Central Banking, Monetary Policy and the Future of Money (The Elgar Series on Central Banking and Monetary Policy) 1800376391, 9781800376397

Table of contents :
Front Matter
Copyright
Contents
About the editors
List of contributors
Acknowledgements
Introduction to Central Banking, Monetary Policy and the Future of Money
1 Cryptocurrencies and the future of money
2 Bitcoin design, theory of money and implications: a Keynesian assessment
3 Cryptocurrencies, Big Techs, central bank digital currencies and the changing role of banks in the payment industry: old wine in new bottles?
4 Is CBDC strengthening the monetary transmission mechanism?
5 CBDC: functional scope, pricing and controls
6 Money creation and liquid funding needs are compatible
7 The Swedish e-krona: a means of guaranteeing the possibility of making payments for all
8 Programmable central bank digital currency for monetary circuits of production
9 Large-scale currency circuits as anti-crisis mechanism: the Argentine Redes de Trueque
10 Community-based alternative currencies as drivers of new monetary arrangements
11 ‘In money we trust’: the issue of confidence in money in the Swiss WIR system
Index

Citation preview

Central Banking, Monetary Policy and the Future of Money

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THE ELGAR SERIES ON CENTRAL BANKING AND MONETARY POLICY Series Editors: Louis-Philippe Rochon, Full Professor, Laurentian University, Canada, Editor-in-Chief, Review of Political Economy and Founding Editor Emeritus, Review of Keynesian Economics, Sylvio Kappes, Assistant Professor, Federal University of Ceará, Brazil and Coordinator, Keynesian Economics Working Group, Young Scholars Initiative and Guillaume Vallet, Associate Professor, Université Grenoble Alpes and Centre de Recherche en Economie de Grenoble (CREG), France This series explores the various topics important to the study of central banking and monetary theory and policy and the challenges surrounding them. The books in the series analyze specific aspects such as income distribution, gender and ecology and will, as a body of work, help better explain the nature and the future of central banks and their role in society and the economy. Titles in the series include: The Future of Central Banking Edited by Sylvio Kappes, Louis-Philippe Rochon and Guillaume Vallet Central Banking, Monetary Policy and the Environment Edited by Louis-Philippe Rochon, Sylvio Kappes and Guillaume Vallet Central Banking, Monetary Policy and Social Responsibility Edited by Guillaume Vallet, Sylvio Kappes and Louis-Philippe Rochon Central Banking, Monetary Policy and the Future of Money Edited by Guillaume Vallet, Sylvio Kappes and Louis-Philippe Rochon Future volumes will include: Central Banks and Monetary Regimes in Emerging Countries Theoretical and Empirical Analysis of Latin America Edited by Fernando Ferrari Filho and Luiz Fernando de Paula Central Banking, Monetary Policy and Income Distribution Edited by Louis-Philippe Rochon, Sylvio Kappes and Guillaume Vallet Covid 19 and the Response of Central Banks Coping with Challenges in Sub-Saharan Africa Salewa Olawoye-Mann Central Banking, Monetary Policy and the Political Economy of Dollarization Edited by Sylvio Kappes and Andrés Arauz Central Banking, Monetary Policy and Gender Edited by Louis-Philippe Rochon, Sylvio Kappes and Guillaume Vallet Central Banking, Monetary Policy and Financial In/Stability Edited by Louis-Philippe Rochon, Sylvio Kappes and Guillaume Vallet

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Central Banking, Monetary Policy and the Future of Money Edited by

Guillaume Vallet Associate Professor, Université Grenoble Alpes and Research Fellow, Centre de Recherche en Economie de Grenoble (CREG), France

Sylvio Kappes Assistant Professor, Federal University of Ceará, Brazil and Coordinator, Keynesian Economics Working Group, Young Scholars Initiative

Louis-Philippe Rochon Full Professor, Laurentian University, Canada, Editor-inChief, Review of Political Economy and Founding Editor Emeritus, Review of Keynesian Economics THE ELGAR SERIES ON CENTRAL BANKING AND MONETARY POLICY

Cheltenham, UK • Northampton, MA, USA

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© Guillaume Vallet, Sylvio Kappes and Louis-Philippe Rochon 2022 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA

A catalogue record for this book is available from the British Library Library of Congress Control Number: 2022938981 This book is available electronically in the Economics subject collection http://dx.doi.org/10.4337/9781800376403

ISBN 978 1 80037 639 7 (cased) ISBN 978 1 80037 640 3 (eBook) Typeset by Cheshire Typesetting Ltd, Cuddington, Cheshire

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Contents vii ix xv

About the editors List of contributors Acknowledgements Introduction to Central Banking, Monetary Policy and the Future of Money Guillaume Vallet, Sylvio Kappes and Louis-Philippe Rochon   1 Cryptocurrencies and the future of money Matheus R. Grasselli and Alexander Lipton

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  2 Bitcoin design, theory of money and implications: a Keynesian assessment57 Matheus Trotta Vianna   3 Cryptocurrencies, Big Techs, central bank digital currencies and the changing role of banks in the payment industry: old wine in new bottles? Léo Malherbe and Matthieu Montalban

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  4 Is CBDC strengthening the monetary transmission mechanism?94 Pál Péter Kolozsi, Kristóf Lehmann and Zoltán Szalai   5  CBDC: functional scope, pricing and controls Ulrich Bindseil, Fabio Panetta and Ignacio Terol

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  6 Money creation and liquid funding needs are compatible Marco Gross and Christoph Siebenbrunner

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  7 The Swedish e-krona: a means of guaranteeing the possibility of making payments for all Eva Julin

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  8 Programmable central bank digital currency for monetary circuits of production Andrés Arauz

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v

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  9 Large-scale currency circuits as anti-crisis mechanism: the Argentine Redes de Trueque Georgina M. Gómez

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10 Community-based alternative currencies as drivers of new monetary arrangements Jérôme Blanc and Marie Fare

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11 ‘In money we trust’: the issue of confidence in money in the Swiss WIR system Guillaume Vallet

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Index

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About the editors Sylvio Kappes is Assistant Professor of Economic Theory at the Federal University of Ceará, Brazil. He has a PhD in Development Economics from the Federal University of Rio Grande do Sul, Brazil. His main areas of research are Central Banking, Monetary Policy, Income Distribution and Stock-flow Consistent models. His work has been published in a number of peer-reviewed journals, such as the Review of Political Economy, the Journal of Post Keynesian Economics and the Brazilian Keynesian Review. Sylvio is a co-editor of The Elgar Series on Central Banking and Monetary Policy, together with Louis-Philippe Rochon and Guillaume Vallet. He is the Books Review Editor of the Review of Political Economy, and sits on the editorial boards of the Review of Political Economy and the Bulletin of Political Economy. He is also a co-coordinator of the Keynesian Economics Working Group of the Young Scholars Initiative (YSI) of the Institute for New Economic Thinking (INET). Louis-Philippe Rochon is Full Professor of Economics at Laurentian University, Canada, where he has been teaching since 2004. Before that, he taught at Kalamazoo College, in Michigan. He obtained his doctorate from the New School for Social Research, in 1998, earning him the Frieda Wunderlich Award for Outstanding Dissertation, for his dissertation on endogenous money and post-Keynesian economics. In January 2019, he became the co-editor of the Review of Political Economy and its Editor-in-Chief in 2021. Before that, he created the Review of Keynesian Economics, and was its editor from 2012 to 2018, and is now Founding Editor Emeritus. He has been guest editor for the Journal of Post Keynesian Economics, the International Journal of Pluralism and Economics Education, the European Journal of Economic and Social Systems, the International Journal of Political Economy, and the Journal of Banking Finance and Sustainable Development. He has published on monetary theory and policy, post-Keynesian economics and fiscal policy. Louis-Philippe is on the editorial board of Ola Financiera, the International Journal of Political Economy, the European Journal of Economics and Economic Policies: Intervention, Problemas del Desarrollo, Cuestiones Económicas (Central Bank of Ecuador) and Bank & Credit (Central Bank of Poland), the Bulletin of Political Economy, Advances vii

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in Economics Education, Il Pensiero Economico Moderno, the Journal of Banking, Finance and Sustainable Development and Research Papers in Economics and Finance. He is the Editor of the following series: The Elgar Series of Central Banking and Monetary Policy; and Elgar’s New Directions in PostKeynesian Economics series. Louis-Philippe has been a Visiting Professor or Visiting Scholar in Australia, Brazil, France, Italy, Mexico, Poland, South Africa and the USA, and has further lectured in China, Colombia, Ecuador, Italy, Japan, Kyrgyzstan and Peru. He is also the author of 150 articles in peer-reviewed journals and books, and has written or edited close to 35 books. He has received grants from the Social Sciences and Humanities Research Council in Canada (SSHRC), the Ford Foundation and the Mott Foundation, among other places. Guillaume Vallet is an Associate Professor of Economics at the University of Grenoble Alpes, France and a Research Fellow at Centre de Recherche en Economie de Grenoble. He holds two PhDs, one in economics earned from the University Pierre Mendès-France (Grenoble, France) and the other in sociology obtained at the University of Geneva (Switzerland) and at the École des hautes études en sciences sociales (Paris, France). Guillaume was awarded a Fulbright Award, in 2021, to explore the development of the social sciences during the Progressive Era (1892–1920), especially in light of economists’ and sociologists’ treatment of income inequality. His research focuses on monetary economics, the political economy of gender and the history of economic thought during the Progressive Era. He is the author of 47 articles in peer-reviewed journals and books, and has written nine books. His work has appeared in several distinguished academic journals, such as Revue d’Economie Politique, Economy and Society. His work on Albion W. Small has appeared in Business History and the Journal of the History of Economic Thought. He has been invited to give talks by many institutions, such as the New School for Social Research (New York, USA), the Bank of Ecuador, the Bank of Hungary, the Bank of Israel, the Swiss National Bank and the United Nations in Geneva.

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Contributors Andrés Arauz is an Ecuadorean economist. He completed his PhD in financial economics at UNAM in Mexico City. His research work focuses on banks, cross-border payments, technology and the public sector. He is a former presidential candidate, Minister of Knowledge and Human Talent, former Vice Minister of Development Planning, and former Chief Operating Officer of the Central Bank of Ecuador. He sat on the boards of Ecuador’s Tax Committee, Foreign Trade Committee and Public Debt Committee. He has worked together with civil society organizations from around the world on tax justice, illicit financial flows and monetary reform, and has undertaken consulting work in these areas. Arauz transformed Ecuador’s national payment system in favour of technological and economic inclusion of the popular and solidarity financial sector. He is a leading supporter of a special issuance of Special Drawing Rights in the middle of the pandemic. He leads Ecuador’s Observatorio de la Dolarización. Ulrich Bindseil is Director General Market Infrastructure and Payments at the European Central Bank (ECB), a post he has held since November 2019. Previously, he was Director General Market Operations (from May 2012 to October 2019) and head of the Risk Management Division (between 2005 and 2008). Mr Bindseil first entered central banking in 1994, when he joined the Economics Department of the Deutsche Bundesbank, having studied economics. His publications include, among others, Monetary Policy Operations and the Financial System (Oxford University Press, 2014) and Central Banking before 1800 – A Rehabilitation (Oxford University Press, 2019). Jérôme Blanc is Full Professor in Economics at Sciences Po Lyon, France, and a member of the research centre Triangle (UMR CNRS 5206). His  works deal with money and the plurality of its forms and practices, mainly analysed through socio-economic lenses and with an inclination to history of ideas. Focused on monetary plurality, its nature, characteristics and regulation, he authored and co-authored several books, from Les monnaies parallèles: unité et diversité du fait monétaire (L’Harmattan, 2000) to Les monnaies alternatives (Repères, 2018). He also edited with ix

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L. Desmedt the collective book Les pensées monétaires dans l’histoire: l’Europe, 1517–1776 (Classiques Garnier, 2014), and he co-edited with P. Alary, L. Desmedt and B. Théret Institutionalist Theories of Money: An Anthology of the French School (Palgrave Macmillan, 2020). He co-founded the Research Association on Monetary Innovation and Community and Complementary currency systems (RAMICS) in 2015. Marie Fare is Associate Professor in Economics at the University of Lyon 2, France, and a member of the research centre Triangle (UMR CNRS 5206). Her research focuses on monetary plurality and, more particularly, on community and complementary currencies (CCs) mainly ­analysed through socio-economic and institutionalist viewpoint. Her works deal with CCs analysed in relation with sustainable territorial development (potentialities, impacts and prospects). She authored several articles published in academic journals on CCs, on their relationship to governments and public authorities, their specificities as social innovations, the issue of value and business selection, socio-economics models in local currencies schemes or prerequisites for the success of local currencies. She eventually authored the book Repenser la monnaie, Transformer les territoires, Faire société (Rethinking Money, Transforming Territories, Making Society) (ECLM, 2016). Georgina M. Gómez is Associate Professor in Institutions and Local Development at the International Institute of Social Studies of Erasmus University Rotterdam. She is president of the international Research Association on Monetary Innovation and Complementary Currency Systems (RAMICS.org) and was Chief Editor of the International Journal of Community Currency Systems (2015–20). She obtained a PhD with distinction with a thesis on ‘Community and complementary currency systems in Argentina’. She has published on monetary innovation, local economic development in Latin America, social and solidarity economy, and institutional and grassroots economics. She has directed development projects on Local Economic Development in Brazil, Nicaragua, Western Africa and Colombia funded by various multilateral organizations. Matheus R. Grasselli is a Professor of Mathematics and the Deputy Provost at McMaster University, where he previously served as Chair of the Mathematics of Statistics Department (2018–22), and is a former Deputy Director of the Fields Institute for Research in Mathematical Sciences in Toronto, Canada (2012–16). He has a PhD from King’s College London and has published research papers on information geometry, statistical physics, and numerous aspects of quantitative finance, including interest rate theory, optimal portfolio, real options, executive ­compensation and macroeconomics. He is also the author of an undergraduate textbook on

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Contributors ­xi

numerical methods. He is a regular speaker at both academic and industrial conferences around the world and has consulted for the Canadian Imperial Bank of Commerce (CIBC), Petrobras, EDF Energy and Bovespa. A member of the editorial board of the Journal of Banking and Finance, Review of Political Economy, Frontiers of Mathematical Finance and the Journal of Dynamics and Games, he is also the founding managing editor of the book series Springer Briefs on Quantitative Finance, and is currently the Editor-in-Chief of the International Journal of Theoretical and Applied Finance. Marco Gross has worked as an economist and financial sector expert at the Monetary and Capital Markets Department of the International Monetary Fund (IMF) since 2018. He is regularly responsible for leading and conducting systemic risk analyses for the IMF’s Financial Sector Assessment Programs (FSAPs), Article IV consultations and Technical Assistance, thus far largely in East Asia, Africa and the Americas. The work involves banking system solvency and systemic liquidity analyses together with the derivation of policy recommendations to support monetary stability. Before joining the IMF, he worked at the European Central Bank (ECB) from 2008 to 2018 in its Macroprudential Policy and Financial Stability area and the Research Department. He had a leading role in developing the models for the European-wide bank stress tests in 2014, 2016 and 2018 (conducted jointly with the European Banking Authority, EBA), and shaped and implemented the scenario design frameworks beyond banks also for insurers and pension funds for the European Insurance and Occupational Pensions Authority (EIOPA), and Central Counterparties (CCPs) for the European Securities and Markets Authority (ESMA), via the work at the ECB and liaising with EIOPA and ESMA through the European Systemic Risk Board (ESRB). He developed various analytical frameworks to support policy-makers to inform the timing and calibration of macroprudential policies, especially those that are borrower based. Marco’s graduate studies included stays at Goethe University Frankfurt, the London School of Economics in the UK, Beijing University in China and St Gallen University in Switzerland. He sees post-Keynesian economics as a valuable branch, with a great deal of its appeal and real-world policy relevance stemming from the emphasis on stock-flow consistency and endogenous money. Eva Julin is Deputy Head of the General Secretariat at Sveriges Riksbank (the central bank of Sweden). Julin has a PhD in economics from University of Gothenburg where she was also Research Fellow and lecturer combined with employment at SIDAs Planning division, and senior policy analyst at the Ministry of Foreign Affairs. Julin was Coordinator

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of European Affairs and Advisor at the International Department of the Riksbank from1996 until 2000, when she became Chief Cashier. From 2004 to 2007 she was Deputy Head of the Market Operation department and from then she was Deputy Head of General Secretariat. Since 2016, her main responsibilities have been related to research and analysis of digital currencies and the future payment market. Currently, Julin is the Steering Group Manager for the Riksbank’s e-krona pilot project. Pál Péter Kolozsi graduated from the Budapest University of Economic Sciences and Public Administration and received his PhD at Sciences Po de Paris (Institut d’Eudes Politiques de Paris). He is a Director at the Magyar Nemzeti Bank (MNB, the central bank of Hungary), and Associate Professor at the MNB Knowledge Center of the János Neumann University. He specializes in monetary policy, public finance and institutional economics. Kristóf Lehmann is Director at the Magyar Nemzeti Bank (the central bank of Hungary), in charge of international monetary policy analysis. His was an emerging market economic analyst for the German DZ Bank (from Takarekbank Budapest) and joined the Magyar Nemzeti Bank in 2011. He obtained his PhD at Corvinus University of Budapest and holds an MBA at Maastricht School of Management. He is a member of the International Relations Committee of the European Central Bank. Alexander Lipton is Global Head, Research & Development at Abu Dhabi Investment Authority, Co-Founder and Advisor at Sila, Visiting Professor and Dean’s Fellow at the Hebrew University of Jerusalem, and Connection Science Fellow at MIT. Alex is an advisory board member of several fintech companies worldwide. In 2006–16, Alex was Co-Head of the Global Quantitative Group and Quantitative Solutions Executive at Bank of America. Earlier, he was a senior manager at Citadel, Credit Suisse, Deutsche Bank, and Bankers Trust, and a professor at the University of Illinois. In addition to his work as a quant, Alex held visiting professorships at EPFL, NYU, Oxford University, Imperial College, and the University of Illinois. In 2000 he was awarded the Inaugural Quant of the Year Award and in 2021 the Buy-side Quant of the Year Award by Risk magazine. Alex has authored/edited eleven books and more than a hundred scientific papers on thermonuclear physics, astrophysics, applied mathematics, financial engineering, and distributed ledgers. Over the years, he has given numerous keynote presentations on applied mathematics, quantitative finance, and fintech at conferences and forums worldwide. His most recent book, Blockchain and Distributed Ledgers: Mathematics, Technology, and Economics, was published in August 2021.

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Léo Malherbe is Associate Professor (maître de conférences) at Université Picardie Jules Verne, France. His research is focused on Keynesian macroeconomics and institutionalist analysis. His PhD thesis examined the evolution of the Icelandic mode of development and, more specifically, the evolution of monetary structures over the course of financial and political crises. His other works deal with the history of monetary systems as well as innovations in the payment industry and in monetary policy. Matthieu Montalban is Associate Professor (maître de conférences HDR) at the Bordeaux University, France. His research is focused on a regulationist and institutionalist approach of construction of markets, business models and the way in which regulations and technical changes in some sectors are transforming the mode of regulation and accumulation regimes of capitalism, and reciprocally how macro-transformations are influencing industries structures and business strategies. He has worked on the financialization and regulation of the pharmaceutical industry, on the private equity sector and on value theory. His more recent works study how the digitalization process, the platform economy and cryptocurrencies are transforming the mode of regulation and accumulation regime. Fabio Panetta has been a member of the Executive Board of the European Central Bank (ECB) since 1 January 2020. He is responsible for International and European Relations, Market Infrastructure and Payments and Banknotes. Prior to joining the ECB, Mr Panetta was Senior Deputy Governor of the Banca d’Italia and President of the Italian Insurance Supervisory Authority (Ivass). He served as a Member of the Board of Directors and as a Member of the Committee on the Global Financial System of the Bank for International Settlements. From 2014 to 2019 he was a Member of the Supervisory Board of the Single Supervisory Mechanism at the European Central Bank. Mr Panetta graduated with honours in Economics from LUISS University (Rome). He holds an MSc in Economics from the London School of Economics and a PhD in Economics and Finance from the London Business School. He has authored books and papers published in international journals, such as the American Economic Review, the Journal of Finance, the Journal of Money, Credit and Banking, the European Economic Review and the Journal of Banking and Finance. Christoph Siebenbrunner is a Research Fellow at Harvard’s Center for Research on Computation and Society, USA. He works on creating a more stable, fairer and accessible financial system by building complex formal models to further our understanding of the current system, its dynamics and vulnerabilities. He collaborates with major institutions both from the

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public and private sector to develop actionable solutions to address practical problems facing the financial industry, using cutting-edge methods from artificial intelligence, applied mathematical disciplines including network theory, and emerging technologies such as blockchains. He holds two PhDs in Mathematics and Economics and Industrial Engineering, from the University of Oxford and Vienna University of Technology, respectively. His academic work draws on over six years of professional experience as a financial stability expert at central banks, including the European Central Bank, most recently as the Lead Developer for Stress Testing Models at the Austrian National Bank, as well as experience in the private sector as a consultant. Zoltán Szalai graduated from Karl Marx Economics University, Budapest, Hungary. He has worked at the Magyar Nemzeti Bank (the central bank of Hungary) since 1992, specializing in monetary strategy and European monetary integration. Ignacio Terol works at the European Central Bank (ECB) in the Market Infrastructure Innovation & Integration Division, where he leads the innovation team. The team is responsible for the preparation of the digital euro project. Previously he was responsible for the evolution of Eurosystem services in the area of Market Infrastructures and Evolution Manager for Target Instant Payment Settlement (TIPS). Mr Terol was involved in the TARGET2-Securities (T2S) project from its conception in 2006 to going live in 2015. Before that he worked on several reports of the Committee on Payment and Settlement Systems (now the CPMI) between 2000 and 2005. Mr Terol holds a degree in economics and business administration from the Centro Universitario de Estudios Financieros (CUNEF). Matheus Trotta Vianna is a Lecturer in Economics at the University of Manchester, UK. He holds a PhD in Economics from the Federal University of Rio de Janeiro, Brazil, with a Visiting Research Period at the Scuola Superiore Sant’Anna, Italy. He obtained his MSc and BSc in Economics at the Federal University of Rio de Janeiro. He is also an Associate Researcher at the Central Bank Observatory and Economic Dynamics Research Groups at the Federal University of Rio de Janeiro. Former Executive Coordinator and Researcher at the Multidisciplinary Institute for Development and Strategies. Mr Vianna has been writing, researching and teaching macroeconomics, economic modelling, monetary economics and financial instability analysis.

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Acknowledgements In the making of this book, we would like to thank all the authors who contributed a chapter, therefore their time and energy. Written and put together during the worst of COVID-19, we appreciate it more knowing that many of the authors had urgent family commitments, and we all had to navigate more difficult work conditions. We would also like to acknowledge, as always, the generous support of Alan Sturmer and the rest of the team at Edward Elgar Publishing for their continued and enthusiastic support of our work.

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Introduction to Central Banking, Monetary Policy and the Future of Money Guillaume Vallet, Sylvio Kappes and Louis-Philippe Rochon INTRODUCTION Since the 2007/08 financial crisis, central banks have been waking up to new realities concerning both the limitations of conventional policies, and the impact conventional and unconventional policies may have, only to face the possibility of aggregate demand secular stagnation. The task currently facing central banks is in identifying the challenges ahead and to respond to them with the right tools and policies. This is a far cry from the Goldilocks years of the Great Moderation when central bankers and policymakers celebrated, thinking they had finally got things right. Business cycles had been vanquished, we were told, with huge and obvious implications for monetary policy. Keynes was a relic of a bygone era. However, this illusion was short lived. With the financial and then the pandemic crises, central banks tested the limits of monetary policy. They pushed interest rates to near zero in many countries, but the results were disappointing as the policy had very limited or even no success in generating economic growth, thus disapproving neoclassical theory. It would appear that consumption and investment  decisions rely on variables other than the rate of interest. Real  interest rates were pushed to negative territory in the hope of stimulating demand. However, this was an instance of imposing a theory where  the empirical evidence was clearly showing otherwise. As Storm  writes, ‘As the real  interest [rate] increased from 1.6% in 1980 to 8.1% in 1984, the investment rate increased’ (Storm 2019, n.p., original emphasis). Nevertheless, there was still a belief in the loanable funds theory: if only real rates were pushed low enough, investment would pick up. This was how some, such as Lawrence Summers, interpreted secular stagnation: not 1

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as much as a crisis in aggregate demand, but instead as a crisis in loanable funds, easily solved by lowering interest rates. This approach corresponded, for the past few decades, with the rise of the Austerian philosophy, where central banks have been made to carry most of the economic-policy burden, thereby contributing to the age of monetary policy dominance, during which fiscal policy was given up to the pursuit of economic growth. Governments, it was assumed, overburdened us and future generations with piles of public debt. They had to assure balanced or sound finances, and leave the challenge of fine-tuning economic activity to independent central bankers. An important conclusion we can draw from the pair of crises is that central banks are unable to carry the whole burden of recovery. With the failure of both conventional and unconventional policies, many central banks resorted to asking governments to inject stimulus, given that they ‘had done their job’. As Bernanke testified in front of Congress, on 5 June 2012, ‘Monetary policy is not a panacea. … I would feel much more comfortable if Congress would take some of this burden from us and address these issues.’ It was the return of Keynes, or rather, the ‘Return of the Master’ (Skidelsky 2009). Although Keynes did make an appearance in 2009, it  was short lived as, by 2010, many countries had resorted back to sound finance. But the Master did return in a big way during the COVID crisis, when unprecedented fiscal stimulus, including in some countries the quasi-nationalization of private-sector wages, proved so historically important. Around the world, governments embraced deficit spending on a large and unprecedented scale: once again, Keynes rescued aggregate demand. Central banks also went through a rethinking process of their own. Strict adherence to inflation targeting, which has been around since the early 1990s, started to wane, as some central banks started to adopt either dual mandates, for example, New Zealand which was ironically the first bank to inflation target, or a looser version of inflation targeting – average inflation targeting. Of particular note, and following in the footsteps of a number of countries such as Canada, the Federal Reserve abandoned reserve requirements in 2020, in a further attempt to update their monetary framework. This is a clear statement that reserve requirements do not work in giving  central  banks control over the supply of credit by commercial banks. That  is,  the money multiplier is dead, and as a recently published paper by the Federal Reserve states, ‘RIP money multiplier’ (Ihrig et al. 2021).

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Introduction ­3

THE OLD MODEL OF CENTRAL BANKING Despite these seemingly positive changes over the past decade, has there been real change in monetary thinking, or has it been more cosmetic than anything else? The answer may be a little of both. To answer this question, let us begin with a discussion of what we call the old model of central banking, most associated with Friedman’s monetarism, pre-dating the new consensus model. Such an old model, we argue, is based on the following nine fundamental arguments: 1. Central banks control the supply of high-powered money or reserves. 2. Central banks exert control over the growth of monetary aggregates, the money supply. 3. Central banks control reserve requirements. 4. The money multiplier is at the core of the transmission mechanism. 5. Debate over rules versus discretion, favouring the former. 6. The natural rate of interest is a relevant variable for policy. 7. Money and inflation are linked. 8. Central banks must be independent. 9. The long-run neutrality of money. Accordingly, central banks can control the money supply given their control over high-powered reserves and reserve requirements, a key element in the money multiplier. It is assumed that the money multiplier is stable. If central banks want to rein in money supply growth, they need only to either decrease the supply of high-powered money or increase reserve requirements. In both instances, the supply of money is assumed exogenous and therefore independent of whatever occurs in the economy, by definition. In accordance with the quantity theory of money, assuming stable velocity, the rate of growth of the money supply should be set according to the long-run, natural growth of the economy, also known as Friedman’s rule. According to this model, commercial banks are mere financial intermediaries, and their lending activities are at the mercy of central banks: they are severally constrained in their ability to lend – by the availability of reserves and deposits. Central banks can influence lending by increasing or decreasing the availability of high-powered money to the banking system and, through the (stable and predictable) money multiplier, will impact the supply of bank loans. That is, deposits create loans. However, if the central bank can influence the supply of loans, this is only a short-run phenomenon. Indeed, monetary policy only has s­ hort-run effects. In the long run, money is neutral and has no impact on real

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v­ ariables. Money only affects prices in the long run. This is the standard way of reading the quantity theory of money equation: from left to right and, if money supply growth is appropriately set, then in the long run the price level remains constant. This is an important function of central banks, and is seen as crucial given the notion that inflation is influenced by all things monetary: inflation is ‘always and everywhere a monetary phenomenon’. Control of the growth of the money supply therefore becomes of paramount importance: if central banks cannot control the money supply, then they must as well give up on trying to control inflation. The idea that inflation and money are linked was considered – and still is – a universal truth. This led Friedman to propose his monetary rule. There were in fact two main reasons for favouring rules over discretion: Friedman had a deep mistrust of central bankers, and in this sense always opposed the notion of independent central banks. At least, were they so independent, rules would ensure that central bankers would follow proper monetary policy etiquette.

THE NEW MODEL OF CENTRAL BANKING In recent years, central banks themselves have come a long way in leaving at least parts of the monetarist story behind, and many have gone so far as to embrace some version of the post-Keynesian theory of endogenous money (even though post-Keynesian works and authors are seldom, if ever, cited). If the old model of central banking owed a debt to Friedman, the new approach owes a great deal to the work of Wicksell. In this new model, most now readily admit that it is the rate of interest that is the control instrument, not some monetary aggregate, and that the setting of interest rates is independent of the quantity of reserves in existence – what Borio and Disyatat (2010) have termed the ‘decoupling’ effect. Former Bank of Canada Governor Gerald Bouey famously stated in 1982, ‘We did not abandon the monetary targets: they abandoned us’ (Dodge 2010). It is perhaps because of this that central banks turned to another monetary framework, careful, however, not to stray theoretically too far from orthodox monetary thinking. Indeed, ‘the main change is that it replaces the assumption that the central bank targets the money supply with an assumption that it follows a simple interest rate rule’ (Romer 2000, p. 154). With that in mind, central banks then looked for a more suitable model to build, and turned to inflation targeting, a concept that goes back at least to Keynes (1923). This elegant, three-equation model (see  Romer  2000;

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Introduction ­5

Taylor 1993; Woodford 2003) contains a Taylor rule, and well-behaved IS and Phillips curves. New Zealand was the first country in the world to adopt the new model, in 1990, followed by Canada the following year. The model was widely popular with central banks and academics. Indeed, Goodfriend (2007, p. 59) claimed that ‘the Taylor Rule became the most common way to model monetary policy’, and Taylor (2000, p. 90), heralded that ‘at the practical level, a common view of macroeconomics is now pervasive in policy-research projects at universities and central banks around the world’. The inflation target itself became the anchor for inflation, and in Wicksellian fashion, we find embedded in the model the inescapable n ­ atural rate of interest determined by productivity and thrift, and a ­market-determined benchmark rate set by the central bank. The model was also based on some fine-tuning: whenever the rate of inflation was above target, central banks, via a Taylor rule, would raise the benchmark rate, hoping the economy would slow down just enough to bring inflation back down to target, via the well-behaved IS and Phillips curves. Without these, of course, the model falls apart. The adoption of this new model corresponded also to the period of the Great Moderation, leading some to argue that ‘In the years prior to August 2007, central banks had appeared to have almost perfected the conduct of monetary policy’ (Goodhart 2011, p. 145). Yet, with the financial crisis, the model began falling apart and a new search for a new monetary policy framework was under way. This model was confronted with the problem of the lower bound, where central banks were  unable to push nominal interest rates below zero. Here,  central banks  were convinced the natural rate was below zero and hence why they needed to push the benchmark rate to such low levels. However, in their model, even a zero nominal rate was still too high: real rates were still above the natural rate given low levels of inflation. Interestingly, the secular stagnationist view was based precisely on this view: our economies were stagnating because the natural rate had fallen below zero; austerity had nothing to do with it. As stated previously, stagnation was interpreted as a crisis in loanable funds, not a crisis in aggregate demand per se. Owing to this, fiscal policy was not seen initially as a possible solution; austerity made sense, according to this view. In the continued absence of fiscal policy, central banks were struggling to be seen as still relevant, and turned to unconventional means to foster economic growth – means that proved as uninspiring as the more conventional policies. Yet, the financial crisis would eventually reveal the degree to which the monetary new emperor had no clothes: the limits of this new view were starting to emerge. In a startling new paper, ‘Whither

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central banking’, Summers and Stansbury (2019) were now admitting ‘the impotence’ of the model: ‘Simply put, tweaking inflation targets, communications strategies, or even balance sheets is not an adequate response to the challenges now confronting the major economies … Central banks cannot always set inflation rates through monetary policy’.

