Money, Banks and Finance in Economic Thought

Making sense of the short history of central bank digital currencies

Larue Louis, Hoover Chair of Economic and Social Ethics, UCLouvain

Bitcoin and cryptocurrencies are attracting increasing media attention. They have also triggered reflection among central bankers about the role of money in a digital age. Some see these currencies as a potential threat, but most of them acknowledge that the innovation at the core of Bitcoin (the distributive ledger technology, or DLT) might have interesting applications for monetary policy and the control of payments. Many are intensely studying the possibility for central banks to issue their own digital currency (hereafter called Central Bank Digital Currency, or CBDC), the form it would take, and the consequences it could have on monetary policy and financial stability. This article is located at the crossroad of the (recent) history of economic thought and the ethics of finance. We are pursuing three goals. First, we analyse how central banks have been framing the development of crypto currencies since 2008. In particular, we show that central bankers are torn between instrumental worries (financial stability and the strength of their channels of transmission of monetary policy) and a recognition of the DLT technological potential to overcome policy dilemmas (the infrastructural power wielded by commercial banks). Second, we discuss how CBDC could constitute a radical change of the current monetary system. It could become an additional counter-cyclical instrument and allow central banks to render banking services directly to the public, hence substituting for the usual financial intermediaries. Proponents of this scenario emphasize the moral and efficiency failures of the private banking sector (lack of accountability, too big to fail issues, debt bubbles) and call for more efficient and just policy instruments and transmission mechanisms. Opponents fear the advent of a new Frankenstein, a central bank with increased and unchecked powers. Third, we underline the limits of this debate. On the one hand, the power of unelected bureaucrats and the inefficiencies of centralized bureaucracy should be counterbalanced by adequate representation and accountability mechanisms. Defending Frankenstein alone makes no sense. On the other hand, the present state of the private financial sector is indefensible. If one rejects the Frankenstein scenario, one must then call for tougher regulations. Our conclusion is that, given the state of contemporary finance, reforms are necessary. CBDC constitutes one possible reform, provided that adequate representation and accountability mechanisms are put into place. The alternative would be a tightly regulated private financial sector.

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Keywords: Central Banks, Digital Currencies, Monetary Policy, Central Bank Digital Currencies,

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