ALT currencies – sovereign CBDC

sovereign central bank digital currencies – crypto, blockchain, CBDC

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crypto capitalisation  10/6/2021  Central banks of Switzerland, France in wholesale CBDC trial   27/5/2021  Stampede for digital currency poses a threat to our banking system – Goaded by the popularity of cryptocurrencies, central banks are scrambling to launch digital cash by  2/2021  Money creation, bank profits, and central bank digital currency  by Dirk Niepelt 

“The role of central bank digital currency is increasingly being discussed, both in terms of its utility in monetary policy as well as the controversy of bank-level profit from money creation. This column presents a method for quantifying the funding cost reduction enjoyed by banks, highlighting that money creation substantially contributes to profits. This raises important questions for policymakers to address as they seek to optimise the deployment of digital currencies within financial institutions. …

Conclusion: Either calibration implies that money creation substantially contributes to bank profits. Between 1999 and 2017 the funding cost reduction for US banks amounted to roughly 0.4 to 0.8% of GDP just before and around the financial crisis. In contrast, banks did not benefit from cost reductions (or they even bore additional funding costs) once financial markets had calmed. These numbers compare with NIPA data for financial sector profits on the order of 3% of GDP prior to the financial crisis, negative profits during the crisis, and 2-3% after the financial crisis.

In a world with full substitution of central bank digital currency for deposits, bank profits would have been the same as in the data had the Federal Reserve financed banks at the equivalent loan rate. Had the Federal Reserve refinanced banks at the risk-free interest rate instead, bank profits would have been substantially lower before, but not after, the financial crisis.”  The Economist unveils endogenous engine of capitalism   17/4/2021   ECB: Half of Europeans Think Blockchain Solves Counterfeit Digital Euros – The European Central Bank quizzed the public about its digital euro. Half of the respondents think blockchain could deal with counterfeits and resolve technical glitches.    By Ekin Genç

The European Central Bank gathered Europeans’ views on a digital euro, a central bank digital currency (CBDC). Most want a privacy-respecting CBDC, and half think blockchain’s the right solution for avoiding counterfeiting and technical glitches. The responses came mostly from German men.


other men worry  24/5/2021 Central bank digital currencies may increase financial inclusion but are a headache for lenders – If customers convert existing bank deposits into CBDCs, lenders will be forced to shrink balance sheets, Fitch Ratings says

coindesk   5/2021  China’s CBDC Could Give Beijing ‘Leeway for Economic Retaliation,’ Says National Security Expert  – Yaya Fanusie also believes that fears the Chinese CBDC would undermine or displace the U.S. dollar as the world’s reserve currency are “overblown.”   by Jamie Crawley  10/5/2021  chinas-digital-currency-could-be-the-future-of-money-but-does-it-threaten-global-stability   by Daniel Broby

… “Every step forward increases the prospect of China becoming the first country to put its currency fully on a permissioned blockchain. No date has been announced, but a national rollout seems foreseeable within the next 12 months, most likely in staggered stages.  In contrast, western central banks like the Federal Reserve, Bank of England and to a lesser extent the European Central Bank have all been been moving more slowly on so-called central bank digital currencies (CBDCs). They worry about things like getting privacy right when all transactions will be publicly visible on the blockchain, and about the effect on retail banks.  Yet a digital yuan raises profound questions about global financial stability. The question for the world’s other major economies is how to respond. …”     25/3/2021  China proposes global rules for central bank digital currencies   By Tom Wilson, Marc Jones China proposed a set of global rules for central bank digital currencies on Thursday, from how they can be used around the world to highly sensitive issues such as monitoring and information sharing.

Global central banks are looking at developing digital currencies to modernise their financial systems, ward off the threat from cryptocurrencies like bitcoin and speed up domestic and international payments. China is one of the most advanced in its effort.   4/2021 Don’t Let China Mint the Money of the Future – U.S. policy makers need to wake up to the potential of digital currency and electronic payments and the peril of allowing China to dominate them. By Niall Ferguson     GM copy here

“… Meanwhile, as Bitcoin has grown more respectable, the cool kids have moved on to decentralized finance (“DeFi”), “an open, permissionless, and highly interoperable protocol stack built on public smart contract platforms” such as the Ethereum blockchain, to quote a recent and excellent St. Louis Fed paper by Fabian Schaer. Like Bitcoin, DeFi has no centralized third-party system of verification and regulation. But it is a much looser, more variegated system, with multiple coins, tokens, exchanges, debt markets, derivatives and asset management protocols. As Schaer puts it:

