Money, Banks and Finance in Economic Thought

A Decentralized Banking System: the 21st Century Utopia?

Lutz Adrien, GATE L-SE- University St Etienne (FRANCE)

When Knut Wicksell published his 1898 seminal book “Geldzins und Güterpreise” (translated in 1936 under the title “Interest & Prices: a Study of Causes Regulating the Value of Money”) he developed an ideal type of “an organized credit economy” in which “money does not actually circulate at all, neither in the form of coin (except perhaps as small change) nor in the form of notes” (Wicksell, 1936: 70). At that time, the existence of a banking economy with the complete centralization of lending by banks and monetary institutions where “all domestic payments are effected by means of a Giro system and bookkeeping transfers” (Ibid.) was seen as a utopian. The emergence of digital currencies nowadays, mostly following Satoshi Nakamoto working paper on a ‘Peer to Peer Electronic Cash System’ in 2008, has opened as many doubts as many hopes concerning the possibility of a totally decentralized monetary system with no place for central banks or whatever third party. Worldwide reactions notably from central banks are quite unexpected. In fact, the rise of the Bitcoin, Ether, and other cryptocurrencies has led central banks and international monetary institutions to revisit some fundamental questions that touch on the origin and ‘raison d’être’ for central banks. Quite surprisingly the increasing works on ledger payments technology employing private digital currencies do not conclude to the death of central banks. By contrast, two answers are given: (1) ‘the rise of cryptocurrencies only highlights the important role central banks have played, and continue to play, as stewards of public trust.’ (BIS, 2018) or (2) central banks should consider ‘proposals for state issue of digital currency’ (Dow, 2018). Quite forty years later than Hayek’s “Denationalization of money” thesis (1976, 1978 for the refined edition), central banks face new issues by way of the emergence of a hypothetical decentralized banking system. Based on the works from both central banks and BIS’ research departments, the paper aims at wondering to what extent a decentralized monetary system is a utopian? If not, what role should central banks play in a world with cryptocurrencies? Can central bankers benefit from crytocurrencies when liquidity provision (repo duty) is considered?


Keywords: Cryptocurrency; decentralized banking system, central banks

Paper file