Can We Stabilize the Price of a Cryptocurrency?: Understanding the Design of Bitcoin and Its Potential to Compete with Central Bank Money

Based on legal arguments, we advocate a conceptual and normative shift in our understanding of the economic character of central bank money (CBM). The widespread treatment of CBM as a central bank liability goes back to the gold standard, and uses analogies with commercial bank balance sheets. However, CBM is sui generis and legally not comparable to commercial bank money. Furthermore, in modern economies, CBM holders cannot demand repayment of CBM in anything other than CBM. CBM is not an asset of central banks either, and it is not central bank shareholder equity because it does not confer the same ownership rights as regular shareholder equity. Based on comparisons across a number of legal characteristics of financial instruments, we suggest that an appropriate characterization of CBM is as ‘social equity’ that confers rights of participation in the economy’s payment system and thereby its economy. This interpretation is important for macroeconomic policy in light of quantitative easing and potential future issuance of central bank digital currency (CBDC). It suggests that in robust economies with credible monetary institutions, and where demand for CBM is sufficiently and sustainably high, large-scale issuance such as under CBDC is not inflationary, and it does not weaken public sector finances.

Private entities have recently attempted to invade the realm of central banking. This chapter identifies such activity as ‘shadow central banking’, and draws analogies to the previous emergence of ‘shadow banking’ more generally. The similarities between shadow banking and shadow central banking are clear when analysing the circumstances of their emergence, their pathologies, and the regulatory response. This chapter focuses on the evolving roles of central banks and private initiatives, as their activities have led to the rethinking of central banking activities and the form of money in modern capitalism. In doing this, it proposes that this disruption of traditional central banking activity stems from a new interpretation of the concept of money, one that defies the classic dichotomy of ‘central bank money’ versus ‘commercial bank money’. This chapter then analyses the main characteristics of shadow central banking and identifies specific commonalities not only with the shadow banking system, but also with historical systems that pre-existed the modern central banking framework. Finally, it considers the systemic risks, systemic conflicts of interest and opaque corporate governance mechanisms associated with shadow central banking and posits some policy considerations to address such risks.

The modern monetary system is controlled by the state and yet linked to private deposit banking. Monetary value held in deposits with commercial banks is known as ‘commercial bank money’ (CoBM). Monetary value held in deposits with the central bank – as well as banknotes issued by the central bank – is called ‘central bank money’ (CeBM). Under this scheme, central banks thus issue two forms of central bank money: cash for the retail sector and balances in traditional reserve accounts for wholesale purposes (reserves). However, for several years now, and most recently in particular against the background of private actors commencing to issue private digital currencies, a growing number of central banks have also been investigating the possibility and implications of issuing a digital form CeBM for the general public: central bank digital currency (CBDC), also known as retail CBDC (rCBDC).

This paper discusses the potential and limitations of Bitcoin as a digital currency. Bitcoin as a digital asset has been extensively discussed from the viewpoints of engineering and security design. But there are few economic analyses of Bitcoin as a currency. Bitcoin was designed as a payments vehicle and as a store of value (or speculation). It has no use bar as money or currency. Despite recent enthusiasm for Bitcoin, it seems very unlikely that currencies provided by central banks are at risk of being replaced, primarily because of the market price instability of Bitcoin (i.e. the exchange rate against the major currencies). We diagnose the instability of market price of Bitcoin as being a symptom of the lack of flexibility in the Bitcoin supply schedule - a predetermined algorithm in which the proof of work is the major driving force. This paper explores the problem of instability from the viewpoint of economics and suggests a new monetary policy rule (i.e. monetary policy without a central bank) for stabilizing the values of Bitcoin and other cryptocurrencies.

Subject. The article considers negative interest rates applied by both central and commercial banks on deposits and loans under conditions of significant changes in monetary arrangements of the modern economy. Currently, the number of central and commercial banks using such interest rates tends to increase. Objectives. The aim is to review theoretical and practical scientific studies on identifying the root causes of using the negative interest rates and the implications of this practice in the modern economy. Methods. The study involves methods of induction, deduction, synthesis, and comparative analysis. Results. The application of negative interest rates by central banks is aimed at stimulating the use of money (the banking sector liquidity) in central banks’ payment systems. The application of negative rates by commercial banks is related to the absence of commercial banks’ interest in using the deposits of business entities in conditions when the volumes of bank lending are restricted by Basel standards, i.e. by the Capital to Risk (Weighted) Assets Ratio (CRAR). Conclusions. Using the negative interest rates due to the specifics of the modern monetary arrangements cannot be characterized as an effective instrument of modern monetary policy implementation. Refusal to apply negative interest rates practices should be supported by effective coordination between the central bank money (the banking sector liquidity) and M1 money supply, which is formed as result of commercial banks’ credit transactions.

