Central Banks & Commercial Banking

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

Source: https://www.federalreserve.gov/paymentsystems/coin_data.htm

Central Banking Goals and Functions

• Economic Policy Goals, so-called ‘Dual Mandate’ by Federal Reserve
  • “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 Bank Digital Currency (CBDC)

• 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 (from central bank to the public) 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 - 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 Accessible 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

Private Sector Stable Value Tokens

• Fiat Collateralized: Tether, TrueUSD
• Crypto Collateralized: BitShare, Dai, Havven
• Commodity Collateralized: Digix, Ekon
• Not Collateralized ‘Seigniorage based’: Basis, Saga

The Money Flower

Source: https://www.ft.com/content/862f247b-005b-3915-b22a-542b5ab3736b