Central banks and digital transformation

aje on March 25, 2022

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:

The evolution of money

Key readings:
Recommended podcasts:
Current policy relevance:

In response to the 2022 Fed paper, 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)
  • For more see: Selgin, G., “A ‘narrow’ path to efficient digital currency”, Cato Briefing Paper No. 134, February 9th 2022
Other country case studies

Here’s a website that keeps track of interest in CBDCs around the world:

https://cbdctracker.org/

Here is a good article summarising various CBDC experiments:

Learning Objectives: Provide an assessment of central bank responsibilities in the digital currency landscape. 

Cutting edge theory: Assessing current policy relevance of central bank activities.