{"id":20299,"date":"2016-11-18T17:59:27","date_gmt":"2016-11-18T22:59:27","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/should-a-central-bank-issue-digital-currencies\/"},"modified":"2016-11-18T18:40:50","modified_gmt":"2016-11-18T23:40:50","slug":"should-central-banks-issue-digital-currencies","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/should-central-banks-issue-digital-currencies\/","title":{"rendered":"Should Central Banks Issue Digital Currencies?"},"content":{"rendered":"

Central bank\u2019s \u201cOperation Model\u201d and Its Social Cost<\/strong><\/p>\n

Issuing currencies is central banks\u2019 most traditional and fundamental business. For more than 300 years, they have been manufacturing banknotes, managing inventories, and developing new technologies. They began to conduct macroeconomic policy only in modern times (Yes, TOM > BGIE, as always.)<\/p>\n

However, issuing currencies is costly, both for a central bank and for all of us. For example, Bank of Japan (BOJ) printed 3 billion sheets of new banknotes in FY2015, which costed US $500 million[1]<\/a>.<\/p>\n

Also, central banks manage \u201csupply chain\u201d to distribute currencies. BOJ operates a huge automated warehouse (560,000 square feet in total floor space) in a suburb of Tokyo, where it processes banks\u2019 orders, issue clean banknotes, verifies the authenticity of returned banknotes, and stores suitable banknotes for recirculation. It also has 32 branches all over the country, where those processes are conducted almost manually. In total, BOJ\u2019s annual cost of manufacturing and distributing banknotes was US $800 million in FY2015, 43% of its total budget[2]<\/a>.<\/p>\n

Moreover, it costs all of us a to use paper currencies. We need to safely store and carry banknotes to settle transactions by cash, and there is a risk of cash being stolen. In 2012, European Central Bank estimated that the social cost of cash payment was 0.49% of total GDP in European countries[3]<\/a>. A similar research in Singapore estimated the cost was 0.52% of its GDP[4]<\/a>. Essentially, we are losing money by using money!<\/p>\n

Central Bank\u2019s Actions in Digital World<\/strong><\/p>\n

Now, let\u2019s talk about Fintech. As you might have heard, technological innovations, such as “block chain” and “distributed ledger technology (DLT),” have enabled the development of \u201cbitcoin.\u201d However, as an executive central banker recently said, \u201cfor any asset to be used and accepted as currency, it must have sufficient “trust” among a wide range of users. In this respect, “bitcoin” attempts to create a “chain of trust” from scratch, but this requires substantial costs.\u201d[5]<\/a><\/p>\n

Given the social cost of cash payment, and privately issued bitcoins\u2019 challenge for \u201ctrust,\u201d the argument for central bank\u2019s digital currency seems natural. In fact, several central banks have already changed their operations, or started developing digital currencies in coordination with the private sector.<\/p>\n

Operational change<\/u><\/p>\n

Denmark:
\nCentral bank of Denmark stopped internal printing of banknotes and minting of coins in 2016, and started outsourcing these functions to external service providers, given the decreasing demand for new banknotes and coins. By this operational change, it expects to yield total savings of US $12 million (kr. 100 million) until 2020.[6]<\/a><\/p>\n

 <\/p><\/blockquote>\n

Development of digital currencies<\/u><\/p>\n

Nederland:
\nIn March 2016, National Bank of Nederland (DNB) published it would develop a prototype of digital currency, called \u201cDNBcoin,\u201d by applying blockchain and DLT.[7]<\/a><\/p>\n

Russia:
\nIn October 2016, Central Bank of Russia published it had successfully developed a\u00a0prototype\u00a0block chain for transactions confirmation, called \u201cMasterchain,\u201d with leading financial market players.[8]<\/a><\/p>\n

Canada:
\nIn June 2016, Bank of Canada published it was partnering Canadian banks, fintech entrepreneurs and other companies to test DLT.[9]<\/a><\/p>\n

