Central bank cryptocurrencies are a bad idea but central bank electronic money could have big benefits, improving financial stability, simplifying monetary policy and reducing the reliance on cash, say researchers at the Federal Reserve Bank of St Louis.
The possibility of a so-called FedCoin has reared its head again in recent days, with Kevin Warsh, a former Fed governor, arguing that it "would be a pretty effective way when the next crisis happens for us to maybe conduct monetary policy".
In a blog, Aleksander Berentsen and Fabian Schar argue that central bank electronic money offers many of the benefits of cash, without the drawbacks.
"We believe that there is a strong case for central bank money in electronic form, and it would be easy to implement. Central banks would only need to allow households and firms to open accounts with them, which would allow them to make payments with central bank electronic money instead of commercial bank deposits," they write.
This would satisfy people's need for virtual money without having to face counterparty risk while also having a "disciplining effect" on commercial banks which would have to change their behaviour to attract deposits.
Central bank electronic money for all would also simplify monetary policy and make it more transparent because if markets are not segregated, the interest rate on these accounts would be the lowest interest rate in the economy.
The idea is not a new one; two years ago Bank of England deputy governor Ben Broadbent floated the possibility of using distributed ledger technology to enable individuals to hold digital currency accounts with the central bank.
However, Broadbent worried that taking deposits away from commercial banks makes it harder for them to make loans and could make them more reliant on wholesale markets, "a source of funding that didn’t prove particularly stable during the crisis, and could reduce their lending to the real economy as a result".
Meanwhile, Berentsen and Shar are not convinced by a genuine central bank cryptocurrency. While it would be "straightforward" from a technological perspective, the key characteristics of cryptocurrencies are a "red flag" because the associated anonymity creates a massive reputational risk.
"In general, we don't think that a central bank should be in the business to satisfy the demand for anonymous payments. We believe that such a demand can and will be perfectly satisfied by the private sector, in particular through cryptocurrencies."