Tyler Cowen recently started this debate recently where he said central banks should mint their own cryptocurrency or not. Cowen said central banks should keep away from the cryptocurrency space as they are conservative bureaucracies which shall kill all innovation.
There was a response from David Andolfatto disagreeing with Cowen and says currency is a central bank game and they will have to eventually play it.
And then there is this post by JP Koning who manages to sum up issues on monetary economics really well. In this new post, he says central banks have been focusing all this while on monetary stability which is obvious. But they came into being monpolising currency function and anonymity was central feature of their issued currency. But this was long ago and central banks neither more remember nor care much for this function as they take it for granted.
Now for the first time in many years they have to rethink on this currency function as cryptocurrencies are providing competition:
Central bankers are at their most comfortable when engaging in technical debates over the finer points of monetary policy. But over the next few years they may be forced out of their comfort zone into a thorny philosophical debate over anonymity and financial censorship. They are poorly equipped for such a debate.
When central bankers monopolized the issuance of banknotes in the 1800s and early 1900s, little did they know that a hundred years later anonymity would become an important public good. And because banknotes are the only generally-accepted way for law-abiding citizens to make uncensored anonymous payments, central bankers effectively became—by accident rather than design—the sole purveyors of these vital services.*
Banknotes are anonymous because it is very difficult to link banknotes to identities, say by monitoring usage of notes via a note’s serial number. As for ‘uncensored’, this means that banknotes are available for anyone to use—i.e. they are highly resistant to censorship. There are no gateways involved, no need to get permission ahead of time by opening an account or installing some sort of proprietary software or hardware, and no way for the issuer to halt a payment while it is being made.
If you glance through the research papers that central banks typically publish, they’re almost all on monetary policy. And why not? A stable medium of exchange is one of the most important services provided by a central bank, so they need to do their homework. But if you try to find research on the topics of anonymity and censorship resistance, good luck. What this tells me is that central bankers know very little about the unique set of services they are providing to the cash-using public, despite being the world’s only suppliers. Not only have they blundered into their role of monopoly provider of anonymity and uncensored payments, they are trying their best to pretend the role isn’t theirs.
Take for instance the European Central Bank’s decision to stop printing the €500 note, which was motivated by the desire to cut down on crime. No doubt a significant chunk of €500 notes are used by criminals, but the ECB seems to have made no effort to quantify the anonymity services lost by the tax-paying non-criminal public. Because the ECB has never officially admitted its role as Europe’s sole provider of uncensored payments anonymity, it lacks the sorts of datasets and institutional wisdom that are necessary for formally approaching problems about anonymity and censorship-resistance. So while their decision about the €500 wasn’t necessarily wrong, it was surely uninformed.
As central banks stop printing so called High Denomination Notes in their respective countries, they should give people proper information behind their decision backed by some data. What is instead happening is just treating these notes as criminal which they themselves issued!
It is these very features of anonymity and uncensored when they think of their role in crypto world:
With the emergence of bitcoin and the slowly percolating Fedcoin debate, central bankers are thinking for the first time in ages about designing cash-like systems from scratch. And since these systems may eventually replace the physical stuff, central bankers will have to accept the fact that they are the only providers of anonymity and censorship resistant payments services, and that maybe they should get their act together and think hard about the value of these services to the public. A great start can be found in former Fed policy maker Narayana Kocherlakota’s Monetary Mystery Tour, which ends with the exhortation: “Need more economists working on these issues!”
Bringing this back to Cowen’s article, I don’t agree that central bankers should refuse to test the idea of a central bank-issued cryptocurrency because this represents a new and risky technology. That would be shirking their duty as a monopolist provider of the unique services embedded in paper cash. Central bankers should only say no to Fedcoin because they’ve done a rigourous cost-benefit calculus that takes into account the social value of anonymity and censorship resistance to the public, and that effort has resulted in a conclusion that the status quo—the provision of these public services on a polymer or cotton substrate—is the best option.
Having blundered into their role as monopoly provider of anonymous payments, here’s hoping that the cryptocurrency revolution means that central bank’s finally take that role more seriously. If they don’t, maybe they should just give up their monopoly.
Superb as always.
It is also ironical that so called futuristic cryptocurrency is bringing back centuries old debate on role of currencies and who should be issuing them…