Central Bank Digital Currency (CBDC)

Just to clarify: I was in no way countering JP's arguments. I don't know where he finds himself in regards to the moral hazard argument. Probably in the middle, as usual :-)

I was interested in hearing his thoughts on it.

Oliver, what do you mean by JP being in favor of bank secrecy? As far as I know, he's for anonymity with restrictions, so that people can remain anonymous to each other and to third parties in smaller transactions.

In any case, I didn't mean to hijack the thread...

You both bring up some great points.

Antti asks: "Why the central bank, and not the private banks?"

Yes, abolish central bank-issued banknotes and private banks can easily fill the void by supplying the public with non-anonymous payments media. They already do a good job with deposits. And if they were allowed to, then they could easily meet public demand (i.e. for the large part criminal/illegal) for anonymous payments. For instance, we know from historical experience that banks are effective issuers of privatte banknotes, which are anonymous. Or, as Olivier points out, banks could also provide the public with secrecy via protected bank accounts, although the level of anonymity might not be as complete as cash since the user provides information to the system operator.

I like the idea of CBDC but only if it is anonymous, and by that I mean it provides privacy from both the issuer (the government) and all counterparties to a transaction. The reason I like the idea of an anonymous CBDC rather than a private alternative (Swiss bank accounts of private digital cash) is it allows the government to directly capture a flow of revenue (i.e. seigniorage) that can be used to offset harm caused by illegal activity abetted by anonymous/secret payments media. So for instance, people use banknotes to evade government taxes. This is unfair to everyone who chooses to pay taxes and can lead to a break down in societal trust. Since banknotes pay no interest, the central bank captures seigniorage revenue from those who hold the notes. A large proportion of note holders will be tax evaders, so the central bank is in essence "stealing" some of the money back from them, which it will remit back to the government each year.

Likewise with criminals. Governments counter criminal activity by costly law enforcement. Since criminals by necessity hold a lot of 0% yielding cash, a central bank is directly taxing them. This tax, or seigniorage, gets remitted back to the government which can use the funds to defray law enforcement costs.

If the government chooses to get out of the business of providing anonymous payments and leaves it to the private sector, then it no longer captures seigniorage from criminals and tax evaders, and must bear the full costs of their activities. The profits it would have earned from tax evaders and criminals accrue to the private sector instead. The private sector and criminals get all the benefits and the public gets the shaft.

The advantage of an anonymous CBDC over cash is that the amount of seigniorage that society can re-capture from criminals and tax evaders can be precisely calibrated. Cash's interest rate is forever set at 0%, and this may not be optimal. Maybe a 0% interest rate doesn't capture enough from criminals and tax evaders. A CBDC's interest rate, however, can be set to a negative level so the public's compensation for tax evasion and criminality increases.

All of this addresses Oliver's point: "you seem to be arguing in favour of secrecy laws? So why not just endorse them outright?"

I do find McAndrews's argument to be fairly convincing. And as you point out, to be entirely consistent the two of us should also be in favor of bank secrecy laws, since that would shift the task of providing an anonymous payments medium away from the mafia and towards legitimate bankers. The reason I prefer the CBDC/cash route to bank secrecy is that if private banks become the primary providers of anonymous payments services, then bankers and bank shareholders will end up capturing all the seigniorage from criminals and tax evaders, when maybe the public--which directly bears the costs of criminality and tax evasion--should capture it.

Thanks, JP!

I, too, see very little point in a non-anonymous CBDC. To see point in that, one has to be (a) a proponent of the "big C view", as you put it, or (b) a central banker who is worried about the influence and "brand" of the central bank in a cashless economy. So you and I agree on anonymity and are both for small c rather than big C (although I'm not yet convinced about the need for a CBDC).

Where I don't fully agree is you using the ability to skim tax evaders and (other) criminals as one of the main arguments for CBDC. I think its raison d'etre should rest on a higher moral ground :-) You seem to be saying that the authorities should offer criminals a way to transact anonymously--thus avoiding getting caught--but charge a fee for it. I'm also worried about the law-abiding users of CBDC, who would pay the same price as any criminal would for their choice of credit balance, but receive a lot less valuable service. If an anonymous alternative was provided by private banks, they would probably charge less for its use, as they would be in it for other reasons than punishing criminals.