United Kingdom:
\nIn June 2016, the Governor of Bank of England(BOE) stated \u00a0it would explore the use of DLT in BOE\u2019s core activities, including the operation of real-time settlement system [10]<\/a>.\u00a0Also, in February 2016, after repeated discussion with BOE staffs, a London University economist published a paper, which suggested the introduction of BOE\u2019s digital currency \u201cRSCoin.\u201d[11]<\/a><\/p>\n

China:
\nIn January 2016, People\u2019s Bank of China published it had a \u201cmid-term\u201d strategy of issuing its own digital currency, and would try to launch it as early as possible.[12]<\/a><\/p>\n

 <\/p><\/blockquote>\n

Next Step and Political Implications<\/strong><\/p>\n

So far, most central banks have developed digital currencies only for internal test, and don\u2019t have specific plans for putting them into circulation. For example, Bank of Canada explained that the only goal of its partnership with the private sector was to understand the mechanics, limits and possibilities of the technology.<\/p>\n

Going forward, I propose more and more central banks should start specific experimentation of issuing digital currencies, rather than internal research, to figure out operational issues. I think this is a good direction because central banks\u2019 digital currencies have a huge potential to reduce operational costs of the whole society.<\/p>\n

At the same time, central banks, academics, and financial institutions should also discuss political implications of central banks\u2019 digital currencies.<\/p>\n

Potential questions include,<\/p>\n

\u201cWho should track all the transaction data to transfer digital currencies; central banks, commercial banks, or the third party?\u201d<\/p>\n

\u201cAny impact on financial intermediary function of commercial banks if people have direct access to central banks\u2019 digital currencies?\u201d<\/p>\n

\u201cAny implication for monetary policy? For example, is it possible for a central bank to decrease the face amount of the digital currency and literally implement \u201cnegative interest rate\u201d?\u201d<\/p>\n

 <\/p><\/blockquote>\n

Yes, it\u2019s obviously a big challenge, but we should keep going.<\/p>\n

(797 words)<\/p>\n

 <\/p>\n

[1] Bank of Japan,” Banknotes Orders in FY2015″ (only in Japanese), February 2016.<\/p>\n

[2]Bank of Japan,”Financial Statements for the 131st Fiscal Year\/Fiscal 2015″, May 2016.<\/p>\n

[3]European Central Bank,”The social and private costs of retail payment instruments, a European perspective”, September 2016.<\/p>\n

[4]KPMG, “Singapore Payments Roadmap: Enabling the future of payments,” August 2016.<\/p>\n

[5]Hiroshi Nakaso, “FinTech \u2013 Its Impacts on Finance, Economies and Central Banking,” November 2016.<\/p>\n

[6]Danmarks Nationalbank, “Danmarks Nationalbank adapts to falling demand for new banknotes and coins,” Press release, October 20, 2014.<\/p>\n

[7]Berndsen, Ron, “If Blockchain is the answer, what is the question?” Speech at the Dutch Blockchain Conference, June 20, 2016.<\/p>\n

[8] Bank of Russia, “Bank of Russia and market participants have developed Masterchain prototype and successfully made first test transactions,” Press release, October 5, 2016.<\/p>\n

[9]\u00a0Wilkins, Carolyn, “Fintech and the Financial Ecosystem: Evolution or Revolution?” Speech at Payments Canada, June 17, 2016.<\/p>\n

[10] Carney, Mark, “Enabling the FinTech transformation: Revolution, Restoration, or Reformation?” Speech at the Lord Mayor’s Banquet for Bankers and Merchants of the City of London at the Mansion House, June 16, 2016.<\/p>\n

[11] Danezis, George and Sarah Meiklejohn, “Centrally Banked Cryptocurrencies,” Proceedings of Network and Distributed System Security Symposium 2016, Internet Society.<\/p>\n

[12] Fan, Yifei,”On Digital Currencies, Central Banks Should Lead,” Bloomberg View, September 1, 2016.<\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

Let\u2019s talk about our most fundamental product and its producers; \u201ccash, and central banks.\u201d
\nIn a digital world, some central banks have already developed digital currencies, and changed their operations. 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