Central Bank Digital Currencies: A
Revolution in Banking?
September 18, 2016 "Information
- Several central banks, including the Bank
of England, the People’s Bank of China, the
Bank of Canada and the Federal Reserve, are
exploring the concept of issuing their own
digital currencies, using the blockchain
technology developed for Bitcoin. Skeptical
commentators suspect that their primary
goal is to eliminate cash, setting us up for
negative interest rates (we pay the bank to
hold our deposits rather than the reverse).
Ben Broadbent, Deputy Governor of the Bank
of England, puts a more positive spin on it.
He says Central Bank Digital Currencies
could supplant the money now created by
private banks through “fractional reserve”
lending – and that means 97% of the
circulating money supply. Rather than
outlawing bank-created money, as money
reformers have long urged, fractional
reserve banking could be made obsolete
simply by attrition, preempted by a better
mousetrap. The need for negative interest
rates could also be eliminated, by giving
the central bank more direct tools for
stimulating the economy.
blockchain works was explained by Martin
Hiesboeck in an April 2016 article titled “Blockchain
Is the Most Disruptive Invention Since the
The blockchain is a simple yet ingenious
way of passing information from A to B
in a fully automated and safe manner.
One party to a transaction initiates the
process by creating a block. This block
is verified by thousands, perhaps
millions of computers distributed around
the net. The verified block is added to
a chain, which is stored across the net,
creating not just a unique record, but a
unique record with a unique history.
Falsifying a single record would mean
falsifying the entire chain in millions
of instances. That is virtually
In a speech
at the London School of Economics in March
2016, Bank of England Deputy Governor Ben
Broadbent pointed out that a Central Bank
Digital Currency (CBDC) would not eliminate
physical cash. Only the legislature could do
that, and blockchain technology would not be
needed to pull it off, since most money is
already digital. What is unique and
potentially revolutionary about a national
blockchain currency is that it would
eliminate the need for banks in the payments
According to a July 2016 article in The
Wall Street Journal on the CBDC
[M]oney would exist electronically
outside of bank accounts in digital
wallets, much as physical bank notes do.
This means households and businesses
would be able to bypass banks altogether
when making payments to one another.
only the payments system but the actual
creation of money is orchestrated by private
banks today. Nearly 97% of the money supply
is created by banks when they make loans, as
Bank of England acknowledged in a
bombshell report in 2014. The digital money
we transfer by check, credit card or debit
card represents simply the IOU or promise to
pay of a bank. A CBDC could replace these
private bank liabilities with central bank
liabilities. CBDCs are the digital
equivalent of cash.
Money recorded on a blockchain is stored in
the “digital wallet” of the bearer, as safe
from confiscation as cash in a physical
wallet. It cannot be borrowed, manipulated,
or speculated with by third parties any more
than physical dollars can be. The money
under the owner’s sole control until
transferred to someone else, and that
transfer is anonymous.
Rather than calling a CBDC a “digital
currency,” says Broadbent, a better term for
the underlying technology might be
“decentralised virtual clearinghouse and
asset register.” He adds:
But there’s no denying the technology is
novel. Prospectively, it offers an
entirely new way of exchanging and
holding assets, including money.
Banking in the Cloud
novel possibility he suggests is that
everyone could hold an account at the
central bank. That would eliminate the
fear of bank runs and “bail-ins,” as well as
the need for deposit insurance, since the
central bank cannot run out of money.
Accounts could be held at the central bank
not just by small depositors but by large
institutional investors, eliminating the
need for the private repo market to
provide a safe place to park their funds. It
was a run on the repo market, not the
conventional banking system, that triggered
the banking crisis after the collapse of
Lehman Brothers in 2008.
Private banks could be free to carry on as
they do now. They would just have
substantially fewer deposits, since
depositors with the option of banking at the
ultra-safe central bank would probably move
their money to that institution.
That is the problem Broadbent sees in giving
everyone access to the central bank: there
could be a massive run on the banks as
depositors moved their money out. If so,
where would the liquidity come from to back
bank loans? He says lending activity could
be seriously impaired.
Perhaps, but here is another idea. What if
the central bank supplanted not just the
depository but the lending functions of
private banks? A universal distributed
ledger designed as public infrastructure
could turn the borrowers’ IOUs into “money”
in the same way that banks do now – and do
it more cheaply, efficiently and equitably
than through banker middlemen.