Deposit insurance is a very interesting subject. I'd like to discuss it later in more depth. In my opinion, what connects CBDC and deposit insurance is that their justifications can only rest on a well-defined relationship between the central bank (more broadly: monetary authorities) and the private banks (this is connected to what Oliver said in his comment). Is this relationship well-defined? I don't think so. But perhaps that is part of the design. Perhaps the central bank is supposed to keep the private banks in check by pretending it won't come to rescue when the shit hits the fan? But it always does. Through the Temporary Liquidity Guarantee Program, the FDIC guaranteed all non-interest bearing deposits, no matter the size, and, one could argue, nearly all other credit balances in banks in October 2008. This happened after the FDIC one week earlier had raised its deposit insurance limit from $100,000 to $250,000, which obviously wasn't enough.

Antti: "Where I don't fully agree is you using the ability to skim tax evaders and (other) criminals as one of the main arguments for CBDC. I think its raison d'etre should rest on a higher moral ground :-) You seem to be saying that the authorities should offer criminals a way to transact anonymously--thus avoiding getting caught--but charge a fee for it. I'm also worried about the law-abiding users of CBDC, who would pay the same price as any criminal would for their choice of credit balance, but receive a lot less valuable service. If an anonymous alternative was provided by private banks, they would probably charge less for its use, as they would be in it for other reasons than punishing criminals."

I see it working sort of like Zcash, a cryptocurrency that provides optional anonymity. Criminals and law-abiding users of CBDC who want anonymity must pay for it by accepting a negative interest rate. Law-abiding CBDC users who are willing to be unshielded and make transparent transaction are spared the fee, and may even earn interest. So a CBDC's raison d'etre isn't just to provide "clean needles" to the underground economy while using the negative interest rate to replace lost taxes and fund crime prevention. It would provide law abiding citizens with the ability to make anonymous digital payments, albeit for a price. And it would provide those who don't care about anonymity with a cash-like electronic token that yields positive interest, fixing one of the main inefficiencies of cash (everyone who holds it bears an inflation tax).

Antti: "Is this relationship well-defined? I don't think so. But perhaps that is part of the design. Perhaps the central bank is supposed to keep the private banks in check by pretending it won't come to rescue when the shit hits the fan? But it always does."

There's a good post by Cecchetti and Shoenholtz on this.

www.moneyandbanking.com/commentary/2018/1/28/time-consistency-a-primer

Oliver: "Which takes me to what I think is the actual problem with this kind of reasoning. Namely that for it to work as you say, it would have to be implemented simultaneously around the world. Either that or it would have to be augmented with some kind of capital controls. Neither of which is going to happen. As it is, banking hubs with secrecy laws around the world attract monies from dubious, overseas sources, depriving other countries of tax income and sheltering despots and criminals from their own jurisdictions. So the Switzerlands of this world harbour international criminals and skim off a lot of business for themselves in the process. The GDP and taxes thus generated probably dwarf any seigniorage effects by CBDC."

You bring up a good point. If users of the domestic CBDC are taxed at -5% a year, they might just go to Switzerland to get their secret payments services, and thus the issuing nation loses out on seigniorage while Switzerland gains. CBDC would have to be twinned with a policy that makes accessing the Switzerlands of the world more costly, effectively imposing that same negative interest rate on owners of private Swiss bank accounts, or by pressuring these havens to relax secrecy. My understanding is that this is already happening; isn't the private Swiss bank account a thing of the past?

I've thought this over. CBDCs might be easier to pull off internationally than I imagined although most current coordination efforts among countries seem to be pointing in the opposite direction.

Switzerland has needle vending machines and government monitored heroin and methadone programmes, btw.. Not that they're alone in that. They did have a completely liberalised drug policy in Zurich until ca. 1993, though with open drug use in parts of town. That got rather out of hand. There was drug tourists from all over Europe and the scene became more and more violent, which is why it was eventually shut down in favour of controlled mix of the type that seems to be catching on in various countries. There may be a moral in that, somewhere.