Economic news Embassy 65
Could digital currency be an answer to boom and bust?
In the week that the identity of the creator of digital currency, Bitcoin, became public, economic attachés heard how this disruptive technology could provide a powerful monetary policy tool, at an AERL meeting with a Bank of England research expert.
Senior researcher Michael Kumhof gave economic envoys a thought-provoking preview into his ground-breaking research into Central Bank-issued digital money that could have a profound impact on counter-cyclical monetary policy in the future.
In the wake of the financial crisis, there had been a growing appetite for more or better public control over debt and money, explained Kumhof, who outlined that this could be achieved either through more regulation or through monetary reform that would give policy makers control over a substantial monetary aggregate, such as Central Bank Digital Currency (CBDC), or indeed the entire money supply (so-called ‘Sovereign Money’).
Based on his research model, Kumhof listed the possible benefits of CBDC, including a one-off efficiency gain of 3% of GDP. CBDC also provides a second tool for monetary policy which has the potential to smooth the business cycle and reduce boom-and-bust credit volatility. Quantitative easing could be deployed more directly in the economy. Finally, if banks are not as critical in the payments system in a CBDC-based system, this could potentially reduce the problem of banks being ‘too big to fail’.
But there were drawbacks to the system, warned Kumhof, including more interdependence between monetary and fiscal systems so taxes and spending would have to be designed so as not to make the economy more volatile. An additional caveat was that the research was based only on the currency of a single country, not on a supra-national currency.
With such a major system change, many aspects could go wrong, especially since this was new territory and no data to work with, but the gains were potentially so significant that it was worth doing a thorough cost-benefit analysis, said Kumhof.
Inspired by Kumhof’s presentation, diplomats said disruptive technologies such as digital currency had the potential to “press the reset button” on the financial system and the way monetary policy is currently managed.