THE HUMPTY-DUMPTYING OF THE NEW MODEL There is no denying that the new consensus model has come under criticism in the past decade, since the financial crisis, and not just from ­post-Keynesians, but from a growing number of analyses from within central banks themselves. The question remains as to whether all the central banks’ guards and horses can put the model back together again. In a Bank of England paper now almost a decade old, McLeay et al. (2014) go to great lengths to dispel some old myths surrounding monetary creation, and clarify the misconceptions of money creation from the reality. In particular, they argue that lending creates deposits: ‘In the modern economy, those bank deposits are mostly created by commercial banks themselves’ (McLeay et al. 2014, p. 15). More crucial, we believe, is the explanation of why reserves are not an important component of bank lending, and cannot ‘be multiplied into more loans’ (McLeay et al. 2014, p. 14). In a second paper published at the Bank of England, Jakab and Kumhof (2018) argue that ‘loans come before deposits’ and that ‘a new loan involves no intermediation. No real resources need to be diverted from other uses, by other agents, in order to be able to lend to the new customer’ (Jakab and Kumhof 2018, p. 4), which they claim is a ‘more realistic framework’ which is ‘supported by a long and growing list of central bank publications’ (Jakab and Kumhof 2018, p. 1). Moreover, they specify that this view ‘has always been very well understood by central banks’ (Jakab and Kumhof 2018, p. 7). The Bundesbank, of all banks, also contributed to this new central bank model, in 2017, with a paper entitled ‘The role of banks, non-banks and the central bank in the money creation process’. A reference to the ‘money creation process’ is a very telling rejection of the exogenous money story where this process is absent, in the notion of helicopter money. The paper argues that: Sight deposits are created by transactions between a bank and a non-bank (its customer) – the bank grants a loan, say, or purchases an asset and credits the corresponding amount to the non-bank’s bank account in return. Banks are thus able to create book (giro) money. This form of money creation reflects the

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Introduction ­7 financing and portfolio decisions of banks and non-banks and is thus driven by the same factors that determine the behaviour of banks and non-banks. (Deutsche Bundesbank 2017, p. 15)

In a 2018 speech, Christopher Kent, Assistant Governor of the Reserve Bank of Australia, discussed whether money was ‘born of credit?’ He makes clear that ‘Money can be created, however, when financial intermediaries make loans. Accordingly, the concepts of money and credit are closely linked in a modern economy … The process of money creation requires a willing borrower … [and the bank must] satisfy itself that the borrower can service the loan’ (Kent 2018, p. 4). These are familiar themes for post-Keynesians, who will recognize the notion that loans create deposits, and that they are demand-determined by creditworthy borrowers; that is, money is seemingly endogenous. Moreover, two papers recently published by the Federal Reserve show a very different side to the central bank model. In the first, Rudd (2022) argues that inflationary expectations are no ground for predicting future levels of inflation. According to the author, such an idea rests on ‘extremely shaky foundations’ (Rudd 2022, p. 25). The conclusions are devastating as anticipations of inflation certainly are a core principle of central banking today. The ‘pugnacious paper’ created a firestorm, leading The Economist (2021) to declare the paper ‘a social-media sensation’. In the second paper, by Ihrig et al. (2021), with the provocative subtitle ‘R.I.P. money multiplier’, the authors explain the changes to monetary policy in the USA, following the financial crisis and COVID. The paper is worth noting for a few reasons. First, in light of the Federal Reserve’s elimination of reserve requirements in 2020, the authors warn professors of mistakes they still make when teaching money and banking. Second, the authors admonish textbooks for still teaching the ways of the old model. The subtitle of the paper is meant to be a definitive statement (and perhaps even a warning) to economists that they are doing a disservice to students by not correctly representing (or understanding) what central banks do. Both reasons are summarized by the title to one section of the paper: ‘Make sure your teaching is current’. Finally, in celebrating the twenty-fifth anniversary of the publication of Moore (1988), Bindseil and König (2013) – Bindseil works at the European Central Bank (ECB) – have acknowledged that ‘the last 25 years have vindicated the substance of his thinking [Moore’s] in a surprising way that could hardly have been anticipated in 1988. Central bankers have by now largely buried “verticalism”, at least when it comes to monetary policy implementation’ (Bindseil and König 2013, p. 385). This is an ­acknowledgement that the old model of central banking is dead.

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Or is it? While many of the above quotes (and we could have cited a number of other papers) certainly appear, at least on the surface, as indicative of important changes in monetary thinking, we are not convinced. While there is no doubt that central banks have come a long way in repudiating some of the elements of the old model, we argue they have not successfully done so in their entirety. What is left is perhaps best described as a hybrid model. We agree with Fiebiger and Lavoie (2020, p. 78) who have argued that ‘The NCM replaced money supply target­ing with inflation targeting while preserving monetarist results.’ This is exactly what Lavoie (2006, p. 167) meant when he wrote, almost two decades ago, that new consensus models ‘simply look like old wine in a new bottle’. Let us once again refer to the nine arguments above: 1. Central banks control the supply of high-powered money or reserves. 2. Central banks exert control over the growth of monetary aggregates, the money supply. 3. Central banks control reserve requirements. 4. The money multiplier is at the core of the transmission mechanism. 5. Debate over rules versus discretion, favouring the former. 6. The natural rate of interest is a relevant variable for policy. 7. Money and inflation are linked. 8. Central banks must be independent. 9. The long-run neutrality of money. We can conclude that arguments 1–4 have been abandoned by many central banks, and in new consensus models as well. However, despite these advances, welcome as they are, we are still not entirely in agreement with the idea that mainstream thinking is any closer to the post-Keynesian story of endogenous money. That is, the new model of central banking certainly leaves behind a number of assumptions of the old model, but from a post-Keynesian perspective, it does not go far enough. Five elements still remain at the core of the model. Argument 5: as regards the debate over rules versus discretion, we can summarize that it has evolved, but perhaps not by much. The old model contains a monetary rule, while the new model contains an interest rate rule. However, Taylor (1993, p. 195) defines his approach as akin to ‘a responsive rule’. Indeed, Taylor (1993, p. 196) claims that ‘Policymakers do not, and are not evidently about to, follow policy rules mechanically’, therefore leaving some room for discretion, and warns about making Taylor rules ‘too complex’. So, in many ways, central banks use fine-tuning to adjust interest rates in response to inflation shocks.

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Introduction ­9

Argument 6: as regards the natural rate of interest, it is still at the heart of new consensus models. In a Wicksellian manner, it acts as an anchor to short-term benchmark rates. The purpose of the central bank is to set the rate and to move it up or down until it reaches an inflation target, corresponding presumably with the natural rate. The question is whether we can have a theory of endogenous money while also espousing a natural rate of interest. Rochon (1999) and Smithin (1994) have always rejected the claim that a theory of endogenous money can accommodate a natural rate of interest. If post-Keynesians believe the benchmark rate is truly exogenous, then that would rule out a natural rate that acts as an anchor for central bank rates. At best, as Palley (2006, p. 80) writes, the new consensus ‘is a conception of endogeneity that is fundamentally different from the Post Keynesian conception, which is rooted in the credit nature of money’. Palley names the new consensus (NC) approach as ‘central bank endogeneity’. In a similar vein, we would argue that the new consensus lacked a ‘theory of endogenous money’. As Setterfield (2004, p. 41) arrives at the same conclusion: ‘whereas the stock of money is endogenous in practice in NC macroeconomics, it is endogenous in principle in PK macroeconomics’. Argument 7: in addition, inflation is still thought to be linked to monetary policy. Only central banks are equipped to regulate economic activity efficiently in order to influence inflation and achieve its target, with minimal damage to the economy. Inflation, we can say, is always and everywhere a monetary policy phenomenon. Argument 8: central bank independence is still considered a sine qua non of mainstream monetary policy. Advocates claim that it is at the core of current monetary thinking, especially now (at the time of writing this introduction) as inflation is starting to increase around the world. According to Goodhart (2021), if inflation persists, central banks must move to swiftly increase interest rates or risk losing credibility. Central bank independence is tied to notions of credibility: ‘It is important to have in place adequate mechanisms to “guard the guardians” of monetary and financial stability’ (Goodhart and Lastra 2018, p. 49). There is also a staunch defence of the long-run neutrality of money. This is particularly so in current research on the links between monetary policy and income distribution. While some central banks recognize the income distributive impact of monetary policy, it is said to be small and temporary (see Rochon 2022). For instance, Romer and Romer (2001, p. 910) claim that ‘It is certainly true that expansionary policy can generate a boom and reduce poverty temporarily. But the effect is unquestionably just that: temporary.’ In a recent survey,1 Colciago et al. (2019, p. 1224) argue that ‘Over the longer horizon, the distributional impact is likely to die out

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given the temporary nature of the effects of monetary policy shocks.’ This is a required conclusion to a theory that insists on long-run neutrality. The new model is thus not too far from Friedman (Fiebiger and Lavoie 2020), well evidenced in the following quote by Bernanke (2003, online speech): ‘I am ready and willing to praise Friedman’s contributions wherever and whenever anyone gives me a venue … We can hardly overstate the influence of Friedman’s monetary framework on contemporary monetary theory and practice … both policymakers and the public owe Milton Friedman an enormous debt’.

THE POST-KEYNESIAN MODEL OF CENTRAL BANKING While mainstream economists have had to face new realities and come to some realizations about how central bank policy operates, ­post-Keynesians have also made some changes in the way they perceive central banks and monetary policy. Endogenous money is still the copingstone of ­post-Keynesian theory, where the rate of interest is set by central banks in a total disconnect with the natural rate, which is rejected. Loans make deposits, and banks are never constrained by a lack of deposits or reserves, but only by a lack of creditworthy borrowers. While Kaldor (1970) and Moore (1988) are central to this view, the ideas were present in many of  Joan Robinson’s writings, especially The Accumulation of Capital (1956). Post-Keynesians have pushed the boundaries of central banking by advocating against the use of fine-tuning, and by linking monetary policy to income distribution. As regards the first of these, the concept of fine-tuning consists of incrementally increasing and decreasing interest rates until the correct rate of interest is found, which delivers an inflation consistent with its target. However, a great deal is assumed here. In new consensus models, this fine-tuning is based on well-established IS and Phillips curves: central banks change interest rates in an effort to generate just the right amount of change in output, which in turn will generate just enough change in unemployment and inflation. However, these are empirical relationships that need to be tested, and thus far the empirical evidence is weak. Both Keynes and Robinson rejected fine-tuning. Keynes is famous for having said that fine-tuning ‘belongs to the species of remedy which cures the disease by killing the patient’ (Keynes 1936, p. 323). In a similar vein, Robinson, in a greatly underappreciated essay, argues that ‘The regulating effect of changes in the rate of interest was at best very weak’

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Introduction ­11

(1943, p. 26), and again in 1952, where she describes as a ‘false scent’ the use of ­counter-cyclical monetary policy, and rejects: the conception of an economy which is automatically held on a path of steady development by the mechanism of the rate of interest … But it is by no means easy to see how the monetary mechanism is supposed to ensure how that the rate of interest actually assumes its full employment value … The automatic corrective action of the rate of interest is condemned by its very nature to be always too little and too late. (Robinson 1952, pp. 73–4)

While recognizing this, post-Keynesians further argue that monetary policy is foremost about income distribution. While the mainstream is starting to recognize this, as stated previously, there is nevertheless a stark difference with post-Keynesians. While for the mainstream, monetary policy may have income distributive effects in the short run, for ­post-Keynesians, monetary policy is income distribution. It is for both of these reasons that Lavoie (1996, p. 537), in rejecting fine-tuning, concludes that: It then becomes clear that monetary policy should not so much be designed to control the level of activity, but rather to find the level of interest rates that will be proper for the economy from a distribution point of view. The aim of such a policy should be to minimize conflict over the income shares, in the hope of simultaneously keeping inflation low and activity high.

PURPOSE OF THE CENTRAL BANKING AND MONETARY POLICY SERIES In early 2018, we decided to organize a small gathering on ‘the future of central banking’, and applied for a financial grant from the Social Sciences and Humanities Research Council (Canada) as they have a wonderful programme for that purpose. The three of us had been having discussions around this topic for a few years previously, noticing what appeared to be important changes in central banking and monetary policy, from ‘unconventional policies’ such as quantitative easing and lower-bound policies, to discussions over income distribution, the environment and the quasi-embrace of at least some version of endogenous money by some central banks. It was in this spirit that we gathered in Talloires (France), on the shores of Lake Annecy, over a few days on 26–28 May 2019. We invited some well-known heterodox scholars, such as Elissa Braunstein, Gary Dimsky, Juliet Johnson, Marc Lavoie, Dominique Plihon and Mario Seccareccia, but also some more mainstream scholars, such as Etienne Farvaque and

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Ulrich Bindseil, in an effort to encourage a dialogue of sorts on central bank-related topics. We also partnered with the Young Scholars Initiative, from the Institute for New Economic Thinking, which funded the travel and accommodation of 11 young scholars. This partnership has proven rewarding for all those involved. By all accounts, it was a huge success and it was from this gathering that the idea of a book on the same topic was born. The ensuing book went well beyond the initial plan, as we expanded its scope and breadth. The Future of Central Banking is the first book of this series, and we divided it into several sections, each dealing with the relationship between central banking, monetary policy and various themes, such as the environment, gender, income distribution, macro-prudential policies, structural change and central bank independence. While we are very proud of this book, and it remains in many ways ground-breaking, it soon became apparent that there was more to be said on each of these topics, and so we began discussions with Edward Elgar Publishing to create a series dedicated to all aspects of central banking. While we signed the contract for the book in July 2019, by November we signed a contract to create the series. That first book would then anchor the rest of the series. From there, we felt that many of the topics from the first book needed to be developed, so we decided to do entire books on each of these themes. We agreed on the next four titles – income distribution, the environment, social responsibility and the future of money – and quickly contacted some possible contributors. This then launched us in new directions, and new reflections, with the aim of moving forward the critical discussion over the future of central banking, and pushing the boundaries of heterodox thought. In many ways, the mainstream was ‘out-researching’ us on some of these topics, and heterodox economists had to return to monetary policy and push forward. This was also the rationale for creating the Monetary Policy Institute, which we all direct. The overall goal of this new series is to contribute to a new research agenda on central banking and monetary policy. Note, the title of the series is not simply ‘monetary policy’ as we understand it, that is, interest rates and their impact on the economy. While there is still a great deal of work to be done in this respect, for instance, understanding the impact of incremental changes in interest rates on income distribution and social classes, on gender, on the environment, and so on, we need to go beyond a mere discussion over interest rates, and consider central banks as institutions. This remains a gravely underdeveloped area of research in economics, though sociologists have considered this topic with great

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Introduction ­13

promise. In this context, economists have much to learn from sociology, and their emphasis on power, for instance. Sociological studies on central banking highlight that, as institutions, central banks produce rules that ‘coerce’ individuals and shape their lives through their policies. In that, central banks exert what Susan Strange termed ‘structural power’ on the economy and society. This ­‘structural power’ is personally concentrated in central bankers’ hands, whose sociological profile should be put in relation to the distributive nature of monetary policy: do central bankers really serve the people? This crucial argument demonstrates that central banks reciprocally need people’s confidence in order to gain social legitimacy: central banks’ power needs to be ‘socially embedded’. Central banks are undoubtedly non-neutral institutions, and for that reason, economics has a lot to learn from other social sciences. Finally, the crucial question is whether central banks serve the interests of the people (see Fontan et al. 2018). This opens up a Pandora’s Box of questions and more, about central banking, monetary policy and social responsibility, democracy, gender, income distribution and structural change. One by one, these themes are covered in the books in this new series which aims to push the boundaries of how we currently analyse, reflect and write about central banks.

THE STRUCTURE OF THE BOOK When it comes to the relationship between money and its future, many key issues come to mind. Specifically, as readers will discover in this book, at stake is principally the future of national currencies, which includes the rise in digital currencies. Similarly, the increasing number of local currencies is explored in this book. Both digital and local currencies address a key issue: do these currencies challenge the existing central banks’ monetary systems, or do they offer new positive opportunities for such systems? The book, which contains 11 chapters by leading economists and social scientists, seeks to shed new insights on this issue. In Chapter 1, Matheus R. Grasselli and Alexander Lipton analyse different types of cryptocurrencies (pure-asset, or commodity-like, cryptocurrencies such as Bitcoin, central bank digital currencies and stable coins) and the associated distributed ledger technology (DLT) on which they are based. This first chapter, with the use of examples and cases, is crucial to understand both the technical aspects underlying each of these and their economic properties. The reader will learn that cryptocurrencies can perform multiple economic functions. Since cryptocurrencies seem to

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be everywhere today, it is paramount to distinguish between those seeking their own space of sovereignty and those whose existence is related to that of stable existing assets, such as stable coins. At stake is also their capacity to promote and secure trade and transactions on a large basis. With that aim in mind, the authors also rests on a stock-flow consistent model incorporating the different types of cryptocurrencies. This macroeconomic modelling enables the reader to understand the systemic economic consequences of changes in the balance sheet arising from transactions between the main economic sectors and actors (financial institutions, central bank, banks, firms, and so on). Chapter 2, by Matheus Trotta Vianna, also deals with cryptocurrencies, but with a special focus on Bitcoin. The latter has been frequently described as an alternative to national currencies, which was either praised or condemned by economists and people. In order to avoid falling into the trap of analysing Bitcoin through these two extreme approaches, the author conducts an analysis consisting of separating the Bitcoin system and technology from the Bitcoin unit individually. This distinction is crucial to assess both the potential but also the risk associated with the spreading use of this cryptocurrency. As Trotta Vianna emphasizes, although Bitcoin’s system has technically the power to facilitate and improve our payments and other related systems, the Bitcoin unit raises serious concerns, especially in connection with its scarcity. Resting on the Keynesian theory of money, the author explains why Bitcoin’s model, whose underpinnings are based on the classical theory of money (merely defined as an asset fulfilling the three traditional functions of means of payment, unit of account and store of value), fails in being considered as money. Specifically, according to Trotta Vianna, it is worth remembering that Bitcoin does not meet the two Keynesian essential properties: Bitcoin’s elasticity of production and substitution are not zero (or negligible). More broadly, Bitcoin is not debt: ‘I owe you’ (IOU) transactions do not exist within its system, and no economic actor is promising to accept your Bitcoin back. However, although not a money, Bitcoin implies monetary transactions that could hamper but also jeopardize central banks’ monetary systems. For this reason, the author of the chapter is right when he mentions in his conclusion that central banks pay greater attention to Bitcoin, and cryptocurrencies more generally. In the following chapter, Léo Malherbe and Matthieu Montalban follow the same conclusions than Trotta Vianna’s: they start their chapter emphasizing that Bitcoin is not a complete money. This first statement is key to address the relationship between Bitcoin – also more generally cryptocurrencies, or even ‘crypto-assets’ according to the two authors – and central banks’ systems. Specifically, the chapter copes with the consequences of

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Introduction ­15

the emergence of these cryptocurrencies, and digital currencies, on the changing role of central banks as well as on banks in the payment industry. These cryptocurrencies have particularly gained ground in the aftermath of the 2007–08 crisis. Some economic actors behind have backed their cryptocurrencies to official currencies, such as stablecoin, and some central banks themselves have reacted by creating their own digital currencies, the central banks digital currencies (CBDCs). As Malherbe and Montalban explain, CBDCs are part of a technological upgrade of the monetary authorities that would allow users to benefit from a secure electronic payment method that could bypass intermediaries, such as banks and Big Techs. On the one hand, CBDCs are presented as a way to fight against both the structural power of banks, and the rise of Big Techs, which can be seen as a threat for user’s privacy. On the other hand, CBDCs can be seen as a way to allow financial inclusion, with less drain on foreign reserves and as cheap international transfers without putting at risk the general public, as occurs with cryptocurrencies. At the first sight CBDCs seem to challenge the functioning of the current banking system as well as the payments system. However, as the  authors explain, CBDCs correspond more to the re-emergence of older projects, in that CBDCs can be compared to old ‘deposited currency’ proposals, particularly those of the 1930s. That is, CBDCs are ‘old wine in new bottles’ according to Malherbe and Montalban. Also, it is worth noting that CBDCs as well as cryptocurrencies tackle a fundamental issue: the debate on centralization versus decentralization of the monetary system and its consequences on the role, power and structure of banks. In Chapter 4, by Pál Péter Kolozsi, Kristóf Lehmann and Zoltán Szalai the reader will find a review of the literature on the possible impact of CBDC on the transmission of monetary policy. This impact is a matter of trust in money. This is why, once again, the emergence of digital currencies challenges the confidence that economic actors place in money. As in the previous chapters, the authors emphasize the increasing trend shared by central banks to issue their own digital currencies. This choice is not without any consequences regarding the monetary policy transmission channel to the economy and, more broadly, on monetary sovereignty. This is why the authors turn to the post-Keynesian’s approach of endogenous money to analyse the rise of CBDC, in the context of radical uncertainty. According to Kolozsi, Lehmann and Szalai, resting on this approach is crucial to understand the legitimacy of central banks’ money, since the private sector is unable to provide monetary and financial stability. By contrast, central banks are able to ensure the stability of the banking and the financial systems, which depends on the quality and quantity of the asset side of bank balances and to the insurance of central

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banks’ lender-of-last resort function. However, the authors recognize that the increasing digitalization of money offered by the private sector as well as its growing use could lead to declining use of traditional central bank currency. Chapter 5, by Ulrich Bindseil, Fabio Panetta and Ignacio Terol, is also dedicated to the analysis of the rise of CBDCs, and its consequences. The authors begin by emphasizing that many central banks decided a few years ago to turn to the issuing of their own digital currency to sustain confidence. Specifically, the main underpinning idea was to preserve public access and full usability of central bank money in a world in which consumers and firms turn increasingly to electronic payments. Moreover, at stake for central banks was the issue of maintaining financial stability. Therefore, the chapter discusses success factors for CBDCs, and how to avoid at the same time the risk that CBDCs could crowd out banks and private-sector payment solutions. Indeed, since the rise in the number of CBDCs is often associated with disintermediation, it is crucial to assess the effective impact of the spread of CBDCs on the banking and financial sectors. The chapter describes very well the state of the debates between the pros and the cons of CBDC, the authors explaining the expected advantages and the likely drawbacks of CBDCs. In particular, although the latter must be attractive through their capacity to foster trade (including an international dimension), they also have to fit with the security of the payments system (including the connection between the domestic payments system to international payments networks). This is why Bindseil, Panetta and Terol discuss the role of the incentives applied to private-sector service providers involved in the distribution, usage and processing of CBDCs, including fees and compensations. Marco Gross and Christoph Siebenbrunner start the following chapter by defining three structural features of monetary systems (a two-layer structure comprising a private-sector agent deposit system with commercial banks; money created is tied to bank loans; and money stock is endogenously and elastically driven by demand and constrained loosely by regulation of different types). From this, the authors argue that the notion of money creation as a result of banking credit is compatible with the notion of liquid funding needs in a multi-bank system, in which liquid fund (reserve) transfers across banks occur naturally. Similarly, Gross and Siebenbrunner stress that interest-rate based monetary policy has a bearing on macroeconomic dynamics precisely in relation to that multi-bank structure. The chapter is insightful in that it rests on key theoretical and empirical facts. The authors classify the existing literature on banks’ loan activity,

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Introduction ­17

including that on the intermediation, the fractional reserve and the money creation view. However, the authors go beyond this literature, focusing not only on bank lending (money creation) but also they lay out the lending process through centralized non-bank financial institutions and decentralized-market based intermediation. The authors apply this focus to a series of balance sheet examples based on double-entry bookkeeping principles, but also to a stock-flow consistent agent-based model (ABM) to illustrate the monetary system dynamics related to the loan and money creation process. Gross and Siebenbrunner conclude the chapter with a discussion related to CBDCs, shedding light on both how CBDC systems would be designed in relation to ‘credit provision’, and how the use of CBDCs on a large scale is likely to strengthen monetary policy’s ‘control potential’ over the economy if the CBDC was to be ‘interest-bearing’. In Chapter 7, Eva Julin also grapples with the issue of CBDCs, focusing mainly on the Swedish e-krona that the Central Bank of Sweden, the Riksbank, is expected to launch. The author starts her chapter by discussing the expected benefits of the introduction of CBDCs, before applying this framework to the Swedish example. In Sweden, the decrease in the use of cash is one of the main reasons pushing for the introduction of the e-krona. The author even believes that in Sweden currently, it could be assumed that the general public has an overall trust in the monetary system, in that their private digital money can be exchanged for state guaranteed money (cash in particular). However, it is paramount to ensure that CBDCs would not jeopardize the payments system, even though the Central Bank of Sweden has often noted that increased competition and innovation on the payment market are desirable developments (including private initiatives). This is why reflections on the risk associated with the creation of the e-krona, as well as the possibility of its functioning in the event of disruptions, crises and contingency is crucial. This is evidence that the most important underpinning of the e-krona is that it must be of benefit to all Swedish people: money is a common good that should be protected. Even though Julin considers electronic money to be the unavoidable future for most countries, it is worth keeping in mind that smoothly functioning and reliable modes of payment should be regarded as a collective utility. Therefore, the public sector should continue to be involved in the payment market, since the state has a responsibility to maintain confidence in the monetary system. Andrés Arauz, in Chapter 8, starts by stressing that CBDCs are already here in central banking. From the pioneering role of Ecuador and China in the creation of these currencies, the author states that CBDCs now belong to the monetary landscape. The aim of the chapter is neither to focus on

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the relationship between CBDCs and the related payment system dynamics, nor on that between CBDCs and the financial stability impacts on the commercial banking system. Arauz explores the CBDCs’ impacts on production, resting on a circuittheory based approaches with respect to the monetary theory of production. Elaborating on this approach, the author studies the characteristics that CBDCs should have with an activist central bank in mind, especially one low in the international money hierarchy and sympathetic to development concerns of its country. Similarly, the author ties the fate of CBDCs with the emergence of other cryptocurrencies, which correspond to privately issued programmable money. Although there is a large array of monetary instruments, or quasi-monetary instruments, sustaining the use of this programme money (mobile-phone airtime, airline miles and food stamps), Arauz argues that with CBDCs, a successful CBDC that can guarantee real-time gross settlement, by definition, should rest on a unique ledger. To expand this statement, the author analyses the issue of fungibility between bank money and central bank money, what he terms the contingent liability on the CBDC ledger. Chapter 9, written by Georgina M. Gómez, is the first of the three chapters of the book dedicated to local currencies. In this chapter, the author focuses on the Redes de Trueque, an Argentinian complementary currency system which was the largest in the world between 1995 and 2006. As for the WIR currency which is explored in Chapter 11, albeit for different reasons, the Redes de Trueque arouses interest since it is described as a system able to trigger counter-cyclical mechanisms. Therefore, revisiting the case, Gómez discusses the generative conditions that led to trickle-down effects, especially income effects on low-income groups. As the author explains, these groups would normally suffer the most from the generalized scarcity of means of payment and economic downturns, so complementary currency circuits would support these groups the most. Last but not least regarding the political economy of money, Gómez’s breakthrough is to emphasize throughout the chapter that the underpinnings of currencies’ use are also an expression of class inequalities. In Chapter 10, Jérôme Blanc and Marie Fare cope with the transformative power of community and/or complementary currencies (CCs) on money itself. Particularly in the aftermath of the Global Financial Crisis, several projects of CCs emerged, ‘in between dollarization and blockchainbased currencies’ as the authors state. Beyond their differences, CCs may be presented as experiences that fall into the category of organized monetary plurality, which have gained ground for more than 20 years. In this chapter, Blanc and Fare shed light on the emergence and development of CCs from what they term a twin process of spreading

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Introduction ­19

and differentiation (in relation to the innovations CCs hold). The authors also examine the diversity of relations existing between CCs and regulatory authorities, ranging from threats (including direct prohibition) to integration within appropriate legal frameworks. Depending on their different purpose, Blanc and Fare classify the CCs according to the three main objectives they pursue, namely, a territorialization of activities, the stimulation of exchanges, and the transformation of practices, lifestyles and social representations. Although these three main objectives are consistent with a great diversity of situations in reality, they share the view that CCs can be analysed in relation to potential drivers of institutional change in the meaning of money, without necessarily challenging the existing national monetary framework. By contrast, according to the authors, CCs can generate monetary plurality within the official monetary system and opening spaces for monetary commons. Finally, in Chapter 11, Guillaume Vallet deals with the underestimated WIR, a Swiss local currency that has been in existence in Switzerland since the 1930s. This enduring existence being rare for a local currency, the author addresses the issue of confidence in the WIR and, more broadly, in money. To that end, Vallet rests on the French institutionalist approach of money, whose authors refer to three main keystones when they grapple with the issue of confidence in money: methodical, hierarchical and ethical confidence. As regards the WIR, as the author explains, confidence rests on its capacity to boost trade between Swiss small businesses but also the social bonds between them, since this currency promotes sharing and the non-maximization of profits. Similarly according to Vallet, the WIR owes its strength, its attractiveness and its resilience to crises to this currency also being related to the Swiss monetary system: not only does the WIR help bolster confidence in the Swiss monetary system taken as a whole, but the reverse is also true. It is the assumption of the author that the WIR owes its popularity to the confidence placed in the Swiss franc system. This focus on the WIR example is crucial to analysing the inherent monetary tension between centralization and fragmentation, since this local currency embodies the dual relationship with monetary unity and plural forms of money in a given monetary space. This echoes the conclusions of Malherbe and Montalban, expressed in Chapter 3. The WIR thus exemplifies the extent to which money has a ‘life’, and is a ‘process’ according to the author. This is why, relying on specific social values and norms, the WIR system personifies a form of local anchorage that is decisive for both the Swiss economy and Swiss democracy.

