Blockchain & Money: Session 15: Central Banks and Commercial Banking, Part 1 by M.I.T. Sloan School of Management with Professor Gary Gensler

Blockchain and Money–Class/Session 15–Prof. Gary Gensler MIT Sloan School of Management

Session 15: Central Banks & Commercial Banking, Part 1

Session 15 Study Questions:
- What strategic considerations should go into Central Banks thinking of expanding access to digital reserves through central bank digital currency (CBDC)?
- How might design considerations–retail vs wholesale access; token or account based; interest bearing and level of service–weight in such decisions?
- What are the challenges CBDCs might pose to commercial banking models, monetary policy implementation, payment systems resilience and financial stability?

Session 15 Readings:
- ‘Central Bank Digital Currencies’, BIS.
- ‘The Future of Money: Digital Currency’, Garratt.
- ‘Central Banks and Digital Currencies’, Broadbent.
- ‘A Perspective on Electronic Alternatives to Traditional Currencies’, Camera.
- ‘Bitcoin is Fiat Money, Too’, Economist.

Overview: Fiat Currency and Central Banking; Central Banking Approaches to Blockchain Technology; Payment System and Blockchain Technology Initiatives; Central Bank Digital Currency and the ‘Money Flower’; Conclusions.

Fiat Currency
- Represented by Central Bank Notes & Commercial Bank Deposits
- Relies upon System of Ledgers
- Accepted for Taxes
- Legal Tender for All Debts Public & Private

Central Banking Goals and Functions
- Economic Policy Goals
  - e.g.–U.S. Federal Reserve so-called ‘Dual Mandate’: “promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates”
- Manage Fiat Currency
  - Supply
    - Physical Cash and Monetary Base
    - Reserve and Capital Requirements
  - Price
    - Interest Rate Open Market Operations
    - Foreign Exchange Interventions
    - Exchange Controls
- Oversee Fractional Banking System
  - Provide Reserves
  - Regulate and Supervise Banking System
  - Promote Safe and Efficient Payment System
  - Lender of Last Resort
- Banker to the Government
  - Manage Foreign Exchange Reserves
  - Conduct Government Bond Auctions
  - Lender of Last Resort

Central Banks, Cryptocurrencies, and Blockchain Technology
- Monitor and Study
- Restrict Use
- Payment System Experimentation
- Central Bank Digital Currency Initiatives

Payment System ‘Pain Points’
- Costs
- Delayed Settlement
- Chargebacks
- Fraud
- Privacy
- Availability
- Financial Inclusion
- Cross Border Payments
- Centralization of Ledgers
- Complexity

Public Sector General Payments Initiatives
- European Union–Target Instant Payment Settlement & Payment System Directive II
- India–Immediate Payment Service
- U.K.–Updated Real-Time Gross Settlement System & Open Banking
- U.S.–Faster Payment Task Force

Central Bank Digital Currency:
- Central Banks Currently Issue Digital Reserves to Commercial banks
  - and Physical Tokens (Cash and Coin) to Public
- Commercial Banks Provide Digital Currency (Deposits) to Public
  - Essentially a form of Intermediated CBDC
- Private Sector is Experimenting with Stable Value Tokens
- Strategic question: Should Direct Access to Digital Reserves be Expanded?

CBDC–Opportunities
- Continue Government Provision of a Means of Payment
- Promote Competition in Banking System
- Promote Financial Inclusion
- Address Payment System ‘Pain Points’
- For Some Nations, Avert Sanctions

CBDC–Blockchain Technology
- Fiat Currency is Recorded on Ledgers:
  - Central Bank and Commercial Bank Ledgers
  - Non-Bank Ledgers
- Verification and Networking Critical to Economics of Money

CBDC–Challenges & Uncertainties
- Financial Stability and Potential to Increase Ease of Bank Runs
- Changes to Commercial Banks’ Deposits and Funding Models
- Effects on Credit Allocation and Economy
- Monetary Policy Implementation & Transmission
- Resilience of Open Payment Infrastructures

CBDC–Design Considerations
- Widely Accesible vs. Wholesale
- Token (e-Money) or Account (e-Deposit) based
- Issuer–Central Bank, Commercial Bank or Others
- Degree of Anonymity
- Transfer Mechanism
- Limits or Caps
- Interest Bearing and Level of Account Services

Official Sector Digital Currency Initiatives
- Dubai–emCash project
- Ecuador–Dinero Electronico–U.S. $ electronic currency
- Iran–Indigenous Cryptocurrency backed by Iranian Rials
- Senegal–eCFA
- Sweden–E-Krona initiative
- Tunisia–e-Dinar
- U.K.–Royal Mint Gold
- Uruguay–6 Month Pilot for Digital Uruguayan Peso
- Venezuela–Petro Oil backed Initial Coin Offering

Conclusions:
- Central Banks Play an Important Role in Economy
- We Already Live in an Electronic Currency Age
- Payment Systems and Fiat Currency have had Challenges
- Blockchain Technology can be a Catalyst for Change
- Central Bank Digital Currency, though, likely will be seen in Adoption

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