One of the threads in the regulatory discussions that have been taking place in Europe in the wake of the Lehman crisis has been about strengthening the financial market infrastructure. Attention has turned to the issue of whether payments by so-called financial market infrastructures should be made in ‘central bank money’ (CEBM) rather than ‘commercial bank money’ (COBM). This paper looks at the roles of CEBM and COBM in the clearing and settlement of fixed-income securities in Europe. CEBM is seen as a risk-free settlement asset. The problem is that most institutions wishing to make payments do not have access to central bank accounts and many institutions that do have access do not necessarily think it economic or worthwhile to open an account. But, most importantly, few central banks offer cross-border access (a major exception being the European Central Bank within the eurozone) and none offer foreign currency payments. All developed economies therefore use CEBM and COBM in tandem, but the vast bulk of payments are made in COBM. In order to aid an understanding of the complex interaction of CEBM and COBM in the clearing and settlement of repos in Europe, the paper maps the flow of money and securities in central counterparty-cleared repo business.

The objective of this paper is to examine the relationship between the central bank's daily money market operations in the form of Term Repo and Term Reverse Repo operations on stock returns using daily data. Unlike earlier studies, we use two new monetary measures, namely, Repo Spread and Reverse Repo Spread. Controlling for firm‐specific factors and time dummies and addressing endogeneity issue, we show that the central bank's money market operations have a significant effect on daily returns. Further, we also observe that the inclusion of these monetary variables improves the prediction of the stock returns.

The goal of this paper is to assess the impact of e-banking, which are distinct from conventional banking systems, on central banks’ monetary policy. E-banking poses a challenge to central banks’ ability to control interest rates and it may also increase endogenous financial instability. The challenge to interest rate control stems from the possibility that e-banking may diminish the financial system’s demand for central bank liability, rendering central banks unable to conduct meaningful open market operations. Increased financial instability could emerge from the increased elasticity of private money production and from the periodic runs out of e-banking into central bank money that generates liquidity crises. Similarly, the future of e-banking is dependent on its growth, regulation and increased technological advancements that would boost the security of the new instrument. It will directly impact the central bank’s control of monetary policy unless it is included in its measurements of monetary aggregates. We therefore recommend that since the impact of e-banking on monetary policy depends solely on how fast it will spread and the extent to which it will substitute for cash, it is vital that Central Bank of Nigeria (CBN) considers taking steps to compensate the resulting decrease in its balance sheet. Also, CBN must have to impose special obligations with the money reserve on the e-banking issuer in case of any large increase in e-banking creativity that will affect the monetary policy at the end. The government must keep the rate of prices stable and with this condition, where e-banking will be equal to other forms of money which maintain by apportion percentage as a reserve ratio to the central bank. Similarly, if e-banking spreads moderately, there will be a decrease in the seigniorage income and thus, the decrease in the balance sheet of CBN will be limited. Hence, it must include e-banking in monetary aggregates that the spread of e-banking may lead to a change in the velocity of money. Keywords: monetary policy, e-banking, technology, velocity of money

Central bank money is the foundation of modern monetary and payment systems. Central bank money defines a unit of account. The price at which this money trades determines “monetary policy.” And most payment systems require the transfer of central bank funds before a transaction is legally final or “settled.” Despite its current ubiquity, the origins of central bank money have remained obscure, and the present-day system involves a remarkable conceptual leap from earlier coin-based systems. In this paper, we recount how the critical innovation—the creation of a unit of account that could be maintained solely through open-market operations—took place in the seventeenth-century Dutch Republic (for a more detailed examination see Quinn and Roberds 2005; Quinn and Roberds 2006). The villain in our story is the incremental debasement that unsettled the quality of new coins and the price of old coins. The protagonists are the Dutch authorities who contended with debasement by regulating the price of coins and by creating “exchange banks,” the Bank of Amsterdam in particular, to assure the quality of coins. The plot is propelled forward because well-intentioned regulatory changes exacerbated the debasement problem. Resolution began when authorities disconnected the Bank of Amsterdam from the price of circulating coins. The solution was conceptually difficult because a coin would have a different price in the Bank of Amsterdam than it had outside. Once this dichotomy was accepted, however, a robust market developed to mediate the relationship between the Bank of Amsterdam and circulating coins, and ledger accounts at the bank become the de facto means of final settlement. In the end, the final step into the world of fiat money—the elimination Monetary SySteMS: tranSitionS and experiMentS