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NOTE 1. For a survey following a post-Keynesian perspective, see Kappes (2021).

REFERENCES Bernanke, B.S. (2003), ‘Remarks by Governor Ben S. Bernanke’, at the Federal Reserve Bank of Dallas Conference on the ‘Legacy of Milton and Rose Friedman’s Free to Choose’, Dallas, TX, 24 October, accessed 23 March 2022 at https://www.federalreserve.gov/boarddocs/speeches/2003/20031024/default.htm. Bernanke, B.S. (2012), ‘Five questions about the Federal Reserve and monetary policy’, speech at the Economic Club of Indiana, Indianapolis, IN, 1 October, accessed 23 March 2022 at https://www.federalreserve.gov/newsevents/speech/ bernanke20121001a.htm. Bindseil, U. and P.J. König (2013), ‘Basil J. Moore’s horizontalists and verticalists: an appraisal 25 years later’, Review of Keynesian Economics, 1 (4), 383–90. Borio, C. and P. Disyatat (2010), ‘Unconventional monetary policies: an appraisal’, The Manchester School, 78 (September), 53–89. Colciago, A., A. Samarina and J. de Haan (2019), ‘Central bank policies and income and wealth inequality: a survey’, Journal of Economic Surveys, 33 (4), 1199–231. Deutsche Bundesbank (2017), ‘The role of banks, non-banks and the central bank in the money creation process’, Monthly Report, April, accessed 23 March 2022 at https://www.bundesbank.de/resource/blob/654284/df66c4444d065a7f519e2a​b​ 0​c​476df58/mL/2017-04-money-creation-process-data.pdf. Dodge, D. (2010), ‘70 years of central banking in Canada’, remarks to the Canadian Economic Association, accessed 23 March 2022 at https://www.banko​ f​ca​n​a​d​a.ca/w​p-content/up​loads/2010/06/dodge.pdf. Fiebiger, B. and M. Lavoie (2020), ‘Helicopter Ben, monetarism, the new Keynesian credit view and loanable funds’, Journal of Economic Issues, 54 (1), 77–96. Fontan, C., F. Claveau and P. Dietsch (2018), Do Central Banks Serve the People, Cambridge: Polity Press. Goodfriend, M. (2007), ‘How the world achieved consensus on monetary policy’, Journal of Economic Perspectives, 21 (4), 47–68. Goodhart, C. (2011), ‘The changing role of central banks’, Financial History Review, 18 (2), 135–54. Goodhart, C. (2021), ‘What may happen when central banks wake up to more persistent inflation?’, VOX EU, Centre for Economic Policy Research, London, 25 October. Goodhart, C. and R. Lastra (2018), ‘Populism and central bank independence’, Open Economies Review, 29 (1), 49–68. Ihrig, J., G.C. Weinback and S.A. Wolla (2021), ‘Teaching the linkage between the banks and the Fed: RIP money multiplier’, Economic Research, Federal Research Bank of St Louis, September, accessed 23 March 2022 at https://resear​ ch.stlouisfed.or​g/publications/page1-econ/2021/09/17/teaching-the-lin​ka​ge-bet​w​ ee​n-banks-a​nd-the-f​ed​-r-i-p-money-multiplier​.

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Jakab, Z. and M. Kumhof (2018), ‘Banks are not intermediaries of loanable funds: facts, theory and evidence’, Bank of England Staff Working Paper No. 761, Bank of England, London. Kaldor, N. (1970), ‘The new monetarism’, Lloyds Bank Review, July, 1–17. Kappes, S. (2021), ‘Monetary policy and personal income distribution: a survey of the empirical literature’, Review of Political Economy, June, doi:10.1080/095382 59.2021.1943159. Kent, C. (2018), ‘Money – born of credit’, remarks at the Reserve Bank’s Topical Talks Event for Educators, Sydney, 19 September. Keynes, M. (1923), A Tract on Monetary Reform, London: Macmillan. Keynes, M. (1936), The General Theory of Employment, Interest and Money, London: Macmillan. Lavoie, M. (1996), ‘Monetary policy in an economy with endogenous credit money’, in G. Deleplace and E.J. Nell (eds), Money in Motion: The Post Keynesian and Circulation Approaches, Basingstoke: Macmillan, pp. 532–45. Lavoie, M. (2006), ‘A post-Keynesian amendment to the new consensus on monetary policy’, Metroeconomica, 57 (2), 165–92. McLeay, M., A. Radia and R. Thomas (2014), ‘Money creation in the modern economy’, Bank of England Quarterly Bulletin, Q1, accessed 23 March 2022 at https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-​ t​he-modern-economy​. Moore, B.J. (1988), Horizontalists and Verticalists: The Macroeconomics of Credit Money, Cambridge: Cambridge University Press. Palley, T. (2006), ‘A post-Keynesian framework for monetary policy: why interest rate operating procedures are not enough’, in C. Gnos and L.P. Rochon (eds), Post-Keynesian Principles of Economic Policy, Cheltenham, UK and Northampton, MA, USA: Edward Elgar, pp. 78–98. Robinson, J. (1943), ‘The problem of full employment’, Workers’ Educational Association & Workers’ Educational Trade Union Committee, London. Robinson, J. (1952), The Rate of Interest and Other Essays, London: Macmillan. Robinson, J. (1956), The Accumulation of Capital, London: Macmillan. Rochon, L.P. (1999), Credit, Money and Production: An Alternative Post-Keynesian Approach, Cheltenham, UK and Northampton, MA, USA: Edward Elgar. Rochon, L.-P. (2022), ‘The general ineffectiveness of monetary policy or the weaponization of inflation’, in S. Kappes, L.-P. Rochon and G. Vallet (eds), The Future of Central Banking, Cheltenham, UK and Northampton, MA, USA: Edward Elgar, forthcoming. Romer, C.D. and D.H. Romer (2001), ‘Monetary policy and the well-being of the poor’, in J. Rabin and G.L. Stevens (eds), Handbook of Monetary Policy, London: Routledge, pp. 887–912. Romer, D. (2000), ‘Keynesian macroeconomics without the LM curve’, Journal of Economic Perspectives, 12 (2), 149–69. Rudd, J.B. (2022), ‘Why do we think that inflation expectations matter for inflation? (And should we?)’, Review of Keynesian Economics, 10 (1), 25–45. Setterfield, M. (2004), ‘Central banking, stability and macroeconomic outcomes: a comparison of new consensus and post-Keynesian monetary macroeconomics’, in M. Lavoie and M. Seccareccia (eds), Central Banking in the Modern World: Alternative Perspectives, Cheltenham, UK and Northampton, MA, USA: Edward Elgar, pp. 35–56. Skidelsky, R. (2009), Keynes: The Return of the Master, London: Allen Lane.

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Smithin, J. (1994), Controversies in Monetary Economics: Ideas, Issues and Policy, Aldershot, UK and Brookfield, VT, USA: Edward Elgar. Storm, S. (2019), ‘Summers and the road to Damascus’, Institute for New Economic Thinking, New York, 3 September, accessed 23 March 2022 at https:// www.ineteconomics.org/perspectives/blog/summers-and-the-road-to-damascus. Summers, L.H. and A. Stansbury (2019), ‘Whither central banking’, Project Syndicate, 23 August, accessed 23 March 2022 at https://www.project-syndicate. o​rg/co​mmentary/central-ban​kers-in-jackson-hole-should-admit-impotence-bylawrence-h-summers-and-anna-stansbury-2-2019-08​. Taylor, J.B. (1993), ‘Discretion versus policy rules in practice’, Carnegie-Rochester Conference Series on Public Policy, Stanford University, CA, 39, 195–214. Taylor, J.B. (2000), ‘Teaching modern macroeconomics at the principles level’, American Economic Review, 90 (2), 90–94. The Economist (2021), ‘Does anyone actually understand inflation?’, The Econ­ omist, 9 October, accessed 23 March 2022 at https://www.economist.com/finan​ ce-and-eco​nomics/2021/10/09/does-anyone-actually-understan​d-inflation​. Woodford, M. (2003), Interest and Prices: Foundations of a Theory of Monetary Policy, Princeton, NJ: Princeton University Press.

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1. Cryptocurrencies and the future of money Matheus R. Grasselli and Alexander Lipton 1. INTRODUCTION Cryptocurrencies, and the distributed ledger technology (DLT) on which they are based, have captured the attention and imagination of investors, academics, politicians and the general public alike. Touted by technology enthusiasts as the future of money, cryptocurrencies promised advantages include a secure and completely decentralized payment system, a drastically simplified and more stable financial sector, and a more inclusive, transparent and democratic economy. Reality has been more nuanced and marked by high volatility in the price of well-known cryptocurrencies such as Bitcoin, an uncomfortable degree of opacity and centralization, and inefficient implementations, in particular in respect of energy consumption. The allure of using the latest developments in computer science and cryptography to solve time-honoured economic problems is, however, too great to ignore. Accordingly, despite the glaring difficulties just mentioned, novel applications of DLT continue to be proposed, including revolutionizing the way artwork and other intellectual property are traded through the use of non-fungible tokens. The full breadth of applications of cryptocurrencies, blockchains and DLT, as well as the technical background needed to understand them, are beyond the scope of any single chapter, and we recommend Lipton and Trecconic (2022) as an entry point to this fascinating world. In this chapter, we restrict ourselves to a discussion of the strictly monetary applications of DLT. Specifically, we consider: pure-asset, or commoditylike, cryptocurrencies such as Bitcoins in section 2; central bank digital currencies (CBDC) in section 3; and the more recent class of stable coins in section 4. For each of these types of cryptocurrencies, we provide a definition, a brief description of the technical aspects underlying each of them, and some prominent representative cases. In each case, we explore their economic characteristics through an extensive use of balance sheet operations in the manner of Lavoie (2003). In section 5, we describe the 23

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type of macroeconomic framework that best aggregates these balance sheet operations in a coherent way, namely, a stock-flow consistent model incorporating the different types of cryptocurrencies.

2.  PURE-ASSET COINS There are many overlapping and non-equivalent ways to classify cryptocurrencies, such as their degree of centralization and anonymity, or the type of algorithm used for validation and consensus building (Tasca and Tessone 2019). As mentioned in the previous section, because we are primarily interested in the economic aspects of cryptocurrencies, we adopt a taxonomy based on their balance-sheet status. That is, we focus on what type of assets and liabilities they represent and for which economic agents. Economically speaking, the simplest type of cryptocurrency consists of what we term pure-asset coins. This is also the original and, currently, most widespread class of cryptocurrencies and includes not only the Big Three well-known examples of Bitcoin (BTC), Etherium (ETH) and Ripple (XRP), but also many precursors such as Ecash, Digicash, bit gold and b-money, as well as subsequent variations such as Litecoin and countless replicas, or alt-coins, among them Dogecoin. From an economic viewpoint, the defining feature of this type of cryptocurrencies is that they are not a liability of any specific agent. That is, they figure on the balance sheet of the agents holding them as an asset, while they do not figure as a liability in the balance sheet of any other economic agent. In this respect, cryptocurrencies of this type are similar to physical commodities such as gold or silver, and should not be viewed as a financial asset such as a bond or a stock. Similar to physical commodities, the simplest way to acquire pure-asset cryptocurrencies is by exchanging them for other assets (for example, purchasing gold using bank deposits) or by providing goods and services (say, by being paid in gold for delivering a very good musical performance). Still analogous to physical commodities, another way to acquire pure-asset cryptocurrencies is through mining, that is, by executing a specific task that is associated with the creation of new coins – the term used for a unit of cryptocurrency – that did not exist before. Accordingly, the difficulty and related cost (for example, in terms of required time and resources) associated with mining affect the available supply of these coins, and consequently their price. Once acquired, a pure-asset coin can then be exchanged by other assets (for example, by selling them to someone in exchange for some amount of bank deposits) or for other goods and services (for example, using them to pay a dealer for some artwork). In all instances, since they are not a liability

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Cryptocurrencies and the future of money ­25

for any economic agent, nobody has an obligation to covert a pure-asset coin into anything else. Moreover, unlike physical commodities, pure-asset coins do not have any intrinsic value for non-monetary purposes, for example, in the way that gold can be used in dentistry. As a result, the value of these coins depends exclusively on the willingness of other agents accepting them in exchange of other assets, goods or services. Take Bitcoin as an illustrative example. The decentralized, permissionless Bitcoin protocol, described for the first time in the seminal paper by Satoshi Nakamoto (2008), launched the blockchain revolution. Nakamoto articulated his objective as follows: I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party — The main properties: Double-spending is prevented with a peer-to-peer network. No mint or other trusted parties. Participants can be anonymous. New coins are made from Hashcash style proof-of-work. The proof-of-work for new coin generation also powers the network to prevent double-spending.

With some simplifications made for the sake of clarity, the protocol can be described as follows (see Lipton and Treccani 2022, ch. 5 for more details). The protocol uses a native token called Bitcoin or BTC. The main objective of the protocol is to make sure that ownership of BTC is internally consistent. The protocol says nothing about the value of BTCs in US dollars (USD) or other fiat currencies. This value is established by supply and demand considerations on (mostly centralized) exchanges, operating entirely outside the protocol itself. At its peak, the value of one BTC was 63 500 USD. To participate in the protocol, one must create a public–secret key pair, which one can do without asking anyone’s permission; hence, the protocol is permissionless. The public key is a point P on the Koblitz elliptic curve, secp256k1; the secret key is a number k, such that P = k × G, where G is the base point. As their names suggest, public keys are known to all the participants. In contrast, secret keys must be protected at all costs since losing a secret key is tantamount to losing BTCs associated with the corresponding public key. Collections of key pairs are termed Bitcoin wallets. At the time of writing, there are about 200 million Bitcoin wallets. Copies of the Bitcoin ledger are controlled by the full nodes, which use what is termed proof-of-work (PoW) consensus protocol (as described below) to ensure that all these copies are mutually consistent. Currently, there are about 13 000 full nodes. In addition, there are Bitcoin miners whose role (as explained below) is to maintain the integrity of the Bitcoin ledger. Not surprisingly, the concept behind the Bitcoin protocol is purely mathematical. Bitcoin grows by induction, starting with the genesis block.

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The principal Bitcoin operation transfers BTCs from one wallet (address) to the following wallet (address). These transfers are cryptographically secured and have to be signed by the secret key of the donor address. Thus, Bitcoin transactions are organized as chains, with the output of one transaction becoming the input of the next. These chains can be traced back to the Coinbase transactions (as explained below), or even further to the genesis block. The entire Bitcoin ledger exists only online. Hence, if no additional measures are taken, it would naturally suffer from double-spending. For example, the owner of wallet A can send her BTCs simultaneously to two (or even many) wallets, say B and C. This possibility does not occur when payment is made in cash since A can physically give her money either to B or C, but not both. However, it can happen if A writes two checks but has funds to cover only one; this illegal practice is known as check kiting. It also does not occur when electronic transfers are performed by authorized third parties, such as banks. Since Bitcoin is entirely self-contained and does not have exogenous intermediaries, the protocol has to control the validity of transfers endogenously. This control is exercised by miners, who maintain the integrity of the ledger. Here is how they operate. When the owner of wallet A (traditionally called Alice) wishes to transfer her BTCs to the owner of wallet B (traditionally called Bob), she broadcasts her intention to the network of full nodes and miners. Her transaction goes into the memory pool. Miners extract transactions from the pool and form them into blocks. On average, a block contains 2000 transactions. First, miners check that all proposed transactions in their blocks are correctly signed, have enough funds in the donor wallet, and so on. It is important to emphasize that miners receive transactions at different times so that timestamps cannot order transactions properly. Hence, blocks created by different miners are not identical. Once the block’s content is verified, miners compete to validate their respective blocks as soon as possible. Participating in block validation requires enormous resources, including hardware, software, personnel and, above all, electricity. This is why the corresponding validation is said to be based on PoW. Figure 1.1 illustrates the above description graphically. Figure 1.2 shows how the Bitcoin ledger evolves when a new block is added to it. Moreover, since the validation game relies on the winner-takes-all principle, all participants spend these resources. As a result, the electricity wastage by the protocol is genuinely gargantuan. Bitcoin currently consumes around 110 terawatt hours per year,1 equal to the annual energy consumption of Sweden, or 0.55 per cent of the world’s total. Bitcoin has a truly clever mechanism for controlling the complexity required to validate a block. When the number of miners increases or decreases, so does

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Cryptocurrencies and the future of money ­27 W

M

W

N W

M

M

M

Alice’s wallet

Bob’s wallet

M

M N

N

M

N

N

N N

W

M W

Note:  N denotes full nodes, M denotes miners and W denotes wallets.

Figure 1.1  How Alice pays Bob via the Bitcoin protocol StateM

StateM Block

WalletM, 1, UTXOM, 1

TX (Addr.In11, Amt.In11,..., Addr.Out11, Amt.Out11)

WalletM, 2, UTXOM, 2

TX2(Addr.In21, Amt.In21,..., Addr.Out21, Amt.Out21)

...

WalletM, NM, UTXOM, NM

WalletM+1, 1, UTXO’M+1, 1

1

WalletM+1, 2, UTXO’M+1, 2

...

... TXo(Addr.Ino1, Amt.Ino1,..., Addr.Outo1, Amt.Outo1)

...

WalletM+1, NM+1, UTXO’M+1, NM+1

Figure 1.2 The Bitcoin ledger is a giant Markov chain whose state changes when a new block is added to it the complexity of the validation. As a result, on average, it always takes 10 minutes to validate a block. Miners spend all the resources because the successful miner is rewarded with the block reward, paid by the protocol via the Coinbase transaction mentioned earlier. Rewards are halved every four years (on average). Initially, they were 50 BTC per block. Currently, rewards are 6.25 BTC per block. Owing to the periodic halving of the Coinbase rewards, the asymptotic value of the total supply is 21 million BTCs. The PoW protocol allows Bitcoin ledgers observed by different full

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nodes to agree, at least for blocks sufficiently deep with the blockchain. If ledgers start to disagree at the top (for the most recent blocks), the longest valid chain wins. Thus, a participant in the Bitcoin protocol can receive BTC into her address in two ways, either by mining or from an address, which acquired BTC previously. Tables 1.1 to 1.3 illustrate the transactions mentioned above. In Table 1.1 we see that the act of mining by Alice leads to an increase of $10 000 in the Bitcoin asset class, without either an increase in liabilities or a decrease in any other asset, except for the deposit account, which is used to pay for the operational costs of mining (for example, electricity) of $9000. As a result, Alice’s net worth increases by the amount of Bitcoin that is mined, net of costs, or $1000 in this example. In all the examples that follow, we highlight in italic the affected balance sheet entries after a given transaction. Observe that, from the assets listed in this example, Bitcoin most resembles a house and a car, in that they are not liabilities for any other economic agent, wheres bank deposits and savings are liabilities for Alice’s bank. In Table 1.2 we see the effect of Alice using Bitcoin to purchase artwork from Bob. Assuming that no fees are paid, the net worth of each agent is not affected by the transaction, which corresponds to a pure exchange of assets. Notice again that, in this example, artwork is a type of asset similar to Bitcoin, in that it is not a liability for any economic agent. Next, in Table  1.3, we see the effect of Bob selling his bitcoins to his bank in exchange for an increase in his deposit account which is a liability for his bank. Assuming again that there are no fees for this transaction, it results in no change in net worth for either party. The Bitcoin protocol originated an era of great expectations. Bitcoin partisans think that the protocol can remove money from centralized government control, eventually replace national currencies with BTCs, decentralize payments and provide anonymity to its users. Bitcoin detractors note that the protocol has a meagre transaction-persecond (TpS) capacity (3–6 TpS, while Visa, the credit card processor, processes 20 000 TpS) and high transaction fees, preventing everyday usage of BTC for payments, is not sufficiently decentralized owing to the natural tendency of miners to coalesce, and does not provide anonymity. In addition, since BTC has no intrinsic value, it can have any price, which is determined solely by the supply and demand consideration, thus making its price extremely volatile. Besides, as mentioned previously, the PoW consensus algorithm results in enormous electricity consumption by the protocol for securing a relatively low number of transactions (about 100 million per year). Bitcoin realists note that while BTC cannot be used for conventional payments, it can be used for the immutable and final discharge of ­substantial

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500 000 20 000 1 500 298 000

Mortgage Car loan Credit card Net worth

House Car Bank deposit Savings Bitcoin

750 000 30 000 10 500 28 000 1 000

Liabilities ($)

Assets ($)

Alice’s balance sheet (before)

House Car Bank deposit Savings Bitcoin

Assets ($) 750 000 30 000 1 500 28 000 11 000

Net worth

Mortgage Car loan Credit card

Liabilities ($)

Alice’s balance sheet (after)

Table 1.1 Alice’s balance sheet before (left) and after (right) mining $10 000 worth of Bitcoin at an operational cost of $9000

299 000

500 000 20 000 1 500

30

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200 000 40 000 500 1 199 500

Mortgage Bank loan Credit card Net worth

House Artwork Bank deposit Savings Bitcoin

1 200 000 80 000 10 000 150 000 0

Liabilities ($)

299 000

500 000 20 000 1 500

Assets ($)

Bob’s balance sheet (before)

Net worth

Mortgage Car loan Credit card

House Car Bank deposit Savings Bitcoin Artwork

750 000 30 000 1 500 28 000 11 000 0

Liabilities ($)

Assets ($)

Alice’s balance sheet (before)

House Artwork Bank deposit Savings Bitcoin

Assets ($)

House Car Bank deposit Savings Bitcoin Artwork

Assets ($)

Net worth

Mortgage Car loan Credit card

1 200 000 72 000 10 000 150 000 8 000

Net worth

Mortgage Bank loan Credit card

Liabilities ($)

Bob’s balance sheet (after)

750 000 30 000 1 500 28 000 3 000 8 000

Liabilities ($)

Alice’s balance sheet (after)

1 199 500

200 000 40 000 500

299 000

500 000 20 000 1 500

Table 1.2 Balance sheets before (left) and after (right) Alice uses $8000 in Bitcoin to purchase artwork from Bob

31

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1 199 500

Net worth

8 000 000 2 000 000 1 000 000 1 900 000

Deposits Savings Bonds Net worth

Loans Treasuries Reserves Cash Bitcoin

9 000 000 3 000 000 300 000 200 000 400 000

Liabilities (thousands $)

Assets (thousands $)

Bank balance sheet (before)

200 000 40 000 500

Mortgage Bank loan Credit card

House Artwork Bank deposit Savings Bitcoin

1 200 000 72 000 10 000 150 000 8 000

Liabilities ($)

Assets ($)

Bob’s balance sheet (before)

Loans Treasuries Reserves Cash Bitcoin

Net worth

Mortgage Bank loan Credit card

Liabilities ($)

9 000 000 3 000 000 300 000 200 000 400 007

1 199 500

200 000 40 000 500

Net worth

Deposits Savings Bonds

1 900 000

8 000 007 2 000 000 1 000 000

Liabilities (thousands $)

Bank balance sheet (after)

1 200 000 72 000 17 000 150 000 1 000

Assets (thousands $)

House Artwork Bank deposit Savings Bitcoin

Assets ($)

Bob’s balance sheet (after)

Table 1.3 Balance sheets before (left) and after (right) Bob sells $7000 in Bitcoin to his bank

32

Central banking, monetary policy and the future of money

obligations. The protocol is not nearly as decentralized as was initially claimed but still inspires future developments. The lack of anonymity can be addressed if necessary. Figure 1.3 shows the price and market capitalization of BTC over the past five years, a period marked by both extraordinary growth and extreme volatile swings. Observe that, owing to the slow process of mining new coins, the market capitalization behaves for practical purposes as a nearconstant multiple of the price, and this relationship tends to become more exact as the number of BTCs in circulation approach its asymptotic limit of 21 million coins.2 Speaking of Helen of Troy, Christopher Marlowe coined an immortal phrase: ‘the face that launched a thousand ships’. Without a doubt, Bitcoin can be called ‘the protocol that launched a thousand coins’. Many associated protocols are modest variations of the original Protocol. Ethereum, however, is genuinely different. Launched in 2015, Ethereum promises were even grander than Bitcoin’s, and with a current market capitalization of approximately 450 billion USD, it is Bitcoin’s closest rival in popularity. From the very beginning (Buterin 2013), it was designed as a decentralized virtual machine, named $60 000

BTC price

$50 000 $40 000 $30 000 $20 000 $10 000 $0

2017

2018

2019

2020

2021

2022

2017

2018

2019

2020

2021

2022

BTC market capitalization

$1 200 billion $1 000 billion $800 billion $600 billion $400 billion $200 billion $0 billion

Source:  coinmarketcap.com (accessed 11 September 2021).

Figure 1.3 Price (top) and market capitalization (bottom) for Bitcoin (BTC) in USD

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Cryptocurrencies and the future of money ­33

the Ethereum Virtual Machine (EVM), that is, the first distributed Turingcomplete computer. The EVM can process smart contracts and support distributed autonomous organizations, thus providing consensus as a service (CaaS). Ethereum suffers from several drawbacks (see Lipton and Trecanni 2022, ch. 6 for more details). First, it has low TpS capacity and high transaction fees, preventing its usage for everyday transactions. Second, an obsolete payment model based on gas consumption makes the EVM a distributed calculator at best. Third, smart contracts are not smart enough, cannot be fixed if they have bugs, and consume collateral on a prodigious scale. Finally, Ethereum also uses a PoW consensus algorithm and is a voracious consumer of electricity. Yet, as a robust CaaS provider, the EVM is very convenient for issuing tokens, such as the stable coins, discussed below, and for many other purposes. Moreover, it is a triumph of engineering. Ethereum launched the CaaS revolution; currently, it competes with several newer protocols with superior capabilities, such as Cardano, Polkadot, Solana, Algorand and Zilliqa. Figure 1.4 shows the price and market capitalization of Ethereum’s native token, ETH, which has exhibited a similar pattern of rapid growth and extreme volatility as BTC. Unlike BTC, the number of ETH coins in circulation was not designed to converge to a fixed asymptotic value, and has increased more or less linearly from the initial 72 million coins to currently close to 120 million coins, although this rate of increase is also subject to change by consensus within the network. The third prominent example we cover in this class is Ripple. Even though, as we explained previously, Bitcoin, Ethereum and Ripple all represent pure assets of the holder, they do have substantial, if subtle, differences. On a technical level, the main difference is that, in the Ripple protocol, consensus in the ledger is achieved by voting among a special type of network nodes named validators (see Lipton and Trecanni 2022, ch. 7 for details). That is, the time and energy-consuming consensus by PoW used by the Bitcoin and Ethereum protocols are replaced by a much faster process, at the expense of a higher degree of centralization. Relatedly, from an economic viewpoint, the key difference is that all XRP coins – the native tokens in the protocol – were pre-mined at the inception  of the network, rather than mined over time as a reward for validators as with Bitcoin and Ethereum. Concretely, 100 billion XRP coins were created in 2012, with 80 billion coins allocated to the company behind the protocol and 20 billion coins to its founders, and have been put in circulation at a rate of approximately 1 billion coins per month through spending by the original owners (that is, exchanging them for other assets).

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34

Central banking, monetary policy and the future of money $5000

ETH price

$4000 $3000 $2000 $1000 $0

2017

2018

2019

2020

2021

2022

2017

2018

2019

2020

2021

2022

ETH market capitalization

$500 billion $400 billion $300 billion $200 billion $100 billion $0 billion

Source:  coinmarketcap.com (accessed 11 September 2021).

Figure 1.4 Price (top) and market capitalization (bottom) for Ethereum (ETH) in USD Owing to its faster and cheaper validation of transactions, Ripple became a popular protocol for large cross-border payments, primarily as a competitor to traditional payment systems such as SWIFT. As can be seen in Figure 1.5, the price of XRP has exhibited at least as much volatility as that of Bitcoin and Ethereum, essentially for the same reason, that is, that there is no other asset, financial or real, backing its value. In addition, while Bitcoin was deemed by the Security and Exchange Commission (SEC) Chair Jay Clayton as not being a security,3 the SEC filed a lawsuit against Ripple, alleging that by selling XRP, the company held a $1.3  ­billion unregistered securities offering.4

3. CENTRAL BANK DIGITAL CURRENCIES (CBDCS) In order of economic complexity, the next class of cryptocurrency consists of digital coins issued by a central bank, the CBDCs. Several countries, including the Bahamas, China, Ecuador, the European Union and Switzerland, to

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Cryptocurrencies and the future of money ­35 $4.00

XRP price

$3.00 $2.00 $1.00 $0.00

2017

2018

2019

2020

2021

2022

2017

2018

2019

2020

2021

2022

XRP market capitalization

$150 billion

$100 billion

$50 billion

$0 billion

Source:  coinmarketcap.com (accessed 12 September 2021).

Figure 1.5 Price (top) and market capitalization (bottom) for Ripple (XRP) in USD mention but a few, are currently experiment with CBDCs (Boar and Wehrli 2021). The US and UK are less active in this area. Economically, cryptocurrencies of this type are most similar to cash and central bank reserves. Recall that central bank reserves are special types of deposit accounts that commercial banks (and other select financial institutions) maintain with the central bank. They are therefore assets for the commercial bank and liabilities for the central bank, and are the primary instruments used to conduct monetary policy. Although completely digital, reserves should not, in our view, be considered a cryptocurrency owing to their limited access and centralized, non-anonymous nature: at any give time, the central bank knows exactly the amount of reserves held by each participant bank, as well as any transfers occurring between banks. The other main type of central bank liability is physical cash, either in the form of notes or coins. Unlike reserves, cash can be held as an asset by any economic agent. Moreover, with the exception of tracing mechanisms used in criminal investigations, it is completely anonymous, in that the central bank only knows the total amount of cash in circulation, but does not know how much is held by which agent or what transactions are made between agents using cash.

