[povik]

Are these proposed central bank “digital currencies” anything more than a centralised or federalised database of who-owns-how-many?

And if so, how does that differ from what we have now? That is, in a European country, I have an account with my bank, and my bank has an account with the central bank (or the two interact in some other way).

My understanding of the current system is limited, I merely know some large portion of the issued currency today is without physical representation.

[PeterisP]

Well, the current system as you describe is a two-level system with your bank in between; a CBDC allows you to "have an account" directly with the central bank directly and make/receive payments without needing a retail bank intermediary.

It also enables central banks to achieve policy goals that they could not earlier - for example, in the last big crisis all the quantitative easing did not result in as much actual lending to people in the economy as central banks expected; the retail banks between you and the CB had other interests. A CBDC enables a central bank to inject money in the economy directly to people and companies, bypassing the major retail banks.

[povik]

I see. But then again I am a bit confused by this text in the report on digital euro[0], which was recently posted on HN.

“While the Eurosystem would always retain control over the issuance of a digital euro, supervised private intermediaries would be best placed to provide ancillary, user-facing services and to build new business models on its core back-end functionality. A model whereby access to the digital euro is intermediated by the private sector is therefore preferable.“

That sounds like a bank to me. But I guess it must be so that the relationship between the central bank and intermediary will be different.

I struggle to find the defining features of these CBDCs so that it is more than empty branding. I guess you might sum it up as “bringing the central bank and currency-users closer thanks to modern technologies”?

[0] https://www.ecb.europa.eu/euro/html/digitaleuro-report.en.ht...

[danialtz]

Accounts at central banks is only one model of CBDC, called Direct CBDC, which is to my knowledge much less preferred way than a hybrid apparoach (like what’s there today), for several reasons: - managing a complexity of nation-wide banking for Central Banks is quite early at this stage, being a traditionally a government portion known mostly for policies and economics than cutting edge tech deployment. - CBs want to keep stability, and breaking down a current model of banking by introduction of a new FIAT model is not one of them

There are key needs and major requirements additionally for the CBDC that are documented in the latest BIS and ECB reports.

[nmlnn]

It's the branding that they need to get rid of cash. Playing it off as an analogue to digital switch, rather than the removal of transaction freedom and privacy.

[adament]

I think if we want to argue that central banks will soon be pushing for CBDCs to let people have accounts directly with the central bank we need to argue why they at the same time are opposing* narrow banks, which to me seems to be a different technical tool achieving an equivalent goal?

* At least the Fed seems to be: https://www.bloomberg.com/opinion/articles/2019-03-08/the-fe...

[notahacker]

The main reason the Fed is rejecting this is that it doesn't want to give banking privileges to entities which don't perform the core function of commercial banks from the Fed's point of view (lending) and really dislikes the idea of the public getting reasonably high interest rates for zero risk and zero contribution to the economy for reasons discussed in your article. If that's proposed as a goal for CBDCs, they won't happen (at least not without far more significant reform of regulations and incentives surrounding lending)

In theory, CBDCs could be just a back end representation of the existing financial system for more efficient settlement though, which would be a different technical tool to achieve the Fed's current goal. That looks considerably more likely to happen than removing financial intermediaries from the picture.

[adament]

I agree. In which case I think the question as posed in a sibling thread is central: How do CBDCs differ from the current digital settlement system already available at several central banks? The sibling thread mentions the Bank of England and the Danish central bank has a similar digital settlement system. Is it “just” a fancy term for a technical upgrade or is there a substantive difference in function?

[jrs235]

I assume the FED is rejecting it because the owners of the FED are the member banks which stand to lose from this implementation.

[dageshi]

Hmmm, wouldn't the CBDC be safer than any other place to put your money? So in a crisis, wouldn't you sell everything and put it in the CBDC including potentially government bonds precisely at the time the government probably needs to borrow cheaply?

That seems like a recipe for disaster to me.

[danialtz]

Indeed, financial stability and crisis models are the transformation studies several central banks and also stablecoins like Celo undertake to understand how introduction a new monetary instrument would solve some issues and affect others. Short answer is it’s too early to say since it’s a tech-push innovation sped up by demand-push of pandemic and global players.

[riffraff]

I feel the payment side is pretty relevant here: governments and central banks are starting to realize that as currency dematerilializes the VISA, MasterCard etc of the world are going to drain a significant part of the economy, which they would rather keep, being in the business of, well, managing those currencies.

