Central Bank Digital Currencies: A Revolution in Banking?

Several central banks, including the Bank of England, the People’s Bank of China, the Bank of Canada and the Federal Reserve, are exploring the concept of issuing their own digital currencies, using the blockchain technology developed for Bitcoin. Skeptical commentators suspect that their primary goal is to eliminate cash, setting us up for negative interest rates (we pay the bank to hold our deposits rather than the reverse).

But Ben Broadbent, Deputy Governor of the Bank of England, puts a more positive spin on it. He says Central Bank Digital Currencies could supplant the money now created by private banks through “fractional reserve” lending – and that means 97% of the circulating money supply. Rather than outlawing bank-created money, as money reformers have long urged, fractional reserve banking could be made obsolete simply by attrition, preempted by a better mousetrap.  The need for negative interest rates could also be eliminated, by giving the central bank more direct tools for stimulating the economy.

The Blockchain Revolution

How blockchain works was explained by Martin Hiesboeck in an April 2016 article titled “Blockchain Is the Most Disruptive Invention Since the Internet Itself“:

The blockchain is a simple yet ingenious way of passing information from A to B in a fully automated and safe manner. One party to a transaction initiates the process by creating a block. This block is verified by thousands, perhaps millions of computers distributed around the net. The verified block is added to a chain, which is stored across the net, creating not just a unique record, but a unique record with a unique history. Falsifying a single record would mean falsifying the entire chain in millions of instances. That is virtually impossible.

In a speech at the London School of Economics in March 2016, Bank of England Deputy Governor Ben Broadbent pointed out that a Central Bank Digital Currency (CBDC) would not eliminate physical cash. Only the legislature could do that, and blockchain technology would not be needed to pull it off, since most money is already digital. What is unique and potentially revolutionary about a national blockchain currency is that it would eliminate the need for banks in the payments system. According to a July 2016 article in The Wall Street Journal on the CBDC proposal:

[M]oney would exist electronically outside of bank accounts in digital wallets, much as physical bank notes do. This means households and businesses would be able to bypass banks altogether when making payments to one another.

Not only the payments system but the actual creation of money is orchestrated by private banks today. Nearly 97% of the money supply is created by banks when they make loans, as the Bank of England acknowledged in a bombshell report in 2014. The digital money we transfer by check, credit card or debit card represents simply the IOU or promise to pay of a bank. A CBDC could replace these private bank liabilities with central bank liabilities. CBDCs are the digital equivalent of cash.

Money recorded on a blockchain is stored in the “digital wallet” of the bearer, as safe from confiscation as cash in a physical wallet. It cannot be borrowed, manipulated, or speculated with by third parties any more than physical dollars can be. The money remains under the owner’s sole control until transferred to someone else, and that transfer is anonymous.

Rather than calling a CBDC a “digital currency,” says Broadbent, a better term for the underlying technology might be “decentralised virtual clearinghouse and asset register.” He adds:

But there’s no denying the technology is novel.  Prospectively, it offers an entirely new way of exchanging and holding assets, including money.

Banking in the Cloud

One novel possibility he suggests is that everyone could hold an account at the central bank. That would eliminate the fear of bank runs and “bail-ins,” as well as the need for deposit insurance, since the central bank cannot run out of money. Accounts could be held at the central bank not just by small depositors but by large institutional investors, eliminating the need for the private repo market to provide a safe place to park their funds. It was a run on the repo market, not the conventional banking system, that triggered the banking crisis after the collapse of Lehman Brothers in 2008.

Private banks could be free to carry on as they do now. They would just have substantially fewer deposits, since depositors with the option of banking at the ultra-safe central bank would probably move their money to that institution.

That is the problem Broadbent sees in giving everyone access to the central bank: there could be a massive run on the banks as depositors moved their money out. If so, where would the liquidity come from to back bank loans? He says lending activity could be seriously impaired.

