Working Paper: CEPR ID: DP13728
Authors: Alex Cukierman
Abstract: The point of departure of this paper is that, in order to preserve the effectiveness of monetary policy in a world increasingly flooded by private digital currencies, central banks will eventually have to issue their own digital currencies. Although a non-negligible number of central banks (CBs) are actively considering the pros and cons of a central bank digital currency (CBDC) there is yet no CB that has issued such a currency on a full scale. Following a brief survey of current CBs positions on the issuance of a CBDC the paper presents two proposals for the implementation of such a currency: A moderate proposal in which only the banking sector continues to have access to deposits at the CB and a radical one in which the entire private sector is allowed to hold digital currency deposits at the CB. The paper compares and contrasts the implications of those two polar paths to a CBDC for the funding of banks, the allocation of credit to the economy and their implications for welfare as well as for political feasibility. One section of the paper shows that the radical implementation may pave the way toward a narrow banking system and dramatically reduce the need for deposit insurance in the long run.The paper evaluates the relative merits of issuing a currency on a blockchain using a permissionless distributed ledger technology in comparison to a centralized (permissioned) blockchain ledger operated by the CB and concludes that the latter dominates the former in more than one dimension. But it does acknowledge that distributed ledger technologies have many actual and potential cost savings benefits in other segments of the financial and real sectors.
Keywords: central bank digital currency; blockchain technology; permissioned; permissionless; centralized versus decentralized currencies; narrow banking
JEL Codes: E5; E4; H41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Issuance of a CBDC (E42) | Reduction in the need for deposit insurance (G28) |
| Radical implementation of a CBDC (E42) | Narrow banking system (E42) |
| Radical implementation of a CBDC (E42) | Reduction in the need for deposit insurance (G28) |
| Radical implementation of a CBDC (E42) | Improved overall stability of the financial system (G28) |
| Moderate proposal for CBDC (E42) | Preserve monetary policy effectiveness (E52) |
| Moderate proposal for CBDC (E42) | Mitigate risks to financial stability (G28) |
| Centralized ledger technology (E42) | Outperform decentralized blockchain solutions (E42) |
| Centralized ledger technology (E42) | Better facilitate monetary policy (E52) |