The central banks of Norway and England have published reports exploring different models for central bank-issued cryptocurrencies. By contrast, Federal Reserve governor, Lael Brainard, recently expressed her opposition to central bank cryptocurrencies – claiming that such would result in broad “macroeconomic consequences.”
Decline of Cash Prompts Norwegian Central Bank to Consider Central Bank-Issued Digital Currency
A new report prepared by a working group of Norges Bank has indicated that Norway’s central bank is contemplating the development of a central bank-issued cryptocurrency. The report states that “A decline in cash usage has prompted us to think about whether at some future date a number of new attributes that are important for ensuring an efficient and robust payment system and confidence in the monetary system will be needed,” adding “If the answer is yes, a [central bank-issued digital currency (CBDC)] may be an appropriate measure.”
Norges Bank identifies three specific purposes for a central bank-issued consideration that it believes “merits further consideration: […] ensur[ing] a public and credit risk-free alternative to deposits in private banks, in addition to cash[,] function[ing] as an independent backup solution for the ordinary electronic payments systems,” and “ensur[ing] the existence of suitable legal tender as a supplement to cash.”
The report states that “It is too early to conclude whether Norges Bank should take the initiative in introducing a CBDC. The impacts of a CBDC – and the socio-economic cost-benefit analysis – will depend on the specific design. The design, in turn, will depend on the purpose of introducing a CBDC,“ adding that “A CBDC raises complex issues,” and “There is virtually no international experience to draw on.” Norges Bank states that it “will continue to issue cash as long as there is demand for it. But when cash usage declines, a CBDC can be an alternative to deposit money. The primary purpose of a CBDC is to ensure confidence in money and the monetary system.”
“Further analysis is needed to assess the purposes of a CBDC, the types of solutions that best achieve these purposes and the benefits measured against financial and other costs. This is a long-term undertaking. The aim of publishing the working group’s report is to inform the public about its work, disseminate knowledge[.] and initiate a dialogue with stakeholders,” the report states.
English Central Bank Explores Different Models for Central Bank-Issued Cryptocurrency
The Bank of England has published a working paper exploring three potential models for central bank-issued digital currencies.
The three models explore are the “Financial Institutions Access” model (FI), the “Economy-Wide Access” model (EW), and the “Financial Institutions Plus CBDC-Backed Narrow Bank Access” model (FI+). The FI model would see “CBDC access […] limited to banks and [non-bank financial institutions (FBFIs)],” whereas the EW model additionally allow “households and firms” to access CBDC. The FI+ model would see “CBDC access […] limited to banks and NBFIs,” however, “Within the NBFI sector there is at least one financial institution that acts as a narrow bank, providing a financial asset to households and firms that is fully backed by CBDC but that does not extend credit. That is, they provide households and firms with an asset that has the risk profile of central bank money, rather than a risk profile linked to the financial institution and of its borrowers.”
The report claims to “find that if the introduction of CBDC follows a set of core principles, bank funding is not necessarily reduced, credit and liquidity provision to the private sector need not contract, and the risk of a system-wide run from bank deposits to CBDC is addressed.” Said principles are that “CBDC pays an adjustable interest rate,” that “CBDC and reserves are distinct, and not convertible into each other,” “No guarantee [of] on-demand convertibility of bank deposits into CBDC at commercial banks,” and that “The central bank issues CBDC only against eligible securities.”
U.S. Federal Reserve Governor Opposed to Central Bank-Issued Digital Currencies
The Norwegian and British reports come approximately one week after U.S. Federal Reserve governor Lael Brainard expressed her opposition to the suggestion of central bank-issued cryptocurrencies at the Decoding Digital Currency Conference in San Francisco.
Governor Brainard expressed a number of concerns pertaining to central bank digital currencies, stating that “there are serious technical and operational challenges that would need to be overcome,” including “the risk of creating a global target for cyberattacks or a ready means of money laundering.”
Mrs. Brainard argued that “the issuance of central bank digital currency could have implications for retail banking beyond payments,” asserting that “If a successful central bank digital currency were to become widely used, it could become a substitute for retail banking deposits. This could restrict banks’ ability to make loans for productive economic activities and have broader macroeconomic consequences.“ The governor also claimed that “the parallel coexistence of central bank digital currency with retail banking deposits could raise the risk of runs on the banking system in times of stress.”
Governor Brainard concluded that “there is no compelling demonstrated need for a Fed-issued digital currency,” adding that “most consumers and businesses in the U.S. already make retail payments electronically using debit and credit cards, payment applications, and the automated clearinghouse network.”
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