This architecture can create an immutable and highly interoperable financial system with unprecedented transparency, equal access rights, and little need for custodians, central clearing houses, or escrow services, as most of these roles can be assumed by ‘smart contracts.’ … Atomic swaps, autonomous liquidity pools, decentralized stablecoins, and flash loans are just a few of many examples that show the great potential of this ecosystem. … DeFi may lead to a paradigm shift in the financial industry and potentially contribute toward a more robust, open, and transparent financial infrastructure. …

… What is the right historical analogy for all this? Allen Farrington argues that Bitcoin is to the system of fiat currencies centered around the dollar what medieval Venice once was to the remnants of the western Roman Empire, as superior an economic operating system as commercial capitalism was to feudalism. Another possibility is that the advent of blockchain-based finance is as revolutionary as that of fractional reserve banking, bond and stock markets in the great Anglo-Dutch financial revolution of the 18th century.

Like all such revolutions, however, this one, too, has produced its haters. Well-known economists such as Nouriel Roubini continue to predict Bitcoin’s demise. Bridgewater founder Ray Dalio has warned that, just as the U.S. government prohibited the private ownership of gold by executive order in April 1933, so the same fate could befall Bitcoin. …

In other words, Bitcoin and Ethereum, as well as a great many other digital coins and tokens, are stateless money. And the more they can perform at least two out of three monetary functions tolerably well, the less that banning them is going to work — unless every government agrees to do so simultaneously, which seems like a stretch. The U.S. isn’t going to ban Bitcoin, just tax it whenever you convert bitcoins into dollars.

The right question to ask is therefore whether or not the state can offer comparably appealing forms of digital money. And this is where the Chinese government has been thinking a lot more creatively than its American or European counterparts. …

The expansion of a Chinese digital currency will ultimately pry open the U.S. grip over global payments, and therefore compromise U.S. sanctions policy and a significant measure of U.S. power in the world. … It is not that China’s digital currency is going to become the dominant standard of payments … But it could become one standard, creating a parallel system with which to avoid the long arm of U.S. regulation.”    6/ 3/2021    why-central-banks-want-digital-currencies.html    04/2020  Disintermediation and the Bankers’ Conundrum – Stanford Prof Says Status Quo Can’t Avoid Digital Currencies   2019   ECB Policy Makers Said to Discuss Central Bank Digital Currency – Bloomberg   4/2018   FED Researchers Shockingly Recommend “… Money For All”

Fed researchers have shockingly strongly argued in favor of central bank electronic money for everyone in the Federal Reserve Bank of St. Louis Review.  And the main reason for it appears to be because they say the role of interest in the current financial system has “a high risk that it will trigger political controversies.”

Aleksander Berentsen, a research fellow at the Federal Reserve Bank of St. Louis and Fabian Schär, managing director of the Center for Innovative Finance at the Faculty of Business and Economics, University of Basel, have seemingly broken rank with what appears to be a consensus among central banks regarding what we call digital cash. That is, everyone has access to central bank accounts.

They do so in the context of a binding referendum in Switzerland this June 10th where the matter is put to a vote, with the article citing Switzerland a number of times. The Swiss National Bank is against the proposal, as is the German Central Bank, but the FED has seemingly implicitly or tacitly come out in favor of it.

To briefly provider an overview of money, we can say that the current financial system has three components. There is first the cash in your pocket, which is as simple as it gets. Then there is what we call digital cash, or the researchers call central bank issued money, which are not accessible by the public and are available to only other commercial banks. Both of these are legal tender and are “legitimate” money.  Then there is commercial bank money and this has two components. First, there is commercial bank money which is basically a digital representation of your cash. Then there is commercial bank money which is created out of thin air when banks issue a loan, such as a mortgage. Neither of these two are legal tender, and both can be considered as private money or bank money.  What role interest plays here however has not been explained. The referendum has led to a global debate of sorts, with central bankers explaining how the system works, but they have been very silent on the role interest plays.  When you take out a mortgage, say for $100,000, over the 25 years lifetime of the mortgage you’ll probably pay back $200,000 in total. $100,0000 which is destroyed, and then around $100,000 in interest which is paid to the commercial bank. For the central bank, the system is somewhat the same in regards to how they create actual money, senbi/digital cash as we call them, or central bank digital money. They act as a gold standard of sorts in the financial system, as a base. Around 200, mainly commercial banks, have an account with the central bank. That account can be seen as a sort of spreadsheet where the central bank freely types whatever number to be digitally shown. There isn’t some “concrete” representation if you like. However, they don’t randomly type in whatever number. They create digital money when they buy from the commercial bank say bad loans or maybe decent mortgages. That money is then destroyed when they sell to the commercial bank say government debt bonds.  There’s a lot of interest here at play, and obviously we’re talking of billions and billions. So the current interest rate is fairly low at around 1.5% (averages 5%-6%), but even there that’s around 60 billion a year in interest on four trillion legal tender base money.

