David Andolfatto

Implications of virtual currencies for monetary policy

Transcript

1. Under what conditions could virtual currencies a¤ect monetary policy? David Andolfatto Federal Reserve Bank of St. Louis December 07, 2015
2. Virtual currency Digital money vs digital cash. Digital money consists of electronic book-entry objects existing on ledger managed by trusted intermediary. ledger could be publicly visible, limited visibility, central, distributed, etc. we already have digital money. Digital cash is digital money with additional “cash-like” attributes. bearer instrument, permissionless, censorship-resistant, low user cost (e.g., low-denomination USD paper, bitcoin).
3. Impact on monetary policy Despite advances in payment systems related to digital money, rationale for MP policy (stabilization, LOLR) not much a¤ected. Non-government digital cash (Bitcoin) o.t.o.h. could be disruptive. First, a constraint on in‡ation-…nance. true for any $ substitute, but BTC accessible via phone and internet. Second, inevitable maturity transformation by …nancial sector using BTC- denominated debt instruments may contribute to …nancial fragility and complicate LOLR interventions.
4. Financial fragility BTC non-interest-bearing asset (like gold, cash, etc.) Incentive to create BTC-denominated interest-bearing deposit liabilities, redeemable on demand for BTC (fractional reserve banking). interest …nanced by assets funded by deposit liabilities. We see this throughout history, even under gold-standard regimes (also shadow banking). Complicates LOLR operations, makes narrow-banking legislation more at- tractive?
5. Central bank digital money Fed already has digital money (reserves), but only banks permitted to use it. Why? U.S. Treasury online accounts at www.treasurydirect.gov At very least, permit banks to issue SBAs at retail and wholesale levels. Policy: an additional instrument; re-think role of FDIC. How might banks feel about this? Still a role for banks.
6. Central bank digital cash? CB digital money not permissionless, censorship-resistant bearer instru- ment (is this a problem?). Fed could introduce Fedcoin–a digital cash P2P payment service built on (say) Bitcoin protocol. open-source (with program parameters controlled by Fed core develop- ers). P2P payment requests cleared by anonymous miners paid in Fedcoin. Fedcoin treated as a denomination of money, credible …xed exchange rate regime is possible (unlike Bitcoin).
7. Fedcoin Bene…ts. grant wider access to cheap payment service for disadvantaged groups. eliminate cost of managing physical cash supply. Costs. may facilitate illegal trade (though Fedcoin will leave digital trail). maintaining secure decentralized ledger expensive (mining costs).
8. Conclusions Money and payments system is fundamentally about recording and com- municating information securely and e¢ ciently. Developments in electronic data storage and communications (internet) should have a profound e¤ect on CB policy. online utility bank accounts at CBs now possible and desirable. Same technology has spawned private virtual currency systems. currency competition ubiquitous throughout history. discipline for CBs, but …nancial stability concerns.