Central banks and digital transformation

Lecture handout: Central banking and digital transformation*

We are seeing unprecedented innovation in payment technologies, with disruptive firms encroaching on activities that many think should be left to central banks. But why not think creatively about the opportunities and threats from decentralised money? What is the proper role of a monetary authority in a system that is fit for the twenty first century? This lecture equips students with the skills to take a radical look at contemporary issues that relate crypto currencies and central bank activities.

Prerequisite: I assume that you have some familiarity with basic concepts from money and banking, and know about and understand Blockchain and Bitcoin. If you don’t, see here:

Money and (central) banking

Key readings:
Recommended podcasts:

Starbucks isn’t a bank, but here’s a good Twitter thread on their fintech capabilities:

And here’s my short video on The Starbucks Hustle:

Recent updates

In May 2022 the stablecoin TerraUSD broke its peg to the dollar. A very good explanation of what happened, and why, is by Josh Hendrickson: When a Dollar Isn’t a Dollar. And so is this thread:


A good article debunking a lot of Web3 hyperbole is here:

Current policy relevance:

In January 2022 the Fed released a paper on CBDC’s. In response, George Selgin wrote a briefing paper that advocated expanding the set of providers that the Fed deals with, to obtain the competition and innovation that comes from the private sector without the Fed having to issue their own digital currencies. Stablecoin issuers do not require the same regulatory oversight as traditional banks, by providing access to the Fed’s system they simply need to ensure that they fully back their coins with central bank reserves (and possibly short term Treasury certificates). This would require:

  • Bank licenses should be available to non-traditional banks (i.e. institutions that don’t do all of the activities typically associated with a bank, such as maturity transformation)
  • The Fed should allow fintech companies to have master/settlement accounts (which the Bank of England did in 2018)
Further activity

In September 2022 Sequoia Capital published a gushing profile of FTX founder Sam Bankman-Fried. In November they went bankrupt, and Sequoia removed the article. However, you can download a PDF version here.

Points to consider:

  1. Did SBF’s utilitarian philosophy contribute to his willingness to cross ethical boundaries? (His objective was to make as much “risk neutral” money as possible)
  2. If his intention was to contribute to the norms of capitalism, would he have behaved differently?
Learning Objectives: Provide an assessment of central bank responsibilities in the digital currency landscape. 

Cutting edge theory: Making assessments of digital and crypto currencies.