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36

Central banking, monetary policy and the future of money

Analogously to cash and reserves, CBDCs are assets for the economic agents holding them and liabilities for the central bank, and can therefore, in principle, be used for the same economic purposes. If restricted to banks only, they would be indistinguishable from reserves, so the only interesting situation consists of CBDCs that can be held by the general public. One possibility consists of CBDCs in the form of generalized reserves, that is, deposit accounts that members of the public hold at the central bank (see Bordo and Levin 2017). This would not require any technological innovation, other than scaling up the system of accounts already used by commercial banks and select financial institutions. It would not, however, have the property of anonymity: as with reserves, the central bank would know the amount of CBDCs held by each economic agent and be able to trace every transaction within the system. Moreover, by offering accounts to all members of the public, a central bank would have to perform the know your client (KYC) and anti-money laundering (AML) functions currently performed by commercial banks, for which it is most likely ill equipped. A much more promising possibility consists of a central bank partnering with private institutions to create what the Bank of England has termed a platform model for CBDCs (see Bank of England 2020). In this model, the central bank maintains a core ledger recording only basic payment transactions between accounts that are accessible only to private sector firms known as payment interface providers, which would be responsible for all interactions with the general public, from web interfaces to value-added services. The payment interface provider would either register an account in the core ledger for each of its clients, or maintain a single pooled account for all of its clients. Crucially, in this platform model, the identity of the users does not need to be known to the central bank, as the accounts could be pseudonymous on the core ledger. For the sake of argument, suppose that the payment interface provider is a commercial bank. When a member of the public who is a client of the bank requests to convert part of their bank deposits into CBDCs, digital tokens are created in the core ledger in the form of a liability for the central bank and are held as assets for the client in a digital wallet administered by the bank, and at the same time an equivalent amount is deducted from the bank’s reserves. From a balance sheet perspective, this is entirely analogous to a cash withdraw, whereby there is a decrease in the amount of deposits and a corresponding decrease in the amount of cash/reserves held by the bank. The only difference is that, unlike cash and real wallets, CBDCs and the digital wallets in which they are stored are still administered by the payment interface provider, in this instance the bank. When properly designed, this type of CBDC can have all the properties commonly associated with cash, including anonymity in respect of

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Cryptocurrencies and the future of money ­37

the central bank, except in extraordinary circumstances such as criminal investigations. Importantly, the KYC and AML functions would continue to be performed by the payment interface provider. Finally, the central bank would guarantee that CBDC tokens held by commercial banks can always be converted into cash at par, thereby ensuring the stability of the CBDC price in respect of the fiat currency issued by the same central bank. A novel and more controversial use of CBDC could be the implementation of unconventional monetary policy in the form of negative interest rates, whereby wholesale replacement of physical by digital cash would remove, or at least relax, the zero lower bound (ZLB) (see Grasselli and Lipton 2019a for details). Table 1.4 illustrates the balance sheet operations described above. Namely, Bob uses the same commercial bank as in the previous example to acquire CDBC. From Bob’s viewpoint, this is an exchange of assets (deposits replaced by CBDC), whereas from the bank’s viewpoint it is a decrease in both assets (reserves) and liabilities (deposits), with neither party experiencing any change in net worth. Finally, from the viewpoint of the central bank, this operation is an exchange of liabilities (reserves replaced by CBDC). Observe also that, as shown in the example, CBDC can coexist with Bitcoins, bank deposits and other types of assets.

4.  STABLE COINS Stable coins are a class of cryptocurrency designed to avoid the wild price fluctuations that plagued pure-asset coins such as Bitcoins and Ethereum since their inception (see Figures 1.3 and 1.4). From an economic point of view, their key feature is that they are a liability of some financial institution that is obligated to hold an equal or larger amount of some other asset as collateral (see Lipton et al. 2021 for more details). 4.1  Fiat-Backed Stable Coins (FBSCs) The simplest example of a stable coin consists of a cryptocurrency issued by a bank or some other private financial institution that is committed to hold an equal or greater amount of a central bank reserves5 as assets. Similar to a CBDC, when a client of such a bank decides to convert part of their bank deposits into the FBSC, they receive digital tokens in the form of assets held in their digital wallet, and consequently the proposed implementations for these two types of cryptocurrencies are very similar from a technological point of view. Some authors considered an FBSC as a synthetic CBDC (see Adrian and Mancini-Griffoli 2019).

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38

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1 191 500

Net worth

8 000 000 2 000 000 1 000 000 1 900 000

Deposits Savings Bonds Net worth

Loans Treasuries Reserves Cash Bitcoin

180 000 000 100 000 000 60 000 000 50 000 000

Reserves Cash CBDC Net worth

Treasuries

390 000 000

Liabilities (thousands $)

Assets (thousands $)

Central bank balance sheet (before)

9 000 000 3 000 000 300 000 200 000 400 000

Liabilities (thousands $)

Assets (thousands $)

Bank balance sheet (before)

200 000 40 000 500

Mortgage Bank loan Credit card

House Artwork Bank deposit Savings Bitcoin CBDC

1 200 000 72 000 17 000 150 000 1 000 0

Liabilities ($)

Assets ($)

Bob’s balance sheet (before)

Treasuries

390 000 000

1 191 500

200 000 40 000 500

Net worth

Deposits Savings Bonds

Reserves Cash CBDC Net worth

179 999 994 100 000 000 60 000 006 50 000 000

Liabilities (thousands $)

1 900 000

8 000 001 2 000 000 1 000 000

Liabilities (thousands $)

Central bank balance sheet (after)

9 000 000 3 000 000 299 994 200 000 400 007

Assets (thousands $)

Loans Treasuries Reserves Cash Bitcoin

Net worth

Mortgage Bank loan Credit card

Liabilities ($)

Bank balance sheet (after)

1 200 000 72 000 11 000 150 000 1 000 6 000

Assets (thousands $)

House Artwork Bank deposit Savings Bitcoin CBDC

Assets ($)

Bob’s balance sheet (after)

Table 1.4 Balance sheets before (left) and after (right) Bob buys $6000 in central bank digital currency (CBDC) from his bank



Cryptocurrencies and the future of money ­39

From an economic point of view, the key difference between the two is that FBSCs are a financial liability of the private company issuing them, whereas CBDCs, as discussed previously, are a liability of the central bank. In particular, an FBSC can be introduced by private companies even if the corresponding central bank is unwilling or unable to issue a CBDC, provided the issuer has enough cash or central bank reserves to fully collateralize the coins. In the case of a bank issuing an FBSC, an obvious difficulty arises when the amount of coins demanded by the clients, which in principle can be as high as their total deposits, exceeds the amount of reserves held by the bank. In this instance, in order to credibly maintain the promise of convertibility, the bank must sell some of its other assets in order to raise the necessary amount of reserves as collateral, which might not always  be  possible. This is entirely analogous to the liquidity problem  that  arises when bank clients demand to withdraw deposits in excess of reserves, and the only guaranteed solution to this problem is to make sure that an emitter of an FBSC always has reserves in excess of deposits. That is, the natural emitter of an FBSC is what is known as a narrow bank. An example of an FBSC currently in circulation is the Utility Settlement Coin (USC) designed by the financial technology (fintech) company Clearmatics. These coins are meant to be used as an internal token for interbank payments between participating banks, and are fully collateralized by their collective central bank reserves (see Lipton and Trecanni 2022, ch. 8 for details). As mentioned previously, in order for circulation of these coins to be extended to the general public, their issuance will have to be outsourced to a narrow bank. Table 1.5 illustrates the operation of client of a narrow bank, in this instance Alice from the previous examples, converting part of her bank deposits into an FBSC. Notice that the narrow bank in this example is similar in size (for example, as measured by total assets) to the conventional bank depicted in Table 1.4, but with a much narrower set of assets (hence the name), namely, primarily central bank liabilities (that is reserves, cash and CBDC). This does not prevent a narrow bank from  lending (that is, holding regular loans as assets), provided they have  other types of liabilities to fund these lending activities, such as savings (for example, 2-year savings accounts) in this illustrator. The crucial feature is that they hold reserves in excess of the amount of the FBSC and deposits.  Notice further that, since there is no risk of a run on deposits, a narrow bank can operate with a much slimmer amount of capital.6

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40

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Net worth

250 000

2 500 000 10 000 000 1 000 000

Savings Deposits FBSC

Loans Reserves Cash CBDC

2 500 000 11 000 000 100 000 150 000

Liabilities (thousands $)

299 000

500 000 20 000 1 500

Assets (thousands $)

Narrow bank balance sheet (before)

Net worth

Mortgage Car loan Credit card

House Car Bank deposit Savings Bitcoin Artwork FBSC

750 000 30 000 1 500 28 000 3 000 8 000 0

Liabilities ($)

Assets ($)

Alice’s balance sheet (before)

Loans Reserves Cash CBDC

750 000 30 000 500 28 000 3 000 8 000 1 000

Net worth

Mortgage Car loan Credit card

Liabilities ($)

2 500 000 11 000 000 100 000 150 000

299 000

500 000 20 000 1 500

Net worth

Savings Deposits FBSC

250 000

2 500 000 9 999 999 1 000 001

Liabilities (thousands $)

Narrow bank balance sheet (after) Assets (thousands $)

House Car Bank deposit Savings Bitcoin Artwork FBSC

Assets ($)

Alice’s balance sheet (after)

Table 1.5 Balance sheets before (left) and after (right) Alice buys $1000 in fiat-backed stable coins (FBSCs) from her narrow bank



Cryptocurrencies and the future of money ­41

4.2  Custodial Stable Coins (CSCs) These are similar to FBSCs, except that, instead of central bank reserves, the issuer is obligated to hold deposits in a designated bank as a collateral. In this case, price stability is achieved, in principle, because the issuer guarantees convertibility of the CSC into cash by being able to withdraw from the deposit account held as collateral. Accordingly, this relies on the capacity of the designated bank to honour the deposit withdraw, which in turn depends on the designated bank having access to enough central bank reserves. That is, similarly to an FBSC, the price stability of an CSC can only be fully guaranteed if the designated bank is itself a narrow bank. Current examples of CSCs include Tether (USDT), TrueUSD (TUSD), USD Coin (USDC) and SilaToken (SILA). Tether is by far the best known example in this class, and since its price does fluctuate against the USD (see Figure 1.6) indicates that, in practice, there is still a lot of opacity around the deposits used as collateral. Fluctuations highlight that a privately issued CSC always carries some credit risk, mainly because the bank where it holds collateral can default or collateral itself can be absent. Under $1.10

Tether price

$1.05 $1.00 $0.95 $0.90

2017

2018

2019

2020

2021

2022

2017

2018

2019

2020

2021

2022

Tether market capitalization

$80 billion $60 billion $40 billion $20 billion $0 billion

Source:  coinmarketcap.com (accessed 11 September 2021).

Figure 1.6 Price (top) and market capitalization (bottom) for Tether (USDT) in USD

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42

Central banking, monetary policy and the future of money

normal conditions, banks, being tightly regulated institutions, default very infrequently. However, during times of crisis, their creditworthiness can deteriorate rapidly, thus jeopardizing the stability of the corresponding CSCs. Table 1.6 illustrates the operation of a member of the public, in this instance Bob from the previous examples, converting part of his bank deposits into a CSC issued by a generic custodial company. We assume the custodial company keeps deposits in the same narrow bank used by Alice in the previous example. The changes in balance sheet that accompany this operation are as follows: Bob has his bank deposits reduced by the same amount of the CSC purchased; consequently, the deposit liabilities of Bob’s bank are reduced by this amount, with a corresponding transfer of reserves to the narrow bank; the deposit account of the custodial company increases by this amount, which allows it to issue the new CSC. Notice that the narrow bank has enough reserves to cover not only the FBSC that it issues, but also all of its deposits, which includes the deposit account of the custodial company, thereby ensuring the price stability of the CSC. If the custodial company used the same bank as Bob instead, it might run into liquidity issues if it attempted to convert all of its bank deposits into cash, which would put into question the convertibility of its own CSC. The growth of Tether and other stable coins has been phenomenal. In one year, the capitalization of Tether increased by a factor of six: it was about $10 billion on 1 August 2020, and $64 billion on 1 August 2021 (see Figure 1.6). We can explain this growth by noticing that trading ­cryptocurrencies cannot rely on conventional banks because they cannot move funds in real time and are disinclined to get deeply involved in crypto trading. Accordingly, it must use stable coins instead. 4.3  Digital Trade Coins (DTCs) Next in the hierarchy of stable coins are cryptocurrencies collateralized with a basket of either real or financial assets. This class includes the generic digital trade coins (DTCs) proposed in Lipton et al. (2018), as well as several specific examples including Tiberiuscoin (TCX), a cryptocurrency collateralized by a basket of previous metals, and Diem (formerly known a Libra), the proposed Facebook cryptocurrency collateralized by a basket of financial assets including currencies and US Treasuries. The defining feature of a DTC is that an administrator assembles a pool of underlying assets originally owned by a group of sponsors and issues the DTC in an amount initially equal to the value of the collateral. The administrator then sells the DTC to the general public in exchange for fiat currency, which is held in a deposit account in an affiliated bank on

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43

VALLET 9781800376397 PRINT.indd 43

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1 199 500

Net worth

8 000 001 2 000 000 1 000 000 1 900 000

Deposits Savings Bonds Net worth

Loans Treasuries Reserves Cash Bitcoin CBDC

9 000 000 3 000 000 150 000 200 000 400 000 149 994

Liabilities (thousands $)

Assets (thousands $)

Bank balance sheet (before)

300 000 10 000

CSC Net worth

Bank deposits

310 000

Liabilities (thousands $)

Assets (thousands $)

Custodial balance sheet (before)

200 000 40 000 500

Mortgage Bank loan Credit card

House Artwork Bank deposit Savings Bitcoin CBDC CSC

1 200 000 72 000 11 000 150 000 1 000 6 000 0

Liabilities ($)

Assets ($)

Bob’s balance sheet (before)

Loans Treasuries Reserves Cash Bitcoin CBDC

310 002

9 000 000 3 000 000 149 998 200 000 400 007 149 994

1 199 500

200 000 40 000 500

CSC Net worth

Net worth

Deposits Savings Bonds

1 900 000

7 999 999 2 000 000 1 000 000

Liabilities (thousands $)

300 002 10 000

Liabilities (thousands $)

Bank balance sheet (after) Assets (thousands $)

Bank deposits

Net worth

Mortgage Bank loan Credit card

Liabilities ($)

Custodial balance sheet (after)

1 200 000 72 000 9 000 150 000 1 000 6 000 2 000

Assets (thousands $)

House Artwork Bank deposit Savings Bitcoin CBDC CSC

Assets ($)

Bob’s balance sheet (after)

Table 1.6 Balance sheets before (left) and after (right) Bob buys $2000 in custodial stable coins (CSCs) from a custodial company

44

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2 500 000 9 999 999 1 000 001 250 000

Savings Deposits FBSC Net worth

Loans Reserves Cash CBDC

2 500 000 11 000 000 100 000 150 000

Liabilities (thousands $)

Assets (thousands $)

Narrow bank balance sheet (before)

Table 1.6 (continued)

Loans Reserves Cash CBDC

2 500 000 11 000 002 100 000 150 000

Assets (thousands $)

Net worth

Savings Deposits FBSC

250 000

2 500 000 10 000 001 1 000 001

Liabilities (thousands $)

Narrow bank balance sheet (after)



Cryptocurrencies and the future of money ­45

behalf of the sponsors. The end result is that the administrator’s balance sheet consists of the underlying basket as assets and the DTC as liabilities; the sponsors have deposits in the affiliated bank instead of the underlying basket of assets; and the general public, who originally held fiat currency, holds DTC as assets. This setup ensures that the price of the DTC remains close to the market price of the underlying basket. This is because if the price of the DTC falls significantly, then the general public can sell it back to the administrator, who in turn returns a portion of the underlying assets to the sponsors in exchange for fiat currency that can be used to pay back the general public. Observe that this is contingent on the affiliated bank having enough reserves to cover the withdrawals made by the sponsors, so once more the natural candidate for this role is a narrow bank. Conversely, if the price of the DTC increases, it is in the interest of the sponsor to supply additional assets to the administrator, who then issues and sells additional DTCs and passes the proceeds back to the sponsor in the form of deposits in the affiliated bank. Secondary mechanisms for price stability of the DTC include savings accounts held by the general public with variable interest rates paid in DTCs according to changes in demand. Table 1.7 illustrates this last situation. A group of sponsors with a combined net worth of $100 000 and $400 000 in loans uses these funds to purchase a basket of assets worth $500 000. They then keep $50 000 of these assets in their own balance sheet, while transferring $450 000 to the administrator, who issues an equal amount of DTCs and sells to the general public. The proceeds of the sales are held as deposits in a narrow bank, which are listed in the balance sheet of the sponsors as assets. When the price of the DTC increases, the administrator finds a member of the general public interested in buying additional DTCs, in this case Bob from the previous examples, and the following operations happen: Bob’s bank deposits go down, and consequently the deposit liabilities of his bank, with an equal amount of reserves being transferred to the narrow bank; the sponsors transfer the same amount from the basket of assets to the administrators in exchange for an increase in deposits with the narrow bank; the administrator issues new DTCs. Digital trade coins can be viewed as an instrument of barter taken to the next level. Since a DTC is anchored on a basket of assets that have real value, its price has low volatility, similar to that of the corresponding basket. As a consequence, it can be used as a transaction currency, as well as a unit of account and a store of value (as much as gold or oil can). Moreover, DTCs can serve as a much needed counterpoint for national fiat currencies since their value is only indirectly affected by central banks’

VALLET 9781800376397 PRINT.indd 45

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46

VALLET 9781800376397 PRINT.indd 46

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400 000 100 000

Loans Net worth

Basket of assets Deposits

50 000 450 000

Liabilities (thousands $)

Assets (thousands $)

Sponsors balance sheet (before)

450 000 0

DTC Net worth

Basket of assets

450 000

Liabilities (thousands $)

1 199 500

200 000 40 000 500

Assets (thousands $)

Administrator balance sheet (before)

Net worth

Mortgage Bank loan Credit card

House Artwork Bank deposit Savings Bitcoin CBDC CSC DTC

1 200 000 72 000 9 000 150 000 1 000 6 000 2 000 0

Liabilities ($)

Assets ($)

Bob’s balance sheet (before)

1 200 000 72 000 4 000 150 000 1 000 6 000 2 000 5 000

Net worth

Mortgage Bank loan Credit card

Liabilities ($)

Basket of assets Deposits

450 005

DTC Net worth

49 995 450 005

450 005 0

Loans Net worth

400 000 100 000

Liabilities (thousands $)

Sponsors balance sheet (after) Assets (thousands $)

Basket of assets

1 199 500

200 000 40 000 500

Liabilities (thousands $)

Administrator balance sheet (after) Assets (thousands $)

House Artwork Bank deposit Savings Bitcoin CBDC CSC DTC

Assets ($)

Bob’s balance sheet (after)

Table 1.7 Balance sheets before (left) and after (right) Bob buys $5000 in digital trade coins (DTCs) from an administrator

47

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1 900 000

Net worth

Net worth

250 000

2 500 000 10 000 001 1 000 001

Savings Deposits FBSC

Loans Reserves Cash CBDC

2 500 000 11 000 002 100 000 150 000

Liabilities (thousands $)

Assets (thousands $)

Narrow bank balance sheet (before)

7 999 999 2 000 000 1 000 000

Deposits Savings Bonds

Loans Treasuries Reserves Cash Bitcoin CBDC

9 000 000 3 000 000 149 998 200 000 400 007 149 994

Liabilities (thousands $)

Assets (thousands $)

Bank balance sheet (before)

Loans Reserves Cash CBDC

9 000 000 3 000 000 149 993 200 000 400 007 149 994

Net worth

Deposits Savings Bonds

2 500 000 11 000 007 100 000 150 000

Net worth

Savings Deposits FBSC

250 000

2 500 000 10 000 006 1 000 001

Liabilities (thousands $)

1 900 000

7 999 994 2 000 000 1 000 000

Liabilities (thousands $)

Narrow bank balance sheet (after) Assets (thousands $)

Loans Treasuries Reserves Cash Bitcoin CBDC

Assets (thousands $)

Bank balance sheet (after)

48

Central banking, monetary policy and the future of money

activities. Viewed in this way, a DTC can be seen as a privately issued version of a supranational currency used for international trade, along the lines of Keynes’s bancor (see Schumacher 1943 and Keynes 1943). 4.4  Over-Collateralized Stable Coins (OSCs) As a final class of stable coins, we now consider coins that are collaterilized by what we described in section 2 as pure-asset coins, that is, unstable native cryptocurrencies in some existing blockchain. The best-known example in this class is the Dai, a decentralized cryptocurrency issued by MakerDAO, an open-source project on the Ethereum blockchain created in 2014.7 Any user of the MakerDAO protocol (namely, anyone with an identity recognized in the system) can acquire an arbitrary amount of Dai by borrowing them from the MakerDAO system, provided they lock an amount of ETH (or other assets accepted by the system) equal to a multiple (as determined by the system) of the Dai borrowed. Once acquired in this manner, Dai can be used as any other cryptocurrency, for example, to buy goods and services from other agents, or be sold in exchanges. The collateral remains locked in the vault and can only be retrieved by returning the corresponding amount of Dai (that is, repaying the loan), plus a stability fee (also set by the system) that can also only be paid in Dai. The target price of the Dai is currently set at 1 USD, and this soft peg is achieved by a combination of mechanisms. At a fundamental level, the ability of the system to create arbitrary amounts of Dai prevents its price from increasing too far away from the peg, as new Dai can be created and immediately acquired by agents who demand them (provided they lock in the necessary collateral) whenever demand rises.8 On the other hand, the existence of a larger amount of collateral prevents the price of Dai from dropping too far from the peg, as it can be returned to the system in exchange of collateral whenever the demand drops.9 However, since the collateral asset (for example, ETH) can itself experience large price fluctuations, the amount of overcollateralization needs to be set high enough for this mechanism to work.10 Table 1.8 illustrates what happens when Alice, having already used $10  000 from her savings to purchase Ethereum, decides to lock $5000 of which in a vault managed by the MakerDAO system (which continues to be owned by Alice for accounting purposes) in exchange for $3000 in Dai. Observe that the newly acquired Dai match an increase in liabilities for Alice in the form of a Dai loan that needs to be repaid to the system. Accordingly, the assets of MakerDAO increase by the amount of this loan, with a corresponding increase in liability in the form of Dai in circulation. Notice the close resemblance to the familiar endogenous money creation

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49

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6 000 000 2 000 000

Dai Net worth

Dai loans Other assets

6 000 000 2 000 000

Liabilities (thousands $)

299 000

500 000 20 000 1 500 0

Assets (thousands $)

MakerDAO balance sheet (before)

Net worth

Mortgage Car loan Credit card Dai loan

House Car Bank deposit Savings Bitcoin Artwork FBSC Ethereum Vault Dai

750 000 30 000 500 18 000 3 000 8 000 1 000 10 000 0 0

Liabilities ($)

Assets ($)

Alice’s balance sheet (before)

Dai loans Other assets

Net worth

Mortgage Car loan Credit card Dai loan

Liabilities ($)

6 000 003 2 000 000

299 000

500 000 20 000 1 500 3 000

Dai Net worth

6 000 003 2 000 000

Liabilities (thousands $)

MakerDAO balance sheet (after)

750 000 30 000 500 18 000 3 000 8 000 1 000 5 000 5 000 3 000

Assets (thousands $)

House Car Bank deposit Savings Bitcoin Artwork FBSC Ethereum Vault Dai

Assets ($)

Alice’s balance sheet (after)

Table 1.8 Balance sheets before (left) and after (right) Alice acquires $3000 in Dai by locking in $5000 in ETH in her vault

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Central banking, monetary policy and the future of money

that characterizes a regular bank loan. The difference here is that the creation of new Dai is entirely decentralized and demand driven, whereas regular bank loans, the creation of deposits, in principle, needs to be approved by the bank. Observe, however, that in reality a commercial bank will almost always extend loans to a client with sufficient collateral, provided the bank has enough capital to satisfy regulatory constraints. Since MakerDAO does not face this type of capital requirement, its ability to create Dai is even more unrestricted than in traditional endogenous money-creation frameworks for banks as described, for example, in Lavoie (2003). Figure 1.7 shows the price and market capitalization of Dai over the past two years. We observe that, apart from brief periods of volatility at the outset of the COVID-19 financial turbulence in 2020, the stabilization mechanism described previously seems to have worked well, with the price of Dai remaining within 10 per cent of parity with the USD, which partially explains the rapid increase in market capitalization observed in the past year.

Dai price

$1.10

$1.05

$1.00

$0.95 Oct 2019

Jan 2020

Apr 2020

Jul 2020

Oct 2020

Jan 2021

Apr 2021

Jul 2021

Oct 2021

Jan 2020

Apr 2020

Jul 2020

Oct 2020

Jan 2021

Apr 2021

Jul 2021

Oct 2021

Dai market capitalization

$8 billion $6 billion $4 billion $2 billion $0 billion Oct 2019

Source:  coinmarketcap.com (accessed 11 September 2021).

Figure 1.7 Price (top) and market capitalization (bottom) for Dai in USD

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5. TOWARDS A MACROECONOMIC MODEL WITH CRYPTOCURRENCIES In the previous sections, we described the economic properties of different types of cryptocurrencies by means of representative examples of balance sheet transactions between agents. Naturally, these transactions correspond to only a small sample of the transactions executed by such agents, and the balance sheets themselves are incomplete snapshots of the relationships between them. For example, in Table 1.2, Alice and Bob each have mortgages as their liabilities, but we do not indicate in whose balance sheets these mortgages are listed as assets, probably a different bank for each. Similarly, in Table 1.3, Bob’s deposits are a tiny fraction of his bank’s total deposits. As yet another example, the central bank in Table 1.4 has liabilities in the form of reserves held as assets by a large number of banks, including the Alice’s narrow bank and Bob’s commercial bank. The systematic aggregation of balance sheets for all agents of a given group or sector, the changes in balance sheet arising from transactions between entire sectors, and the exploration of their macroeconomic consequences are the principles of the approach known as stock-flow consistent (SFC) modeling (DoS Santos 2005). Whereas a full specification of an SFC model incorporating cryptocurrencies is beyond the scope of this chapter and will be explored elsewhere, we nevertheless find it instructive to provide its basic structure, as a natural extension of the examples and definitions introduced above. Accordingly, consider at a minimum a seven-sector open economy consisting of households, firms, banks, other financial institutions, the Treasury, the central bank, and the rest of the world with the following basic properties. 1. Households: households hold conventional cash, government debt, bank deposits, shares of firms, banks and other financial institutions, and all types of cryptocurrencies discussed in the chapter (pure-assets, CBDC and stable coins) as assets. Their liabilities consist of bank loans, and loans provided by other financial institutions. They receive income in the form of wages, interest on deposits and government debt, and dividends, which they then use to pay taxes and consume goods and services. The difference between income received and expenses paid constitutes savings, which are allocated among balance sheet items (for example increasing deposits, or paying down consumer debt). 2. Firms: firms hold all types of assets held by households, except shares11 in addition to physical capital12 and inventories. Their liabilities consist

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of bank loans, loans provided by other financial institutions, shares13 and certain types of privately issued cryptocurrencies (for example, DTC for the administrator of a consortium). They choose the level of production based on long-term growth and short-term fluctuations in demand, as well as the level of investment (which is itself part of demand) and receive revenue from the sales of goods and services as income (including revenue from services associated with the cryptocurrencies they issue), which they use to pay wages, depreciation costs, interest on debt, taxes and dividends. The difference between income received and expenses paid constitutes retained profits, which are allocated among balance sheet items (for example, an increase in capital or a loan repayment). 3. Banks: banks, including both commercial and narrow banks, hold loans, government debt, reserves, and potentially all types of cryptocurrencies as assets. Their liabilities consist of deposits (both sight and time deposits), shares and certain types of privately issued cryptocurrencies (for example, FBSC issued by a narrow bank). They receive fees and interest on loans, reserves and government debt as income, with which they pay taxes, dividends and interest on deposits. The difference between income received and expenses paid constitute retained profits, which are allocated among balance sheet items (for example, an increase in holding of government debt). They can create money (that is, deposits) endogenously in fractional banking, but are not allowed to do so in narrow banking. They interact with the central bank through purchase and sale of government debt in exchange for reserves, which in turn is how the central bank implements monetary policy. 4. Other financial institutions: this sector includes lending institutions that do not have demand deposits as their liabilities (for example, they issue shares in order to fund their lending) that arise in the context of narrow banking, as well as providers of consumer loans and credit card debt. It also includes private issuers of stable coins, such as custodial stable coins (for example, Tether) and overcollateralized stable coins (for example, Dai). Their assets are loans and other debt securities, and their liabilities are shares and the cryptocurrencies they issue. 5. Treasury: this is the part of a sovereign government that sets spending and taxation, which in the simplest form can be given by constant ratios, so that the government debt remains stable, since the main focus of this model is the operations of the central bank and interactions with cryptocurrencies. Also, for simplicity, the only asset of this sector is a deposit account with the central bank, which is used for spending and transfers to other sectors, as well as to collect taxes, whereas the

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only liability is treasury bills (or other government debt of longer maturity), on which it pays interest. In addition, we assume that the Treasury owns the central bank (although they can be operationally independent), and therefore receives all of its profits. 6. Central bank: this is a key sector in the model, whose liabilities consist of cash, reserves, the Treasury deposit account and CBDC. Its assets consists primarily of government debt, but could also include other securities, as with quantitative easing. As mentioned previously, any profits for this sector (for example, a difference between interest earned and interest paid) are transferred to the Treasury. The central bank in this model performs the following functions: (1) purchase and sale of government bonds from the banking sector in order to achieve a desired level for the policy rate; (2) issuing of CBDC; and (3) direct lending to firms and households in periods when bank credit is not sufficient. 7. Rest of the world: in order to investigate the potential of DTC as a supranational currency for the purpose of trade, we need to include an external sector in the economy. We assume for simplicity that, from the viewpoint of the domestic economy, the rest of the world can be represented entirely by real imports, consisting of household consumption of foreign goods and services purchased directly from abroad, and real exports, consisting of domestic goods and services sold by firms to foreign consumers. In addition, we assume that the only domestic asset held by foreigners consists of cash, which is a liability of the central bank, and DTC, which is a liability of the administrator that issues them on behalf of a consortium of domestic sponsors. More general versions of the model could include Treasury bills and bank deposits as assets held by foreigners, as well as many types of foreign assets held by domestic households. Apart from the basic accounting properties described above, a fully specified SFC model needs to include all of the structural functions determining the behavior of each sector, such as consumption of households, investment by firms, lending by banks, and spending and taxation by the government. We plan to pursue this line of research in a subsequent publication, and hope that the basic structure described previously motivates others to do the same.

