The need isn't for the consumer. It's advantageous for the central bankers. With it they can more easily control demurrage/inflation/deflation/confiscation (like the Chinese government plans to do with the e-RMB).
IE taxes based on savings instead of income.
What I don't understand is the consequences of that on private banks.
Even if every bank account in the country started charging an account fee to cover negative interest rates, people would continue to use banks because they are just so damn convenient.
It's really only the wealthy who would be faced with this being any significant amount of money, and those people comprise a tiny minority of bank accounts.
Maybe, maybe not - it's possible for interest rates to be high and inflation to be even higher (stagflation).
This is a pretty fundamental misunderstanding of modern economics.
It is a tax on savings whether currency is "supposed" to be saved or not. All retail banks offer savings accounts specifically for this purpose.
I think tax is the wrong word because a tax implies a kind of tithe on top of desirable behavior. A fine implies that you are being penalized for undesirable behavior. I think the latter is a more apt description.
Your mattress full of hundos is detrimental to the economy and you are being fined for maintaining it.
Savings accounts are not an example of unproductive capital because they collateralize loans. That's why they're not subject to the inflationary haircut. They're not particularly productive hence the low return, which may be below inflation. However, that's an ROI below benchmark, not inflation. i.e. savings accounts are just a bad investment. Bad investments will exist in any market conditions.
Personally I maintain a small cash buffer in a savings account and I pay the (small) delta between inflation and interest rate as a fee for liquidity.
When central banks issue cash now are they literally sending billions of dollars to the mint, trucking it off to a bank, and then the bank records it on a digital ledger? Seems wasteful.
It is, but it's restricted. M0 is central bank money [1]. Currently, only financial institutions have it. If the public could open accounts at the BoE, they too could own M0.
CBDCs are a way to give the public M0 without putting the central bank into the retail banking business. That gives central banks powerful new levers. For example, cash limits how negative rates can go. If cash were to become scarce and most money were held as M0, the central bank could enforce negative interest rates by clawing back M0.
Negative rates are feasible today. But were they to go sharply negative, they'd hit bank capital. Having the public directly hold M0 removes that side effect.
No, it doesn’t. Cash with depreciation or expiration (both preannounced and ad hoc) has been used before. Politics, not technology, limits the use of that tool, and CBDC doesn’t meaningfully change the politics.
Yes, if you changed the cash we're talking about, pounds sterling, it would be different.
> CBDC doesn’t meaningfully change the politics
Remember a few years ago, when IT would talk about getting long-needed projects greenly because they slapped "blockchain" on the proposal?Expiring cash is toxic. CBDC is not. Branding matters.
Bank deposits are insured up to £85k, which means they are as solid and as good as cash.
It’s well known that negative rates only bind on commercial bank deposits - if at all.
Negative rates are just a tax on banks - which they recover by charging more for loans, and paying less for deposits like any other costs.
Also, wouldn't this widespread use require in-kind withdrawal of cash from circulation to have any real effect?
Btw I don't think OP argued citizens wouldn't need an account.
>> For example, cash limits how negative rates can go. If cash were to become scarce and most money were held as M0, the central bank could enforce negative interest rates by clawing back M0.
This would only really be effective if CBDC became prevalent enough to actually make a dent in money supply. What proportion of money would have to be CBDC for this to actually have an impact, and would we get there by just pure issuance of CBDC or by taking cash out of circulation and replacing it with CBDC?
> Btw I don't think OP argued citizens wouldn't need an account.
>> CBDCs are a way to give the public M0 without putting the central bank into the retail banking business.
I don't know how you would avoid retail banking unless you were to issue it via a means other than an account.
There's a lot more that goes into retail banking than just having an account. Of course citizens would need an account, how else will they be tracked :) I think the OP meant that the central bank could give customers an account for the sole purpose of holding their digital "crypto" coins and sending/receiving money with it....without having to do provide all the other services that go with retail banking like loans, credit cards etc.
Going fully cashless will make negative rates impossible to avoid. UBI can be more specifically targeted as well.
