It also enables central banks to achieve policy goals that they could not earlier - for example, in the last big crisis all the quantitative easing did not result in as much actual lending to people in the economy as central banks expected; the retail banks between you and the CB had other interests. A CBDC enables a central bank to inject money in the economy directly to people and companies, bypassing the major retail banks.

“While the Eurosystem would always retain control over the issuance of a digital euro, supervised private intermediaries would be best placed to provide ancillary, user-facing services and to build new business models on its core back-end functionality. A model whereby access to the digital euro is intermediated by the private sector is therefore preferable.“

That sounds like a bank to me. But I guess it must be so that the relationship between the central bank and intermediary will be different.

I struggle to find the defining features of these CBDCs so that it is more than empty branding. I guess you might sum it up as “bringing the central bank and currency-users closer thanks to modern technologies”?

[0] https://www.ecb.europa.eu/euro/html/digitaleuro-report.en.ht...

There are key needs and major requirements additionally for the CBDC that are documented in the latest BIS and ECB reports.

* At least the Fed seems to be: https://www.bloomberg.com/opinion/articles/2019-03-08/the-fe...

In theory, CBDCs could be just a back end representation of the existing financial system for more efficient settlement though, which would be a different technical tool to achieve the Fed's current goal. That looks considerably more likely to happen than removing financial intermediaries from the picture.

That seems like a recipe for disaster to me.

When QE did involve the purchase of assets from banks (i.e. QE3 with MBS/ABS purchases, and in the EU where banks held a lot of govt debt) then it did lead to increase lending but the effect varied significantly (for example, in the EU the effect was tiny because most banks in the region are functionally insolvent).

So QE is not thought to have any particular effect on bank lending, and is generally not used with that aim in mind now. I think this was thought to be true in 2008 but we know now that it has no/little effect (i.e. QE is mainly effective through portfolio rebalancing). And central banks that did try to increase bank lending (the UK in the mid-2010s, and the ECB...always) use other techniques (i.e. FLS, LTRO...which, iirc, are direct lending to commercial banks by central banks...I think, I don't follow this stuff closely anymore).

Just generally too, if commercial banks are holding a lot of govt debt then that is usually a sign of problems elsewhere (i.e. the EU).

Banks can only store reserves in accounts at the central bank because only banks can have such accounts.

What they get is money from the central bank in interest for holding those reserves and that effectively subsides lending a bit - at least until the interest rate drops so low that people are tempted to draw out cash

In general, there are benefits and drawbacks:

- efficiency: well, despite having a fast transaction time the machinery behind banking system is old and in-efficient, scary even to think how it’s still working. Cross-border is another major friction.

- flexible monetary policies and tools: e.g. directly depositing relief money into the accounts of people in crisis times, or negative interest rates.

- financial inclusion: not everywhere people are banked and part of socioeconomic circle to receive benefits, e.g. African countries or small portion of modern world, where banking is privileged. In theory, one does not need a whole banking backend to store coins, as seen by crypto world.

- innovation backstop: the new currency could act as a settlement layer for the known stability model of money in a country to create new tools (asset chains, etc) or automate them at much lower cost.

Of course, it comes with a risk (from CB’s perspective) of disintermediation of banking system, technological challenges, privacy concerns, etc.

What you have in your bank account is not digital cash. It's effectively a note that the bank owes you cash.

This may sound like a technical detail but as far as I understood without physical money there would be no bank accounts. That's what I always wondered about: how could an economy go 100 percent electronic banking, if banking is built on the existence of physical cash?

This is the missing link. With those accounts you actually would be able to own electronic cash.

That said I have no idea how this would work in practice. Maybe you would have the payment option to pay with this electronic cash. But why would you pick one over the other?

Also why would a bank require physical cash? Banking is based on savings and loans, debt and credit, not cash. The money in your bank account is not backed by real coins somewhere in a vault.

Holding Bitcoin, on the other hand, is more like gold in that there is only so much of it.

Yes.

> as far as I understood without physical money there would be no bank accounts.

I'm not sure why that would be the case. I've never withdrawn a physical dollar from my bank account.

> how could an economy go 100 percent electronic banking, if banking is built on the existence of physical cash? This is the missing link.

I don't think that's the point of CB digital currency. The point of CB's digital currency is to reduce the indirection between policy and business/consumer behavior.

NB: this includes both fiscal and monetary policy. So e.g. provides a mechanism to cut the retail banks out of things like covid relief funds.

And yes, your bank doesn't have all the money required to pay everyone out at the same time. That's 'fractional reserve lending'.

But at the same time, the money it does have is not all cash.

[1] https://en.wikipedia.org/wiki/Money_supply

1) One important difference is counterparty risk: the balance of your bank account is not really backed by anything, it is only a liability of the bank. If the bank goes bust then you are left with nothing (except for any amounts covered by government deposit guarantee schemes). This would not be an issue for an account at the ECB because they can't go bust.

On the other hand, the ECB has already said that they would put limits in place to avoid bank runs where everybody converts their commercial bank deposits into digital euro.

2) Another difference would be that moving deposits between different banks requires clearing and settlement between those banks, which slows everything down. Digital euros could in principle be transferred directly.

On the other hand, the ECB has mentioned that digital euro transactions might still be handled by banks, and that there might still be some form of settlement.

3) A digital euro account might give you direct exposure to the ECB policy interest rates. (Unfortunately the deposit interest rate is currently negative.)

They have absolutely nothing to do with crypto either.

If you read it I think its pretty clear that whatever they are talking about is totally unrelated to crypto.

But just thinking through it, the properties of crypto are the polar opposite of what a central bank wants out of the monetary system.

The last 80 years since Bretton woods has been the story of the US trying to centralize global markets around the dollar. The last thing they want is something that is either distributed or permissionless.

If you read the wiki for CBDCs it acknowledges this at the end after paying a bunch of lip service to how they were "inspired" by crypto.

https://en.m.wikipedia.org/wiki/Central_bank_digital_currenc...

> In contrast to cryptocurrencies, a central bank digital currency would be centrally controlled (even if it was on a distributed database), and so a blockchain or other distributed ledger would not be required or useful - even as they were the original inspiration for the concept.[24][25

Which of course removes bank solvency risk - just like cash

This is, however, a simplification. Central bankers like this idea because it gives them more control. Most people should be suspicious of this idea for the same reason.