6. CONCLUSION As we have seen in the previous sections, cryptocurrencies can perform multiple economic functions. Pure-asset coins such as Bitcon and

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Ethereum are economically more similar to precious metals and commodities, which are held primarily for hedging and speculative purposes. Others such as Tether and Dai are functionally closer to conventional bank deposits, thereby relying on the financial health of the institution issuing them for liquidity and stability, whereas CBDCs are the closest type of cryptocurrency to conventional cash. The successes and merits of each cryptocurrency depend as much on its technological implementation as on its economic fundamentals. For example, the time and energy-consuming consensus mechanism by PoW used by Bitcoin explains its low number of transactions per second and corresponding unsuitability as a scalable medium of exchange for retail use. However, the much simpler and faster Ripple protocol also exhibits extreme price volatility for its native token, XRP, as do all pure-asset coins. The reason for this is that, by not being a liability for any economic agent and not having any intrinsic value, these coins lack any credible mechanism for price stabilization and have to rely exclusively on the expectation that other users will want to buy or hold them at some point in the future. At the other extreme, CBDCs are fully backed by central banks and therefore have exactly the same stability properties as fiat currencies. On the other hand, widespread adoption of digital tokens directly managed by a central bank and available to the public at large raises its own operational and economic problems, chief among which are concerns regarding KYC and AML functions, as well as privacy. The approach reviewed above utilizes a partnership between the central bank and the private sector, which is tasked with administering the CBDCs owned by members of the public, while these coins remain entirely a financial liability of the central bank. Implemented in this way, CBDCs would have all the properties associated with cash – except anonymity in respect of the specific private sector intermediary chosen to administer one’s digital wallet – plus all the conveniences associated with digital alternatives. Between the two extremes of pure-asset coins and CBDCs is the growing class of stable coins, with varying degrees of convenience and price stability. Both FBSCs (viewed by some as synthetic CBDCs) and CSCs, such as Tether, necessitate the introduction of a narrow bank as either the issuer or the designated deposit holder for the issuer of these coins. That is the old notion of full-reserve banking (see Pennacchi 2012 for an overview) finds a new raison d’être in the context of cryptocurrencies. Similarly, technological innovations allowing the creation of DTC could represent the arrival of an asset-backed supranational stable currency long dreamed of by economists (see references in [12, s. 2]). Finally, issuance of overcollaterilized stable coins, such as Dai, share all the similarity with the type of endogenous money creation in the form of bank deposits arising

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from loans, without the corresponding regulatory framework, at least at the time of writing. In conclusion, when viewed as the next chapter of a long and turbulent history, cryptocurrencies point to a future of money that is in all respects similar to its past: uncertain, diverse, hierarchical, hybrid, fundamental to society and, ultimately, fascinating.

NOTES   1. See https://cbeci.org (accessed 10 September 2021).   2. In September 2021, there were close to 18.8 million BTCs in circulation, of which 10 to 20 per cent might have been irrecoverably lost.   3. ‘Cryptocurrencies are replacements for sovereign currencies … That type of currency is not a security’. See https://www.cnbc.com/amp/2018/06/06/sec-chairman-clayton-saysagency-wont-change-definition-of-a-security.html? (both accessed 10 September 2021).   4. See https://www.sec.gov/news/press-release/2020-338 (accessed 10 September 2021).   5. Or, equivalently, cash or CBDC, given the central bank commitment to par convertibility between cash, CBDC and reserves.   6. See Grasselli and Lipton (2019b) for an example of a macroeconomic model for narrow banking.   7. See https://docs.makerdao.com (accessed 11 September 2021).   8. Compare this with the case of the tightly controlled supply of Bitcoin, which means that whenever there is higher demand, its price increases without bounds.   9. Compare again with Bitcoin, which does not have the guarantee to be converted into anything else when demand drops, leading to arbitrary price decreases. 10. As an illustration, the total amount of Dai in circulation in August 2021 is approximately USD6 billion, whereas the total amount of assets locked in MakerDAO vaults is close to USD10 billion. 11. This is for simplicity only. In reality firms own shares of other firms, although this would be netted at a sector level, but can also own shares of banks and other lending institutions, in the same way that banks can own shares of firms. Unless strictly necessary to highlight a specific financial phenomenon (for example, fire sales of securities by banks in periods of distress) we prefer the simplifying assumption in which shares are exclusively owned by households. 12. For the purpose of SFC models, following a convention adopted by national accounts in most countries, real estate is considered part of the capital in the firms sector, with homeowners treated as sole proprietors receiving income either as actual rent from tenants or saved rent not paid to other landlords. Accordingly, mortgage debt can be combined with firms’ debt. See https://www.bea.gov/sites/default/files/methodologies/ nipa_primer.pdf (accessed 11 September 2021) for details. 13. We favour the accounting convention of treating shares issued by companies as explicit liabilities, in order to match the assets held by shareholders. For details, see Godley and Lavoie (2007).

REFERENCES Adrian, T. and T. Mancini-Griffoli (2019), Fintech Notes: The Rise of Digital Money, Washington, DC: International Monetary Fund.

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Bank of England (2020), ‘Central bank digital currency: opportunities, challenges and design’, discussion paper, March, Bank of England, London. Boar, C. and A. Wehrli (2021), Ready, Steady, Go? Results of the Third BIS Survey on Central Bank Digital Currency, BIS Papers No. 114, Basle: Bank for International Settlements. Bordo, M.D. and A.T. Levin (2017), ‘Central bank digital currency and the future of monetary policy’, NBER Working Paper No. 23711, National Bureau of Economic Research, Cambridge, MA. Buterin, V. (2013), ‘Ethereum White Paper: a next generation smart contract & decentralized application platform’, accessed 10 September 2021 at https:// ethereum.org/669c9e2e2027310b6b3cdce6e1c52962/Ethereum_White_Paper_-_ Buterin_2014.pdf. Dos Santos, C.H. (2005), ‘A stock-flow consistent general framework for formal Minskyan analyses of closed economies’, Journal of Post Keynesian Economics, 27 (4), 711–35. Godley, W. and M. Lavoie (2007), Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth, Basingstoke: Palgrave Macmillan. Grasselli, M.R. and A. Lipton (2019a), ‘The broad consequences of narrow banking’, International Journal of Theoretical and Applied Finance, 22 (1), 1950007. Grasselli, M.R. and A. Lipton (2019b), ‘On the normality of negative interest rates’, Review of Keynesian Economics, 7 (2), 201–19. Keynes, J.M. (1943), ‘The objective of international price stability’, Economic Journal, 53 (210–211), 185–7. Lavoie, M. (2003), ‘A primer on endogenous credit-money’, in L.-P. Rochon and S. Rossi (eds), Modern Theories of Money: The Nature and Role of Money in Capitalist Economies, Cheltenham, UK and Northampton, MA, USA: Edward Elgar, pp. 506–43. Lipton, A. and A. Treccani (2022), Blockchain and Distributed Ledgers: Mathematics, Technology, and Economics, Hackensack, NJ: World Scientific. Lipton, A., T. Hardjono and A. Pentland (2018), ‘Digital trade coin: towards a more stable digital currency’, Royal Society Open Science, 5 (7), 180155. Lipton, A., A. Sardon, F. Schär, and C. Schüpbach (2021), ‘Stablecoins, digital currency, and the future of money’, in A. Pentland, A. Lipton and T. Hardjono (eds), Building the New Economy, Cambridge, MA: MIT Press, pp. 285–320. Nakamoto, S. (2008), ‘Bitcoin: a peer-to-peer electronic cash system’, accessed 10 September 2022 at http://bitcoin.org/bitcoin.pdf. Pennacchi, G. (2012), ‘Narrow banking’, Annual Review of Financial Economics, 4 (1), 141–59. Schumacher, E.F. (1943), ‘Multilateral clearing’, Economica, 10 (38), 150–65. Tasca, P. and C.J. Tessone (2019), ‘A taxonomy of blockchain technologies: principles of identification and classification’, Ledger, 4, doi:10.5195/ledger.2019.140.

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2. Bitcoin design, theory of money and implications: a Keynesian assessment Matheus Trotta Vianna 1. INTRODUCTION Almost everything in our modern life is digital. We write and read in a computer, we talk to each other by text messages, and we record the beautiful moments of our life in digital social networks. We even shop online and, most importantly, we pay digitally. You can pay for the London underground by simply tapping your mobile phone into a reader and you can now go anywhere you want. When you receive your salary after your hard work, you simply open your bank’s application (app) and see an increase in your account’s balance, a number. You pay your bills by reading barcodes, thus reducing the digits in your account. Even though most transactions and payments were already actioned digitally, the past decade went through the emergency of some innovative forms of electronic Money. The rise of cryptocurrencies was a significant breakthrough in our modern economies. The first and perhaps most important of those digital assets is bitcoin, still holding more than 70 percent of market dominance 10 years after its launch.1 For some years, Bitcoin existed under the radar of the public in general. That was the reason why bitcoin became (in)famous in the first place: owing to the way it ensured anonymity to its users, bitcoin was mainly used for illegal transactions, cross-border transfers and criminal activities. However, in 2017, when the bitcoin price in US dollars had record-breaking appreciation rates, its popularity also increased. To illustrate the overvaluations, the bitcoin price in US dollars was stable at less than $10.00 from its creation in 2009 until 2013. In 2013 it increased to something close to $100.00, and it reached a peak of $1091.97 on 20 November of the same year. This was approximately a 900 percent appreciation in two months. It was the biggest percentage overvaluation so 57

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far, but it was just getting started in absolute terms. On 2 January 2017, the bitcoin value was $996.48, in June it reached $2974.59 and in September $4913.60. An increased interest by the public fueled the market even further, leading it to a peak of $19 045.50 in December 2017, in a movement that several analysts characterized as a bubble. After that peak, bitcoin price felt and became stable at around $10 000.00 for almost three years, until the 2020 pandemic. For reasons yet to be explained, bitcoin price reached unrecorded levels, including a new historical peak of $41 911.99 in January 2021.2 Going back to a London Underground example, in 2021 you could find advertisements on several stations reading, ‘If you are seeing Bitcoin on the underground, it’s time to buy’. The appreciation rates put bitcoin in the spotlight for many people, not only economists and analysts. However, it is not its price overvaluations that presented a breakthrough, although these price movements might instead hint at some features in opposition to its ideals. Many people, including economists and high-level technicians of relevant institutions, such as central banks, have been advocating the use of bitcoins and other cryptocurrencies as an alternative to national currencies, the ‘money of the future’. Some may say, paraphrasing Churchill’s famous quote, that ‘bitcoin is the worst form of money, except for all the others’ (Bjerg 2016). The creation of the bitcoin itself is based on the idea of getting rid of intervention and control of a third party in the global monetary and payment system (Nakamoto 2008). Bitcoin, and other subsequent cryptocurrencies, were created under this libertarian ideal. More than 10 years after the launching of the first cryptocurrency, many debates were held and there are more to come. In order not to fall into the extremes of this debate, on the one hand, quickly saying that bitcoin is a fraudulent scheme used only by criminals, or that it will bring a financial apocalypse, and on the other, stating that bitcoin will solve the problems of our society and rid us of banks and especially the government, we must be careful and investigate more deeply. In this chapter we separate the bitcoin system and technology from the Bitcoin unit individually, noting some consequences of each. Whereas we recognize that the idea behind the system is revolutionary and can facilitate and improve our payments and other systems, the concept behind the unit definition was misguided, following conventional interpretations of Money. The Bitcoin unit was conceived from the beginning to be like gold. It is no coincidence that the computers that try to solve the cryptography problems in order to release a new unit in the system are named ‘miners’. As Mehrling (2017) wrote, proposals for monetary reform are always and everywhere based on some underlying theory of Money. There is a theory of Money behind the bitcoin, in which the value of bitcoin is sustained

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by its scarcity and the confidence that this scarcity will be maintained. This old view leads to misconception especially around the nature and definition of what Money is. A more general denomination, progressively more used and accepted, should be crypto-assets. Could a crypto-asset be a crypto-money or a cryptocurrency? Perhaps, under some conditions, but that is not what they are now. In order to show that the main problems of bitcoin, and other cryptocurrencies that follow the same design, are the definition of the unit, based on a misconceived understanding of Money, we employ concepts of Keynesian theory of Money. Using Keynes’s essential properties of Money, and concepts of a more recent approach termed modern money theory (MMT), we clarify what is Money, showing that bitcoin units are not Money. This chapter is structured as follows: section 2 elucidates and defines a plethora of existing names, notations and concepts around the general notion of Money. This section also tries to briefly differentiate digital, virtual, cryptographic or any possible name those currencies or assets might assume in the growing literature, to avoid mistakes. Section 3 presents a classical notion or theory of money, on which Bitcoin is based. The fourth section elucidates a Keynesian approach to Money, combining Keynes’s direct contributions, such as essential properties of Money, and MMT. Both these sections are brief expositions, whereas the debate between both views is a great deal more extensive than illustrated herein. We do not discuss common questions when discussing monetary theories, such as the relationship between Money and overall prices, neutrality of Money and monetary policy. Instead, we restrict ourselves to the notion, the nature and the properties of Money under those views, together with some contextualization. The fifth section presents some interpretations and possible consequences of the Bitcoin design in light of the Keynesian perspective presented previously. A final section closes out with some concluding remarks.

2.  MONEY: CONCEPTS, NAMES AND NOTATIONS The concept of Money is perhaps one of the most unclear and debatable in economics. If different theories of Money are not enough, there are some functions of Money, many origin stories, several forms of Money, different taxonomies and characterizations of Money and yet not even a single consensus definition of what Money is. Before we continue with the theory and the analysis, a clarification of terms to be used in this text is necessary. Following the clarifications of Wray (2015) and Tymoigne and Wray (2006), let us establish some terms:

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The word ‘Money’, in capital letters and italics refers to a general, abstract and theoretical construction that can be explained by different theories, that can assume different aspects depending on the  theoretical explanations and that contains several sublogical constructs, such as definition, nature, history, functions and properties. So far in this text, this is the semantic used for the word Money. The word ‘Money’ or ‘money unit’ refers to a unit of account, a general one, similar to dollars, meters, yards or pounds. It is a denomination for counting and registering something. From now on, every Money will be written with capital letters, or with abbreviations; for example, Money, Bitcoin, Dollar, BTC and USD. The word ‘money’ or ‘money instruments’ refers to instruments, methods and tools to count and register the money units, therefore, ‘money instruments’ are denominated in Money. While several money instruments possess the same name as their money unit, this is not a necessary condition. However, to avoid misunderstanding in the event of same names, ‘money instruments’ is written with small letters. Almost anything can serve as a money instrument. In the history of humankind, several items have taken this role: gold, paper, bank notes, government bills, bank deposits and, currently, even bits of data. Money instruments might assume a few forms and therefore a taxonomy of money instrument can be elucidative: – Physical versus digital – some instruments can be held manually while others exist only in the realm of information, translated into a series of binary digits. A metal coin is a physical instrument whereas a bitcoin is a digital instrument. Bills are physical whereas bank deposits are now digital. – Transferable versus non-transferable – some instruments can be passed from one person to another, while some can never be transferred and are specific to one person. A coin is a transferable instrument, but a bank deposit account is specific to the owner. A bank can reduce or increase the amount of funds in the account, doing the opposite in someone else’s account for a transaction, however, the account itself was not transferred. These attributes are sometimes defined as ‘token-based instruments’ versus ‘account-based’ or ‘object-based’ versus ‘claimbased’ (Adrian and Mancini-Griffoli 2019). – Public versus private – some monetary instruments are created or issued by the government while others are issued by private agents. Dollar bills are issued by the US government whereas bank deposits are issued by private banks.

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The word ‘currency’ refers to a specific type of money instrument, a physical,3 transferable and public, therefore issued by the government, usually denominated in the money unit defined by the government.4 In our modern economies, currency usually assumes two physical forms: paper bills and metal coins.

Under those terms, the word ‘cryptocurrencies’ is not quite precise. Even if we assume that currency does not strictly need to be physical in order to account for recent innovations, cryptocurrencies are not, to date, issued by the government nor are they usually denominated in the money unit defined by the government. As currencies are a specific type of money instruments, it would be more appropriate to name these assets as cryptomoney or, even more general, crypto-assets. The latter term has been progressively more accepted and used. If eventually a new cryptographic digital money is issued by the government, transferable and denominated in the government’s unit, then the definition cryptocurrency would be appropriate under our notation. Another set of terms also creates a lot of confusion for those studying these instruments. Cryptographic, digital, electronic and virtual are all terms in this set. To help us elucidate, we follow some definitions by He et al. (2016): ●

●

●

Digital instruments – these exist in the form of data, strings of digits. This term is a broad notion, including several sub-types of instruments. A bank deposit, a central bank reserve and a bitcoin are all digital assets. Virtual instruments are sub-type of digital instruments that are not denominated in a government unit. Virtual instruments are usually denominated in their own unit, which exists only in the virtual world and has no physical counterpart. A bank deposit is a digital instrument, but it is not a virtual instrument as it is denominated in USD. Bitcoins, denominated in BTC, are virtual instruments. Cryptographic instruments are a sub-type of digital instruments that use complex cryptography algorithms to record and secure transactions, and to verify the authenticity of the instrument. The cryptography mechanism usually replaces the role of a central entity or authority that keeps all the records and guaranty security. A bank deposit is a non-cryptographic digital instrument, whereas bitcoins are digital, virtual and crypto-instruments.

Under these terms, can we define Money in the conceptual and theoretical sense? The common answers are misleading. Some people view Money as means of payment, unit of account and store of value. However, those

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are functions of Money, what it can do, not what it is. We could have people answering that question with its commonly known (but questionable) origin story, of society choosing something to overcome the double coincidence of wants of a barter economy. Again, this is not what money is. Others can even answer with money essential properties, but it is still not what it is, only characteristics of Money. To answer properly, it is necessary to understand the nature of Money. The answer to this question of the nature of Money is the core of theories of Money we discuss next. Each theoretical view understands the nature of Money differently, leading to contrasting implications.

3.  THE CLASSICAL VIEW OF MONEY If you open any of the most important economics textbooks, such as Mankiw (2012), the section on Money is usually the same: Money is defined as something that fulfills three functions, and a stylized origin tale of Money is told to contextualize. Money is broadly defined as an asset, or a set of assets, readily available to make transactions. Although this definition is correct, it is not useful, as a theoretical delimiter and further specifications and characterizations are necessary. Often, those specifications consist of the functions of Money, so that the asset or set of assets must be able to fulfill those functions in order to be defined as Money. The origin tale tries to contextualize and corroborate those functions. The asset or set of assets must then fulfill the following functions: (1) means of payments, (2) unit of account and (3) store of value. To be means of payments, that asset must be accepted as settler of transactions, and anyone can accept that asset in exchange for goods and services. To  be the unit of account, the asset must be used to denominate goods and services, so that there is a rate of exchange between that asset and any other goods, therefore a price vector in relation to that unit. Finally, to be a store of value, the asset must be able to transfer value from the present to the future, so it must be able to be exchangeable from other assets currently and in the future. The common tale on the origin of money corroborates the first two functions. The tale tells us that the first market societies began trading by barter, directly exchanging goods for goods. The barter society, however, faces a fundamental problem: the necessary double coincidence of wants, and it becomes a relevant problem as the number of transactions tends to increase. To overcome this problem, society chooses one good that everyone agrees to accept as means of payments, even if that good is not meaningfully useful, and that good becomes the unit of account, so there is

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an exchange rate between that good and every other good. The tale is illustrated by several goods which have been chosen as means of payment and unit of account throughout human history, such as salt, wheat, silver and gold. As goods can be perishable, lost, destroyed or robbed, and can be heavy to carry, society evolved to paper notes backed on some amounts of good. Finally, the amount of goods the paper notes represented had never been used as means of payments, so they were no longer necessary, only the paper note itself, arriving at our recent fiat money. This notion of Money crosses the history of economic thought. It is in modern dynamic stochastic general equilibrium models, it is behind the quantitative theory of money and it can even be traced back to classics economists such as Adam Smith (1977), David Ricardo (2001) and Karl Marx (1992). When Adam Smith (1977) explains the division of labor in a barter economy, a transaction cannot be completed if one party wants a good, but the other party does not want the good offered by the first party, and that is why people normally hold some amount of a good that, in general, everyone accepts and desires, and that good becomes the money instrument. Then, logically, all prices are denominated in those goods, becoming now a unit of account as well. The value of money is then the intrinsic value of the chosen commodity and, for the classics, the value of a good is determined by the required labor in its production, therefore by the production cost. As Ricardo and Mill put it: Gold and silver, like all other commodities, are valuable only in proportion to the quantity of labour necessary to produce them and bring them to market … (Ricardo 2001, p. 256) But money, no more than commodities in general, has its value determined by demand and supply. The ultimate regulator of its value is Cost of Production. (Mill 2000, p. 580)

So, what is Money in the classical view? Money is a commodity, a special type of good socially chosen to be used as means of exchange. Any good could be chosen, but some properties are desirable such as divisibility, durability, low transaction costs, facilitating trade which is  the primary function of Money. Since any good can be exchanged by the chosen money at an exchange rate, all goods can be denominated in relation to money, so, after assuming the function of means of payments, the money becomes the money unit, the unit of account. Thus, the value of money depends on the intrinsic value of the good, mainly governed by its production costs, including scarcity effects. Although money has its

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intrinsic value, it does not provide utility itself, it is probably less useful than any other human need, apart from the fact that it facilitates trade. Money is an intermediary, not an end.

4. A MODERN KEYNESIAN PERSPECTIVE ON MONEY Hyman Minsky stated that banks do not lend money, but banks create money instead, in that case, bank deposits. He showed us that: in truth, what is money is determined by the workings of the economy, and usually there is a hierarchy of monies, with special money instruments for different purposes. Money not only arises in the process of financing, but an economy has a number of different types of money: everyone can create money; the problem is to get it accepted. (Minsky 1986, p. 228)

This approach to Money leads us to a more recent Keynesian interpretation termed ‘modern money theory’ (MMT). Briefly, MMT is a modern version of Chartalism, a heterodox approach to Money where the notion of Money is intrinsically linked with the state or with the law. Although we regard it as a Keynesian interpretation, it is built on the work of many other economists in addition to Keynes and Minsky, such as Georg Knapp, Alfred Mitchel-Innes and Abba Lerner, among others.5 Modern money theory proposes to explain the nature of Money (Wray 2015). Although the complete explanation is far more complex, a simple and quick answer is, Money is debt. All monies are debts, or ‘I Owe You’s (IOUs). An IOU is a liability, a financial obligation. Since it is a liability of the issuer, it is also an asset of the holder. This does not mean that every debt is money. For an IOU to be money, the obligation of the issuer is to accept it back. The moment an issuer does not accept its IOU back, he or she is in default. Everyone can issue an IOU. A silly illustration: I can write on napkins (my money instrument) that I owe you 1 Napkin or NPK (my unit of account, my money unit). I can use my own unit of account, or I can use someone else’s, 1 NPK or 1 USD. In any case, when I issue an IOU, I am promising to accept it back whenever you come to me to have your 1 NPK or 1 USD. If I do not pay you, I am in default. It is also desirable that I use something less fragile than a napkin to register the IOU. Note that the asset is not the napkin but the IOU, the promise, which can be registered in any instrument, a physical transferable instrument, such as a napkin or a coin, a physical but not transferable instrument, such as an entry in my paper notebook, or a

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digital instrument, such as an entry in my Excel spreadsheet. It could even be registered in the minds of the issuer and the debtor. As Minsky observed, the problem is to get the money accepted. Why would anyone accept my money, my napkin? If there is a demand for it, people might accept it. If I say to my friends and family that all they want from me, a favor or some advice, or even a good or service, should be paid with napkins, I could create a demand for my own money. If it is too scarce for the current demand, I could simply write more napkins. That is exactly what banks and the government do. They issue IOUs. Bank deposits are money issued by the banks and denominated in the national unit of account. My deposit account is an IOU from the bank to me, saying that the bank owes me a certain number of Dollars, and it promises me that I can have my Dollars back at any time I want, so it will accept the IOU back. This is how Minsky (1986) describes banking activity. They do not need dollar bills before crediting a value in my account. They are creating an IOU, its own money. Finally, dollar bills or coins are forms to record the IOU, a money instrument issued by the government and denominated in government’s own Money (unit of account): US Dollars. Therefore, the government is saying to you that you can take a 10-dollar bill back, and it will accept it back and giving you 10 dollars, probably in another 10-dollar bill or two 5-dollar bills. In chapter 17 of The General Theory of Employment, Interest and Money (Keynes 1936) called ‘The essential properties of interest and money’, Keynes highlights two essential properties the asset must have to become money. Money should have zero (or negligible) elasticity of production, that is, agents cannot have net profits if they decide to produce money. If money production generated net profits, since the final goal of every agent is monetary accumulation of capital, all firms could produce money to have even more money, instead of producing goods and services. So, when demand for money increases, there is no incentive to employ additional resources in the production of additional quantities of money. In addition, money should have zero (or negligible) elasticity of substitution. That is, the value of money, in terms of Money, does not increase or decrease if agents tend to replace other assets for money, and vice versa. The only instance when this could occur is if uncertainty affects the value of money in the future, for example, relevant inflation or deflation. If the value of money is not stable, agents have an incentive to replace money for another asset, and vice versa. Money loses its property of purchasing power because the values established in the monetary contracts are no longer stable. Agents, including possibly the state, will search for a more stable asset to serve as the unit of account and the means of payments for contracts (Davidson 1978).

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Every IOU has zero (or negligible) elasticity of production. You cannot employ more resources to produce more IOUs. You simply issue it. Its issuing does not generate net profits. When I write in my napkin that I owe you 1 NPK or 1 USD, this does not generate net profits to me. Instead, it generates more debt and it can create liquidity and/or default risks, for example. Not every IOU has zero (or negligible) elasticity of substitution, though. The value of non-interest-paying IOUs, in relation to itself, does not increase if more people demand it instead of another asset. My napkin showing that I owe you 1 NPK will always primarily be valued as 1 NPK. However, if when I issue an IOU I promise to pay interest in addition to the promise to accept it back, its primary value will not remain constant in terms of itself, but will increase in time, making its elasticity of substitution non-negligible. Therefore, to have zero (or negligible) elasticity of substitution, an IOU must be a non-interest-paying liability. Moreover, for IOUs, a necessary condition to have a stable price over time is that the issuer is trustable, that is, creditworthy. If the promise to pay back the IOU is trustable, its value can be stable, but if you do not trust that the issuer will pay back his or her IOU, its value, in time, will decrease and tend to zero. If the issuer is promising to pay back in his or her own unit of account and own IOU, it is highly improbable that he will default, unless he voluntarily decides to do so. If the issuer is promising to pay back in another unit and other IOU, he or she must be in a liquid position to be trustable. To conclude, what is Money in a Keynesian view? Money is debt in its nature. Money is an IOU, a promise, a claim. Money is always a liability of someone and, consequently, an asset for someone else. To be accepted, someone must be willing to hold it and demand it. People will hold and demand that debt as money if it must be used as means of payments for something, even imposed as with taxes for a government’s IOU, and if they believe the issuer is creditworthy and will fulfill the promise of payback. The moment it is accepted, it becomes a money and acquires liquidity. The IOU now has power of disposal, to a degree. In order to become accepted as money and to have a stable value through time, an asset  should  have zero (or negligible) elasticities of production and substitution. IOUs, and  specifically ­non-interest IOUs, possess the two Keynesian essential properties of money.

5. BITCOIN 5.1  A Quick Characterization on the Bitcoin System and Features This subsection does not aim for a full explanation on the technology and all the concepts behind the Bitcoin system, but a brief review.

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The Bitcoin system was created in 2009 by Satoshi Nakamoto. The main idea of the system was to find a solution for the double-spending problem replacing the current solution, a trusted third party, such as a bank. The double-spending problem emerges when the first party transfers money to the second party in a transaction and doubles the money, keeping it in the  original account at the same time. This is a problem that exists only in a digital system, with digital instruments. In a physical system, we cannot give a 10-dollar bill to someone and keep it ourselves at the same time. In a digital system, where the instrument is merely a string of data, it is possible to transfer 10 USD to someone else and copy the same string of data to keep the amount in the original account. The usual way to solve this problem is to have a trusted third party, such as a bank, to keep the record of each transaction and to assure the debt of the 10 dollars in the first party’s account and the credit of the same amount in the second party’s account. In his seminal paper which establishes the Bitcoin system, Nakamoto proposes the following: ‘To accomplish this without a trusted party, transactions must be publicly announced, and we need a system for participants to agree on a single history of the order in which they were received’ (Nakamoto 2008, p. 2). In order to solve the double-spending problem, the Bitcoin system proposes a single ledger which keeps the record of every transaction for each existing bitcoin. This system is open to all users; it is available to the public. The system that gives the proof-of-record for every transaction is a peer-to-peer network, which means that it is not based on a central server, but it uses the computer processing power of all computers connected to the system. It is decentralized, the information, that is, the data of the system, is spread across thousands of computers. This characteristic is also designed to make the system safe, computationally impractical for an attacker (hacker) to change it. This peer-to-peer network is also known as the Blockchain. This system is based on transaction blocks, which are analogous to a page on a ledger. The miners are the computers responsible for verifying that each transaction is legal, by searching the entire history of that bitcoin  and of the users involved in the transaction. The miners must ensure that the first party has enough bitcoins to complete the transaction, and that the first party obtained those coins from previous legal transactions. This is how double spending is avoided. Anyone can be a miner, you just need a computer connected to the network. Moreover, miners are awarded with transaction fees, in the form of a percentage of the transaction value. Every block contains the entire history of the ledger, adding the new transactions thereto. That is where the name Blockchain comes from.