Generally speaking, the money supply exceeds the total amount of cash in most countries.
If they are in control of digital currency then they have a ledger of transactions, maybe? and if you have a 1:1 record of every single ledger then it's a bit harder to obfuscate?
Banks & businesses keep ledgers like these, but you have to 1. get your hands on it and 2. in case of multiple sets of books, you need to find the correct one. And then you have to connect all the dots.
Chinese capital and lending controls are very strict but this hasn't stopped Chinese and others to try and move money out of China. China has had repeated issues with things happening beyond regulators' reach until they become too big to hide and then have to be unwound, like excessive use of shadow banks for lending.
Settle everything instantly, no charges, no withdrawal fees converting between cash and digital. The cost of running the system are probably minimal compared to what the entire consumer-banking sector collects.
Depending on where you are, this cost might be hidden from you. (banking in the USA for example is expensive compared to the UK)
However as you point out, those companies that provide PoS terminals take either a monthly fee, or a percentage cut.
Neither are roads, railways, wastewater treatment, communication lines or electricity. Money is infrastructure, and it makes sense for government to control and subsidize these to secure free and equal access, as well as ensure that developments of them occur in ways that benefit all members of society.
Politicians can’t print a dollar without abusing it to promote religion (“In God We Trust”), funding war, or handing it out to get reelected.
https://www.federalreserve.gov/monetarypolicy/reservereq.htm
It worked quite well, I'd say.
If you are going to mention the open banking API initiative, then what are the requirements to get access to that? You can't as an individual.
Also, this was the easy case, inter-UK. Now tell me how to transfer using Python and without applying to all kinds of regulators for API access a pound from a UK account to a US/EU/Japan account.
It’s been a few years so I don’t remember the details, but I’ve written Python that was about that simple using Teller[0] without any problems. Didn’t need a digital currency or direct access to the Open Banking API, just used normal Pounds Sterling and normal bank accounts.
It gives Teller full access to your account from what I read, can you limit it for example to just send money, without them going through your statements?
And it's still only intra-UK.
Wise (Formerly TransferWise) does forex.
I fully agree with you though, the Open Banking outcome in reality almost looks like a joke. I only found the above as I was searching for a while to find a way to do this that didn't involve building my own screen scrapers to implement.
There are banking offerings in the UK with official APIs however you are looking at £200/month+ in costs.
And what about fees? BTC, ETH and many other coins are essentially unusable for smaller transactions. Sending .02 ETH (about $45) from my MEW wallet costs .00292 ETH (about $6.75).
What happens if I give a street artist 5 pounds to draw my picture and then he flatly refuses?
What happens if someone mugs me on the street and steals 100 pounds from me?
Should we not have cash at all because of these two problems, and others?
as you've alluded to, its not open to consumers, only financial institutions, with good reason. It gives you lots of access to do all sorts of things.
> how I can transfer one pound from me to you using a 20 line Python script?
Now this isn't a usecase I had thought about. I mean there are APIs that I can use to interface to a specific bank that will allow me to do this. But they are hidden behind layers of bureaucracy.
I think the issue for _consumer_ banking is making sure there is enough screening to make sure its not as easy for scammers and tricksters to get money from you.
How so? There's no reason a bank account shouldn't be programmable. If the worry is fraud and account hacks, that already happens when the computer is compromised or people get scammed.
Agreed.
But until we have a better system of plainly showing access levels to one's account its a scammer paradise to allow access via said API.
You and I are educated in the world of API access, so will think twice before clicking "agree" to allowing emoji corp access to my bank account to "verify your identity", but a significant number of people would blindly click allow. Until we have either educated the public, or made an access GUI that stops 99.9% of that kind of use case, its just not worth the hassle.
Nobody says such API would be connected to a person's life holdings. It could be low amounts that are safe to lose in case of a hack.
Of course, you need to educate people to not put all their life savings into those accounts. But the same applies to multiple other services.