As we’ve stated, no one has yet explain what role this interest plays neither in the commercial bank money system, nor the central bank money system, but the researchers say:

“All instruments that are currently discussed have the characteristic that the central bank pays, in some form, interest on reserves (see Berentsen, Kraenzlin, and Müller, 2018).

There is a political economy issue with these payments since, as of today, they are paid only to the few financial intermediaries that have access to central bank electronic money.  The general public might not consider such large payments equitable or beneficial, and there is a high risk that it will trigger political controversies that have the potential to affect central bank independence (see Berentsen and Waller, 2014).  Central bank electronic money is an elegant way of avoiding possible political upheavals with regard to these interest payments, by allowing the whole population to have access to these interest payments and not just a small group of commercial banks.”

Indeed, one of the main argument of the Swiss referendum proponents is that actual legal tender digital cash would mean everyone would benefit from the creation of money pretty much out of thin air, rather than it being concentrated as it is currently. The authors further say “we conjecture that ‘central bank electronic money for all’ would have a disciplining effect on commercial banks.” That is because they’d have to pay more in interest to attract depositors as everyone would be able to hold it with the central bank in a way that is as safe as cash.  It further ensures commercial banks would be more careful in what risk they take as anyone can just leave and, what the authors don’t say but you’d think imply, is because they would no longer be systemically relevant, or as systemically relevant as they currently are in effectively tying the payment system to commercial bank money.

The authors are however against the idea of this central bank money accessible to all being a cryptocurrency of sorts. “Once we remove the decentralized nature of a cryptocurrency, not much is left of it,” they say, arguing the central bank could use the current centralized payment system. We disagree. We think they are missing a trick or there should at least be pilots. The authors do seem somewhat knowledgable of this space, calling cryptos “unique” and a “fundamental innovation,” but they don’t really consider how a centralized crypto could work, or their many other qualities beyond pseudo-anonymity and permissionless access.  And that is cryptos, ethereum in particular, allow inanimate objects to have a “bank account.” Try giving a fridge a fiat bank account, for example. That’s impossible, because the fridge would need to enter a pin or have some other authorization process, which of course it can’t do because fridges can’t think.  But, with ethereum smart contracts, you can put a small computer chip in the fridge, furnish it with sensors, give it wi-fi access to connect to the blockchain and the if/then smart contract rules, and basically the fridge now has a bank account and can metaphorically go out to buy milk for you.

That’s possible because smart contracts do not have private keys (pins). They do not need them as the entire network validates the rules. Therefore, to send payments the network just verifies whether the smart contract is doing so within its own rules. To receive payments, of course the smart contract has a public address and obviously the entire network knows how much that smart contract has received and therefore how much it can spend even within the rules.

It is not clear whether that is really possible only with a decentralized network. For simple crypto money itself, like bitcoin, you could of course have just one node and then everyone else connects to it through light clients or SPV wallets that run on your mobile as most already do for btc and eth.  But for smart contracts, you probably could do the same but it is not clear how easy it is to allow everyone to publish their smart contract in that one node, with all then connecting through SPV.

The authors’ main argument against crypto-fiat is that central banks should not be in the business of providing anonymous money, but cryptos are pseudo-anonymous and central banks do print anonymous money in the form of cash and notes. There could be plenty of innovation there, and really to have the author’s position is pretty fine as decentralized cryptos can provide the service in regards to sort of giving machines bank accounts. But that decision should be a bit more informed, and broader than the author’s description, so as to consider the potential benefits more thoroughly.That includes costs to run the different payment systems, the potential increased efficiency, and more widely the general potential benefits of money as code, or codable money.   4/2020   Money Reimagined – MMT – How a Dangerous Idea Could Work   by Michael J. Casey

“… Some of my words might attract scorn from the bitcoin community’s “digital gold bugs,” who tend to view MMT’s suggestion that governments ignore deficits and manage spending by printing money as crazy talk. Unlike them, I think MMT’s take on the relationship between government and money is essentially accurate and that it’s a useful point of understanding in our ongoing debates over how best to deliver economic stimulus in the COVID-19 era.

