Classic Rereading | Why is the central bank digital currency a natural extension of current currency trends?

Original title: "The Future of Digital Banking and Monetary Policy of the Central Bank"


This article was published in 2017 at In this era of rapid development of knowledge, the advanced nature of the ideas in the text cannot be compared with the articles published in 2019. However, this article combines the ideas of many digital law coins (CBDC) before 2017 and provides a fairly complete system. It still has a lot of reference value today. Many of the articles discussing CBDC today quote the views of Bordo and Levin.

Because of Facebook's Libra incident, the concept of "digital legal currency" has entered the Chinese financial community. This has been a topic of little concern in the past and has become a hot topic.

Some of the ideas in the text now seem to be new. For example, "the widespread use of CBDC and the elimination of banknotes will prevent tax evasion, money laundering and other illegal activities that are easier to carry out through banknotes, especially large denominations," indicating that digital currency is tax evasion. The nemesis of money laundering and illegal activities is contrary to the risk that many people believe that digital currency will increase money laundering. For a long time, the author also believes that digital currency has greatly reduced the risk of money laundering, which is exactly the opposite of the characteristics of digital tokens. Digital tokens are a tool for money laundering and an important reason for many countries to oppose digital tokens. However, the functions of digital currency are just the opposite. They are anti-money laundering supervision tools, and national regulatory authorities should give strong support.

The paper also mentions the results of a number of studies, including the Bank of England, which indicate that digital currency can contribute to the development of the real economy.

Note that there was no concept of wholesale digital law currency (wCBDC) proposed by BIS at the time. The reports of the three central banks (UK, Canada, Singapore) have not yet come out. IBM, JP Morgan Chase Bank, Facebook, VISA, WalMart, and Fnality have not yet The issuance of stable currency, the National Monetary Fund (IMF) has not yet released the concept of synthetic digital law currency (sCBDC) and the surprisingly possible financial scenario in the future. These events that changed history were only later appeared.

Although the article is short but the point is sharp and easy to understand, we will not comment on it.

About the Author

Professor Michael Bordo received a master's degree in economics from the London School of Economics after earning a bachelor's degree from McGill University in 1963. He received his Ph.D. from the University of Chicago in 1972. From 1981 to 1989, Bordeaux served as a professor of economics at the University of South Carolina, then as a professor of economics at Rutgers University, and now a professor of economics at Rutgers University and director of the Center for Monetary and Financial History.

He is a member of universities around the world (including the University of California, Los Angeles, Princeton, Harvard, Cambridge, and London School of Economics) as well as the Central Bank and International Monetary Institutions (including the International Monetary Fund, the Federal Reserve Board, the Bank of Canada, the Bank of England, and the Bank for International Settlements). ) served as a number of visiting positions.

Bordeaux has served in the editorial departments of many academic journals, including the International Central Bank Journal, International Monetary and Financial Journal, and the Journal of Economic History and Economic History. His research focuses on the history of economic finance, monetary economics, and economic thought. He has written numerous articles on the exchange rate system, such as the gold standard and the Bretton Woods system. Another area of ​​expertise is the Great Depression and the financial crisis. He also studies globalization from a historical perspective.

Professor Andrew Levin received a bachelor's degree in economics and mathematics from Yale University in 1984 and a doctorate in economics from Stanford University in 1989. After graduation, Levin worked for the Federal Reserve Board for 20 years, including two years as a monetary policy strategy and communication with the special advisor to the chairman and vice-chairman, and he also served as an advisor to the IMF. After that, Levin joined Dartmouth College to teach macroeconomics and monetary policy courses.

He is currently a scientific advisor to the Norwegian and Swedish central banks (Norwegian central bank and the Swedish central bank) and a regular visiting scholar at the International Monetary Fund. Previously, he served as an external consultant to the European Central Bank, an external consultant to the Bank of Korea, a visiting scholar from Canada, Japan, the Netherlands and New Zealand; and also provided technical assistance to the Albanian and Argentine central banks.

Michael Bordo & Andrew Levin

Central banks around the world are considering issues related to sovereign digital currencies. This paper argues that these currencies can change all aspects of the monetary system and contribute to the systemic and transparent nature of monetary policy. In particular, the central bank's digital currency can be seen as an exchange medium with little cost, a secure value store and a stable account unit. To achieve this goal, the currency will be account-based and interest-bearing, and the monetary policy framework will target real price stability.

In Rome in the third century, Julius Paulus Prudentissimus, the chief legal adviser to Alexander the Emperor, described the basic principles of government currency issuance in terms familiar to modern monetary economists. He writes that it is the “accounting unit”, “value storage method” and “exchange medium” that regulate the pricing of goods and services that promote economic and financial transactions (Watson 2010). Paulus realized that the utility of money depends on its nominal quantity, not its material basis. That is to say, the effectiveness of a currency depends on the public's confidence in the authorities' management of the monetary system.