[sjtindell]

I read somewhere that in the US some banks took the QE money and put it back into their accounts with the Fed where it collected interest. Rather than lend it out, they essentially got paid just to hold it. There’s an economic argument saying that it made them safer, etc. but it doesn’t sound quite right to me.

[adament]

While I am not familiar with the story you are referring to, it does not sound weird to me. Given that QE works by the central bank buying risky assets (initially government bonds), presumably the banks received the QE money by selling higher yielding(given that even during QE the rate curve was mostly upward sloping) government bonds to the federal reserve than the interest rate they earned by depositing said money at the federal reserve. This would seem an irrational move from the banks unless they had some additional use for the cash compared to the government bonds?

[hogFeast]

This is actually complex. But QE, in most cases but not all (for example, QE3) involved the purchase of assets from the non-bank sector, not purchases from banks (in the US, banks do not hold a large amount of US govt securities).

When QE did involve the purchase of assets from banks (i.e. QE3 with MBS/ABS purchases, and in the EU where banks held a lot of govt debt) then it did lead to increase lending but the effect varied significantly (for example, in the EU the effect was tiny because most banks in the region are functionally insolvent).

So QE is not thought to have any particular effect on bank lending, and is generally not used with that aim in mind now. I think this was thought to be true in 2008 but we know now that it has no/little effect (i.e. QE is mainly effective through portfolio rebalancing). And central banks that did try to increase bank lending (the UK in the mid-2010s, and the ECB...always) use other techniques (i.e. FLS, LTRO...which, iirc, are direct lending to commercial banks by central banks...I think, I don't follow this stuff closely anymore).

Just generally too, if commercial banks are holding a lot of govt debt then that is usually a sign of problems elsewhere (i.e. the EU).

[neilwilson]

Banks don’t lend out money from central banks. Never have.

Banks can only store reserves in accounts at the central bank because only banks can have such accounts.

What they get is money from the central bank in interest for holding those reserves and that effectively subsides lending a bit - at least until the interest rate drops so low that people are tempted to draw out cash

[zmk_]

Sweden is probably the most advanced in considering an "e" currency and so far the proposals have been of keeping the two-tier system, i.e., you still have an account with a bank.

[mbrock]

The riksbank seems to be advocating an "e-krona" where each citizen would use a state-issued digital identity to directly use central bank money as a means of payment similar to physical cash, no?

[zmk_]

They have not decided whether e-krona would be a 'account-based' (like you say) and a competing/backup payment system. Or a 'value-based' where it's 'stored on a card'. At the same time they do not want to impact lending facilities of banks so if they go with the first option they will most likely deemphasize it considerably to keep deposits in traditional banks. The 2nd option seems to me like a total fail, similar to what Chipknip was in the Netherlands. The main motivation for the ekrona seems to be the move away from cash, but Sweden has been cashless for a long time now (between Swish and cards).

[danialtz]

The benefits are not that obvious and visible in a European country.

In general, there are benefits and drawbacks:

- efficiency: well, despite having a fast transaction time the machinery behind banking system is old and in-efficient, scary even to think how it’s still working. Cross-border is another major friction.

- flexible monetary policies and tools: e.g. directly depositing relief money into the accounts of people in crisis times, or negative interest rates.

- financial inclusion: not everywhere people are banked and part of socioeconomic circle to receive benefits, e.g. African countries or small portion of modern world, where banking is privileged. In theory, one does not need a whole banking backend to store coins, as seen by crypto world.

- innovation backstop: the new currency could act as a settlement layer for the known stability model of money in a country to create new tools (asset chains, etc) or automate them at much lower cost.

Of course, it comes with a risk (from CB’s perspective) of disintermediation of banking system, technological challenges, privacy concerns, etc.

[fh973]

I can half answer that and hope somebody can complete the story.

What you have in your bank account is not digital cash. It's effectively a note that the bank owes you cash.

This may sound like a technical detail but as far as I understood without physical money there would be no bank accounts. That's what I always wondered about: how could an economy go 100 percent electronic banking, if banking is built on the existence of physical cash?

This is the missing link. With those accounts you actually would be able to own electronic cash.

That said I have no idea how this would work in practice. Maybe you would have the payment option to pay with this electronic cash. But why would you pick one over the other?

[grey-area]

Bitcoin is not 'electronic cash' as you define it here - it's a shared ledger - there are no coins. The only difference with a current account at your bank is central ledger vs distributed consensus ledger.

Also why would a bank require physical cash? Banking is based on savings and loans, debt and credit, not cash. The money in your bank account is not backed by real coins somewhere in a vault.