Perhaps, but here is another idea. What if the central bank supplanted not just the depository but the lending functions of private banks? A universal distributed ledger designed as public infrastructure could turn the borrowers’ IOUs into “money” in the same way that banks do now – and do it more cheaply, efficiently and equitably than through banker middlemen.

Making Fractional Reserve Lending Obsolete

The Bank of England has confirmed that banks do not actually lend their depositors’ money. They do not recycle the money of “savers” but actually create deposits when they make loans. The bank turns the borrower’s IOU into “checkable money” that it then lends back to the borrower at interest. A public, distributed ledger could do this by “smart contract” in the “cloud.” There would be no need to find “savers” from whom to borrow this money. The borrower would simply be “monetizing” his own promise to repay, just as he does now when he takes out a loan at a private bank. Since he would be drawing from the bottomless well of the central bank, there would be no fear of the bank running out of liquidity in a panic; and there would be no need to borrow overnight to balance the books, with the risk that these short-term loans might not be there the next day.

To reiterate: this is what banks do now. Banks are not intermediaries taking in deposits and lending them out. When a bank issues a loan for a mortgage, it simply writes the sum into the borrower’s account. The borrower writes a check to his seller, which is deposited in the seller’s bank, where it is called a “new” deposit and added to that bank’s “excess reserves.” The issuing bank then borrows this money back from the banking system overnight if necessary to balance its books, returning the funds the next morning. The whole rigmarole is repeated the next night, and the next and the next.

In a public blockchain system, this shell game could be dispensed with. The borrower would be his own banker, turning his own promise to repay into money. “Smart contracts” coded into the blockchain could make these transactions subject to terms and conditions similar to those for loans now. Creditworthiness could be established online, just as it is with online credit applications now. Penalties could be assessed for nonpayment just as they are now. If the borrower did not qualify for a loan from the public credit facility, he could still borrow on the private market, from private banks or venture capitalists or mutual funds. Favoritism and corruption could be eliminated, by eliminating the need for a banker middleman who serves as gatekeeper to the public credit machine. The fees extracted by an army of service providers could also be eliminated, because blockchain has no transaction costs.

In a blog for Bank of England staff titled “Central Bank Digital Currency: The End of Monetary Policy As We Know It?”, Marilyne Tolle suggests that the need to manipulate interest rates might also be eliminated. The central bank would not need this indirect tool for managing inflation because it would have direct control of the money supply.

A CBDC on a distributed ledger could be used for direct economic stimulus in another way: through facilitating payment of a universal national dividend. Rather than sending out millions of dividend checks, blockchain technology could add money to consumer bank accounts with a few keystrokes.

Hyperinflationary? No.

The objection might be raised that if everyone had access to the central bank’s credit facilities, credit bubbles would result; but that would actually be less likely than under the current system. The central bank would be creating money on its books in response to demand by borrowers, just as private banks do now. But loans for speculation would be harder to come by, since the leveraging of credit through the “rehypothecation” of collateral in the repo market would be largely eliminated. As explained by blockchain software technologist Caitlin Long:

Rehypothecation is conceptually similar to fractional reserve banking because a dollar of base money is responsible for several different dollars of debt issued against that same dollar of base money. In the repo market, collateral (such as U.S Treasury securities) functions as base money. . . .

Through rehypothecation, multiple parties report that they own the same asset at the same time when in reality only one of them does—because, after all, only one such asset exists. One of the most important benefits of blockchains for regulators is gaining a tool to see how much double-counting is happening (specifically, how long “collateral chains” really are).

Blockchain eliminates this shell game by eliminating the settlement time between trades. Blockchain trades occur in “real-time,” meaning collateral can be in only one place at a time.

A Sea Change in Banking

Martin Hiesboeck concludes:

[B]lockchain won’t just kill banks, brokers and credit card companies. It will change every transactional process you know. Simply put, blockchain eliminates the need for clearinghouse entities of any kind. And that means a revolution is coming, a fundamental sea change in the way we do business.