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The  blocks are chained to each other. To add another block or another page to the ledger, an extremely difficult encryption problem which requires a great deal of computer processing power, must be solved, therefore the cryptographic characterization. So, if someone wants to create a fake page and add it to the ledger, creating a complete fake history that makes the user rich in bitcoin units, he or she must then solve this encryption algorithm named proof-of-work. This proof-of-work mechanism is also another incentive for the miners to do their job. Every time one transaction must be validated, there is also an opportunity to solve the algorithm honestly. When a new page is added honestly, a new unit of bitcoin is created. Another feature of this system is that it is anonymous. Since it follows the ideas of the cypherpunks, privacy-enhancement and anonymity were main concerns of the system. Every user is only identified by its Internet Protocol (IP). The transaction record only identifies the IPs of the two parties involved in each transaction. Finally, another characteristic of this payment system is its low transaction cost. Two people can transfer values between them relatively quickly, regardless of national borders. This is how the Bitcoin system works. This description is of the payment system and not of the bitcoin unit itself. This particular payment system was designed so that every transaction is accounted in Bitcoin units, or BTC. They are created by miners every time a block is added to the Blockchain. So, this specific unit created by the mining process is chosen to be the unit of account and the means of payments for this system. It is interesting to note that the supply of bitcoins is limited. Nakamoto stated that the maximum number of BTC that can exist is 21 million, and the expected year in which this limit will be reached is 2140, giving the rate of the mining process. 5.2  The BTC Unit and Design Implications under Keynesian Light We must separate the Bitcoin system, which is the technology described above, from the bitcoin unit, which is the unit of account of that system and the money instrument. It is important to note that the Bitcoin system could easily use any unit of account and means of payments. The Blockchain technology does not depend on the existence of its own unit. It was a design choice to use the BTC. The idea was to have a unit totally unrelated to the banking system and to the state, and to create an incentive for the mining process. However, there is no limitation to use this payment system in Dollars or in any other possible unit. There are a few implications or problems without even addressing the theoretical aspect on the notion of Money behind the BTC. We must first note that BTC is deflationary because of its limited supply. Even though

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it is divisible, as the supply is limited, the purchasing power of goods and services of a BTC tends to increase if the number of transactions also increases in time. One of the economic fears considered worse than inflation is deflation. With deflation, the good you own or the service you provide in this payment system can rapidly be worth increasingly fewer units of account. It decreases the monetary value of production, while it increases the purchasing power of money.6 If you do not want to be a miner, there are only two ways to acquire a bitcoin: (1) by selling some goods and services accepting it as payment, and (2) by ‘buying’ a bitcoin. ‘Buying’ is exchanging it for another currency you have, for example: for US dollars. You must, however, find someone interested in exchanging bitcoins for your currency. It works like an exchange market. A few websites and even a physical store on Wall Street were created to be exchange centers for bitcoin and other crypto-assets and currently there are several applications and sites which perform this task. Ideally, the exchange rate between USD and BTC could be defined by the relation between the amount of goods and services that 1 USD could buy, and how many BTCs are needed to buy the same amount of goods and services (Dwyer 2015). This would be BTCs purchasing power parity (PPP) exchange rate. However, since the amount of goods and services that can be bought by 1 BTC is unknown, the rate of the BTC in relation to local currency is defined by demand and supply. As the supply of bitcoins is limited, the exchange value of BTC is driven by demand. This brings us to a second problem: bitcoin exchange value is highly volatile, and demand driven, which can lead to a speculative bubble. A third problem arises because bitcoins are expected to appreciate in purchasing power and exchange value: there is an incentive for hoarding it instead of spending it in goods and services, thereby effectively serving as means of payments. Hoarding can lead to a monopoly problem since just a few individuals can ‘buy’ a huge number of bitcoins and hoard it to limit its supply even more. This problem occurs due to design features: the limited supply and the encryption puzzle to mine a new unit which is exponentially increasing. Every new bitcoin has an increasing cost, computational and processing power cost, to be discovered, creating a possible (already existing) monopoly of miners. Only large corporations or cooperatives with the capacity to build immense computational power can mine the next bitcoin. There are even companies producing special processing units designed specifically to solve the bitcoin cryptography. All three problems are caused by limited supply. There is another small feature that contributes even more with its limited supply. Each bitcoin has a code, a unique private key. People can easily forget the key or people can be arrested or die without passing the key to someone else. This is called

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the loss of BTC. Those lost coins are named ‘zombies’ and they are lost forever. There is no mechanism for retrieving them to the system. So, the supply is not only limited, but also tends to decrease in time after the total amount is reached. Bitcoin has several similarities with Money, it can have some common Money functions, but it differs from Money in its nature, in its essence, under the Keynesian approach presented: bitcoin is not an IOU. No one, not even Satoshi Nakamoto, is promising to accept your bitcoin back, not even in BTC. In this, bitcoin is much more like gold or any other commodity, and it was designed to be like that. Eric Tymoigne reached this ­conclusion very quickly, in 2013. In addition, he showed that the fair value of bitcoin is zero (Tymoigne 2013). Our analysis is similar and inspired by his. Although a commodity such as gold or bitcoin can have some money functions, it is not a money instrument because it will never have Keynesian essential properties. For something, such as a commodity, to become a monetary instrument, it must represent, record an IOU. An (specific, non-interest bearing and with no pre-defined maturity) IOU has the two Keynesian properties and can be Money, regardless of the instrument or instruments denominated in it, and used to settle transactions and debts. Bitcoin does not meet the two Keynesian essential properties: bitcoin’s elasticity of production and substitution are not zero (or negligible). The first is evident, as there is an incentive for miners to create new bitcoins, although Nakamoto designed this incentive to be decreasing until the supply reaches a maximum value. As Nakamoto himself wrote, you can put more effort into processing power and computer effort into producing bitcoins (Nakamoto 2008). That production generates profit: one bitcoin. The elasticity of substitution is not negligible, so the value of bitcoins increases or decreases if agents tend to substitute other assets for it, and vice versa, as its supply is limited, and the agents know that. A money instrument, an IOU, can be supplied indefinitely to meet the demand, so its value can remain stable, and the elasticity of substitution is negligible, so ‘there is no limited supply of either private or state IOUs – so long as either is willing to issue IOUs, they can be supplied’ (Wray 2014, p. 28). It must be supplied to meet demand, or its elasticity of substitution will rise and its value in itself will not remain stable. As regards the functions, Yermack (2015) concludes that bitcoin is not a means of payments, not a good unit of account nor a stable store of value, yet. Until now, bitcoin has not been generally accepted as a means of payment, although a few firms are starting to accept it. We suspect that those firms are now accepting it as means of payments, not because it is a good and representative means of payments, but because they are expecting

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future appreciations in terms of Dollars and they want to accumulate bitcoins now to sell them later. So, it is only for speculative purposes. Bitcoins are usually used as unit of account for other crypto-assets, but that is just their exchange rates, as bitcoin is still the most relevant crypto-assets, so many of the others’ value is denominated in BTC. However, goods and services are still denominated in national units of account. You need to convert the value to BTC with an exchange rate. For something to be a store of value, an expected increasing or stable nominal price is the essential condition for value to be well stored in time. It is not the real value that matters, as agents want to accumulate wealth in nominal terms, in money, not in utility of goods. Goods can have expected increasing or stable nominal price in time, for example, real estate or gold, or any other goods that have expected increasing or stable nominal price. To be a store of value, the expected nominal price should be increasing or stable during indefinite time. This is different from expected appreciation, which is the return provided by the difference in the price between the moment the asset was bought and the moment it could be sold in the future, but it must be sold, and it is planned for a definite time. This is speculation. Something can have a completely unstable nominal price, increasing and decreasing in indefinite time, but it can still have expected appreciation if the difference of price between the time it was bought and the time it was sold is expected to be positive. For IOUs, a necessary condition to have stable price in time is that the issuer is trustable, creditworthy. Bitcoins have no issuer nor a promise of payback, as it is not an IOU. Therefore, bitcoin does not resemble Money in a Keynesian perspective. It is at most a speculative asset, a volatile crypto-commodity. Other studies have shown that bitcoin is highly speculative. It has been shown that bitcoin does not behave like a currency according to the common Money function, but instead resembles a speculative investment, such as the Internet stocks of the 1990s (Yermack 2015). Also, BTC prices are 26 times more volatile than the Standard and Poor’s (S&P) index, and what drives its price is speculation of buyers and sellers (Baek and Elbeck 2015). Bitcoin is subject to bubbles, as other assets are, but the bubble component of bitcoin’s price is substantial (Cheah and Fry 2015). In addition, it has been shown that bitcoin’s fundamental value is zero (Tymoigne 2013). 5.3  Design Changes, Forks and Other Units Throughout the Bitcoin existence there have been several critiques, disagreements and proposed changes to the original design, not only by economists and analysts but mainly from inside the Bitcoin network, including miners, developers, exchanges and users. As the Bitcoin system is decentralized,

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any change on the original system, or code, must be voted by all members of the network and, with an increasing number of users and other agents in that network, changes become harder to get approved. However, there have been examples of successful approved changes and implementation. Sometimes, when a group of members of the network proposes a change and it is not approved by the majority, they can create forks, branches of the original system, a copy of the original system but implementing their modifications. Let us wonder, do any of those approved changes or forks address the issues we highlighted? Is there a light? One of the main debates and changes was related to the number of transactions. Briefly, each block of the Blockchain can hold a fixed amount of data and each transaction has a data size. Original Bitcoin blocks used to validate around 1700 transactions per second, whereas current credit card companies validate around 65 000 transactions per second. With an increasing number of transactions, they were stuck in a line waiting until miners create new blocks, taking too long for a transaction to be completed. In addition, users could pay transaction fees to miners to validate their transactions first, and at a point, those fees were around 50 US Dollars. So, transactions were slow and costly, and people stopped believing in the capability of the Bitcoin system as an effective payment system. Some members of the network proposed a reduction in the amount of information in a transaction, with a risk of reducing security, while another group proposed an increase in the block size. The majority voted for the first solution, but the second solution became a fork. For the fork, a new asset was created, named bitcoin cash (denominated in BCH). The main purpose of bitcoin cash was to facilitate transactions, with some supporters arguing that bitcoin cash focused on the means of exchange function whereas the original bitcoin was focusing on being a store of value only (although we already know the difference between expected appreciation and store of value). Some critics say that bigger blocks need high-computational power, increasing the tendency to a monopoly in respect of bitcoin cash, and being less decentralized and allowing only big companies to be able to mine. Although bitcoin cash is a little bit closer to the notion of Money than is bitcoin, it is still far away as it does not address the main design issues we highlight and still does not assume the debt nature of Money nor Keynesian essential properties. Bitcoin cash is not an IOU and still poses a limited supply of units, potentially facing the same problems of the original bitcoin in the long run. There are other forks and, consequently, other assets and units, such as bitcoin gold (denominated in BCG) and bitcoin diamond (denominated in BCD), although none of these addresses the issues we highlighted, none of

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them changes the underlying theory behind the concept. Those two forks reinforce the idea of those assets being similar in design to commodities.

6.  CONCLUDING REMARKS Bitcoin was the first crypto-asset, not cryptocurrency, ever created, instigating a multiplication of similar assets and many debates. It was supposed to be revolutionary, to free the world from the control and monopoly of government and big financial institutions, to change our current understanding of Money and payment systems, and it is a relevant breakthrough thus far. However, as Mehrling (2017) remembers, proposals for monetary reform are always and everywhere based on an underlying theory of Money. Bitcoin has a clear theory of Money as its foundations, the classical view on Money: Money is a commodity, socially chosen to be used as means of exchange, facilitating trade. The value of money depends on the intrinsic value of the good, mainly governed by its production costs, including its scarcity. Bitcoin was designed to be scarce, to be mined exactly as gold, rewarding miners with new units. This notion is historically and theoretically questionable, and there is an alternative view. Under Keynesian perspective, Money is debt. Money is an IOU, a promise, a claim. People will hold and demand that debt as money if it must be used as a means of payments for something, even imposed as with taxes for a government’s IOU, and if they believe the issuer is creditworthy and will fulfill the promise of payback. The moment it is accepted, it acquires power of disposal, to a certain degree, and there is a hierarchy of money. Not only does Money differ in its nature, but it also needs to possess two necessary properties. Bitcoin is not debt. No one, not even Satoshi Nakamoto, is promising to accept your bitcoin back, not even in BTC. Moreover, bitcoin does not possess the Keynesian essential properties: bitcoin’s elasticity of production and substitution are not zero (or negligible). Bitcoin cannot be characterized as Money under the Keynesian theory as it was designed to be a commodity-like asset, such as gold. However, its design creates some implications, such as a deflationary trend, a highly volatile and demand-driven exchange rate which can lead to a speculative bubble and the incentive to hoarding. Thus far, not even the traditional money functions are performed well by bitcoin, it is at most a speculative asset, a volatile crypto-commodity. There were several attempts to change some design problems, even creating other derived assets, but none addressed the design issues we identify. Why? Because no change has questioned the theory of Money that supports Bitcoin’s design.

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The technology introduced by the Bitcoin system is revolutionary. It may change our modern payment and other systems, such as certifications and smart-contracts, even energy transfers, and central banks are actively studying and researching this technology to enhance their systems and possibly create their own digital money. In that event, there will probably be a fundamental difference: the theory of Money. Next revolutions will be given to us only by the future.

NOTES 1. Source: bitcoin.com (accessed January 2021). 2. All data on Bitcoin exchange values can be found at tradingview.com (accessed January 2021). 3. Although none exists yet, there have been studies and efforts to create a digital currency, a virtual form of transferable public money instrument. See Carapella and Flemming (2020) for a literature review and Bank for International Settlement (2018, 2020) and Bank of England (2020) for initial principles and features proposed by central banks usually denominated in the money unit defined by the government. 4. It is possible that the sovereign power to issue currency and define the money unit is transferred to a supranational instance, such as the Euro area. 5. See Wray (1998) and Wray (2014) for a brief history of economic thought of significant figures who contributed to MMT. 6. Barber et al. (2012, pp. 404–5) address the deflationary and hoarding problems and propose a ‘decentralized organic inflation mechanism’, although they do not make it clear what this is.

REFERENCES Adrian, T. and T. Mancini-Griffoli (2019), ‘The rise of digital money’, International Monetary Fund FinTech Note, (19–001), 20. Baek, C. and M. Elbeck (2015), ‘Bitcoins as an investment or speculative vehicle? A first look’, Applied Economics Letters, 22 (1), 30–34. Bank of England (2020), ‘Central bank digital currency opportunities, challenges and design’, discussion paper, Bank of England, London. Bank for Intentional Settlements (BIS) (2018), Central Bank Digital Currencies. Committee on Payments and Market Infrastructure. Market Committee Paper No.174, Basel: Bank for International Settlements, accessed January 2021 at https://www.bis.org/cpmi/publ/d174.htm. Bank for Intentional Settlements (BIS) (2020), ‘Central bank digital currencies: foundational principles and core features’, joint report, Bank for International Settlements, Basel, accessed January 2021 at https://www.bis.org/publ/othp33. htm. Barber, S., X. Boyen, E. Shi and E. Uzun (2012), ‘Bitter to better – how to make bitcoin a better currency’, in A.D. Keromytis (ed.), International Conference on Financial Cryptography and Data Security, Berlin and Heidelberg: Springer, pp. 399–414.

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Bjerg, O. (2016), ‘How is bitcoin money?’, Theory, Culture & Society, 33 (1), 53–72. Carapella, F. and J. Flemming (2020), ‘Central bank digital currency: a literature review’, FEDS Notes, Washington, DC: Board of Governors of the Federal Reserve System, November, doi.org/10.17016/2380-7172.2790. Cheah, E.-T. and J. Fry (2015), ‘Speculative bubbles in bitcoin markets? An empirical investigation into the fundamental value of Bitcoin’, Economics Letters, 130, 32–6. Davidson, P. (1978), Money and the Real World, New York: Springer. Dwyer, G.P. (2015), ‘The economics of bitcoin and similar private digital currencies’, Journal of Financial Stability, 17 (April), 81–91. He, D., K. Habermeier, R. Leckow, V. Haksar, Y. Almeida, M. Kashima, et al. (2016), ‘Virtual currencies and beyond: Initial considerations’, IMF Staff Discussion Note No. 3, January, International Monetary Fund, Washington, DC. Keynes, J. (1936), The General Theory of Employment, Interest and Money, London: Macmillan. Mankiw, N.G. (2012), Macroeconomics, New York: Worth. Marx, K. (1992), Capital: A Critique of Political Economy, vol. 1, Introduction by E. Mandel, trans. B. Fowkes, New York: Vintage Books. Mehrling, P. (2017), ‘Cryptos fear credit’, Global Development Policy Center Blog, accessed March 2022 at https://sites.bu.edu/perry/2017/09/29/cryptos-fear-credit/. Mill, J.S. (2000), Principles of Political Economy, Kitchener, ON: Batoche Books. Minsky, H.P. (1986), Stabilizing an Unstable Economy, New Haven, CT: Twentieth Century Fund Report. Nakamoto, S. (2008), ‘Bitcoin: a peer-to-peer electronic cash system’, Decentralized Business Review, art. 21260, accessed March 2022 at https://www.debr.io/ article/21260-bitcoin-a-peer-to-peer-electronic-cash-system. Ricardo, D. (2001), On the Principles of Political Economy and Taxation, Kitchener, ON: Batoche Books. Smith, A. (1977), The Wealth of Nations 1723–1790, Chicago, IL: University of Chicago Press. Tymoigne, E. (2013), ‘The fair price of a bitcoin is zero’, New Economic Perspectives Blog, accessed March 2022 at https://neweconomicperspectives.org/2013/12/fairprice-bitcoin-zero.html. Tymoigne, E. and L.R. Wray (2006), ‘Money: an alternative story’, in P. Arestis and M. Sawyer (eds), A Handbook of Alternative Monetary Economics, Cheltenham, UK and Northampton, MA, USA: Edward Elgar, pp. 1–16. Wray, L.R. (1998), Understanding Modern Money, Cheltenham, UK and Northampton, MA, USA: Edward Elgar. Wray, L.R. (2014), ‘From the state theory of money to modern money theory: an alternative to economic orthodoxy’, Working Paper No. 792, Levy Economics Institute of Bard College, Annandale-On-Hudson, NY. Wray, L.R. (2015), Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems, New York: Springer. Yermack, D. (2015), ‘Is bitcoin a real currency? An economic appraisal’, in D. Lee Kuo Chuen (ed.), Handbook of Digital Currency, London: Elsevier, Academic Press, pp. 31–43.

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3. Cryptocurrencies, Big Techs, central bank digital currencies and the changing role of banks in the payment industry: old wine in new bottles? Léo Malherbe and Matthieu Montalban 1. INTRODUCTION Thirteen years after the launch of Bitcoin, the first cryptocurrency does not yet have all the three attributes or functions of ‘complete’ money: it is rarely used as a mean of payment and as a unit of account, while its high  volatility means that it is not a reliable store of value either. To  speak of Bitcoin as a crypto-‘currency’ is thus misleading and it is more accurate  to refer to it as a crypto-asset. However, its emergence is sometimes presented as a turning point in the recent evolution of the payment industry. The techno-utopia creating Bitcoin was developing a monetary system that would no longer be dependent on the usual trusted third parties, namely, banks and states, and with very low transactions costs or fees. To achieve this, Bitcoin relies on technical innovation, the blockchain, which is a distributed ledger that enables anonymous transactions to be made and securely recorded without using bank deposits or physical cash. Since this radical monetary innovation, a large crypto-ecosystem has emerged, and more than 5000 cryptocurrencies have been coded on the same technological basis (the blockchain). Even if we observed a dynamic of digitalization of payments that pre-dates Bitcoin, with the use of information and telecommunications technologies (ICTs) by the banking sector, the emergence of cryptocurrencies intensified the reflections and debates on the digitalization of means of payment. This, together with the entry of Big Techs who offer innovative electronic payment services, gradually led public authorities, through their central banks, to communicate about the possibility of creating 76

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their ­central bank digital currency (CBDC). Recently, the largest existing survey (66 central banks covering 75 percent of the world’s population and 90 percent of its output) estimated that 80 percent of central banks are now engaged in CBDC work, with 10 percent of central banks already having developed a pilot project (Boar et al. 2020). Cryptocurrencies and CBDCs are challenging commercial banks’ c­ entral position and role in modern payment systems. These digital innovations can either radically decentralize the payment system in one instance (cryptocurrencies), or recentralize it in the other (CBDCs). As Aglietta and Orléan (2002) showed, the monetary system is always in tension between the risk of ‘fractionation’ (fractionnement), that is, the anarchical development of monetary competition with the risk of deflation and liquidity crisis, and centralization, with a risk of inflation driven by the capture of monetary creation by the state. The current hierarchical system seems, then, a hybrid form between centralization and fractionation, with a central bank controlling the liquidity and a private banking system controlling monetary creation, which amounts to an enormous power given to the banking system as a whole. Post-Keynesian economists often consider endogenous money creation through bank credit is necessary for growth and profit in the monetary production economy (Graziani 1990; Rochon 1999; Davanzatl et al. 2015). Therefore, most of them seem to defend the current hierarchical monetary system. In contrast, some types of ‘monetary populisms’ (the  Bitcoin and cryptocurrencies movement is one of these) criticize the oligopolistic power of banks, owing to issues such as moral hazard (­primarily exemplified by the speculative and risky behaviors before the 2008 crisis and the bail outs) and banks’ ability to capture regulations (and even, to constrain some states). In this context of increased multiform competition and innovations, this chapter examines the consequences of those digital innovations on the changing role of banks in the payments industry. After showing in the second section the driving role of banks in the first wave of digitalization of payments, we discuss in the third section the emergence of Bitcoin and cryptocurrencies in the aftermath of the 2008 crisis. The fourth section is dedicated to the entry of new competitors, with the provision of electronic payment solutions by Big Techs. The fifth section is devoted to the emergence of CBDCs, understood as  both a ­technical and a political response to these monetary contestations. The sixth section investigates from a balance sheet perspective the variety of practical ways to implement a CBDC, while section 7 addresses the debate about the subsequent evolution of the banking system from the ­perspective of a history of economic thought. Section 8 concludes.

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2.  BANKS AND EARLY ELECTRONIC PAYMENTS The now famous blockchain technology is undoubtedly a disruptive innovation, but it is just one innovation among many within a broader  movement  towards digitalizing payments. Without repeating the historical  discussion on the progressive dematerialization of monetary  instruments over the centuries, let us recall that the aim ­ of  achieving  a checkless/cashless society is as old as the emergence of computers. Bátiz-Lazo et al. (2014, 2016) convincingly show that debates around a checkless/cashless future emerged in the US (as well as in Western Europe) in the 1950s in the form of a ‘banker’s dream’. As technology progressively matured, electronic alternatives became cost-effective compared with managing manually a payment system relying massively on checks. The switch from check payments towards electronic payments was already a profound technical change. However, this did not challenge the banking industry; quite the opposite. At the end of the twentieth century, banks around the world provided their customers with homogenous electronic payment services, by relying on widely accepted debit/credit cards such as Visa and Mastercard. With those payment devices, each card is linked to a secret personal identification number (PIN) that allows customer to pay through a standardized technology, both at usual points of sale and on the Internet. As an industry, the banking sector united around a standard technical solution in order to expand and then protect its dominant position in the payment system. However, the management of means of payment  and  the  corresponding incomes (bank card charges and account management fees), represent only an infinitesimal part of the banks’ profits. Banks’ pivotal role in the payment system increased their structural power, their short-term liability (that is, sight deposits that are created through their credit operations) being the main form of money in modern  monetary systems (McLeay et al. 2014). While banks provide  customers with frictionless and safe electronic means of payments, central  banks, for their part, ensure the liquidity of the banking system  as  a  whole, acting as lender of last resort, and governments guarantee deposits. Supplying means of payment to economic actors, banking activity has been strongly regulated to avoid bank runs and to protect deposits. Therefore, banks’ dominant position in the payment industry has been reinforced both by the regulation and by their innovations in supplying the first generation of electronic payment services.

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3. DIGITAL LEDGER TECHNOLOGY AND THE EMERGENCE OF CRYPTOCURRENCIES The invention of Bitcoin relies on digital ledger technology (DLT). A DLT is a decentralized database that is replicated among all the networks’ computers. After transactions are validated, following a given consensus protocol, the information on the ledger is available to the whole blockchain network and a transaction cannot be hacked without enormous energy consumption. For Bitcoin, DLT was an interesting technical innovation as it allowed anonymous peer-to-peer (P2P) payments. Little public information is available about Satoshi Nakamoto, the inventor of Bitcoin and blockchain technology. It is commonly assumed that he or she was part of the cypherpunk crypto-anarchist community  that emerged in the 1990s. Before Bitcoin, this community was already interested in prototypes of anonymous and decentralized payment ­systems, such as B-money and BitGold. However, it is only with Nakamoto’s (2008) contribution that a decentralized and r­esistant-to-Sybil-attacks solution to the double-spending problem was made possible (De Filippi 2018). That is, the blockchain is a technical solution reached by some libertarian developers in their quest for designing a monetary system that would not rely on trusted third parties and allow for maximal electronic privacy. The quest for electronic privacy can be considered successful, even if Bitcoin does not allow for complete anonymity, but instead a form of pseudonymization in that users remain identified by the public key (Reid and Harrigan 2013). By contrast, the desire not to rely anymore on trusted third parties, does not correspond to the reality of how Bitcoin works (Vidan and Lehdonvirta 2018). In summary, we can say that the Bitcoin community gathered around ethical and political values consisting in a strong rejection of states and banks. However, this early ethical commitment was diluted as the community expanded, with a profit-motivated second wave of adopters. Paradoxically, this ethical dilution allowed for a broader demand for Bitcoin and, given the supply constraint, for some rapid surges in prices. This type of diffusion path among the general public makes Bitcoin an increasingly risky speculative asset, thus less and less a potential everydaylife currency, except in the event of failed states or hyperinflationnist conjunctures. Even with this worldwide growing speculative interest for it, the total ‘market capitalization’ (value) of Bitcoin amounts to less than 3.4 percent of the eurozone broad money supply at the time of writing (26 May 2022 calculation). Moreover, Bitcoin is now facing a crackdown in China, where most of the mining operations used to be carried out.1

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The diffusion of Bitcoin as a means of payment is limited for several reasons: (1) the lack of knowledge of non-specialists; (2) transactions fees  for small amounts of transactions and volatility of price; (3) the problems of hacking of some exchanges trading platforms; (4) for fiscal reasons, each transaction in crypto-assets can be taxed for capital gains; (5)  states can choose on their own territory the unit of account and the legal tender;  and  (6) there is no legal protection against the loss of value and no regulation, which are the very essence of Bitcoin, but can also be a reason for ­non-adoption by the general public of these payment systems. From a macroeconomic perspective, Bitcoin’s rule of money creation has been thought to mimic the Gold Standard by creating an artificial scarcity with a maximum monetary supply fixed at 21 million Bitcoins. It is old wine in a new bottle. In principle, this rigidity of the money supply implies a renunciation of money creation through credit. However, nothing can prevent a cryptocurrency platform, such as Coinbase, from making credit on their Bitcoins reserves, if the IOU given to the borrowers becomes accepted as a means of payment. This is what happened with gold and cash, and Bitcoin could become a new form of monetary base (Malherbe et al. 2019). After Bitcoin, many cryptocurrencies (currently more than 5000) with different characteristics have been created based on blockchain: for example, Litecoin is less energy consuming than Bitcoin; Z-Coin/FIRA is more anonymous than Bitcoin; Ethereum platform and ether allow the creation of smart contracts, of Initial Coin Offerings, decentralized organizations, decentralized finance and the Internet of things (IoT); stablecoins such as Tether have a fixed value in a fiat currency (dollar most of the time), and so on. These stablecoins have an important role in the crypto ecosystem: to avoid paying taxes on capital gains when selling against a fiat currency, many cryptocurrencies are sold against stablecoins. However, several concerns emerged about, for instance, Tether (its reserves not being entirely in cash or equivalent but also in commercial paper) and Terra Luna (unable to maintain the peg with USD and crashing totally).2 Most of those ‘cryptocurrencies’ are not complete moneys yet, but some important exceptions exist. Indeed, ether (the second largest cryptocurrency in market capitalization) is the means of payment although ‘gas’ is the unit of account (a subunit of ether) of the transaction fees of smart contracts on Ethereum platform. Therefore, the development of the Ethereum ecosystem, especially the creation of decentralized applications, is entirely dependent on its internal monetary system. With Ethereum also being a virtual machine built to be the new form of Internet, the scope

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of diffusion of ether could be considerable if the applications of the Ethereum platforms were adopted. In the event of effective adoption of one cryptocurrency as everyday life money, the role of banks and central banks would be different. However, it does not mean that they would necessarily disappear, contrary to what is usually assumed by the crypto-community: indeed, if the sovereign money was still different from the crypto, they could compete as means of payment, and so banks’ deposits would compete with the blockchain of the adopted cryptocurrency. The only way for a total substitution of crypto to sovereign money would be through a political choice institutionalizing Bitcoin, or ether or another cryptocurrency, as legal tender and a unit of account, and the obligation to back banks’ deposits to the crypto. In that instance, the role of the central bank would be minimal and the state would lose its monetary sovereignty (especially seignoriage and ability to set interests rates). However, cryptocurrencies have not yet substantially changed the structure of the payments industry, and still face the limits evoked previously to challenge banks. Moreover, the limited supply and the fractionation of the monetary system related to the multiplication of cryptocurrencies can be a source of deflationary pressures and liquidity problems.

4. THE EMERGENCE OF PAYMENT SERVICES PROVIDED BY BIG TECHS We now turn to the entrance of GAFAM and BATX in the payment industry. Big Tech companies have an extensive user network. Combined with their advanced technological skills, they developed new payment services. As an example, we can mention famous American Big Techs’ payment services, such as Amazon Pay, Google Pay and Apple Pay, and Chinese ones, such as Alipay and WeChat Pay, developed by Ant Group and Tencent, respectively. In addition to these advantages, Big Techs benefit from not being subject to the same regulatory framework as banks. However, we can see that payment services provided by Big Techs are sometimes distributed in collaboration with historical banks and, most of the time, suppose the existence of banking accounts. For instance, in the United States, the bank accounts offered by Google are opened with large partner banks such as Citigroup. These partnerships are a way for banks to reach extensive international networks. While they support the thesis of the invasion of Big Techs, these partnerships also confirm that banks are still the central players in the payment system (Bédu et al. 2021).

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In the credit segment, Big Techs are not in a position to compete with incumbent banks at this stage either, even though they would have an informational advantage regarding their potential borrowers (Stulz 2019). A bank’s credit supply is protected from competition from Big Techs by the regulatory authorities, with, for example, the European Central Bank not allowing Big Techs to benefit from banking licenses. Therefore,  banks’ monopoly is protected by regulations and regulatory authorities. More generally, the European policy concerning personal data protection  (such as GDPR)3 is an obstacle to the irruption of Big Tech players. At the time of writing, Big Techs can still not compete with the historic bank oligopoly. However, part of Big Techs’ activities in payment is developing entirely outside the banking sector, with little intention to develop banking subsidiaries (if we except Ant Group, the financial subsidiary of Alibaba). We should insist on the difference between the payment services already mentioned, which are backed by bank accounts, and the development of services that are voluntarily disconnected from them, such as the Libra/Diem4 project developed by Facebook relying on the blockchain technology. This stablecoin project would have been potentially more dangerous for banks, especially in the area of cross-border payments (where fees are very high) and in countries whose monetary sovereignty is already threatened. Nevertheless, authorities’ reactions have downgraded the initial ambition of Libra/Diem: the first version (Libra) would have been an international currency, stable compared with a portfolio and backed by a reserve of national currencies, which would have functioned similarly to a currency board. The initial Libra project could have strongly disrupted the banking system and central banking. However, after the reaction of central banks and monetary authorities, Facebook/Meta first changed and then gave up its project.5 The first change was moving from a multi-currency coin to a network of single-currency stablecoins in which each single-currency stablecoin issued (for example, Diem-$) would have been backed 100 percent by dollar-denominated reserves and short-term securities of the US government. A multi-currency coin (Libra Coin), also 100 percent backed by the reserve assets backing each single-currency stablecoin, would be available to settle transactions between single-currency stablecoins and for countries that do not have a single-currency stablecoin. A simplified balance sheet of the issuing institution (two single-currency and one multi-currency stablecoins) would have the structure shown in Table 3.1. In this situation, there would be no net money creation (the stablecoin issued being a digital substitute to fiat money) and, given the low-return assets of the issuing institution, this type of operation would generate little or no profit.

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Table 3.1  Simplified balance sheet of an institution issuing stablecoins Assets

Liabilities

Diem-$ Dollar-denominated reserves Dollar-denominated short-term assets

Stablecoin ‘Diem-$’

Diem-€ Euro-denominated reserves Euro-denominated short-term assets

Stablecoin ‘Diem-€’

Multi-currency stablecoin Dollar-denominated reserves Dollar-denominated short-term assets Euro-denominated reserves Euro-denominated short-term assets

Libra Coin

Source:  The authors.

In light of the recent developments in electronic payments, namely, an increased and multiform competition based on technical change (DLT, mobile P2P payments, contactless payments, and so on), central banks worldwide started to communicate about the role they could play.