[chrisco255]

There's a big difference. The bank is able to create money from thin air when you deposit funds, thanks to fractional reserve banking. Banks typically only need to hold 10% (or less) of total funds deposited. The rest they loan out, which always finds its way back into the banking system, so that effectively, banks are able to loan out about 10x what their depositors have in their accounts.

Holding Bitcoin, on the other hand, is more like gold in that there is only so much of it.

[grey-area]

The amount of bitcoin on the ledger is increasing all the time, it has not reached the limit yet. This is also defined by software rules which can be changed.

[throwawaygh]

> What you have in your bank account is not digital cash. It's effectively a note that the bank owes you cash.

Yes.

> as far as I understood without physical money there would be no bank accounts.

I'm not sure why that would be the case. I've never withdrawn a physical dollar from my bank account.

> how could an economy go 100 percent electronic banking, if banking is built on the existence of physical cash? This is the missing link.

I don't think that's the point of CB digital currency. The point of CB's digital currency is to reduce the indirection between policy and business/consumer behavior.

NB: this includes both fiscal and monetary policy. So e.g. provides a mechanism to cut the retail banks out of things like covid relief funds.

[chrisco255]

Right, and also provides a mechanism to directly punish political opponents.

[wan23]

Cash is also not cash by that definition. A dollar bill is what is called a banknote, which represents that the bank (or really the government) owes you a dollar.

[jariel]

Money today is already 'mostly digital'.

And yes, your bank doesn't have all the money required to pay everyone out at the same time. That's 'fractional reserve lending'.

But at the same time, the money it does have is not all cash.

[1] https://en.wikipedia.org/wiki/Money_supply

[wcoenen]

> And if so, how does that differ from what we have now?

1) One important difference is counterparty risk: the balance of your bank account is not really backed by anything, it is only a liability of the bank. If the bank goes bust then you are left with nothing (except for any amounts covered by government deposit guarantee schemes). This would not be an issue for an account at the ECB because they can't go bust.

On the other hand, the ECB has already said that they would put limits in place to avoid bank runs where everybody converts their commercial bank deposits into digital euro.

2) Another difference would be that moving deposits between different banks requires clearing and settlement between those banks, which slows everything down. Digital euros could in principle be transferred directly.

On the other hand, the ECB has mentioned that digital euro transactions might still be handled by banks, and that there might still be some form of settlement.

3) A digital euro account might give you direct exposure to the ECB policy interest rates. (Unfortunately the deposit interest rate is currently negative.)

[neilwilson]

Digital euro would have to be handled by the national central banks to avoid pooling. The ECB is a bit different as it has another level of hierarchy in the banking system.

[anm89]

You are exactly correct. These "digital currencies" are simply new types of bank accounts where retail consumers can hold money at central banks. They are no more digital than any other bank account.

They have absolutely nothing to do with crypto either.

[hnthrower]

Do you have a source for that? If I'm not mistaken it was talked around here in the past about them taking the wallets and keys portion from cryptocurrencies.

[anm89]

The closest thing we have in the US is this proposed legislation: https://www.congress.gov/bill/116th-congress/senate-bill/357...

If you read it I think its pretty clear that whatever they are talking about is totally unrelated to crypto.

But just thinking through it, the properties of crypto are the polar opposite of what a central bank wants out of the monetary system.

The last 80 years since Bretton woods has been the story of the US trying to centralize global markets around the dollar. The last thing they want is something that is either distributed or permissionless.

If you read the wiki for CBDCs it acknowledges this at the end after paying a bunch of lip service to how they were "inspired" by crypto.

https://en.m.wikipedia.org/wiki/Central_bank_digital_currenc...

> In contrast to cryptocurrencies, a central bank digital currency would be centrally controlled (even if it was on a distributed database), and so a blockchain or other distributed ledger would not be required or useful - even as they were the original inspiration for the concept.[24][25

[baby]

Imagine this as an open API that everybody can use to transact using the currency of the gov.

[GoblinSlayer]

Cryptocurrencies showed that you can keep all money in a single database. I wonder if those CBDC databases have any integrity controls. Can the administrator simply change account balance and nobody will even notice?

[neilwilson]

It’s little more than a current account at the central bank rather than a commercial bank.

Which of course removes bank solvency risk - just like cash

[hogFeast]

Very simply: monetary policy works by getting banks/private sector to do things they wouldn't otherwise do. Digital currency removes banks from the equation. Instead of banks creating money by lending, central banks would create money.

This is, however, a simplification. Central bankers like this idea because it gives them more control. Most people should be suspicious of this idea for the same reason.