Changes of that magnitude usually take a couple of decades. But the UK did surprise the world with its revolutionary Brexit vote to leave the EU. Perhaps a new breed of economists at the Bank of England will surprise us with a revolutionary new model for banking and credit.


Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including the best-selling Web of Debt. Her latest book, The Public Bank Solution, explores successful public banking models historically and globally. Her 300+ blog articles are at EllenBrown.com. She can be heard biweekly on “It’s Our Money with Ellen Brown” on PRN.FM.

51 Responses

  1. This appears to be more government control over our lives than they have now. I don’t trust these central banks one inch by monopolising loans under the guise of cheaper more efficient technology. The Govt. should be getting out of our lives not deeper into them as service providers. Here’s a couple of questions too: how will they stop people fraudulently using the system? what happens when people can’t reply their debts? what happens when the politicians hike the rates of interest to all the people who thought they were getting some easy money? why is the Govt. becoming a personal lending bank anyway? why can’t the block-chain be done by regular banks who already service our accounts? what makes a civil servant a better banker than a private banker? I think this is supra-national government ideas at work here, digitally controlling private peoples lives and casting aside private enterprise.

    • We’ve already got a nearly-all digital system. The Bank of England is not proposing to ban cash. The question is, would you rather have the money in your bank account be an IOU from a private bank that can go bankrupt or an IOU from a central bank that can’t go bankrupt? More interesting than safety, at least to me, is that it’s a way to take back the power to create money from the private banking cartel. Right now, they create virtually all of our money and lend it back to us. A national blockchain system would be like a national community currency system: we would be creating the money ourselves, turning our own IOUs into something that can be spent in the marketplace. But I realize it’s an uphill climb conveying these concepts. I’ll keep trying!

      • I get it, Ellen, AND I agree with Ian in distrust of PRIVATE central banks, but this blockchain technology will make it possible for every State, city, suburb or tiny community like Goose Egg, Wyoming to have a VIRTUAL & PUBLIC bank. The Bank of “England’s” 300+ rule, as THE prototype/model for all 4 PRIVATE central banks in the US and others around the world is OVER!

        ding dong the wicked witch is DEAD!

      • Govt. can spend more recklessly with this Digital iou’s, since central banks are the know all & hold all.

  2. Reblogged this on Scarabocchi and commented:
    Some great suggestions from Ellen Brown on how CBs can offer banking services directly using block chain technologies.

  3. […] Ellen Brown Writer, Dandelion Salad The Web of Debt Blog September 16, […]

  4. blockchain would make the NSA and GCHQ redundant. they`re still trying to Hack the Tor Network. the Military/ Industrial/ Wall St/ Congressional Complex will kill Blockchain because like Tor. it could be used by “Terrorists, Drug Dealers, WikiLeaks etc”

  5. The Central Bank of Ecuador is already using this or similar system to make payments. The idea is that since everybody has a cell phone but only 40% are banked it would work well to make welfare and similar payments. Trouble is a smartphone is required and not many of the poor have them. So after more than a year of implementation in a population of 15 million less than 100,000 are using it.

    In the 2015 IMF report to Ecuador, it was requested that Ecuador not use its publicly owned central bank to fund the budget and at the same time recommended that they continue using cell phone money, which of course is issued by the Central Bank. Contradictory? or is there a more nefarious plot afoot. The IMF is not known for its philanthropy.

  6. I do not think that the Banksters will go quietly into that good night. Their propaganda machine will probably make it sound like the devil’s instrument.

  7. I don’t like not having money on my possession. What if all power goes down like on a mass EMP. Everything is gone!

    I like the ides of getting rid of the banks, but the thought of untangle able money is scary.

    • There would be no need to eliminate cash — or gold, or whatever else you want to keep in your safety deposit box for emergencies. You could still get cash out of ATM machines. But we have a nearly all-digital system now; and blockchain is a lot safer than our online bank accounts.

