Central Bank Digital Currencies are coming(twitter.com) |
Central Bank Digital Currencies are coming(twitter.com) |
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.
https://www.clevelandfed.org/en/newsroom-and-events/speeches...
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 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.
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.
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.
[1]https://www.cnbc.com/2019/03/08/25percent-of-us-households-a...
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.
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.
“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...
* At least the Fed seems to be: https://www.bloomberg.com/opinion/articles/2019-03-08/the-fe...
That seems like a recipe for disaster to me.
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.
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?
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.
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.
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) 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.)
They have absolutely nothing to do with crypto either.
Which of course removes bank solvency risk - just like cash
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.
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.
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.
“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.
Can you elaborate on the "ridiculous level of control over various gate-keepers"?
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.
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.
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...
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).
[1] https://en.m.wikipedia.org/wiki/Large_Value_Transfer_System
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.
Here's the full interview
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.
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.
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.
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?
They have absolutely nothing to do with crypto either.
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.
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.
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.
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
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.
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.
Or maybe foreign money transfers?
(that's buried somewhere in https://www.ecb.europa.eu/pub/pdf/other/Report_on_a_digital_... )
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.
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.
As you correctly point out, these accounts are no more or less digital than your current bank account.
There are key needs and major requirements additionally for the CBDC that are documented in the latest BIS and ECB reports.
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
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.
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
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).
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
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.
Holding Bitcoin, on the other hand, is more like gold in that there is only so much of it.
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.
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.
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.
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.