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Flattening the monetary hierarchy
Talking about CBDCs with Izabella Kaminska and Ásgeir Bryjnar Torfason
Last weekend I was fortunate to have the opportunity to chat with Izabella Kaminska and Ásgeir Brynjar Torfason about central bank digital currencies. Izabella was until recently editor of the Alphaville blog of the Financial Times, and has just begun her own financial media venture The Blindspot. Ásgeir is a member of the Icelandic Fiscal Council and a fellow at Gothenburg Research Institute, and was also the very first subscriber to Soon Parted. The session was part of the second annual Money View Symposium, organized by the Young Scholars Initiative, which tries to make life better for graduate students following alternative paths in economics.
Our session was nominally organized around crypto and CBDCs, but motivated by the friendly and enthusiastic crowd, we were able to approach these questions through the widest possible lens. The discussion touched on theoretical, microstructural, systemic, and political-economic issues. A video of the entire session (about an hour long) is embedded here:
A number of interesting themes came up, and I expect to come back to them in the weeks to come. In this post, I give a quick orientation to the CBDC debate, and pull out an important thread from the session about the logic of monetary hierarchy.
The CBDC debate
The idea behind CBDC is that central banks, including the US Federal Reserve, could issue a new form of money that could be used for digital payments, for example using a mobile app. It would combine the convenience of electronic deposits with the government imprimatur of paper money.
Why bother? There is not, as we established in the discussion, any clear-cut case. As the session's title suggests, CBDCs are in part a response to the questions raised by cryptocurrencies about the institutional design of the monetary system. Bitcoin and Ethereum will not replace the global dollar-based monetary system, but intellectually they have attracted attention, and central bankers feel they need to have a response (6:12). CBDCs, though they are quite different financially, borrow enough features of crypto that they can be part of that response.
It now seems that regulation is coming for crypto assets (16:00). Izabella noted how late this is coming, and I called it "methodical" (9:50). Perry Mehrling observed, though, that in central bank time it seems in fact rather quick (36:00). Whether quickly or methodically, new regulations might yield a cleaned-up crypto, with stablecoins absorbed by banks for example, and the incumbent banks might then move in. It is true, as Izabella noted, that this would undermine the original logic of crypto, but by the time it happened, that might not trouble anyone.
The logic of hierarchy
There are reasons to be cautious when changing how money works. In an important intervention at the end of the session, Anush Kapadia pointed out that CBDC plans flirt with undoing the hierarchical logic of the monetary system (43:43).
The system is hierarchical so as to encourage the resolution of imbalances at lower levels. If financing problems in one part of the system, say a certain industry or region, can be resolved locally, then they should be. Only what can't be resolved at the lower level should rise to the next higher level, and that escalation should come at a price. And only systemic imbalances, problems at the level of the entire economic system, should show up on the balance sheet of the central bank.
But CBDCs intend to flatten the hierarchy: if the public can get banking services directly from the central bank, then there is no lower level to push imbalances to. Every cash-flow mismatch shows up on the Fed's balance sheet, which could end up being quite unwieldy. Perhaps it is to reassert a hierarchical form that existing CBDC systems, like China's e-CNY, assign a specific role for banks as distributors of CBDCs, even though they do not act as financial intermediaries.
Others have worried about bank disintermediation, the possibility that private banks will be deprived of funding if their depositors migrate instead to CBDC. But as Anush notes, the question of hierarchy is separate from the question of whether banking is public or private. The problem, that is, is not that CBDC gets rid of private banks; the problem is that CBDC gets rid of the shock-absorbing function of intermediaries.
There is more in the video, including some insights and arguments I hope to come back to in future posts. Many thanks to Izabella, Ásgeir, YSI and the Money View community for the session and the symposium as a whole. This is certainly the community best suited to study these questions!