Look at the current £10 note. To even start on getting a "close enough" material (the feel of the polymer, the clear windows), you're looking at acquiring specialized print stock they don't exactly stock at the Office Supply Warehouse down the street. Now, how exactly are you going to transfer a design to it? Conventional CMYK inkjet and laser-- if you can get it to stick, are going to be a dotty, indistinct mess. Heat-transfer might bake the colour in, but would probably wreck the material and be blurry and smudgy. Once you've figured that out, try to figure out how you can precision-cut and apply holographic foil and optically-variable panels. Now scale it up to the point where it's economically viable.
If you've used a printer before, you know it's not going to be capable of cranking out a convincing banknote.
For consumer acceptance, it's important that people can directly trust the system. I'm concerned that "here's some papers that if I go to my local university, there might be a few experts in the math department who can parse them and tell me it's trustworthy" won't have quite the same impact as "look at the fine lines making up the portrait of Jane Austin, you know that's not coming out of your HP DeskJet."
So often not though. Money without oversight will instantly attract the most nefarious users that governments don't like, so it's unlikely anything a government would propose is going to very easily allow things to happen without some kind of regulatory control.
It's hard to fathom exactly what the point would be, because even the benefit of reducing VISA style transaction taxes from the current 2.5% to about 0.1% (which is where it should be) would incur the wrath of the institutions that make money from that and sponsor centre-right politicians in the UK.
It's too early to tell, it could just be a political football for now, something to talk about, get attention, distract us etc..
In fact, things are heading the other way, with "micro"-transactions in mainstream games sometimes exceeding the price of the game itself.
In the music business u don't make money on each song, you only make oney from hit songs.
That song streamed 10 million times can earn you $50k. And it could be more if spotify wasn't taking a bite out of it.
[0]: https://www.businessinsider.com/how-much-does-spotify-pay-pe...
Open Banking is not available to individuals by design. Can you imagine the fraud levels if it was?
To achieve their goal, they program the money with "must be spent on consumer goods and/or rent in the next 6 months." Then they put a "smart contract" on the money and say "can only be spent if you are drug free and looked for a job in the last 6 months."
It's scary and I am against it, but above is the upside, from a certain perspective.
The bailwick of Jersey sent citizens a prepaid card with £100 expiring in 6 monhts which was also disabled for ATM withdrawls during 2020. Again moderate results.
Money is a unit of account, if you mess with it people adjust quickly, there is no free lunch.
It's not the same as giving Wellbutrin+Ritalin to somebody who is depressed.
The more you use extreme measures to force people to do what they don't want, the more they'd refuse to do so.
When people are scared and paralyzed by fear, messing with the unit of account won't calm their worries, if anything given how out of the ordinary it is, it could be argued that it makes things worse.
Money is external, people pick the scheme apart rather quickly and you end up worse than before because now you look desperate to force them to do what you want
Whether this is good or bad on the long run is debate-able, but it would shake things up globally.
Even if they can't see the "crypto-dollar" for less "real dollars", they will just go through some medium of exchange. I.e. buy toilet paper for crypto dollars, and sell it at a discount.
Great point. I didn't consider it offhand.
I tried to get one for my banknote collection, but it got lost in the post. :/
/TinFoilHat
A digital currency would make possible to settle a trade stock in minutes or even seconds.
A digital currency would remove a lot of transactions costs associated with buying/selling stocks.
There are quite a few steps before actual stocks can change hands. For instance the seller could have sold without actually owning the stocks, it might be he even can't deliver them, in which case the clearing will have to take care of that, etc. All these steps could have been automated long ago if the will was there, the reason they haven't is not because of the currency used but because of traditional common practice and legacy reasons.
One real reason why digital currencies are not widely deployed is crime. Already there is a growing problem of ransomware demanding Bitcoin payments; a "true" digital currency that was as convenient as Bitcoin and allowed offline (peer-to-peer) payments (which Bitcoin does not and cannot support) would enable "perfect crimes." This was a concern raised in the 90s when digital cash was being proposed:
https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.46...