After about 2000, with the popularity of electronic devices and high-speed networks, central banks such as the European Central Bank (Mersch 2017), Norwegian Bank (Nicolaisen 2017) and Bank of Canada (Fung and Halaburda 2016) are exploring the possibility of establishing a sovereign digital currency. The time frame for the Swedish central bank (Sveriges Riksbank) to decide whether to launch digital currency has accelerated (Skingsley 2016). The People's Bank of China is experimenting with technical specifications (Yifei 2016). The Bank of England has launched a multi-year survey (Broadbent 2016).

Like banknotes and coins, the Central Bank Digital Currency (CBDC) will also be nominally fixed, universally available, and can be effectively used in all public and private transactions. As a result, CBDC is essentially different from virtual currency created by private entities such as Bitcoin, Ethereum and Ripple, whose market prices have fluctuated dramatically in recent years (Scorer 2017).

Central Bank Digital Currency Design

Our recent work attempts to develop a set of design principles for CBDC, not a technical blueprint (Bordo and Levin 2017). We especially consider the following five questions:

  • Should the CBDC payment involve a transfer between central bank accounts or a digital token that can be directly transferred from the payer to the payee?
  • Should cash be abolished, or should the central bank come up with a fee schedule for transferring funds between CBDC and banknotes?
  • Should the CBDC be interest-bearing or linked to the total price index rather than having a fixed face value like cash and coins?
  • What impact does the CBDC have on the central bank's monetary policy strategy and operational procedures?
  • How will the CBDC affect the interaction between the central bank and the fiscal authorities?

In considering these issues, we assume that the central bank's goal is to maximize the effectiveness of the central bank in fulfilling the basic functions of money – its efficiency as a medium of exchange, its security as a value store, and its record as an economic and financial transaction. The stability of the account unit. Using these criteria, we identified the characteristics of a well-designed CBDC:

The virtually no-cost exchange medium . If CBDC is account-based, the account can be held directly at the central bank or through a public-private partnership with a commercial bank.

Secure storage value . The rate of return of interest-bearing CBDCs may be consistent with risk-free assets such as short-term government securities. The central bank’s interest rate will be the main tool for implementing monetary policy.

Gradually eliminate banknotes . The CBDC can be widely available to the public, and there is a timetable for the transfer fee between cash and CBDC. Therefore, the adjustment of the CBDC interest rate will not be subject to any effective lower limit.

The real price is stable . A possible monetary policy framework can be devised, in which the actual value of CBDC will remain stable over time, based on a broad consumer price index. This framework will encourage the systematic and transparent implementation of monetary policy.

Our analysis draws on a series of literature on monetary economics. Jevons (1875), Marshall (1877), Wicksell (1898), Fisher (1913), Buchanan (1962), and Hayek (1978) are all pursuing a stable unit of computation. Friedman (1960), emphasizing the basic principles of effective exchange rates, argues that government-issued currencies should have the same rate of return as other risk-free assets (Friedman and Schwartz also discussed the basic principles of government currency issuance in 1986).

These two goals, a stable account unit and an effective exchange medium, seem to be irreconcilable, because it is impractical to pay interest on paper money, so Friedman advocates stable deflation rather than price stability. But now, with well-designed CBDC, it has become possible to achieve these two goals.

Advantages of the central bank's digital currency

As an almost no-cost exchange medium, CBDC will increase the efficiency of payment systems. For example, a recent study by the International Monetary Fund pointed out that adopting CBDC will help resolve cross-border financial transactions more quickly and safely (he 2017). The CBDC is particularly beneficial for low-income families, who are often heavily dependent on cash, and CBDC is particularly beneficial for small businesses, as small businesses pay high cash handling fees or exchange fees when paying with debit cards and credit cards. At the macroeconomic level, researchers at the Bank of England estimate that the productivity gains from adopting CBDC will be similar to the sharp reduction in distorted taxes (Barrdear and Kumhof 2016).

The CBDC's interest-bearing design and the elimination of banknotes will also help to improve macroeconomic stability, as the benefit of interest rate adjustments is no longer limited by the effective lower limit to deal with serious adverse shocks.

Goodfriend (2000, 2016), Buiter (2009), Agarwal and Kimball (2015), Pfister and Valla (2017) have long considered the benefits of eliminating the zero-lower limit. The lower limit has been a key reason why many central banks currently set inflation targets at 2% or more, and CBDC will basically eliminate the need to maintain this inflation buffer, or deploy alternative currencies such as quantitative easing or credit subsidies. Policy tools.

