting with Stable Value Tokens
  • Strategic question: Should Direct Access to Digital Reserves be Expanded?

• CBDC–Opportunities
  • Continue Government Provision of a Means of Payment
  • Promote Competition in Banking System
  • Promote Financial Inclusion
  • Address Payment System ‘Pain Points’
  • For Some Nations, Avert Sanctions

• CBDC–Blockchain Technology
  • Fiat Currency is Recorded on Ledgers:
    • Central Bank and Commercial Bank Ledgers
    • Non-Bank Ledgers
  • Verification and Networking Critical to Economics of Money

• CBDC–Challenges & Uncertainties
  • Financial Stability and Potential to Increase Ease of Bank Runs
  • Changes to Commercial Banks’ Deposits and Funding Models
  • Effects on Credit Allocation and Economy
  • Monetary Policy Implementation & Transmission
  • Resilience of Open Payment Infrastructures

• CBDC–Design Considerations
  • Widely Accesible vs. Wholesale
  • Token (e-Money) or Account (e-Deposit) based
  • Issuer–Central Bank, Commercial Bank or Others
  • Degree of Anonymity
  • Transfer Mechanism
  • Limits or Caps
  • Interest Bearing and Level of Account Services

• Official Sector Digital Currency Initiatives
  • Dubai–emCash project
  • Ecuador–Dinero Electronico–U.S. $ electronic currency
  • Iran–Indigenous Cryptocurrency backed by Iranian Rials
  • Senegal–eCFA
  • Sweden–E-Krona initiative
  • Tunisia–e-Dinar
  • U.K.–Royal Mint Gold
  • Uruguay–6 Month Pilot for Digital Uruguayan Peso
  • Venezuela–Petro Oil backed Initial Coin Offering

• Conclusions:
  • Central Banks Play an Important Role in Economy
  • We Already Live in an Electronic Currency Age
  • Payment Systems and Fiat Currency have had Challenges
  • Blockchain Technology can be a Catalyst for Change
  • Central Bank Digital Currency, though, likely will be seen in Adoption

Biblio:

• Gary Gensler. 15.S12 Blockchain and Money. Fall 2018. Massachusetts Institute of Technology: MIT OpenCourseWare, https://ocw.mit.edu. License: Creative Commons BY-NC-SA.
• Video Link: Session 15: Central Banks & Commercial Banking, Part 1
• Slides Link: Session 15: Central Banks & Commercial Bankings, Part 1 Slides