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BoE: Central Bank Digital Currency May ‘Strengthen’ Monetary Policy
According to research from the Bank of England (BoE), a central bank issued digital currency has the potential to revolutionize monetary policy.
BoE Studies Risks and Benefits of Central Bank-Issued Digital Currency
The BoE has been researching how a central bank digital currency (CBDC) would work in practice. It authored a research paper which claimed an important ‘step forward’ in the design of a currency. Accordingly, it stated that it would not leave commercial bank vulnerable — a not unwarranted fear, as many in the crypto space believe that digital currencies will help free people from the massive powers central banks have over consumers.
As of now, unlike Sweden’s Riksbank, the BoE is not currently planning to issue its own digital currency, though it has discussed the possibility of doing so.
The research was authored by Michael Kumhof, a former Stanford University economics professor, who works as senior research advisor in the BoE’s research hub, and Claire Noone, a Reserve Bank of Australia official, who works in the BoE’s note operations division.
The officials set out ‘four core design principles’ for a CBDC which would avoid the possibility of destroying the banking sector, a major concern raised by previous BoE research.
“A CBDC that is a close – but not perfect – substitute for bank deposits may strengthen the transmission of monetary policy changes to the real economy,” say BoE researchers Jack Meaning and Ben Dyson, who summarized the research.
The research on monetary policy transmission shows that a digital currency which pays interest on balances, alongside offering payment services, would allow the BoE to gain greater control over monetary policy.
“With careful design choices, a CBDC need not be disruptive to the conduct of monetary policy,” the researchers wrote.
Because of the volatility associated with digital currencies, to make it work traditional banks would be forced to react more quickly than they do currently to raise or lower interest rates to avoid losing money. The authors said: “This would result in an increase in both the strength and speed of pass-through from the policy rate to these other interest rates, especially as technology and regulatory changes make it easier to switch balances from one account to another.”
Furthermore, according to the researchers, a CBDC would remove the need for banks as an intermediary for buying the government bonds used in quantitative easing — asset purchases used by central banks intended to stimulate demand when interest rates cannot fall any further.
Last week, BoE governor Mark Carney said he was open-minded about the possibility of introducing a central bank currency. He has, however, also criticized the cryptocurrencies currently available, even going as far as to say that Bitcoin had ‘failed’ as a currency.
Going forward, Kumhof and Noone acknowledge that ‘risks remain,’ and that central bank digital money could still potentially impact the stability of bank deposits and bank profitability.
As noted above, this apprehension doesn’t come as a surprise. Banks like the BoE, headed by bankers looking after their own pocketbooks, are beginning to recognize the transformative powers offered by digital currencies to consumers across the globe, but are at the same time worried about what their roles will be moving forward.
“If designed badly, CBDC presents major risks to financial stability,” they warned.
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Nobel-Winning Economist Shiller: Bitcoin Could Be Another Failed Monetary Experiment
The advent of the cryptocurrency market is mimicking that of some of history’s most failed monetary experiments, according to Robert Shiller.
Shiller: ‘No One Can Explain How Cryptocurrencies Work’
Writing in a new blog posted today, the Yale professor and Nobel-winning economist wrote that enthusiasm for the cryptocurrency market remains strong despite warnings that it could be a scam. ‘One must bear in mind that attempts to reinvent money have a long history,’ he said. Yet, while new monetary innovations create excitement to begin with, they fail to last, he added.
As an example he cited Josiah Warner, who in 1827 opened the ‘Cincinnati Time Store’ that sold merchandise in units of hours of work. These relied on labour notes, which resembled paper money; however, while they were considered a sign of importance of working people, the store closed in 1830.
Undeterred by Warner’s failure, two years later Robert Owen attempted to create the National Equitable Labour Exchange in London. This relied on ‘time money’ as a currency. Yet, similar to Warner’s attempts Owen’s experiment failed as well, Shiller pointed out.
A hundred years later, during the Great Depression, economist John Pease Norton proposed a dollar backed not by gold, but by electricity. Notably, though, this too failed to catch on.
“Each of these monetary innovations has been coupled with a unique technological story,” wrote Shiller. “But, more fundamentally, all are connected with a deep yearning for some kind of revolution in society.”
In his opinion, cryptocurrencies like bitcoin are no different, adding:
“The cryptocurrencies are a statement of faith in a new community of entrepreneurial cosmopolitans who hold themselves above national governments, which are viewed as the drivers of a long train of inequality and war.”
He goes on to state that similar to past failed currencies, ‘the public’s fascination with cryptocurrencies is tied to a sort of mystery.’
“Practically no one, outside of computer science departments, can explain how cryptocurrencies work,” he said.” That mystery creates an aura of exclusivity, gives the new money glamour, and fills devotees with revolutionary zeal. None of this is new, and, as with past monetary innovations, a compelling story may not be enough.”
This is certainly not the first time that Shiller has spoken out against the cryptocurrency market. Last October, he called bitcoin a ‘fad,’ as he commented on the ‘strange enthusiasm’ for the currency. Earlier this year, he was reported as being conflicted on bitcoin and wasn’t sure whether it would fail or succeed. He’s also said bitcoin is a bubble and that it only attracts investors because it is a good story.
Featured image from Shutterstock.
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Volatility: A Necessary Ingredient for Monetary and Social Transition
Cryptocurrency volatility isn’t just here to stay, it’s heralding the chaotic change of the blockchain future yet to come.
CoinDesk
Did Satoshi Revive the Yapese Monetary System, with Bitcoin and Blockchain?
According to the erstwhile American adventurer, William Henry Furness III, people of the Pacific Island of Yap had a highly evolved system of money and banking. Something which put to shame the scholastic theories of economic aficionados – Adam Smith, John Locke, etc. Henry’s travelogue mentions that the Yapese already had a “decentralized peer-to-peer” credit … Continue reading Did Satoshi Revive the Yapese Monetary System, with Bitcoin and Blockchain?
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Did Satoshi Revive the Yapese Monetary System, with Bitcoin and Blockchain?
According to the erstwhile American adventurer, William Henry Furness III, people of the Pacific Island of Yap had a highly evolved system of money and banking. Something which put to shame the scholastic theories of economic aficionados – Adam Smith, John Locke, etc. Henry’s travelogue mentions that the Yapese already had a “decentralized peer-to-peer” credit … Continue reading Did Satoshi Revive the Yapese Monetary System, with Bitcoin and Blockchain?
The post Did Satoshi Revive the Yapese Monetary System, with Bitcoin and Blockchain? appeared first on NEWSBTC.