In addition, in the event of a severe economic downturn, CBDC will help provide financial incentives for financial support. Dyson and Hodgson (2017) pointed out that during the economic downturn, funds can be directly deposited into CBDC accounts of low-income households, buffering their purchasing power due to the economic downturn and the temporary negative CBDC interest rate. In fact, Friedman (1948) emphasized the complementarity between monetary expansion and fiscal expansion in this case.

The CBDC is a natural extension of current currency movement trends. For example, most central banks have already paid interest on commercial banks' reserves, and commercial banks' reserves account for a large portion of the overall monetary base. The Fed expanded its ability to pay interest to a wider range of counterparties by borrowing money from the US Treasury bond repo market. In addition, the Federal Reserve Bank now maintains independent deposit accounts for systemically important financial market utility companies so that customers of these utility companies know that their funds are safe, liquid, and interest-bearing. For example, an independent reserve account was set up at the Federal Reserve Bank of Chicago to hold funds for Chicago Mercantile Exchange customers and initial margin for US Intercontinental Exchange (ICE) customers. Account.

The monetary policy aimed at stabilizing prices will be fundamentally different from the current inflation forecasting target system. As mentioned above, most central banks have inflation targets of 2% or higher, and do not consider the situation where inflation has deviated from the target before, so the total price level follows a random upward drift.

In contrast, under the price level target, consumer prices will continue to fluctuate briefly, but monetary policy will ensure that the total price level returns to the target level over time. Families and businesses will be able to plan with confidence that the cost of a basket of representative consumer goods (measured by CBDC) is stable over the medium term, within the planning range of the next 5, 10, 20 or even 50 years It remains roughly the same. This stability is especially beneficial for low-income families and small businesses because they often have little or no access to complex financial planning advice or complex financial instruments to counter the risks.

The widespread use of CBDC and the elimination of banknotes will prevent tax evasion, money laundering and other illegal activities that are easier to carry out through banknotes, especially large denominations (Rogoff 2016). This benefit is important in advanced economies, but more important for developing economies, where most of the economic activity is carried out using cash, and the incidence of tax evasion is very high. Ecuador has proven the feasibility of CBDC. In Ecuador, CBDC is widely used through a simple and secure platform (two-step verification via mobile phone and SMS). In Kenya, the government took the lead in establishing public-private partnerships to provide low-cost digital payments through Safaricom, which currently provides digital payments to approximately 25 million Kenyan customers (using the M-PESA platform). Its two major shareholders are Vodafone (50%) and Kenya's Ministry of Finance (25%).

The risk of the central bank’s negative attitude

Given the rapid pace of payment technology innovation and the proliferation of virtual currencies such as Bitcoin and Ethereum, it may not be wise for the central bank to adopt a negative attitude in dealing with CBDC issues. If the central bank does not produce any form of digital currency, there is a risk of losing currency control, and there is a greater likelihood of a serious economic downturn. Because of this, central banks are moving quickly when considering adopting CBDC.


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[2] Barrdear, J and M Kumhof (2016), “The Macroeconomics of Central Bank Issued Digital Currencies”, Bank of England Staff Working Paper No. 605.

[3] Bordo, M and A Levin (2017), “Central Bank Digital Currency and the Future of Monetary Policy”, NBER Working Paper No. 23711.

[4] Broadbent, B (2016), “Central Banks and Digital Currencies.” Speech to London School of Economics, 2 March.

[5] Buchanan, J (1962), “Predictability: The Criterion of Monetary Constitutions”, In: Leland Yaeger, In Search of a Monetary Constitution. Harvard University Press: 155-183.

[6] Buiter, W (2009), “Negative Nominal Interest Rates: Three Ways to Overcome the Zero Lower Bound”, NBER Working Paper No. 15118.

[7] Dyson, B and G Hodgson (2017), “Digital Cash: Why Central Banks Should Start Issuing Electronic Money”, Positive Money.

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Cai Weide

Director of Digital Society and Blockchain Laboratory of Beihang University, Chief Scientist of Tiande Technology, Major Project Leader of National Ministry of Science and Technology, Director of Blockchain Internet Lab of National Big Data (Guizhou) Comprehensive Experimental Zone, Tianmin (Qingdao) International Sandbox Research Dean of the Academy, Honorary Dean of the CCID Research Institute of CCID (Qingdao), President of the Blockchain Industry Professional Committee of China Asia Economic Development Association, Director of the North Mujin District Block Chain Committee

Jiang Xiaofang

Ph.D. student of Beihang University of Computer Science, Chartered Financial Analyst (CFA), member of Beijing Financial Analyst Association

Liu Wei

Master of Science in Beijing University of Aeronautics and Astronautics, research blockchain direction