This was one of the concerns that prevented banks from adopting e-cash (as the term is understood by cryptographers), though I have been told by people who worked on this that law enforcement agencies were satisfied that they could still "follow the money" since the anonymity property was narrowly defined (banks could not link deposits to withdrawals, but banks would still know who had made a particular deposit, merchants would still be able to identify customers, etc.).
What you didn't mention is that it's also already pretty digital at point of sale as well; Contactless payment, i.e. "card taps" are very common.
Actually, the UK got pretty close to it in the 1990s
Covid was also used in government PR to try and sell the idea of a cashless society.
What they mean by "digital currency" is a for instance a purely digital bank note than you can hold and transfer to someone else (like for instance a crypto token). Clearly that's not how things work now.
Edit: See my further comment below as it looks like people don't quite understand what "digital currency" is.
when you do a bank transfer, do you think they physical cash?
When the BoE does quantitative easing, they don't actually print money[1], they just "transfer" money to banks who then do "things" with it. Its literally just numbers in a DB.
[1] handling physical cash is expensive, slow and difficult. Not only is the price of movement relatively static regardless of the value, you have to keep on paying to store the stuff. The Federal reserve do things differently I think, because are not quite as all in one as the BoE.
Not, it's not.
It seems you and others are confused here and do not understand what is meant by "digital currency".
Digital currencies, like what is discussed and e.g. the "digital yuan" in China, it to create real digital bank notes / coins. Not expert by I think similar to a crypto token.
It means I can hold a digital bank note and pay you by transferring it to you.
This is very different to the current system in which I instruct my bank to do something and to balance with the recipient's bank.
Depending how this is implemented it can be anonymous like physical bank notes, or it can be tracked and plenty of other things also become possible. It also does not require me to interact with my bank.
The only real benefit to this system is that it would probably be run by a government agency and as such, would theoretically make it available to everyone. This would reduce the cost of being unbanked in the US and probably improve lives. Honestly, though, you could just make basic banking available for everyone so they can get paid, pay bills online, and shop easily - it'd likely prove to be more cost effective.
The point being is that what is referred to as "digital currency" is not what we have now (otherwise the BoE and others would not be studying feasibility and costs/benefits). In that sense currency is not digital at the moment. Bank ledgers and transfer instructions are.
You started of staying "currency is not digital", a broad statement about which I don't think there's any confusion, it's just flat-out incorrect. If it's not digital then what is it then, analogue?
Now you're talking about a particular form of digital token, which OK, maybe currency isn't that, and the usefulness of that isn't given. Saying "currency isn't digital because it's not this token" is like saying ".png files aren't digital because they're not .mp3s". It's still numbers in computers. You know, digital.
Currency is currently not digital in the sense meant here. Otherwise the BoE and other central banks would not discuss the possibility of issuing digital currency. It's rather the banks' ledgers and transfer instructions that are digital.
In my previous comment I have only tried to explain what CBDC is. Perhaps I did not do a good job if so please feel free to provide a better explanation that would benefit everyone.
> "currency isn't digital because it's not this token
I have not written that, so I think you do not understand the topic. Here for reference to start with:
The alternative is of course that it's all meaningless hype. Just because the government does something doesn't necessarily prove it makes sense.
your clarifications were helpful
It seems that you're now saying that "BoE Currency is not digital currency." with a specific meaning of "digital currency" separate from the definition of "digital" or "currency".
This is why digital replacements for cash hasn't (and likely won't) succeed.
To often people speak of their government as completely abstract separated entity they can only submit to. But actually, they elect them and the government even follow them in their craziest follies, like, say, leaving the EU in the UK.
I don't feel represented by any of the parties that have a chance to get into power.
Democracy is literally the majority ruling over the minority - the problem being that even that majority can pick between entities they agree with on some issues and not others.
Decentralisation of power is the only way to get control back to people and out of an elected oligarchy.
it is a compromise. I don't want to live in anarchy (sorry, a libertarian world) because like extreme communism it has inherent flaws. Thus I submit to being ruled by the UK government, and actively vote in elections. However as its a compromise, no present party with a chance of winning power reflects my views, thus compromise.