5. CBDC AS A TECHNICAL AND POLITICAL RESPONSE On a global scale and despite certain national disparities, the decline in the use of cash and the evolution of users’ needs in respect of means of payment was not, until recently, a problem for banks and central banks. Banks provided customers with the first generation of electronic means of payment (credit/debit cards, online bank transfers, and so on) and have to rely on central money for interbank settlements. In this context, central banks can impose supervision as well as regulation to banks and implement monetary policy through them. We are now facing a second wave of digitalization, notably with the increasing demand for smartphone payments (partly met by Big Techs), which is challenging not only banks (as managers of the payment system)  but also central banks (as the top of the hierarchized monetary system).

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Central bank digital currencies are part of a technological upgrade of the monetary authorities that would allow users to benefit from a secure electronic payment method that could bypass intermediaries, such as banks and Big Techs. Central bank digital currencies might rely (or not) on DLT but are, by their very nature, politically antithetical to that of Bitcoin. In this perspective, we should also note the political aspects of this innovation. Central bank digital currencies are presented as a way to fight against both the structural power of banks, which have been facing public distrust since the 2008 crisis,6 and the rise of Big Techs, which can be seen as a threat to user’s privacy.7 In the context of the increasing power of GAFAM and BATX, challenging the sovereignty of states worldwide, public legislators impose barriers to these new entrants in order to maintain their traditional partnership with regulated banks in the area of payments. If Big Techs were to become the main (although unregulated) supplier of payment services, they might endanger financial stability (Padilla and de la Mano 2018) and gain a great deal of structural power. This threat over states’ monetary sovereignty and potential financial instability led public authorities to legislate and develop their digital mean of payment, as in China with the digital yuan aiming to provide an alternative to WeChat Pay and Alipay. Central bank digital currencies would not only be a response to Big Techs, however, but also to cryptos and, more precisely, to Bitcoin. First, from a Chinese perspective, Bitcoin mining represents a considerable consumption of energy that is not compatible with China’s carbon neutrality commitments. Second, for countries whose monetary sovereignty is already threatened, such as Ecuador, which is a dollar-based economy,8 a CBDC could help promote financial inclusion, prevent the drain of foreign reserves caused by the conversion of xenodollars into US dollar (USD) banknotes, as well as hinder the spread of Bitcoins and/or Diems, if the general public accepts the CBDC. Surprisingly, another dollarized country, Salvador, is taking the opposite direction; President Bukele proposed making Bitcoin legal tender, mainly to bypass financial intermediaries for remittances and enhance financial inclusion. In the cross-border payments area, traditional banks are not competitive. A survey showed that 92 percent of Salvadorians do not agree with making the acceptance of Bitcoin mandatory and that 82.5 percent of them do not want to receive bitcoin remittances.9 Moreover, Salvador started to use its reserves to buy Bitcoins and is now facing difficulties in rolling its debt due to the over 50 percent drop in the value of Bitcoin between November 2021 and late May 2022.10

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Central bank digital currencies can thus be seen as a way to allow financial inclusion, less drain of foreign reserves, and cheap international transfers without putting at risk the general public, as with cryptos. Indeed, we can see that central banks worldwide are developing, together with the Bank for International Settlements, the Multiple CBDC (mCBDC) Bridge (Auer et al. 2021). This project would probably rely on DLT and allow for instant cross-border payments in multiple currencies among multiple jurisdictions.

6.  VARIETY OF POSSIBLE DESIGNS FOR CBDCS The emergence of CBDC might profoundly change, depending on its design, the payment services industry and banks’ activities. Following the trend of the recent literature on CBDCs, we can distinguish three main possible designs (direct, hybrid and indirect), depending on ‘the structure of legal claims and the record kept by the central bank’ (Auer and Boehme 2020, p. 88). In the direct architecture, the central bank would handle payments without any intermediary involved in the process, this type of CBDC being a direct claim on the central bank itself. Considering that private intermediaries might be more effective in handling payments, two other options exist. In the hybrid architecture, the CBDC is still a direct claim on the central bank but private payment service providers handle retail payments. The final option is the indirect CBDC (ICBDC), representing a claim on an intermediary mandated to back it with ‘actual’ CBDC at the central bank. For each of those designs, we could further distinguish between accountbased CBDC, that is, ‘a type of CBDC tied to an identification scheme, such that all users need to identify themselves to access it’ and token-based CBDC, that is, ‘a  type of CBDC secured via passwords such as digital signatures that can be accessed anonymously’ (BIS 2021, pp. 91–2). At this stage, we study the example where the central bank and banks are passive and users change their portfolio allocation for a given money supply. In Table 3.2, we first look at the consequences for banks of implementing of a direct CBDC in a situation where these accounts are offered free of charge by the central bank and do not generate a return (that is, considering that these accounts are a substitute for sight deposits offered by banks). Banks’ balance sheet will be impacted on the liabilities side if users prefer to use their accounts at the central bank instead of sight deposits. A drain of deposits of amount X, if it reduces banks’ reserve requirements by amount rX on the asset side (with r being the reserve ratio), would require them to balance their balance sheet by refinancing at the central bank by an amount (1–r)X.

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Table 3.2 Consequences on balance sheets of implementing a direct CBDC Change in assets

Change in liabilities Central bank

REFI (+(1–r)X)

Reserves (–rX) CBDC (+X) Banks

Reserves (–rX)

Sight deposits (–X) REFI (+(1–r)X)

An alternative to refinancing would be for banks to pay interest on sight deposits. If refinancing is done at a positive interest rate, both options will increase the cost of the liabilities for the banks. This would reduce their profitability by reducing the interest rate differential between assets and liabilities. Moreover, if we consider the situation where an mCBDC bridge allows for direct cross-border payments, the banks would also lose part of their profits made in the form of commissions, putting their operating model deeply into question. One way for banks to maintain their profitability would then be to increase the return on their assets by taking more risks. The implementation of a hybrid CBDC would have similar consequences for the balance sheet, even if private payment services providers would free the central bank from implementing retail payments. However, unlike with the direct CBDC, those payment services might not be free of charge. The substitution of CBDC for sight deposits might be of a smaller magnitude. The implementation of an indirect CBDC (see Table 3.3) would be similar to the current hierarchical system, the difference being that authorized intermediaries would be ‘CBDC banks’ required to apply a 100 percent reserve ratio. Both with an indirect CBDC and with the current system, the central bank would only deal with wholesale payments between CBDC banks. An indirect CBDC architecture would be a scenario that would be more likely to maintain the oligopolistic structure of the banking sector and its dominant position in the payment industry, with traditional banks creating their own CBDC bank.11 When reading BIS (2021), for instance,12 it is not evident what would be the difference on the liability side of the central bank balance sheet between ‘Reserves’, that is, electronic central money (used for interbank settlements), and ‘CBDC’, which is also electronic central money (used for retail payment and inter-CBDC banks’ settlements). These two items could

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Table 3.3 Consequences on balance sheets of implementing an indirect CBDC Change in assets

Change in liabilities Central bank

REFI (+(1–r)X)

Reserves (–rX) CBDC (+X) Banks

Reserves (–rX)

Sight deposits (–X) REFI (+(1–r)X) CBDC banks

CBDC (+X)

ICBDC (+X)

simply be merged, with Reserves increasing by a total amount of (1–r)X and by renaming the ‘CBDC’ on the asset side of CBDC banks’ ‘Reserves’.13 In addition to the substitution effects between bank deposits and CBDCs, the latter could be issued at the initiative of the central bank. If  we now consider an active central bank, it could credit users’ accounts directly with CBDCs. Beyond being a substitute for bank deposits, CBDCs can therefore appear as a monetary policy tool that could help to reach an inflation target but also an employment target (Batsaikhan et al. 2021; Martin et al. 2021). Leaving aside the substitution effect mentioned previously, the injection of CBDCs would inflate the central bank’s balance sheet as well as the nominal wealth of non-financial agents. Central bank digital currency accounts would increase on the liability side, while several accountingequivalent options can be used to balance this type of operation on the central bank’s balance sheet: on the liability side the central bank could record a reduction of central bank equity (an option that could lead to negative equity for central banks14), while on the asset side the central bank could record a zero-coupon perpetual bond or a token (nation’s monetary equity) (Dyson et al. 2014; Huber 2017).

7.  OLD WINE IN NEW BOTTLES? From this perspective, it appears that a CBDC system is similar to Tobin’s (1985, 1987) ‘deposited currency’ proposal. Considering that ‘deposit insurance is a delegation to private enterprises of the government’s sovereign right to coin money’ and that banks were ‘abusing’ it, Tobin (1987, p. 12)

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argues that it is necessary to ‘provide a kind of deposit money so safe that it does not have to be insured’. Interestingly, Tobin had proposed two ways to implement his ‘deposited currency’ proposal, which recall the distinction used in modern literature between direct and indirect CBDCs. Tobin (1985, p. 25) considered that one way to provide deposited currency would be to ‘allow individuals to hold deposit accounts in the central bank, or in branches of it established for the purpose’ (that is, implementing a direct CBDC) but that ‘given ­current sentiment for privatization’, a ‘more likely alternative’ would be that ‘depository institution[s] entitled to hold deposits at the central bank, … offer deposited-currency accounts to customers’ (that is, implementing an ICBDC through CBDC banks that is 100 percent backed with reserves). By going back even further in the history of economic thought, Tobin’s deposited currency can be seen as a resurgence of the ‘100 percent money’ scheme, advocated by Irving Fisher and Lauchlin Currie in the 1930s (Demeulemeester 2019; Malherbe 2021). Generally, we can see that those proposals (‘100 percent money’, deposited currency and CBDCs) emerged in a period consecutive to financial troubles in which banks were accused of having overstepped their prerogatives and endangered the payment system as a whole. These proposals share a desire to make a clear distinction between money and credit, an intuition that can be traced back to Ricardo (Lainà 2015). As well as in the 1930s, post-crisis periods can significantly change the banking model and the structure of the banking sector. Minksy (1994, pp. 20–21), at a time when the banking structure inherited from Roosevelt’s 1930s reforms was crumbling, argued that the monetary and banking system has to perform two functions, namely, ‘the provision of a safe and secure means of payments, and the capital development of the economy’. ‘100 percent money’ in the 1930s, deposited currency in the 1980s and CBDCs in recent years, share a strong interest in separating those two functions, ensuring that they are performed by two distinct types of institutions. With the emergence of smartphones and DLT, the technical way to implement these proposals changed, but, by its very nature, CBDC is a re-emergence of older projects. We could then consider it to be, indeed, old wine in new bottles.

8. CONCLUSION Bitcoin has been both a technological innovation and a transformative political project. While the latter has not been completed, the innovation of DLT has intensified the debate on the digitization of payments and

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their decentralization. However, the development of Bitcoin is a way to recreate a Gold Standard-like regime, although the multiplication of cryptocurrencies could recreate the traditional problems of fractionation related to monetary competitions, which can limit the adoption of cryptocurrencies for everyday transactions, lead to a tightening of regulation and then maintain the roles of banks and central banks. More so than cryptocurrencies, Big Techs seem to be able to destabilize the structure of payment systems, but they also show a ­willingness to comply with authorities instead of strongly disrupting the payment system. By seeking to counter the rise of the GAFAMs and cryptocurrencies by implementing CBDCs, central banks might thus change the banks’ business model as well as the structure of the banking system, creating a separation between institutions in charge of providing a safe means of payment (for example, narrow/CBDC banks as regards ICBDC or central bank for direct CBDC), on the one hand, and institutions in charge of financing the capital development of the economy and whose liabilities are not money (for example, investment banks or mutual funds), on the other. Minsky (1992, p. 37) considered that this type of proposal, by focusing primarily on the first function (the provision of a secure means of payment), can lead to ‘losing sight of the main object’, which in his view is the financing of the activity (Minsky 1994, p. 34). However, it appears possible to implement these without losing sight of this aspect with, for instance, the central bank taking part in the direct financing of the transition towards a low-carbon economy and/or boosting aggregate demand through households’ CBDC accounts. Moreover, central banks such as the Bank of England15 and the Bank of Canada,16 communicate on CBDC not only as a new means of payment, but also as a new tool for monetary policy allowing for a more direct implementation and transmission of monetary policy.17 What is at stake in the background is therefore much more than a technological upgrade, it is a fundamental debate on centralization versus decentralization of the monetary system and its consequences on the role, power and structure of banks. The substitution of the central bank or private banks by an algorithm (digital ledger or other) is technically possible, especially if we consider that central bank interventions should be rules-based and that the mandate of the central bank could be coded in the algorithm. It is possible to design very different cryptocurrencies than Bitcoin, for example, with a money supply that is elastic to demand and that would automatize the set of interest rates depending on inflation and employment objectives. This ‘automatic’ monetary policy could be upgraded by artificial intelligence.

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However, the total suppression of trusted third parties is a utopia: a state is always necessary to regulate social conflicts, to look for human responsibilities in crises and to enforce some legal tender. Moreover, if blockchain eliminates some trusted third parties, it does not eliminate politics (Malherbe et al. 2019), and it gives the power to another type of technocrat, the coders/developers or digital companies able to develop  the  algorithms (for example, Facebook for Diem or IOHK for Cardano/Ada). Therefore, CBDCs are a way to maintain the political order and to keep the hierarchical banking system alive at the cost of strengthening the control of the central bank over banks. Considering the distrust faced by banks, such an evolution might be considered legitimate. However, it leaves open the question of the democratic governance of central banks and the design of their monetary policy, a debate partly reinforced by the development of cryptocurrencies. We could say that CBDC is neither  an  unfeasible option nor a panacea, just one possible evolution of the payment system among many others. This, in the end, is a political question.

NOTES  1. https://www.reuters.com/technology/cryptocurrencies-tumble-amid-china-crackdownbitcoin-miners-2021-06-21/ (accessed 14 July 2021).   2. This leads Janet Yellen to question the regulation of stablecoins, but also Vitalik Buterin (founder of Ethereum) to ask for insurance deposits for stablecoin holders, treating them as bank deposit holders. This is ironic in the sense that cryptocurrencies were invented to remove trusted third party and pretended to disrupt the old rules through blockchain and a libertarian philosophy.   3. General Data Protection Regulation. See https://ec.europa.eu/info/law/law-topic/dataprotection_en (accessed 14 July 2021).   4. https://www.diem.com/en-us/white-paper/#cover-letter (accessed 14 July 2021).   5. After abandoning the Diem project, Meta is now developing its metaverse project with a dedicated currency, which would mimic the currency in video games.   6. See Larue et al. (2020).   7. Following the results of a public consultation made by the European Central Bank (ECB) (8000 respondents), privacy is the crucial feature of a digital euro (European Central Bank 2021). In its previous report (European Central Bank 2020), the privacy issue is addressed and, in a recent interview, Fabio Panetta, member of the Executive Board of the ECB, said that privacy would be better protected with a digital euro since, unlike private companies, the ECB has ‘no commercial interest in storing, managing or monetising the data of users’. See Birch et al. (2021) for a discussion on Big Techs’ measurement, governance and valuation of digital personal data. https://www.ecb.europa.eu/ press/inter/date/2021/html/ecb.in210620~c8acf4bc2b.en.html (accessed 14 July 2021).   8. Ecuador has been a pioneer country in CBDC, with the Dinero Electronico operated by the Central Bank of Ecuador between 2014 and 2018. See Arauz et al. (2021).  9. https://camarasal.com/dudas-y-preocupacion-entre-empresarios-y-consumidores-antecirculacion-del-bitcoin-en-el-pais/ (accessed 14 July 2021).

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10. https://elpais.com/america/economia/2022-05-09/el-mercado-augura-un-default-de-els​a​l​vador-por-su-matrimonio-con-el-bitcoin.html (accessed 25 May 2022). 11. In a hybrid architecture, the private payments service providers might also be subsidiaries of traditional banks. However, in both cases, the already existing bank and the newly created CBDC bank (or payment services provider) would have a clearly separated balance sheet. 12. See graph 4 (BIS 2021, p. 10). 13. This interpretation is consistent with Meaning et al. (2018) from the Bank of England. 14. In a report published by the ECB in 2016, it is stated that ‘central banks are protected from insolvency due to their ability to create money and can therefore operate with negative equity’ (Bunea et al. 2016, p. 14). The Bank for International Settlements (BIS) also goes in this direction: ‘central banks could lose enough money to drive their equity negative, and still continue to function completely successfully’ (Archer and ­Moser-Boehm 2013, p. 1). Moreover, several central banks have durably operated in negative equity: ‘At the end of 2010, these central banks [Chile, the Czech Republic, Israel and Mexico] had equity levels (relative to total assets) of –23%, –17%, –5% and  –6% respectively, and these were not one-off instances of negative equity. Each had experienced negative equity over most of the preceding nine years’ (Archer and ­Moser-Boehm 2013, p. 60). 15. See Meaning et al. (2018). 16. See Davoodalhosseini et al. (2020). 17. See also Dyson and Hodgson (2016).

REFERENCES Aglietta, M. and A. Orléan (2002), La Monnaie Entre Violence et Confiance, Paris: Odile Jacob. Arauz, A., R. Garratt and D. Ramos (2021), ‘Dinero Electrónico: the rise and fall of Ecuador’s central bank digital currency’, Latin American Journal of Central Banking, 2 (2), 1–10. Archer, D. and P. Moser-Boehm (2013), ‘Central bank finances’, BIS Paper No. 71, Bank for International Settlements, Basel. Auer, R. and R. Boehme (2020), ‘The technology of retail central bank digital currency’, BIS Quarterly Review, March. Auer, R., P. Haene and H. Holden (2021), ‘Multi-CBDC arrangements and the future of cross-border payments’, BIS Paper No. 115, Bank for International Settlements, Basel. Bank for International Settlements (BIS) (2021), Annual Economic Report 2021, June, Bank for International Settlements, Basel. Bátiz-Lazo, B., T. Haigh and D. Stearns (2014), ‘How the future shaped the past: the case of the cashless society’, Enterprise and Society, 15 (1), 103–31. Bátiz-Lazo, B., T. Haigh and D. Stearns (2016), ‘Origins of the modern concept of a cashless society, 1950s–1970s’, in B. Bátiz-Lazo and L. Efthymiou (eds), The Book of Payments. Historical and Contemporary Views on the Cashless Society, London: Palgrave Macmillan, pp. 95–106. Batsaikhan, U., S. Jourdan and B. Massenot (2021), ‘Summary of research on helicopter money’, 25 June, accessed 14 July 2021 at http://www.positivemoney.eu/ wp-content/uploads/2021/07/litterature-review-helicopter-money-June2021.pdf. Bédu, N., Granier, C., Montalban, M. and L. Malherbe (2021), ‘Les banques françaises face à l’émergence des FinTechs de paiement et de crédit:

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dynamique réglementaire et changement technique’, submitted to Revue d’Economie Industrielle. Birch, K., D.T. Cochrane and C. Ward (2021), ‘Data as asset? The measurement, governance, and valuation of digital personal data by Big Tech’, Big Data & Society, 8 (1), 1–15. Boar, C., H. Holden and A. Wadsworth (2020), ‘Impending arrival – a sequel to the survey on central bank digital currency’, BIS Paper No. 107, Bank for International Settlements, Basel. Bunea, D., P. Karakitsos, N. Merriman and W. Studener (2016), ‘Profit distribution and loss coverage rules for central banks’, Occasional Paper No. 196/2016, European Central Bank, Frankfurt. Davanzatl, G.F., A. Pacella and R. Patalano (2015), ‘The Keynesian features of Graziani’s monetary theory of production and some unresolved issues’, Review of Political Economy, 27 (4), 565–84. Davoodalhosseini, M., F. Rivadeneyra and Y. Zhu (2020), ‘CBDC and monetary policy’, Bank of Canada Staff Analytical Note 2020-4, Bank of Canada, Ottawa. De Filippi, P. (2018), Blockchain et Cryptomonnaies, Paris: Presses Universitaires de France. Demeulemeester, S. (2019), ‘La proposition 100% monnaie des années 1930: clarification conceptuelle et analyse théorique’, PhD thesis, École Normale Supérieure de Lyon, Lyon. Dyson, B. and G. Hodgson (2016), Digital Cash: Why Central Banks Should Start Issuing Electronic Money, London: Positive Money. Dyson, B., A. Jackson and G. Hodgson (2014), Switching to a Full Sovereign Monetary System, London: Positive Money. European Central Bank (2020), Report on a Digital Euro, October, European Central Bank, Frankfurt. European Central Bank (2021), Eurosystem Report on the Public Consultation on a Digital Euro, April, European Central Bank, Frankfurt. Graziani, A. (1990), ‘The theory of the monetary circuit’, Économies et Sociétés, 24 (6), 7–36. Huber, J. (2017), Sovereign Money. Beyond Reserve Banking, London: Palgrave Macmillan. Lainà, P. (2015), ‘Proposals for full-reserve banking: a historical survey from David Ricardo to Martin Wolf’, Economic Thought, 4 (2), 1–19. Larue, L., C. Fontan and J. Sandberg (2020), ‘The promises and perils of central bank digital currencies’, Revue de la régulation, 28 (2), accessed 14 July 2021 at http://journals.openedition.org/regulation/18018. Malherbe, L. (2021), ‘Crises et contestations du pouvoir d’émission monétaire des banques: le cas islandais’, PhD thesis, University of Bordeaux, Bordeaux. Malherbe, L., M. Montalban, C. Granier and N. Bédu (2019), ‘Cryptocurrencies and blockchain: opportunities and limits of a new monetary regime’, International Journal of Political Economy, 48 (2), 127–52. Martin, P., E. Monnet, X. Ragot, T. Renault and B. Savatier (2021), ‘Helicopter money as a last resort contingent policy’, 5 July, Centre for Economic Policy Research, London, accessed 14 July 2021 at https://voxeu.org/article/ helicopter-money-last-resort-contingent-policy. McLeay, M., A. Radia and R. Thomas (2014), ‘Money creation in the modern economy’, Bank of England Quarterly Bulletin, 54 (1), 14–27.

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Meaning, J., J. Barker, E. Clayton and B. Dyson (2018), ‘Broadening narrow money: monetary policy with a central bank digital currency’, Bank of England Staff Working Paper No. 724, Bank of England, London. Minsky, H. (1992), ‘Reconstituting the United States’ financial structure: some fundamental issues’, Working Paper No. 69, Levy Economics Institute of Bard College, Annandale-on-Hudson, NY. Minsky, H. (1994), ‘Financial instability and the decline (?) of banking: public policy implications’, Working Paper No. 127, Levy Economics Institute of Bard College, Annandale-on-Hudson, NY. Padilla, J. and M. de la Mano (2018), ‘Big Tech banking’, accessed 14 July 2021 at https://ssrn.com/abstract=3294723. Reid, F. and M. Harrigan (2013), ‘An analysis of anonymity in the Bitcoin system’, in Y. Altshuler, Y. Elovici, A.B. Cremers, N. Aharony and A. Pentland  (eds),  Security and Privacy in Social Networks, New York: Springer, pp. 197–223. Rochon, L.-P. (1999), ‘The creation and circulation of endogenous money: a circuit dynamique approach’, Journal of Economic Issues, 33 (1), 1–21. Stulz, R. (2019), ‘FinTech, BigTech, and the future of banks’, Journal of Applied Corporate Finance, 31 (4), 86–97. Tobin, J. (1985), ‘Financial innovation and deregulation in perspective’, keynote paper presented at the Second International Conference of the Institute for Monetary and Economic Studies, 29–31 May, Bank of Japan, Tokyo. Tobin, J. (1987), ‘A case for preserving regulatory distinctions’, Challenge, 30 (5), 10–17. Vidan, G. and V. Lehdonvirta (2019), ‘Mine the gap: Bitcoin and the maintenance of trustlessness’, New Media & Society, 21 (1), 42–59.

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4. Is CBDC strengthening the monetary transmission mechanism? Pál Péter Kolozsi, Kristóf Lehmann and Zoltán Szalai1 1. INTRODUCTION For a long time, mainstream thinking failed to acknowledge that credit institutions are not only financial intermediaries passing on savings to investors, but institutions responsible for the fundamental part of money creation. However, the landscape has changed significantly during the last couple of years and parallel with that the discussion about central bank digital currencies (CBDCs) has gained an impressive momentum (Mancini-Griffoli et al. 2018; Bofinger and Haas 2020). On the theoretical side, the banking and financial crisis of 2007–08 focused attention on the role of banks in the economy and in money creation, with the conclusion that the financial inter-mediation theory is not an accurate description of reality as banks create the entire loan amount ‘out of thin air’. In the current financial system, money is created almost exclusively in the commercial banking sector, as central banks influence the money creation process only indirectly, through monetary policy and, increasingly, macroprudential regulation. If true, banks and the financial system cannot be seen as simple and neutral intermediaries but as more active players in economic relations – including their role in money creation and the circulation of money (Werner 2014; Ábel et al. 2016). On the practical side, nowadays, the financial system needs to tackle several technological, economic, social and demographic challenges. Our economic and social environment and perspective is constantly and substantially changing for several reasons (demographic trends, transformations affecting the information society, climate change and cultural globalization) which exerts increasing pressure on the structure of society (Harari 2018). This rapidly and fundamentally changing world also  includes the proliferation of digitalization, which is a significant challenge for the financial system and money regarding both its form and substance. 94

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Central banks are very familiar with various ways and means of payments that are more convenient, safe and less expensive than using banknotes and currencies. Monetary history is replete with innovations in the means of payments and, with the advent of digital age, it seems that a new wave of innovation is approaching. It is to be remembered also, that electronic central bank money is nothing new in the interbank market, where the central bank conducts operations with a selected group of financial institutions, mainly commercial banks. In this chapter we offer a short overview of the attitude of central banks towards a possible introduction of digital central bank currency for the non-bank private sector, more specifically in the retail segment, and how it might alter the ways the central banks could affect the economy in preferred directions towards their goals, that is, the transmission mechanism of the monetary policy.

2.  TRUST, MONEY AND CBDCS Without social trust no asset can function as money, and this has to be taken into consideration while thinking about the possibilities of CBDCs. There is one commonality in all definitions of money, that it cannot exist without social trust. Money can be viewed, inter alia, as collective fiction (Harari 2018), debt (Borio 2018), technology (Levine 2019), a share of the net present value of the assets produced by society (Bossone and Costa 2018) or a social convention (Carstens 2018). All these presuppose that trust exists on the part of the members of the community. Historical experience also shows that although the functions of money can be fulfilled by a variety of means, successful currencies have always been characterized by broad acceptance, adequate supply and stability ensured by institutions. The value of money is based on the accepting party being able to trust that others will also accept its money. Maintaining this trust constitutes the primary task and social function of the system of financial institutions. The system of institutions ensuring flow of payments, the value of money and the long-term preservation of price stability and financial stability is the prerequisite for trust in money. Money can also be understood as an implicit contract concluded between the individual and the given community, according to which the individual can have access to money under a previously determined mechanism, and society guarantees that this asset (the money) will be exchangeable for value in the future too. In this regard money is a commitment, that is, debt undertaken by society towards the individual. If money is debt (Graeber 2011; Borio 2018), then the debtor (society) bears obligations, such as the appropriate operation of the financial system, which is therefore the state’s

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responsibility. This applies to deposit money and to central bank money (cash), as the latter is issued by the state representing society. The state has an outstanding role and significance in the current financial system, as ultimately one of the state’s important functions is to draw up and ensure compliance with the implicit contract mentioned previously,  and to set up the necessary institutional framework. It is also important to create and maintain trust in particular non-state actors of the financial system. (Kolozsi 2017).

3. CURRENT CHALLENGES FOR CENTRAL BANKS Money appears more and more in digital form. However, the recent developments in digital revolution are pushing the limits of the current financial system and seek to fulfil certain functions of money. This has changed considerably, as it is mostly the financial infrastructure based on private-sector actors and using digital solutions that faces challenges, for two reasons: ● ●

The proliferation of digitalization may crowd out cash from transactions, so there will be no state-issued money in the financial system. A change in content may also occur, as increasing numbers of private digital money substitutes appear that are not issued or backed by the state, with all its economic and social risks.

As regards the form of money, in digitally advanced countries the use of cash and thus its macroeconomic significance is on a declining path. In  addition, a turnaround in substance may also be experienced owing to the digitalization of money having taken shape in the appearance of privately issued electronic money or cryptocurrencies. Despite not completely fulfilling the functions of money, this threatens to fundamentally question the current financial system. Although with digital money transfer services it is often ‘classic’ deposit money that switches hands, therefore ultimately payments are backed by more traditional bank instruments, privately issued cryptocurrencies have also appeared,2 without any collateral. The use of electronic deposit money is spreading continuously even in the remotest geographical locations and in large swathes of society. Technology giants3 also appear in the market for digital currencies. The  most prominent example of this is Libra, based on Facebook’s network and a wide range of companies, which claimed the right to be

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the new global currency in the summer of 2019. (For more on the concept see Levine 2019 and Libra Association Members 2019.) In Asia, the payment service of Alipay is widely used, and Amazon has also become able to manage supplier credit flexibly, in effect disintermediating small  and medium-sized enterprise (SME) loans from banks (Frost et al. 2019) and sufficiently replacing the working capital lending business for companies that are suited to this. However, the appearance of the technology giants in payments entails considerable risks, owing to the widespread nature and popularity of these firms: consumer confidence is high, while consumer protection, privacy, money laundering and financial stability issues are not resolved.4 Regulators often lag behind at the inception of ambitious plans. Moreover, a key threat of digitalized finance is cyber risk, which has had futurists, sociologists and military experts interested since the advent of the Internet. From phishing to cyber manipulation to attacks on digital banks, payment systems and central banks (for example, in Bangladesh in 2016 and in India in 2018), the near future holds numerous risks from unexplored sources (Geopolitika Közhasznú Alapítvány 2016). The coronavirus pandemic strengthens the existing trends. COVID-19 speeds up digitalization of payments and adds new motivations for central banks to think about digital solutions. A Bank for International Settlements (BIS) survey indicates that ‘central banks try to strike a balance between urgency and caution – leaning somewhat more to the side of caution’ (BIS 2021, p. 15). The survey summarizes the key trends: ● ●

●

About two-thirds of central banks indicated that the crisis has not changed their priority or preference for issuing a CBDC. For those central banks that have altered their stance on CBDC owing to the COVID-19 crisis, main reasons are the goal of enabling access to central bank money during times of emergency and the use of a CBDC as a potential complement to cash and in-person payment methods when social distancing is required. The notion of using CBDC as a means of government-to-person payment, notably direct fiscal assistance or stimulus to households and small businesses, is also widely shared.

The COVID-19 crisis puts an immense pressure on economic policy and within it on central banks in keeping the economy alive and stimulating it. It is a clear emergency when the ability to move forward with new solutions not previously available is rising, as the cost of non-intervention is so high that the resistance against radical solutions with potentially high social or other costs is declining.

