Mojmír Hampl: A digital currency useful for central banks?

Speech by Mr Mojmír Hampl, Vice Governor of the Czech National Bank, at the 7th BBVA Seminar for Public Sector Investors and Issuers, Bilbao, 27 February 2018.

Central bank speech  | 
08 March 2018
PDF version
 |  3 pages

Ladies and gentlemen,

Let me begin by thanking BBVA for their kind invitation to this event. It is a pleasure to speak in front of this knowledgeable and receptive audience, and it is a pleasure for me in particular to be in Bilbao for the first time in my life.

Cryptocurrencies, digital currencies, and especially bitcoin have become almost household names over the last couple of months.

What is especially interesting and curious for this place - as some of you might know - is that among the hundreds of cryptocurrencies introduced in the last couple of years is one called "bilur", which means "chain" in Euskara, the Basque language. Bilur is unique for being the first cryptocurrency explicitly linked to the price of oil.

By the way, the second part of the label "cryptocurrency", namely the currency part, is a misnomer in my eyes. No existing cryptocurrency for the time being conforms to the three basic functions of money: a store of value, a unit of account, and a medium of exchange. One cannot store value in an asset that can get 30%-50% cheaper or more expensive in a matter of days. One cannot use cryptocurrencies to measure value in economic transactions, because prices are mostly not displayed in cryptocurrencies and transaction costs are high and hidden for most people who would like to pay this way. One cannot, at least so far, use cryptocurrencies as a medium of exchange, because not many counterparties accept them.

Therefore, cryptocurrencies are not currencies. To me, rather, they resemble commodities - pieces of code with some value for enthusiastic collectors. Which is fine. Its founders wanted to create something that - through the process of mining and the costs associated with it - would resemble a physical commodity or something physical. I would call it a commodity of the new digital era. But compared to vintage wine, art, or postage stamps, the amount of digital commodities is never really fixed, as proved, for instance, by last year's split (or "fork" - I very much like this particular word) between bitcoin and bitcoin cash or the recent split between litecoin and litecoin cash. A piece of code is, in effect, easier to duplicate and improve upon.




To be sure, a hypothetical digital currency issued by a central bank may have very little in common with the cryptocurrencies that currently exist. These two things are mixed up quite often in the public space. Cryptocurrency is in fact a different concept than a digital currency of a central bank and yet a different concept than electronic money such as pre-paid cards. They are all digital in one way or another, but they are conceptually separate.

Central bank digital money does not have to be based ultimately on a blockchain at all, but, to enable price stability, it will certainly be linked to the value of conventional elastic currency. To keep the current system of elastic money working, even the concept of central bank digital currency will have to allow the amount of money to change, not to be fixed or constant over time. Indeed, in our current system, bank deposits are essentially an existing "digital currency" that we all use.

What some central bankers have in mind, however, is a more substantive change. But it seems to me that the need for this change is often expressed quite vaguely. What problems of the current monetary system, and especially what challenges to monetary policy, should central bank digital currencies address? And how should these digital currencies be designed if they are to be useful in practice? These are other topics of my talk today.

The big problem of the current monetary policy framework is the effective lower bound on interest rates. The underlying neutral rate of interest has probably started to rise recently, but it will hardly reach the levels we were used to in the 1980s and 1990s anytime soon. In other words, during the next recession all major central banks will hit the effective lower bound again. How could a digital currency help?



Even worse, such "safe haven" digital currency accounts at the central bank available to all citizens would probably guarantee a "digital bank run" in any crisis - although deposits at commercial banks are fully insured, accounts at central banks, if no cap is set, will always be seen as safer. This is why the concept of central bank digital currencies has been criticized by, among others, Mark Carney, and why Danmarks Nationalbank concluded in December it had "no plans to issue central bank digital currency."


The immediate consequence of helicopter money would be a financial loss for the central bank, but central bankers should value the price stability of the nation above their income statement.  Financial history of my home country seems to be indicating that there is little interplay between the central bank's financial position and inflation or financial stability performance. So, central banks with less capital, perhaps depleted by helicopter money drops, are unlikely to underperform in the future.

In addition, this operation would be financially neutral at the national level, since the recipients of helicopter money would simply be the country's citizens - a bit like in the case of dividend payments with all households receiving the same amount. Critics might say that it is not the role of central banks to decide on the distribution of funds and that any helicopter money drop should be executed by the government with mere central bank backing. But in fact, any change in the interest rate, just like any other change in the monetary policy stance, inevitably redistributes funds, and indeed does so in a much less transparent way.




Thank you for your attention.