However to your main point. Anonymous easy payments are a vector for corruption, crime and general bad stuff. Sure there are good usecases for it, but mostly it'll be used to avoid tax.
I wonder if you would reconsider anarchy if there was a private system of entities providing government-like services and compete with each other.
It's a win-win for everyone.
Also the energy required to secure the ledger will be dramatically reduced. Proof of work can be replaced by physical security, which is more energy efficient.
Anyone wanting to rewrite the ledger would need more power than the government has in protecting it.
I'm not sure you understand how banking works. The BoE already has a ledger, its just private[1] for a number of reason (the banks accounts are published, but not in real time, and not by individual account). All banks have ledgers, and sometimes they even marry up.
[1]well kind of.
Transactions in ledger-based accounting require a source and target account. In double-entry, all transaction legs have to sum to zero. "$10 on Paul; -$10 on Alice."
Your "current balance" may be cached, but it's never used. Most financial systems (which I suspect extends to banks, but I could be wrong) will enforce recalculation of at least the tip of the account's ledger whenever a transaction comes out of it. You don't just add/substract from a cached number.
Currency is based on trust. Trust that the ledger is correct, auditable and matches up.
but to address your question, its possible to unilaterally reverse a payment, but as you'll then have to tell the clearing house to reverse the transaction, you'll need to get authorization from thirdparty, which is tricky. Moving money around inside a bank though is probably much easier.
However you're far better off just running a limited company and offering loans, that's a far easier way commit fraud.
Do you simply trust that I won't, and that your bank trusts me not to do so?
I suppose the question is, what's stopping me? Trust or security?
but more deeply its both trust security, and legal liability.
First you need to gain access to the system in the first place. Then you need to have unfettered access and be undetected. Considering this has been the number one ledger attack since the beginning of time (which is why tally sticks were a thing, and double entry book keeping) There are lots of systems in place to stop, detect or alert. Not only that you have the statement generating system which sends out physical copies of the account monthly.
Second we would need clearing houses to not notice that there is a mismatch in funds.
third when you try to extract that cash, we'd need the money laundering alarms to not go off. Which, if you've tried to buy a house in the UK, you know is not at all trivial.
You have to realise that the banking system is reliant on a bunch of very bored, highly motivated, fresh out of uni graduates to tally, move and generally be the grease that moves capital about. They will have tried all sorts of tricks to cheat, scam & salami slice money. There is a huge amount of effort going on to stop, detect and deflect fraud. Mainly because the banks are liable for it.
So for standard bank accounts, the chance of someone getting access to a server and changing the values of my account and not being detected are pretty limited. Not impossible, but small.
And thats the key. If the bank cocks up, the law is very much on my side as a consumer. the bank will be compelled to reverse the fraud. If they don't they get fined and or loose their license (although in practice, I don't think thats likely.)
With zero trust, if someone cocks up a digital contract and someone extracts the entire escrow value, game over. no recourse, other than to try and take the perp to court.
In what way is more government surveillance and control over accounts a win for the average citizen? The rich will always find a way like they do with taxes, and it's the average person that suffers every time.
Switching into their own digital currency (or watever technology) government picks doesn't automatically make them and their fiscal policy more trustworthy among businesses, investors or citizens.
They can't hide abusive tax policies, irresponsible spending and desire to control their citizens wealth and financial lives behind their "digital" version of fiat.
I can already have an entirely digital bank account from at least three "challenger" banks. There are also now at least two business accounts that also entirely virtual. "Faster Payments" (customer bank transfers) are delivered in seconds.
I can see a need for speeding up BACS, and reducing the price of CHAPS, but apart from that, there isn't much wrong with the pound.
changing to having an open ledger(bitcoin style) isn't entirely great as a normal citizen. I don't really want my entire financial history to be picked over by advertisers, insurance companies, future employers, and spam/scam bots.
A government isn't ever going to allow a normal citizen to have a anonymous payments system so I don't see them allowing a purely private and anonymous currency (ala-monero)