But I’m also going to say that, within the current analog financial system, MMT’s policy prescriptions would be a recipe for disaster. Without the discipline of fiscal responsibility, especially without the political accountability of having to fund spending with unpopular taxes, what’s to stop sovereign money issuers from doing what they’ve done through history and debasing their currency? …

As per the arguments in last week’s newsletter about Argentina, the very act of removing fiscal constraints would undermine the thing that matters most for a currency to function: trust. … The bigger question, then, is what can be done to enhance trust so that unencumbered government spending can be appropriately deployed to encourage sustainable economic prosperity for all citizens. How might cryptocurrency and blockchain tools help? …  All that’s needed for inflation to set in is the wrong message. If people believe their government is going to become profligate, their inflation expectations will get baked into preemptive price rises, creating a self-fulfilling prophecy. … This risk of trust failure means an MMT approach is not viable … 

But what about in an era of central bank digital currencies? Perhaps CBDCs could offer more transparency and accountability to MMT-guided policymakers, allowing them greater expenditure leeway within the bounds of the inflation constraint. … The rich data generated by a digital monetary system could help officials better estimate money supply, demand and, importantly, velocity (the rate of exchange) – all factors that contribute to inflation but are traditionally hard to measure. … Further, blockchain-based smart contracts could be instituted to automate monetary policy adjustments according to changes in these data inputs. …

Of course, those automated systems could be overridden by the central bank, most easily if the CBDC is based on a closed, single-authority model. … But if the systems are audited by a third party, perhaps by the International Monetary Fund, central banks and the government institutions they answer to would face a difficult political backlash if they were shown to be abandoning the model.

In return for the policymaking freedom that MMT affords them, bolder governments might even adopt permissioned or even permissionless blockchains to lock in these contractual systems and demonstrate their commitment to protecting the value of their currency.    So, you see, interesting ideas can still flourish in the middle path between the extremes. “  2019  WORLD CURRENCY: WHO NEEDS A NUMERAIRE?  By Tom WilsonMarc Jones“… How Global Currencies Work is the work of Barry Eichengreen, Arnaud Mehl, and Livia Chitu. Mehl and Chitu are both economists at the European Central Bank. Eichengreen is a professor of economics and political science at the University of California, Berkeley. Their hypothesis is that it is perfectly possible for a plurality of currencies to share the global stage.  This is an important thesis, to which currency traders and speculators might want to pay attention. It means, among much else, that the PRC’s renminbi and the US dollar are not necessarily engaged in a sort of iron-cage death match. The rise of the former need not mean the demise of the latter.  Further, this new take on global currencies doesn’t make the Bretton Woods Conference out to be as earth shaking an event as is often thought.     ….    (The) data does not show quite the London-centered financial world presumed by the conventional account. At the beginning of that period, sterling accounted for 64% of reserves, with Germany’s mark and France’s franc also constituting “non-negligible shares.”  …   For a new player to take central stage within a decade indicates, to these authors, that the lock-in or network effects are not as powerful as they are sometimes made out to be. They were not working for the pound. …” … 2021  Sweden’s Central Bank to Test Digital Currency With Handelsbanken – The Riksbank will partner with Handelsbanken to test how the e-krona might work in the real world.


Geld:Angst vor dem digitalen Euro?    Markus Zydra

“Die Einführung des neuen Bargelds durch die EZB rückt näher. Ob die Bürger dazu Vertrauen fassen, hängt davon ab, wie sehr die Privatsphäre geschützt bleibt.  ….  In unserem Finanzsystem gibt es nämlich zwei Arten von Geld – für das eine stehen die Geschäftsbanken gerade, für das andere die Zentralbanken: Geschäftsbanken, Sparkassen und Volksbanken schaffen Geld aus dem Nichts, beispielsweise durch die Vergabe eines Kredits, der auf dem Konto des Kunden gutgeschrieben wird. Das Entscheidende ist: Geschäftsbanken können pleitegehen, Zentralbanken nicht. … Zentralbankgeld … ist sicherer als das sogenannte Giralgeld der Geschäftsbanken. Erst wenn Menschen ihr Geld in bar am Bankomaten abheben, verwandeln sie dieses unsichere Bankengeld in sicheres Zentralbankgeld. Die Kernfrage lautet daher: Wird das digitale Bargeld genauso sicher, anonym und vertrauenswürdig ausschauen wie der gute alte Geldschein? Die Konsistenz des neuen Bargelds, die digitale Komponente, nährt den einen oder anderen Zweifel. ….”  13/6/2021  China hat neue staatliche Digitalwährung – mit deutlichen Vorteilen für die Regierung  von Fabian Kretschmer 

Eine neue staatliche Digital-Währung wird China nachhaltig verändern – die Bevölkerung kann künftig mit dem „e-Yuan“ noch umfassender überwacht werden. Um die neue Währung attraktiv zu machen, hat Chinas Regierung nun die Spendierhosen angezogen: Per virtueller Lotterie werden derzeit 40 Millionen Renminbi (umgerechnet rund fünf Millionen Euro) an die Bürgerinnen und Bürger verteilt. Ausgezahlt werden sie in Form des neuen „e-Yuan“, der weltweit ersten staatlichen Digitalwährung.