      • It just sounded like the main purpose was to remove the banks from the picture, to which I greately agree, but sounded like blockchain required it to be 100% digital as you wouldn’t be able to make transactions offline.

  8. […] Fonte: Central Bank Digital Currencies: A Revolution in Banking? | WEB OF DEBT BLOG […]

  9. Rothschild’s mother is reputed to have said something like “dont worry there will be no war because my sons wont finance it”

    The sooner private banks are abolished and the banksters responsible for 2008 are jailed the sooner we might have less wars.

  10. […] (Central Bank Digital Currencies: A Revolution in Banking? – By Ellen Brown) […]

  11. […] original source of this article is Web of Debt Copyright © Ellen Brown, Web of Debt, […]

  12. Whatever is the methodology, we cannot escape the debt-resources question. The debt binge of today won’t be resolved by blockchain technology. It simply has to drop back to the levels of old which may involve what Steve Keen mentions as private debt jubilee.

    The debt-resources question says that credit and money do not come from thin air, they come from future resources. We spend now by taking away from the future, This will have to stop, but when it does it will signal the end of our civilization.

    • I disagree. The Web of Debt and The Public Bank Solution are replete with historical examples that illustrate clearly that this is not so. Money is credit, not a commodity. It can be a tool and catalyst to wealth production. Money created now with foresight can make for a bigger pie for everyone in the future.

      • I did reply earlier but WordPress said they lost it! Money is not credit it responds to credit. It is created by debt, which comes first. Money is available without limit [that can have bad consequences] but credit means spending now on tomorrow’s resources. This has to stop. The world is finite. There will only be scraps for everyone before too long.

        • The only statement of yours I agree with is “the world is finite,” and it is a platitude that has little to do with money. No, I don’t buy this argument for austerity.

          • Well, try this argument for austerity: No one has the right to place other people’s children or future generations in debt. Furthermore, the entire article is complete mumbo-jumbo: what is “The blockchain is a simple yet ingenious way of passing information from A to B in a fully automated and safe manner. One party to a transaction initiates the process by creating a block. This block is verified by thousands, perhaps millions of computers distributed around the net. The verified block is added to a chain” supposed to mean?

            • What debt? Money is credit, to be produced by a sovereign state as needed by its economy. Better have the people produced it through public institutions than the banks produce it for their own parasitic enrichment.

              Your pro-austerity argument seems based on the idea that a country is like a family and must tighten it’s belt if money is short. But it’s not.

              Sorry to hear you don’t understand blockchain. I suggest doing some reading or video watching — maybe you’ll get it.

    • What civilization?
      Look, we have to start somewhere. Of course a transition to better ways of doing things won’t be easy. There is no “perfect system” where humans are involved. But for as long as there has to be a market-economy and money remains a neccessity, we need to be rid of the present system as soon as possible. You know this.

  13. Permissioned and permissionless blockchains differ fundamentally. With permissionless (as is bitcoin’s) any one and every one can join in updating it, you don’t need permission, and no one’s interested in the transactions themselves, only that they are valid (and pay sufficient fee). OTOH, with permissioned (which is what CB’s will inevitably want) only those granted permission can update it, and if told to stop certain transactions (eg donation to a whistle blower the state disapproves of) of freeze certain wallets will do us under threat of losing permission. Bitcoin is true (as close as you can get) digital cash, permissioned systems are not, they are more akin to digital cheques (processed by a central entity).

  14. I do not like the idea of, “The central bank … would have direct control of the money supply. That’s one of the problems we have today: they control the economy.

    I do not like the idea of electronic transactions and money. Everybody would be dependent on data connections. Anybody here have a computer crash?

    I do not like the idea of me having my financial standing (assets and liabilities) plastered out on the line for everyone to see. This is based on my assumption that electronic records will flourish on line and stored in various clouds. I want to be able to make a transaction without going through anyone except the party I’m doing business with. I need the money to be held in my hand.