Zentralbankgeld und Zinsen: unabhängige Instrumente der Geldpolitik? Zentralbanken können über den Zins auch eine bargeldlose Wirtschaft kontrollieren. In einer Ökonomie mit positiver Geldnachfrage könnte die Variation der Geldmenge neben dem Zins ein zusätzliches Instrument darstellen. Diese Hypothese wird für verschiedene Organisationstypen des Geldmarktes geprüft. Sie gilt in einem Floor-, aber nicht in einem Korridor-System (das Fed und EZB anwenden). Im Letzteren ist das Geldangebot endogen über die Vorgabe des Leitzinses bestimmt. Wenn eine tiefgreifende monetäre Stabilisierung notwendig wird, z. B. bei einer Vermögensinflation, sollte (wie früher ansatzweise von der Bundesbank praktiziert) eine "Zangenpolitik„ angewendet werden, nämlich gleichzeitig die Zinsen zu erhöhen und die Geldmenge quantitativ zu beschränken.

As of October 2011, in the context of the TARGET2 payment system, the Bundesbank had accumulated a total claim of 465 billions € on the rest of the Eurosystem, that is on the other National Central Banks of the euro zone and the ECB. The growing claims of the Bundesbank and, to a lesser extent, the National Central Banks of Luxembourg, the Netherlands and Finland, are the counterpart of growing liabilities of the distressed peripheral countries of the euro area. Since the beginning of these crises the rising claims of the Bundesbank correspond to rising liabilities of the National Central Banks of Ireland, Greece and Portugal, and recently Italy and Spain.The central bank of the Eurozone is in fact a set of several institutions known as the Eurosystem. It is composed of the European Central Bank and all the 17 National Central Banks of the member countries. Cross border payments between banks of different countries of the euro area are conducted through a system known as TARGET2. Through this payments system banks can transfer to each other claims on the National Central Banks, known as “central bank money” or “reserves”. Through TARGET2, each cross border transaction between countries belonging to the Euro area gives rise to a gross claim of a National Central Bank on another National Central Bank. Indeed the National Central Bank of the country of the “paying” bank needs to borrow claims on the National Central Bank of the country of the “receiving” bank, in order to transfer these claims to this bank. The National Central Bank of the country of the “paying” bank has thus to borrow reserves from the National Central Bank of the country of the “receiving” bank, before transferring the property of these reserves to this “receiving” bank At the end of each day, the claims or liabilities of National Central Banks on or to each other are netted and replaced by a net claim or a net liability of each National Central Bank on or to the Eurosystem. These daily net claims or liabilities are added to the cumulated TARGET2 balances of each National Central Bank built up since the launch of the euro. Until 2007, the current account deficits of the peripheral countries of the Euro area were compensated by net capital inflows. Since 2008 however, the banks of Germany and other core countries are reluctant to lend to the banks of the peripheral countries, which also experience huge capital outflows. the growing imbalances of TARGET2 accounts are caused by a sustained reversal of capital flows. Net capital outflows now add to the structural imbalance of the current account of peripheral countries, due to a lack of competitiveness. the balance of payments imbalances of the distressed countries benefit from a kind of monetary funding by the Bundesbank.If the euro zone broke up, the Deutsche Bundesbank could incur enormous losses on its TARGET2 related claims on the Eurosystem. In such a scenario, the Bundesbank should be recapitalized by the German government, at the expense of the German taxpayer. Even without a breakup of EMU, the Bundesbank should bear 30% of the potential losses of the distressed countries’ National Central Banks loans to their banks which lack good quality assets to provide as collateral.

