by Andrew White | March 23, 2018 | Comments Off on Blockchain and Central Banks – What Will They Do?
It is not often I can talk about technology and economics at the same time – so when I get the chance I just have to go for it. I was catching up on my reading this morning when I came across this Economist article, A primer on blockchain-based versions of central-bank money. Of course this grabbed my eye and I devoured it in minutes. I then hot-footed it over to the source article, from the Bank for International Settlements: Central bank digital currencies. Consuming this report took a while longer but it gave me enough ammunition to ponder its findings in this blog.
The point however is that the Economist article extends the real research in the BIS report from crypto- or digital currency to blockchain. The BIS article does not actually ponder how central banks will operate with blockchain; the report simply explores issues, some good and some challenging, should central banks replace some “real” money with digital money – a far less disruptive topic.
The report shows that smart economists, and presumably some smart technologists, are exploring ways in which our deb, funding and monetary systems would operate should digital currencies become more broadly based, even issues by a central bank. And that is the key point: The reports assumes that a central authority, a central bank, would simply manage the overall monetary pool – comprised of mixed assets spanning traditional forms of today with a digital asset in the future.
In other words, if the central bank needed to assure a money supply of $100, commensurate to desired inflation and currency value, this $100 could be maintained with some challenges if comprised of a mix of real and digital currency. This is a far cry from exploring what happens to central bank authority to print money should blockchain actually be used to manage a digital currency. In other words, the report is good but it has little to do with blockchain.
The BIS and economist article do not really explore the fundamental dichotomy at the heart of central banking – that is that there is a central point of authority that balances interest rates and the supply of money while at the same time seeking to influence inflation, employment or other economic goals. Blockchain is not a technology that supports such a central authority. As such, vanilla blockchain cannot be used by a central bank since it would lose its primary hold on money supply. Since there is no single authority printing or issuing money into the chain, the central authority loses control of interest rate setting. Interest rates would “float” in response to demand and supply of money on the blockchain network in question.
This may sound scary, but try reading Ron Paul’s interesting book, End the Fed. It is a great read and it explains in simple terms how economies can and did operate before we had central banks. The real point of the BIS paper however is valid and captured in one quote: “If authorities do not act pre-emptively, crypto-currencies could become more interconnected with the main financial system and become a threat to financial stability.” The point being that since central banks cannot control the supply of digital currencies they do not govern, instability on the monetary system will increase since crypto-currencies could subvert central bank policy actions.
But to close the blog we should note that there is not too much public explanation for how central banks and central authority would survive a face to face with a blockchain network. The addition of a new currency, digital or not, that may play a role in an economy that a central bank cannot directly control is a challenge. But trying to survive as a central authority should the entire monetary system become decentralized is quite another. Maybe BIS has written and this – that report has not yet seen the light of day. I certainly have not seen something from them.
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