Against central bank digital currencies

That is the theme of my latest Bloomberg column, note that the idea would to some extent cut private banks out of the intermediation equation.  Here is one excerpt:

An alternative scenario is that the central bank decides to enter the commercial lending business, much as your current bank does. Will the central bank be a better lender than the private banks? Probably not. Central banks are conservative by nature, and have few “roots in the community” as the phrase is commonly understood. The end result would be more funds used to buy Treasury bonds and mortgage securities — highly institutionalized investments — and fewer loans to small and mid-sized local businesses.


The problems run deeper yet. Financial regulation makes a relatively tight distinction between banks and non-banks. Banks have access to the payments system directly and enjoy other privileges, and in return their risk-taking is regulated more heavily (by not only the Fed but also other federal agencies and states). A fintech startup, in contrast, avoids most bank regulations, but it must work through banks to make payments. This division of responsibilities is imperfect, but it has allowed many parts of the U.S. economy to grow and innovate without facing all of the regulations imposed on banks.

This leads to my primary objection to an official government e-currency: It would, in effect, make many more economic institutions more like banks. Over time, those institutions would probably be regulated more like banks, too. For instance, if the Fed is directly transmitting payments made by a private company, it might be wary of credit risk and impose capital and reserve requirements on that company, much as it does on banks. Banks also might complain that they are facing unfair competition, and ask that consistent regulations be imposed. In any case, more of the economy likely will be subject to financial regulation, not just the relatively narrow core of the banking system.

Not all innovation is good innovation.


This has a bit of a "640K is more memory than anyone will ever need" feel.

We live in a digital age. Publishing bits is no more novel than printing on paper. So why should we think paper money is special?

Especially given that most of the "money supply" is already bits in computer ledgers.

Take a moment and read the article.

Tyler isn't arguing against digital currencies. He's arguing against the public being able to directly open an account with the Fed. I'm not sure I agree with his argument, but your reply has nothing to do with the actual column.

Your reply does nothing to answer me.

The Fed has paper money. The Fed has digital accounts. There is a thing called

Tyler is trying to create a difference in kind here, because blockchain, but I reject that.

"Your reply does nothing to answer me."

I wasn't answering you. I was pointing out that you obviously hadn't read the article and weren't addressing the points that the article had made.

"Tyler is trying to create a difference in kind here, because blockchain, but I reject that."

No he's not. Learn to Read.

I did read, before I first commented, and that's my takeaway.

There is not such a difference in kind to be upset about.

I mean for the love of God, "countries have currencies, film at eleven?"

Ooooo, here is another daaangerous precedent:

We’ve reached the point of parody.

Which is the fake anonymous? Or are they all real? Is he that stupid?

What I love is that you can never tell, because it’s always 0% charitable, 0% factual, and all tribal. Add never reading the source material to the equation.

Love it, keep posting mouse.

Do you have anything to add here? Can you enunciate an actual difference in kind between all Fed and Treasury operations and an "eCurrency?"

Other than "but, but, blockchain!"

Name one failed system where a government acted as a secure bank and provided capital to individuals.

You can’t. This entire thing is a conspiracy to make every day Americans pay bank fees.

I don't know about that, but it seems unrelated to whether government eCurrencies are genuinely different than government currencies.

(You all should have let the first observation stand, and not drawn this out. As some bs "you didn't read.")

I wish Cowen had included the lead paragraphs in his essay, in which he asks whether there should be a "public option" for banking (i.e., whether the Fed should accept deposits from individuals and firms), blurring the distinction between banks and non-banks (so that, for example, the Fed would make loans directly to its "customers"). Do we need the middleman (i.e., banks)? Here's an imperfect analogy, but one that might make the point. Many states have a mandatory three-tier system for the distribution of spirits: the distiller, the wholesaler, and the retailer. Why the middleman? To facilitate the regulation of the distribution of spirits. That may seem silly, but it wasn't considered silly when prohibition was repealed. If the state loses control over the distribution of spirits, life as we know it may end (not to mention the collection of taxes on spirits); indeed, recently hundreds of Russians died because of the distribution of tainted (unregulated) vodka. Spirits are an important good, but I would say money is even more important. [An aside, I oppose the three-tier system for the distribution of spirits. Why? The states that don't have the three-tier system have Total Wine and More stores which sell at almost wholesale prices. I suspect Cowen would support the middleman for the distribution of spirits for reasons
similar to his reasons for supporting the middleman in the distribution of money.]

"It would, in effect, make many more economic institutions more like banks."


Theranos Blood Bank.

Anybody can obey the rules of Fed banking. We can down load the regulated banking rules into our smart phones and obey the rules. So anyone can be a bank.

But the rules include a reserve requirement which lowers the demand to be a regulated bank. Not everyone wants to pay the reserve requirement. Thus there is a natural aggregation of the central banks accounts. The congested flows into and out of Fed accounts become will tend toward stable.

This post and the article abuse the term “central bank digital currency” (CBDC) to conduct a “straw man” takedown. He is specifically criticizing the idea of the general public directly having accounts at the central bank. Almost no central banks that I know of are seriously looking into such “one-tier” CBDC. Most are contemplating multi-tier operating models in which banks and other financial institutions act as intermediaries, to minimize financial sector disruption.

Comments for this post are closed