Most textbook models explain the operation of monetary policy in terms of how the central bank influences the market rate of interest by managing the supply of its liabilities relative to the demand for them. Yet some central banks no longer operate that way and, instead, set an interest rate for their own liabilities. This raises the question of how under that modus of operation the central bank's rate is transmitted to the financial markets. Another question concerns whether advances in information technology may erode the demand for central bank money and hence threaten the ability of central banks to implement monetary policy. There are, however, some simple answers to these conundrums. In an open and efficient financial system, the central bank can determine the market rate of interest by standing in the market at its own rate, and rely on interest rate arbitrage to transmit that rate to the market. It follows that even if advances in information technology result in a diminished use of, and thus reduced demand for, a stock of central bank money, that need not undermine a central bank's capacity to implement monetary policy.

Breakthroughs in financial technology (fintech), ranging from early coins and banknotes to card payments, e-money, mobile payments, and, more recently, cryptocurrencies, portend transformative changes to the financial and monetary systems. Bitcoin and cryptocurrencies bear a significant resemblance to base money or central bank money. This functional similarity can potentially pose several challenges to central banks in various dimensions. It may pose risks to central banks’ monopoly over issuing base money, price stability, the smooth operation of payment systems, the conduct of monetary policy, and to the stability of credit institutions and the financial system. From among several potential policy responses, central banks have been investigating and experimenting with issuing central bank digital currency (CBDC). This paper investigates CBDC from a legal perspective and sheds light on the legal challenges of introducing CBDC in the euro area. Having studied the potential impact of issuing CBDC by the European Central Bank (ECB), particularly on the banking and financial stability, the efficient allocation of resources (i.e. credit), as well as on the conduct of monetary policy, the paper concludes that issuing CBDC by the ECB would face a set of legal challenges that need to be resolved before its issuance at the eurozone level. Resolving such legal challenges may prove to be an arduous task as it may ultimately need amendments to the Treaty on the Functioning of the European Union.

During the 20th century, a view established itself, according to which (a) defining central banking would be difficult, (b) the Sveriges Riksbank (established in 1668) and the Bank of England (established in 1694) would have been the first central banks, (c) although at that time central banks did not have a policy mandate and no concept of central banking would have existed before the 19th century. This book challenges these views and rehabilitates pre-1800 central banking, including the role of numerous other institutions, mainly on the European continent. Central banking should be defined as being associated with the issuance of “central bank money”, i.e. financial money of the highest possible credit quality, that is accepted for settlement of any other financial claim in the same way as species money is accepted as it is considered credit, liquidity and market risk free, to use modern terminology. Issuing central bank money is a natural monopoly, and therefore central banks were always based on public charters regulating them and giving them a unique role in a sovereign territorial entity. Many early central banks were not only based on a public charter but were also publicly owned and managed, and had well defined policy objectives. The book reviews these policy objectives and the financial operations of 25 central banks established before 1800. The book shows that many of the central bank controversies debated today actually date back to the period 1400-1800.

Private entities have recently attempted to invade the realm of central banking activities. This Article identifies this activity as “Shadow Central Banking,” and draws analogies with the previous emergence of “shadow banking” more generally. The “shadow banking” system emerged as a network of new and often non-regulated entities, that gradually entered the business of banks. Shadow banking‘s development depended on specific causes and responded to specific needs of the financial system. This transformations ultimately led to the creation of a far more complex and interconnected financial system, which ultimately collapsed amidst the Financial Crisis in 2008. The similarities between shadow banking and Shadow Central Banking are clear when analyzing the circumstances of their emergence, their pathologies, and the regulatory response. After a brief analysis of the shadow banking system, this Article focuses on the evolving roles of central banks and private initiatives, as their activities have led to the rethinking of central banking activities and the form of money in modern capitalism. This Article proposes that this disruption of traditional central banking activity stems from a new interpretation of the concept of money, one that defyies the classic dichotomy of “central bank money” vs. “commercial bank money”. This Article then analyzes the main characteristics of Shadow Central Banking and identifies specific commonalities not only with the shadow banking system, but also with historical systems that pre-existed the modern central banking framework. Finally, this Article considers the systemic risks, systemic conflicts of interest and opaque corporate governance mechanisms associated with Shadow Central Banking and posits some policy considerations to address such risks.