Jens Weidmann on 14 June 2017
http://www.bis.org/review/r170621b.htm
4 How do new technologies shape the future of central banking?
Ladies and gentlemen, getting the issue of policy intervention right still seems to be a formidable task. But while no effort should be spared in addressing this topic, central banks need to be aware that, more often than not, change is not the result of crisis, but of technology.
Every technology comes with technical risks - the recent WannaCry cyber attacks are a case in point. But the main challenge for central banks will probably lie with the tectonic shifts triggered by digitalisation. Digitalisation will spawn new forms of financial intermediation. While this might be a boon to the economy, central banks will be faced with questions regarding the >transmission of their monetary policy.
Some even suggest that privately issued digital currencies might do away with our currencies altogether. However, closer economic analysis indicates that this scenario is likely to be overblown. As a medium of exchange and unit of account, money is subject to substantial network externalities that alternative currencies seem unlikely to overcome. I am also pretty confident that central banks are better able to deliver price stability than a rigid monetary rule or an algorithm.
But even if private digital currencies do remain a fringe phenomenon, central banks are urged by some to consider embracing the new era by issuing their own digital currencies. This would mean that non-financial corporations and even households would have access to the central bank balance sheet in the form of digital balances which - unlike cash - have no noteworthy storage costs.
What might appear intriguing from a technological point of view raises fundamental questions about the nature of the financial system and our economy at large.
Allowing the public to hold claims on the central bank might make their liquid assets safer, because a central bank cannot become insolvent. This is an feature which will become relevant especially in times of crisis - when there will be a strong incentive for money holders to switch bank deposits into the official digital currency simply at the push of a button. But what might be a boon for savers in search of safety might be a bane for banks, as this makes a bank run potentially even easier.
But in taking deposits away from banks, it also removes their ability to engage in maturity and liquidity transformation and make loans.
A new technology therefore reopens an old debate in economics: does maturity transformation enhance welfare, or should banks be prevented from creating liquidity?
My personal take on this is that central banks should strive to make existing payment systems more efficient and still faster than they already are - instant payment is the buzzword here. I am pretty confident that this will reduce most citizens' interest in digital currencies.
Highlightings by me.
We see Jens Weidmann managing the perception:
Jens Weidmann calls it "digitalization".
He sees the benefits for the saver and problems for banks as in bank runs.
He thinks central banks and banks can keep control with instant payments.
But is it?
Locally, we already have instant payment and it is called cash. And I think he is right, that crypto currencies would boom instantly if we lost cash as a means of instant payments.
He thinks central banks can provide better price stability than algorithms. He doesn't say how, it is just a promise. This promise would be good enough for me if there would have been clones of Jens Weidmann all around the world for decades in central banks around the world.
But central bank policies are made by Italian Goldmann Sachs guys, academic Wall Street puppies and state parties. How can he speak for them?
Dear Jens Weidmann, this is not (only) about instant payments, we already have that with cash.
It is about:
- central banks stealing purchasing power from the real economy and give it to their friends in the financial sector. Not possible with Bitcoin.
- payments without permission without borders without capital control.
- payments without a third party custodian that has to be trusted.
- payments that can't be stopped
- currency that does not belong to the bank when it is in "my" bank account
- not paying interest to a bank that created currency out of nothing.
If you think you can address these issues, please do.
Instant payments is the least of those problems (apart from the case of international money transfers).
Yours,
Gerd Castan