Fractional Reserve Lending Obsolete
The Bank of England has
banks do not actually lend their depositors’
money. They do not recycle the money of
“savers” but actually create deposits when
they make loans. The bank turns the
borrower’s IOU into “checkable money” that
it then lends back to the borrower at
interest. A public, distributed ledger could
do this by “smart contract” in the
“cloud.” There would be no need to find
“savers” from whom to borrow this money. The
borrower would simply be “monetizing” his
own promise to repay, just as he does now
when he takes out a loan at a private bank.
Since he would be drawing from the
bottomless well of the central bank, there
would be no fear of the bank running out of
liquidity in a panic; and there would be no
need to borrow overnight to balance the
books, with the risk that these short-term
loans might not be there the next day.
this is what banks do now. Banks
are not intermediaries taking in
deposits and lending them out. When a bank
issues a loan for a mortgage, it simply
writes the sum into the borrower’s account.
The borrower writes a check to his seller,
which is deposited in the seller’s bank,
where it is called a “new” deposit and added
to that bank’s “excess reserves.” The
issuing bank then borrows this money back
from the banking system overnight if
necessary to balance its books, returning
the funds the next morning. The whole
rigmarole is repeated the next night,
and the next and the next.
a public blockchain system, this shell game
could be dispensed with. The borrower would
be his own banker, turning his own promise
to repay into money. “Smart contracts” coded
into the blockchain could make these
transactions subject to terms and conditions
similar to those for loans now.
Creditworthiness could be established
online, just as it is with online credit
applications now. Penalties could be
assessed for nonpayment just as they are
now. If the borrower did not qualify for a
loan from the public credit facility, he
could still borrow on the private market,
from private banks or venture capitalists or
mutual funds. Favoritism and corruption
could be eliminated, by eliminating the need
for a banker middleman who serves as
gatekeeper to the public credit machine. The
fees extracted by an army of service
providers could also be eliminated, because
blockchain has no transaction costs.
a blog for Bank of England staff titled “Central
Bank Digital Currency: The End of Monetary
Policy As We Know It?”, Marilyne Tolle
suggests that the need to manipulate
interest rates might also be eliminated. The
central bank would not need this indirect
tool for managing inflation because it would
have direct control of the money supply.
CBDC on a distributed ledger could be used
for direct economic stimulus in another way:
through facilitating payment of a universal
national dividend. Rather than sending out
millions of dividend checks, blockchain
technology could add money to consumer bank
accounts with a few keystrokes.
objection might be raised that if everyone
had access to the central bank’s credit
facilities, credit bubbles would result; but
that would actually be less likely than
under the current system. The central bank
would be creating money on its books in
response to demand by borrowers, just as
private banks do now. But loans for
speculation would be harder to come by,
since the leveraging of credit through the
“rehypothecation” of collateral in the repo
market would be largely eliminated.
As explained by blockchain software
technologist Caitlin Long:
Rehypothecation is conceptually similar
to fractional reserve banking because a
dollar of base money is responsible for
several different dollars of debt issued
against that same dollar of base money.
In the repo market, collateral (such as
U.S Treasury securities) functions as
base money. . . .
Through rehypothecation, multiple
parties report that they own the same
asset at the same time when in reality
only one of them does—because, after
all, only one such asset exists. One of
the most important benefits of
blockchains for regulators is gaining a
tool to see how much double-counting is
happening (specifically, how long
“collateral chains” really are).
Blockchain eliminates this shell game by
eliminating the settlement time between
trades. Blockchain trades occur in
“real-time,” meaning collateral can be in
only one place at a time.
Change in Banking
Martin Hiesboeck concludes:
won’t just kill banks, brokers and
credit card companies. It will change
every transactional process you know.
Simply put, blockchain eliminates the
need for clearinghouse entities of any
kind. And that means a revolution is
coming, a fundamental sea change in the
way we do business.
Changes of that magnitude usually take a
couple of decades. But the UK did surprise
the world with its revolutionary Brexit vote
to leave the EU. Perhaps a new breed of
economists at the Bank of England will
surprise us with a revolutionary new model
for banking and credit.
Ellen Brown is an attorney, founder of the
Public Banking Institute, and author of
twelve books including the best-selling Web
of Debt. Her latest book, The
Public Bank Solution, explores
successful public banking models
historically and globally. Her 300+ blog
articles are at EllenBrown.com.
She can be heard biweekly on “It’s
Our Money with Ellen Brown” on PRN.FM.