    • the CB’s influence the decision making process, but the final decision is always with the politicians. So we rather should blame Clinton for repealing Glass-Stegall not the fed. Trouble is the politicians today are a supremely incompetent mob,attached by strings to their puppet masters. There is no solution. It never matters who you vote for, a politician always wins.

  15. Our egocentricity ensures we are poor at prediction – our wanting gets in the way of clarity.

    What might be advisable in the case of a novel digital currency like this, is to set aside a particular limited area where the money is valid, somewhere that can be digitally isolated like Estonia (after their unfortunate experience). Then we can see if any unexpected effects are caused.

    The British Government formerly welcomed account holders at BoE when the country was bankrupt during the Napoleonic Wars. Today’s circumstances are not greatly different. We should give it a try.

    Dispensing with the shell game is an important improvement for society. Instead of paying-off those gamblers in New York and City of London we will each be controlling our own money and not using it for speculation, except perhaps the occasional flutter on the horses or lottery.

    I understand rehypothecation to be the re-use of the same security for new loans over and over. It is the source of the paper mountain of debt that Wall Street uses to replace the real domestic economy, the security underlying the river of derivatives. Getting rid of that must be a winner for humanity.

    Indeed, if publication of this digital concept alarms investors it is quite likely the ricketty system that is the basis to the AngloAmerican system of capitalism will collapse of itself as investors rush to remove their illusory profits and convert them into something valuable.

  16. From economic perspective, this CBDC doesn’t differ from already known propositions of the Positive money movement. CBDC’s main weak point is thus the determination of credit worthiness. Put it simple, a bureaucrat should replace a bank manager??? There is a much better solution revealed here:https://ijccr.net/current-issue/vol-20-summer-pp-41-53/

  17. […] Central Bank Digital Currencies: A Revolution in Banking? […]

  18. “The whole financial structure of Wall Street seems to rise or fall on the mere
    fact the Federal Reserve Bank raises of lowers the amount of interest. Any
    business that can’t survive a one per cent change must be skating on thin ice.

    Why, even the poor farmer took a raise of another ten per cent
    just to get a loan from the bank, and nobody from the government paid any
    attention. But you let Wall Street have a nightmare and the whole country has to
    help to get them back in bed again.”
    – Will Rogers August 12, 1929

  19. […] Source Web of Debt Sept. […]

  20. A (up) = A(down) or L(up) or E(up) or R(up)
    A(down) = A(up) or L(down) or E(down) or R(down)
    L(down) = A(down) or L(up) or E(up) or R(up)
    Exp(up) = Exp(down) or L(up) or E(up) or R(up)
    etc etc etc
    Then this is further partioned into large category sub-branches, which themselves can be further partioned & mixed ad hoc by contra accts.

    This is what seperates the public from their money & whatever the variation of Debt/Credit money supply arrangements are or might be – & in a central way it follows would always work sustainably the best when handled by a independent class of experts/technicians from & with binding traditions.

    The hidden issue behind all the corruption & inefficient waste is firstly about having all levels of society on an equal playing field as regards to common sense value allocation & organisation that money is the medium for. At the moment value is the medium for money. Until the public is not seperated from the allocative value of it’s medium, it won’t matter how well calibrated that medium is in regards a naturally growing bureaucracy & corruption in the system seperating the general public from its work in creation of value – along with warping of the market value signals created by the dynamic economy to it’s central nervous system managers.

    Probably because many don’t understand it, but the modern double entry accounting system should be undoubled & unframed for assimilation into the working expense common sense calculations of your average citizenry, with it’s class of economy gradually being phased out, to provide for a solid foundation by the general citizenry generating upwards in market signals to provide clarity and ease to dynamic & efficient central action.

    Just an opinion of course, much respect to Ellen Brown.

  21. […] Central Bank Digital Currencies: A Revolution in Banking? […]

  22. […] Central Bank Digital Currencies: A Revolution in Banking? […]

  23. Probably the most important revolution in finanance and economics is the possible future development of Transfinancial Economics…..


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