Archive for June 12th, 2018

21st century cash: Central banking, technological innovation and digital currencies

June 12, 2018

Of all the stuff one has read on digital currencies, this speech by Fabio Panetta is one of the best. As the Deputy Governor of the Bank of Italy, he provides a lot of clarity on the several issues regarding digital currencies.

First he discusses what digital currency mean in terms of the two functions of money: means of payment and store of value. He says the unit of account does not mean much here as a dollar in Physical notes or a dollar in digital form mean the same thing.

  • Means of Payment: He says central bank digital currency will be beneficial for people without a bank account. In terms of payments CBDC will at best just provide competition to already existing private payment systems. It will also reduce cost of cash but then costs of computing will rise.
  • Store of Value: Currently there are costs to storing physical money which will disappear with CBDC. However, there could be issues as CBDC could compete with  bank deposits leading to so called runs on banks as mentioned by other central banks. Thugh, he does not see this as a problem as banks provide much wider services and people will not easily transfer their deposits.

One needs to balance the risk and benefits:

The risks and benefits of CBDCs are two sides of the same (digital) coin, related to the role of money as a means of payment and a store of value. Recourse to a CBDC as a means of payment may well have benefits, but their precise nature is uncertain and they may still be too small to justify the introduction of a
digital currency. Moreover, the issuance of a CBDC may become less positive on balance if we take into account the potential effects on the demand for commercial bank deposits. The risks and benefits would be  affected by the characteristics of the CBDC, but in any event the risks would not disappear altogether.

The business case for introducing CBDCs remains at best unclear. However, like all issues related to technological innovation, the costs, benefits and risks of digital currencies are likely to change rapidly in the future. This suggests that central banks should continue to examine the potential effects of digital
currencies. Indeed, many of them are currently engaged in research and technical experimentation with a CBDC. The Riksbank, Bank of England, and Bank of Canada, to name a few, are actively analyzing the issue. Some have gone even further, such as the Central Bank of Uruguay, which has launched a pilot
project.14 At Banca d’Italia, we are also studying how a CBDC would impact our financial system and monetary policy, and we are working within the Eurosystem on trials using DLT, which might prove useful for a digital currency. Researchers are also actively reflecting on CBDCs. Today’s conference is a notable example.

Then he discusses some open issues like anonymity aspect of currencies:

Probably the most important issue is whether the digital currency should be traceable or whether it should be designed to guarantee, to the extent possible, anonymity. Cash has always been an incredible instrument: it allows for third-party anonymity in transactions and leaves no trace. While this implies that it is an effective means of payment for illicit activities such as money laundering, the financing of terrorism or tax evasion, it also ensures privacy for its users.

The possibility of tracing our digital transactions may have important economic and ethical implications. Imagine for a moment that payments data suggested that spending on alcohol and the probability of defaulting on a loan are positively correlated. Based on such evidence, a bank might decide to reject a loan demand by an applicant with high expenditure on alcohol, even though the correlation does not reflect any ex-ante causal relationship between these two variables but could be simply due, for example, to an ex-post common psychological factor.16 Though it may be over simplified, this example emphasizes that we need to address carefully the privacy issues that may stem from digitization, and in particular from the introduction of a CBDC. Today these risks are still
limited, as in most countries retail transactions are concluded mainly with cash, and the record of our electronic payments represents an imprecise screening device. This is changing rapidly, however.

Just who should decide on the degree of anonymity associated with the use of a CBDC? Clearly, this is more than just a technical issue, and as such, the choice does not belong to central banks alone but also to the political sphere. We need to think carefully, right now, about how to make the introduction of a CBDC fully compatible with the rights of individuals and about how to square the increasing availability of information on the private lives of each one of us in relation to our political views, state of health, or sexual orientation, with the protection of our personal freedom and with the rules that govern the functioning of a modern liberal democracy.

Hmm. This is an important public policy question.

Lots more in the speech.

Gift receiving at the central bank: Bringing transparency and tightening the rules…

June 12, 2018

Croaking Cassandra Blog posts on this issue of giving gifts to the central bank. One remembers how during Diwali most of the financial firms competed to give the classiest of gifts to the central bank officials. The idea was to be counted and get to know the regulator and if possible be in the favored books. The practice was stopped some years ago and not sure what the status is of today.

It seems in New Zealand, the central bank has released a list of gifts received since July 2016. The gifts vary from a computer mouse to a jar of pickle to movie tickets and what not.

The blogger says that this should not be acceptable at all even for courtesy sake:


India has entered a regime of “permanent surpluses” in most crops and facing a great depression…

June 12, 2018

Reading Harish Damodaran is a must to get some idea on Indian agriculture.

In this piece, he writes on how there is a surplus in most crops in India. The policymakers continue to think we live in age of shortage leading to familiar responses of quotas and restrictions. What we need is a change in thinking as we are possibly facing a great depression in Indian agriculture:


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