Should Czech issue e-koruna?

Central bankers of different countries are joining the debate of whether they should issue digital currencies. This blog has pointed to several such views: NZ, Denmark, Sweden, Finland, Australia and so on.

Mojmír Hampl, Vice Governor of the Czech National Bank in a recent speech gives the Czech perspective.

He says though there are many limitations with the idea , the philosophy behind the idea needs to be supported. It is ironical that econ academia was sleeping over any possible monetary reform and these ideas have instead come from IT sector. Atleast one central banker has honestly admitted this.

…cryptocurrencies are not currencies. To me, rather, they resemble commodities – pieces of code with some value for enthusiastic collectors. Which is fine. Its founders wanted to create something that – through the process of mining and the costs associated with it – would resemble a physical commodity or something physical. I would call it a commodity of the new digital era. But compared to vintage wine, art, or postage stamps, the amount of digital commodities is never really fixed, as proved, for instance, by last year’s split (or “fork” – I very much like this particular word) between bitcoin and bitcoin cash or the recent split between litecoin and litecoin cash. A piece of code is, in effect, easier to duplicate and improve upon.

The fact that cryptocurrencies are rather commodities also shapes our light-touch, liberal approach to regulation at the CNB. We do not want to ban them and we are not hindering their development, but we are also not actively helping or promoting them and we are not protecting them or the customers that use them. Like in a casino, everyone investing in a cryptocurrency must be prepared to lose the entire bet. And central banks do not regulate casino visits.

As you can see, I could easily spend all of my time today talking about the problems of cryptocurrencies, and of bitcoin in particular. I could talk about how much energy it consumes – at some points last year, the bitcoin ecosystem consumed twice as much energy as Nigeria, an oil giant with 190 million people. By the way, the energy consumed on a single bitcoin transaction until 2017 could power a typical American household for more than three weeks. I could talk about how a seven-fold increase in the value of bitcoin some time ago was driven by the manipulation of a single trader. I could talk about the volatility of bitcoin, which surpasses that of any other commonly traded commodity and which renders bitcoin useless for the vast majority of people. I could talk about the funny thing that bitcoin as a quasi-currency was created to make payments cheap and fast, while in reality it is more often than not expensive and slow.

But instead, I will stress – and this is my point today – the positive philosophical influence of bitcoin on the conservative world of central banking. True, it is far from clear that anytime soon a full-fledged digital currency (be it blockchain based or not) will be created by a central bank (some of you may be following the debate in the Riksbank in Sweden), but the last three years have seen an explosion of research on this idea in many central banks. Bitcoin must be credited for this powerful intellectual stimulus. When so many professors at the most esteemed universities of the developed world are not thinking about potential reforms of the current monetary order, we have received a stimulus from the libertarian IT guys instead. Fine.

He says we should think clearly about perceived benefits of e-koruna. There is one benefit which has been touted by some econs: it will enable negative interest rates:

One thing a digital currency can enable is the possibility of deeply negative interest rates. I am not a fan of negative rates at all, but of course one can imagine a scenario in which some central banks replace cash with a digital currency. Then consumers would have nowhere to hide from negative rates, if they do not want to leave their local currency entirely If the central bank guaranteed the anonymity of transactions conducted in the new digital currency (Nobody knows if this is possible), it would behave much like cash – with the significant possibility of a non-zero interest rate charged on balances deposited in it.

By the way, I do not think it is a good idea to push forward the concept of central bank digital currency just as a response to the fall in the use of cash in society. As I noted earlier, households already have access to a digital currency: they can deposit their cash on accounts at commercial banks. If a central bank starts to compete with commercial banks in this arena, it may stop the fall in seigniorage revenues, but of course at the expense of the profitability or even the very stability of the banking sector.

Even worse, such “safe haven” digital currency accounts at the central bank available to all citizens would probably guarantee a “digital bank run” in any crisis – although deposits at commercial banks are fully insured, accounts at central banks, if no cap is set, will always be seen as safer. This is why the concept of central bank digital currencies has been criticized by, among others, Mark Carney, and why Danmarks Nationalbank concluded in December it had “no plans to issue central bank digital currency.”

He further points how the digital currency could help in facilitating helicopter drop of money:

But central bank digital currency brings another potential response to the problem of the effective lower bound: an easily implementable “helicopter money drop”, i.e., direct support of consumption. Of course, this is an even more controversial idea than negative interest rates, at least in the world of central banking. But I believe it is a real and viable possibility in the event of a deep crisis akin to the one of the late 2000s. In this way, central banks could stimulate consumption directly at the individual level, circumventing the transmission uncertainty associated with quantitative easing. Moreover, such a windfall for all households could also boost consumer confidence at a time when optimism is most needed.

……

A helicopter money drop is probably possible even without a digital currency – for example, using central registries of personal bank accounts, often operated by central banks on behalf of the government. But the benefit of using a digital currency is that the central bank would not theoretically need to work with the government, so its independence would not be put in danger. Moreover, the digital currency could be designed specifically to smooth the transmission of helicopter money to consumption.

Again, I stress that I only consider this a realistic scenario in a deep recession. The central bank could also limit the possibility of transferring these funds to bank accounts (and vice versa, in order to eliminate any risk of digital bank runs). If the central bank allowed transfers from bank accounts to the digital currency, it would have to cap the amount a single individual could hold in the digital currency, perhaps at the level of the median monthly salary. In the absolute extreme, the central bank could also determine what goods the helicopter money could be spent on. For example, real estate might be excluded in order to prevent a buildup of bubbles in the housing market.

In a nutshell, any digital currency used by central banks for monetary policy purposes would have to be heavily customized and tailor-made. It would hardly resemble any of the cryptocurrencies, from bitcoin to bilur, as we know them.

 

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