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4.  THE THREAT OF DIGITAL DOLLARIZATION The digitalization of the economy and technological innovations are fuelling interest in the possible issuance of a digital currency. Central banks are the natural candidates for issuing a digital currency as citizens place the most confidence in digital money issued by their domestic monetary authority (ECB 2020). A digital currency could be issued for several ­ reasons, including to support the digitalization of the economy and the strategic independence of the given state; in response to a significant decline in the role of cash as a means of payment, as a new monetary policy transmission channel, to mitigate risks to the normal provision of payment services, to foster the international role of the currency in question, to support improvements in the overall costs and ecological footprint of the monetary and payment systems, and if there is significant potential for foreign CBDCs or private digital payments to become widely used in the given country (ECB 2020). Let’s focus on the latter, the issue of monetary sovereignty. It can be considered as the most fundamental challenge. In our modern monetary system, more stable, trusted and widely used currencies can displace the national currencies of countries with weaker fundamentals (dollarization). By analogy with the concept of classical dollarization, we can speak of digital dollarization if a global, electronic private money crowds out the national currency. Based on experience to date, the current cryptocurrencies have only a very limited potential to jeopardize the role of national currencies. However, a stable digital currency, combined with a large available user base, can already pose a serious threat to traditional national currencies and monetary sovereignty. Digital dollarization is increasingly a real challenge not only for central banks, but also for the society as a whole; owing to technological advances, the widespread use of technology currencies by Big Tech companies, that is, digital dollarization, may currently pose the greatest threat to monetary sovereignty. The state may lose its basic monetary capabilities, such as the ability to generate money, pursue an independent exchange rate policy and pursue an independent interest rate policy. In modern financial systems, monetary sovereignty is always limited in some respects, as the privilege of creating money is not fully enjoyed by even a state that issues its own money. One of the potential tools for strengthening monetary sovereignty could be the development and introduction of digital central bank money. There may be several solutions to strengthen sovereignty through regulation or strengthening the legal framework (Mancini-Griffoli et al. 2018). Also, the concept of digital central bank money, if properly designed,

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can protect a country’s monetary sovereignty from the above challenges. Digital central bank money would be owed to the state in the same way as cash, and its issuance would be the responsibility of the monetary authority, the central bank. With sufficient popularity and widespread use, states would thus be less reliant on the banking system’s willingness to lend and its risk appetite at critical moments for the economy when production capacity utilization is low or in need of renewal. In addition, the overheated lending activity of the pro-cyclical banking system could be kept under control. Reserve pressures from international institutions can also be reduced if digitally  spreading and stable nation-state money could be integrated into a single digital reserve basket. Equipped with the challenge of the Big Tech companies, the state, armed with this efficient digital  alternative, could  even ensure the  establishment  of convertibility by constitutional  means, or even  require the coverage of  technology currencies in the nation-state territory with sovereign foreign currency,  which  would  successfully preserve its sovereignty, at least in monetary terms.

5. CHANGING ATTITUDE OF CENTRAL BANKS TOWARDS DIGITAL CENTRAL BANK CURRENCY Central bankers followed the evolving crypto-asset market, but they were not very active in public discussion until recently. According to a 2018 survey by the International Monetary Fund, among the 15 surveyed central banks, none intended issuing digital currency (ManciniGrifolli et al. 2018). They contemplated the pros and cons of issuing a digital currency, but the focus was not primarily a potential improvement of monetary policy transmission. A typical proposal was that central banks regulate privately issued digital products as if they were just a digital version of other traditional financial assets. Benoît Cœuré, former member of the executive board of the European Central Bank (ECB), ­currently the Head of the BIS Innovation Hub, responsible for the coordination of central bank’s activity in the field of central bank digital currency, proposed to apply the level playing field approach: ‘regulatory answers should be internationally consistent and the principle of “same business, same risks, same rules” should be rigorously applied’ (Cœuré 2019). However, after the announcement by the Facebook-led consortium’s intention to introduce their new private ‘currency’ or ‘stable coin’, and followed by increased public interest, central banks accelerated their activities

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Central bank digital currency: (worldwide)

120 100 80 60 40 20

2021-06

2021-02

2020-10

2020-06

2020-02

2019-10

2019-06

2019-02

2018-10

2018-06

2018-02

2017-10

2017-06

2017-02

2016-10

2016-06

2016-02

2015-10

2015-06

0

Month Note:  Index = 100 at maximum. Source:  ECB; Google Trends: global search for central bank digital currency (all categories) before and after the announcement of Libra in mid-2019.

Figure 4.1  Interest in CBDC increased after Libra and the pandemic in relation to digital central bank money (Cœuré 2019) (see Figure 4.1). Communications about the rationale for a potential introduction of their own digital currencies have changed. Some referred to the potential loss for the population with the disappearance of cash (Riksbank 2017), others were afraid of social exclusion by digitization and so on. The Facebook-led consortium announced its intention to introduce digital private currency in mid-2019. 5.1 Accepting and Legitimacy of a Currency: Central Bank Digital Currencies from the Traditional and Post-Keynesian Angle In the mainstream theory that prevailed before the great financial crisis of 2007–08, money arises from market transactions between equal, freely contracting agents aimed at overcoming the hurdle of the need of ‘double coincidence’. It can be anything, whatever convenience happens to select in practice. In modern times, money can be a valueless token, or even a digital entry in the bank’s ledger. Central banks must ensure that agents have sufficient money for economic transactions and money savings, but not more. Thus, temporary shocks aside, instability of the price level is the consequence of erroneous central bank policy.

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This is a perfect intellectual justification for introducing digital private currencies, except that it does not leave room for central banks! These instruments are cheap and convenient to use even in cross-border transactions. The underlying technology provides the means for decentralized control over issuing the money. These are initiated by private agents regarding the need for horizontal transactions, thus it is hard to say that these are useless (Dow 2018). The technology in principle is suitable for securing artificial scarcity to ensure the value of the otherwise valueless digital entries. As several observers noted, these assets are just the latest technological embodiments of the monetarist advice for replacing discretionary monetary policy with a monetary policy rule à la Milton Friedman (Friedman 1969). Thus, based on the mainstream theory, the main arguments against private digital monies could only be non-monetary considerations, for example, technology companies may collect valuable and potentially sensitive data and use these in their favour and to the detriment of the users. This fear is certainly valid, but probably insufficient to persuade a sceptical audience. Others note the enormous energy requirement of the underlying technology, contrasting it with trusted public institutions which are less polluting (Andolfatto 2018). However, a more environmentally friendly mechanism could be adopted to ensure artificial scarcity than currently used in Bitcoin’s mining. Post-Keynesian theories provide more substantial arguments against private digital currencies and in favour of central bank digital currencies. All streams share the endogenous view of money creation in the economy, which is characterized by non-ergodic processes, thus agents face fundamental uncertainty. Thus, agents seek to always be liquid to avoid costly insolvencies and to ensure economic survival. Decisions are  based on imperfect information as full information is not available to anyone (Kregel 1998). Since the main motive for production is monetary profit, rather than direct fulfilment of (consumption) needs, the simple model of ‘well behaving’ demand and supply curves is not applicable. Price increase does not always diminish demand; instead it may generate more demand by fuelling expectations of further price increases. Thus, financial markets (and the economy more broadly) tend to overheat and overcool or even panic, rather than imposing rational discipline on themselves and on the government as in the models involving ‘bond vigilantes’ (Aglietta 2005). Money and central banking are important, because the private sector is unable to provide monetary and financial stability. Central banks do not necessarily have more information or better models than the private institutions, but they are non-profit institutions, and their task is to provide ­ utcomes the needed stability (Borio 2003, p. 32). There are economic o

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which are unexpected and unacceptable socially or environmentally (Kregel 1990). Even if acceptable, market outcomes can be substantially improved upon by appropriate public policy. Public institutions have legitimacy and power to improve on market outcomes. In consequence, the arguments against private digital currencies and in favour of digital central bank currencies are much stronger in this framework. An even stronger case can be  based on the modern monetary theory (Mitchell et  al. 2019; Kelton 2020) and the constitutional school of money (Desan  2014).  These  note  that, historically, money emerged from the act of the sovereign. The sovereign decided what counted as money that could be used for discharging debt and tax obligations. It also provided the clearing devices used between banks and the sovereign, and indirectly among the bank themselves, while the banks kept the records of transactions between themselves and their customers in various currencies (Kregel 2021a). If we look at the activities of the states that are beyond the ‘night watchmen’ type of functions, which are necessary for the community to survive (Minsky 1986; Aglietta et al. 2016) and thus beyond the coercive, even ‘repressive’, nature of taxes, these social expenditures can be seen as  the  ‘consent’ or ‘contractual’ side of the relationship between the state and the people. Money in this approach is not simply a technical device  facilitating economic transaction, but a social institution which represents a bond between the current and future members of the community. It is important to bear in mind that most of the first crypto-assets, such as Bitcoin, to a varying degree rely on the official currencies. Their valuation is expressed in official currencies. Profit and loss taking is also made by exchanging the crypto-assets for official currencies (see Scott 2021). Incomes traded on crypto markets are generated by the activities financed by the traditional financial system. However, there is a growing consensus that even the traditional financial markets are hardly the best sources of information for investment decision as they tend to be dominated by short-termist behaviour, harmful to long-term welfare and sustainability (Lazonick 2013; Mazzucato and Wray 2015). We think this is especially true for the extremely volatile crypto-assets, either as financing or investment instruments. It is impossible for economic calculations to deal with these wild fluctuations other than perhaps by gambling. Several ‘assets’ termed ‘stable coins’, such as Facebook’s Libra (renamed Diem), try to anchor their value in a portfolio of developed country government bonds. However, in this way, their stability is provided by the same assets, whose potential instability was originally to be avoided by the introduction of the crypto instruments.

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Central bank digital currency and the transmission mechanism of the monetary policy Discussion of the effects of a prospective digital central bank money on the transmission mechanism is unavoidably speculative as little is known about their real design. The spectrum of possibilities covers a digital currency account directly opened with the central bank, or with a public (for example, post office) or private (for example, banks and savings banks) institutions, regulated by the central bank, or just issuance of e-money, which is simply a digital version of the cash, that is, a token-like asset without corresponding account either at the central bank or any other institution (ECB 2020). From a different perspective, the digital central bank currency could be guaranteed to be convertible on a one-to-one basis to official currencies, but some imagine a separate currency with no guaranteed exchange rate to the official currency of the issuing country. From another perspective, the new digital currency could use the same payment system as the official one or could be operated by a separate infrastructure (Bofinger and Haas 2020; Bofinger and Haas 2021). The new currency could be held mainly for transaction purposes or as a safe saving vehicle, depending on the design. Most analysts suppose the target clientele would be the retail user but Meaning et al. (2018) look at the effects of a new central bank currency which would use the current interbank payment system, could be opened to anybody, including retail users, and could be used as central bank reserve including compliance with compulsory reserve requirements imposed on banks. Following the ECB (2020) we will suppose a digital currency targeting a retail customer and using the existing retail payment system, and convertible on a one-to-one basis to the existing central bank currency. The intended use is as a safe saving and transaction instrument which complements, but does not substitute, traditional bank deposits. Interest rate channel The interest rate channel is the most important among the monetary policy transmission channels analysed in the literature. Through this channel the central bank directly influences the agent’s choice between current consumption and investment. It is supposed that the central bank sets it policy rate which is conveyed by the financial system to the long-term riskless rates, the risk premium and the foreign exchange rate. The changes finally affect consumption and investment decisions of the agents both from their current incomes and stock of financial and non-financial wealth. It is supposed that the financial sector works seamlessly, so does not need elaborate examination. Interest rates reflect demand and supply of the loanable

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funds. By influencing interest rates, the central bank ensures that market rates equal natural (or neutral) rate compatible with full employment at stable prices. In mainstream models this neutral (or natural) interest rate is a deep parameter, reflecting a time preference, which would not be affected by the introduction of digital central bank currency. Most of the literature on digital central bank currency deals with the issue of the possible modalities of interest payment on the accounts denominated in it, compared with the official currency deposits, and wonder how this might affect the interest rate channel of monetary policy. It is commonly supposed that interest payment on digital central bank currency would make the monetary policy transmission mechanism faster and more direct, since it would not have to be translated by the financial intermediaries. It would be more effective also as deposits could be opened for previously unbanked segments of the society, so changes in interest rates would affect a larger proportion of the agents. Alternatively, it is also generally agreed that the interest rate should be set below the rate paid by commercial banks in traditional sight deposits to slow down the mass migration of deposits from commercial banks towards the central bank. Bindseil and Panetta (2020) suggest paying different rates on specific proportions of each depositor’s digital currency (a layered interest rate payment). Another suggestion is to administratively limit the maximum amount of digital central bank deposits to avoid financial instability or destabilizing ‘disintermediation’ caused by deposit withdrawal. Furthermore, it is hard to quantify the effects of the range, costs and ease of use of the services provided by central bank digital currency, which will affect its popularity (Meaning et al. 2018). This would directly compete with the accounts provided by private financial and financial technology (fintech) institutions. If usage of these central bank accounts is restricted according to market segments and/or geographical locations, this would make it less attractive. Central bank accounts are safer than the non-insured accounts in private institutions, so it will be attractive for those who seek a safe place for their financial savings. This could cause a run on traditional banks in times of financial instability. However, insured deposits with private institutions provide similarly safe instruments for savers up to a certain amount.5 Moreover, depositors form expectations about the safety of their savings in private institutions beyond legal declarations. During the Great Financial Crisis, authorities in the USA and Europe extended the safety net over non-insured deposits, even to uninsured money market funds. According to the central bank’s current intentions, they do not intend to replace or crowd out private banks, but just want to provide a limited sized, safe alternative to complement the deposits placed with private institutions.

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Therefore, any effect on the interest rate transmission of the traditional monetary policy mechanism would be limited, perhaps slightly improved from the viewpoint of the central bank, as argued previously (BIS 2018, p. 11, box A; Meaning et al. 2018, p. 14). Most discussions are based on the quantity theoretical framework treating banks as black boxes (Bernanke and Gertler 1995). The interest rate channel involves the supposed exogenous supply of central bank reserves. By controlling the central bank reserves, central banks set the policy rate, and in this way the commercial bank’s ability and incentive to lend by affecting demand and supply of funds. Commercial banks are passive agents simply translating reserve supply to money supply, that is, particular monetary aggregates. Several authors add details, such as compulsory reserves and cash/deposit ratios, but the basis remains the same: for analysing the monetary policy transmission mechanism they take money supply exogenously determined by the central bank via controlling reserves. Current vintages of mainstream analyses are faced with the impossibility of controlling exogenously the quantity of reserves by the central bank. However, until very recently, this reality had been absorbed by the mainstream analyses through taking the current practice of controlling the interbank interest rates as equivalent to the reserve control with other means. The theoretical mechanism remained the same, except that for some unexplained and unimportant reason, quantity control in practice had to be exerted via the interbank rate. The rest of the analysis and the conclusions remain intact: the central bank controls the money supply and with it sets policy rate. This presentation of the transmission mechanism is outdated, even misleading. As recognized by Borio and Disyatat (2009), there is no oneto-one translation between the interbank interest rate and the quantity of reserves. They and Lavoie (2014) term this the decoupling principle and make clear that it is the interest rate which is targeted by the central bank and the reserves are supplied endogenously to stabilize interbank interest rates around the policy rate and make the interbank payments smooth. This has long been known by post-Keynesian and other, non-mainstream, economists. Closely relatedly, commercial banks do not lend out reserves; they are not even constrained in their lending activities by ex ante availability of central bank reserves. In their profit calculation, banks make a forecast of future interest rates of the reserves expected to prevail at the beginning of the reserve maintenance period and use this expectation in their lending decision. Banks need reserves only to settle net transfers between each other at the end of the settlement period, usually at the end of the business day.6 They do not need central bank reserves to execute payments between their own clients: in that instance, settlement takes

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place simply as accounting entries inside the bank. Even between banks, clearing can take place since most of the transactions during the day just offset each other. Based on this insight, post-Keynesians have long argued that the need for central bank reserves is practically unrelated to the credit activities of the banks.7, 8 It should be clear by now that the introduction of digital central bank currency would not directly constrain the banking sector’s lending activity except, perhaps, for a limited period of transition after its introduction. Migration of a portion of deposits would result in a smaller deposit base for commercial banks, which would need replacement. Banks would have to turn to wholesale markets for deposits or issue CDs or bank bonds. These sources tend to be more expensive, and less stable items, but this would not quantitatively constrain banks’ credit activity. In addition, as we saw previously, bank lending is far from being proportional to the level of the central bank reserves or the bank’s deposit base. Also, central banks would be able to control the interbank interest rate and could appropriately calibrate the conditions of the digital currency they may issue. In a typical central bank balance sheet, currency9 is a liability of the central bank (see Table 4.1). The counterparty of this item is a typically undesignated10 asset of the central bank, which mainly consists of foreign exchange and monetary gold reserves, claims on the government (government bonds or other claims) and claims on (credits to) the commercial banks and other claims and securities. The bank has assets, such as its buildings. Among the liabilities, the main items are the required and the excess, or free, reserves of currency. Central banks also have equity. With the introduction of digital central bank money, the balance sheet of the central banks will have an additional liability item. In accounting terms, we expect it to be treated similarly to currency. Depending on the specific features to be adopted, the public most likely will transfer its existing deposits and other financial savings, including physical currency and/or new income, into central bank digital currency accounts. The outcome would be a larger balance sheet for the central bank with some additional assets as the counterpart of the increased liability of digital currency deposits (see Table 4.2). Owing to the transfer of some of the existing deposit, the required reserves would diminish. For example, in the eurozone and in Hungary the required reserves are 1 percent of the deposits, which immediately would become free reserve. However, in a parallel move, with the removal of the deposits, assets should also move. While the typical counterparts of the deposits in the bank’s books are commercial bank loans to non-financial agents (companies and households), banks also hold a specific amount of liquid assets for satisfying immediate liquidity needs. Liquid assets

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Table 4.1  Stylized central bank balance sheet without digital currency Central bank balance sheet Assets

Liabilities

Foreign exchange and gold Claims on the government Claims on banks Other claims (securities) Buildings

Currency Required reserves Excess reserves Equity

Source:  The authors.

Table 4.2  Stylized central bank balance sheet with digital currency Central bank balance sheet Assets

Liabilities

Foreign exchange and gold Claims on the government Claims on banks

Currency – Digital currency + Required reserves – Excess reserves – Equity

Buildings Source:  The authors.

typically earn little, so banks tend to economize on them in normal times. However, banks currently hold an unusually large amount of liquid assets in the form of free reserves as a result of the asset purchase programmes of the central banks. The Bank of England (2020) and Positive Money (2020) suppose that banks would have to transfer equivalent amounts of reserves with migrated deposits to the central bank. This is because deposits attracted only compulsory reserves and some additional reserves willingly held by the banks named free reserves, reflecting the expected liquidity conditions during the reserve maintenance period. In normal times, this amounts to a couple of percentages of reservable deposits (see Figure 4.2). Thus, migration of deposits needs significant adjustment. This is one of the most significant risks and is emphasized by nearly all papers on the subject. It is understandable within the traditional framework where deposits are seen as sources bank lending, but the central bank could lend reserves, even those just received as the counterpart of the migrated deposits. It is also

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3500 3000 2500 2000 1500 1000 500 0 1999 –500

2001

2003

Required reserves

2005

2007

2009

2011

Free reserves

2013

2015

2017

2019

2021

Deposits in Central Bank Digital Currency

Note:  1 trillion deposit transfer (dashed line) is hypothesized in Bindseil (2020) and Bindseil and Panetta (2020), as an illustration, based on the size of the affected population and one-month average net income and considered covering normal payments. Source: ECB.

Figure 4.2  Reserve balances at the ECB noted in the literature that, at the current juncture, banks have unusually high level of reserves above the required reserves, so it would be much easier to accommodate the migration of deposits. However, in the post-Keynesian framework central bank reserves are provided endogenously by the central bank anyway, so the adjustment is seen differently. Bank lending is not constrained either by pre-existing deposits or central bank reserves. Reserves are needed for the banking system for interbank settlements, and compulsory reserves are imposed on the banks to smooth the interbank market (Bindseil 2004, p. 204; Fullwiler 2008, p. 15). The stability of the banking system therefore depends on the quality and quantity of the asset side of bank’s balances, and less on the stability of the deposit base. Deposit withdrawal from an individual bank (or from a few banks) means only a change in the distribution of deposits (liabilities) and could be remedied by interbank loans from the banks targeted by the depositors or, if they are unwilling to lend, from the central bank. This follows from the ‘banking’ or ‘clearing’ principle

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mentioned previously, and this is the reason why the Diamond and Dybvig (1983) model of bank runs does not apply in modern economies, where the main source of bank instability is the sudden withdrawal of deposits when the assets of the banks are illiquid. As Kregel (1992, 1993) explains, historically in Europe, banking systems were less fragmented and banks were connected to a centralized payment system, thus, in contrast to the pre-Depression USA, establishing a deposit insurance system was not necessary to restore stability. Therefore, in the European Union, deposit insurance is justified as a consumer protection device (Fratianni 1995). Even Anna Swartz (1991) acknowledged, that the prudential role of deposit insurance became superfluous in the USA after the development of a nationwide integrated payment system connecting banks. As central banks are not constrained in their lending capacity, it does not seem to cause a significant problem to provide enough reserves for the commercial banks if needed.11 Lender of last resort The above mechanism can be used when confidence in the private banks is shaken and depositors transfer their savings to the central bank digital currency account. While the existence of a suitable alternative currency makes this move easier than converting deposits to banknotes as the only current alternative, we saw that handling such a risk is possible by the central bank. Also, it is much easier compared to a situation in which private-sector issued digital funds are affected by a shock of confidence, in which event the lender of last resort operation of the central bank is less obvious. Similar to dollarization, when a private digital currency is used on a significant scale, it hampers the last resort lender capacity of the central bank. However, it is unclear how much it is a real problem if the official currency is still in place and functions in a normal way. Users of the private digital asset could switch to using the official currency and monetary institutions. Bank lending channel Looking at bank lending channels has become a customary addition lately to the mainstream discussions of the transmission mechanism. While the main channel remains the interest rate, bank lending channels become operative when the market clearing process suffers from imperfection. In the imperfect information model of banks used in analysing the monetary transmission mechanism market interest rate is unable to clear the financial market as lenders have imperfect knowledge of the riskiness of the projects. They are unwilling to finance them even at a higher risk premium, believing the project to be too risky. So, it is not in the interest

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of the lender to raise interest rates and clear the financial market (Kregel 1998, pp. 47–8; Delli Gatti and Tamborini 2002, p. 197). Curiously, the New Keynesian model offers an explanation for the less than full employment/capacity segment of the business cycle but does not explain the overshooting part since it supposes that in the absence of rigidities the system reaches a full employment/capacity position. This framework is based on the traditional loanable funds/money ­multiplicator model (Rochon 2000, p. 129; Disyatat 2010, pp. 4–8) supposing that bank’s ability to lend is constrained by the pre-existing d ­ eposits controlled by central banks liquidity operations. The inappropriateness of this theory is currently particularly visible when the central banks flood the interbank market with reserves, but pose a significant communication problem for the central banks. For this reason, BIS economist Disyatat (2010) proposes the abandonment of the mainstream analysis of bank lending channel and builds and alternative model based on an endogenous lending channel which is more compatible with the post-Keynesian principles. In summary, a central bank digital currency would not seem to affect in any substantial way the bank’s lending activity via the mainstream bank lending channel which does not exist, as the bank lending channel is not working via a quantitative reserve controlled by the central banks. Central banks currently try to affect bank’s lending activity with macroprudential policies in addition to monetary policy since monetary policy failed to prevent the great financial crisis via increased policy rates to halt excessive growth of credit. However, as Tily (2010, p. 293) argued persuasively, during the ‘great moderation’ the real interest rate on long-term risky assets relevant for investments in productive capacities were high in historical comparison, despite low inflation and moderate nominal interest rates. Credit was not cheap, but expensive (in real terms) and easy, leading to  excessive bank lending and financial fragility. However, it is a completely different problem from that of insufficient credit owing to asymmetric information. Asset price channel The asset price channel of the transmission mechanism in the traditional framework operates mainly via the wealth effect. If, as we saw, the interest rate channel is not greatly affected by the introduction of the central bank digital currency, then the asset price channel should remain intact as well. While financial markets are important for this channel in some countries (the USA), in most of Europe with bank-dominated financial systems this is a less important channel. Following the Great Financial Crisis, central banks increasingly take into account financial market developments. ­Post-Keynesian economists generally welcomed the modified s­trategies since they fit into their long-held vision of the economy involving

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­ rocyclical behaviour of the asset markets, the potential instability of the p market mechanisms, the endogenous nature of credit, and money creation. Indeed, the main proponents of the new strategies like Disyatat (2010) or Borio (2018) explicitly refer to the work of the post-Keynesian economists. The introduction of central bank digital currency involves migration of a limited amount of deposits, which the holders hold already in interest rate insensitive assets. The rest of the financial savings held to earn financial income would not be affected. Monetary and fiscal policy mix: optimal assignment and monetary transmission Following the Great Financial Crisis, reaching the effective zero bound of the central bank interest rate made traditional interest rate instruments ineffective. Several authors proposed to introduce digital central bank currency to make it easier to tax money holdings and induce spending. Some have suggested abolition of cash to rob the public of the possibility of avoiding the loss of negative interest rates (effectively a tax) on deposits (Rogoff 2004, 2016). It has also been suggested that a ‘helicopter money’ operation, that is, the central bank crediting the public’s accounts with a certain amount, would be easier to implement.12 Setting a time limit for the use of the digital cash, beyond which the money would be deleted, would reinforce the demand effect. However, these are weak arguments as both instruments could be implemented without digital central bank currency. Taxing money-holding was first proposed by Silvio Gesell (1916 [1958]), well before the digital age. Similarly, direct purchasing-power creation by the central bank could be implemented using bank accounts or even bank notes. Both are easier and cheaper to implement in digital form if the necessary infrastructure is in place, but hard to justify if these are not there. Post-Keynesian economists think fiscal policy is often better suited to stabilizing the economy, especially in situations of insufficient aggregate demand. Monetary policy is effective to slow down aggregate demand in the event of overheating, although, too often works via financial fragility. The best way to use it is in combination with appropriate macroprudential and fiscal policies.13 A negative interest rate is easier and cheaper to implement on digital central bank currency as well as allocating ‘helicopter money’. However, the use of direct central bank money transfer for the depositors is fiscal (or quasi-fiscal) policy as it involves income or wealth transfer among members of the public regardless of which institution implements it technically.14 While the fiscal policy calls for the approval of democratically elected government, there is a strong undercurrent in the literature to allocate

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this responsibility to the technocrats of the central banks. A hybrid policy was proposed by Fischer and Hildebrand (Bartsch et al. 2019) whereby the political decision is made on the fiscal side (for example, maximum deficit) and the timing of the implementation would be left to the central bank. Interestingly, Christine Lagarde, President of the ECB, claims that climate change affects monetary and financial stability, thus sticking with market neutrality means supporting an unsustainable development path. Thus, deviating from market neutrality would be a response to a market failure, but needs a politically approved classification system of branches or activities (European Parliament 2019, pp. 21–2). Moreover, post-Keynesian authors, such as Mazzucato and Wray (2015), argue that the current policy assignment is based on artificial separation of the two branches of government policies. The government should finance and direct capital development in the economy and finance innovations. They note that even Keynes was in favour of targeted fiscal spending instead of general pump priming (Tcherneva 2008). He also proposed socializing investments. In addition, commercial bank lending has been directed by central banks and governments during the post-war boom even in developed countries, which could be repeated today (Bezemer et al. 2018). These complex tasks could be performed more easily with the help of government digital currency, while not being indispensable. The central banks did not use the proposed non-conventional tools before the Great Financial Crisis. The reason was not some technical hurdle waiting for an innovation such as central bank digital currency. Instead, they were discouraged from using these tools by the then prevailing economic doctrine. Open economy and the exchange rate transmission Discussion of the exchange rate channel usually involves free financial flows as the default. It works via the interest rate differential between the assets denominated in the domestic currency and in the foreign currency, such as the US dollar. In equilibrium the interest rate parity should hold, that is, the domestic short-term interest rate would be the sum of the foreign interest rate, the expected exchange rate change and a risk premium. In principle, digital central bank currency would not affect the working of this mechanism. Since the demise of the fixed but adjustable exchange rate regime of the Bretton Woods system, it became increasingly clear, that in practice this condition seldom holds, and destabilizing capital flows frequently prevent realizing policy goals. Exchange rates frequently behave in a similar manner to asset prices, instead of equilibrating current accounts and making countries equally competitive in international goods and services markets. Private digital ‘currencies’ can add considerably to these complications. Nonetheless, one of the main attractions of private digital

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‘currencies’ is simplification and cheapening the cross-border transactions. Especially in small countries, preventing penetration of private digital ‘currencies’ may be the most important motivating factor for introducing a central bank digital currency (Cœuré 2019). However, a central bank digital currency should be designed carefully to be able to compete successfully with existing services provided by the private sector. Bofinger and Haas (2021) notes that even without issuing its own digital currency, PayPal satisfies most of the needs expected from prospective users of central bank digital currencies in relation to international transactions. Jan A. Kregel (2021b, 2021c) sees a mobile phone service provider reinventing Keynes’s proposal for an international monetary architecture using the banking principle, the clearing account based monetary and settlement system in a multiple currency environment. Its use is currently limited to purchasing mobile phone services and ancillary goods and services using more than 40 currencies. The instability and the asymmetric burden of external adjustment would be eliminated as the system does not allow the removal of assets (claims). Since the amount of assets (claims) always equals liabilities (debt), the system is stable without any external (‘reserve’) asset, such as gold, the dollar or special drawing rights (SDR). The main risk would be on the quality of the credits the amount of which to be contained either administratively by limiting net positions or by imposing interest payment obligations on both deficit and surplus positions (Kregel 2019). This system could be established on the basis of current national currencies between countries with similar characteristics and preferences, or could be the basis of an international financial system supporting economic development. Similar systems are working even today at subnational level, such as WIR or Sardex (Amato and Fantacci 2014, ch. 4). A clearing system, named European Payment Union, worked in parallel to the newly established Bretton Woods system. It is telling that the system was needed (Kregel 2015). Adopting the clearing or banking principle as the basis of the domestic and international monetary system would change the nature of the monetary policy transmission. The money would be created endogenously as demanded, supporting the domestic policy priorities, instead of being subordinated to constraints of the current system based on scarce currency.

6. CONCLUSION While the mainstream intellectual case against the spread of private digital currencies is weak, central banks can respond to the challenge by

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offering CBDCs. Stronger justification is provided by post-Keynesian streams of schools in favour of CBDCs. Transmission mechanism would not be hindered, or could be slightly improved, by the CBDC versions currently under discussion as far as the traditional channels are concerned. Nonetheless, the underlying mechanisms differ significantly owing to differing views of money creation, the way in which the payment system works and the effectiveness of monetary policy. Similarly, the financial stability risks could be managed in both mainstream and post-Keynesian frameworks. Again, owing to different mechanisms, the risks are found on different sides of the banking system balance sheet, and the capacities of the central banks are seen to be much larger in the post-Keynesian framework. Implementing non-standard policies, such as negative interest rates or ‘helicopter money’, could be simpler and cheaper by using a CBDC, but it is not indispensable for implementing them. Similarly, non-standard policies involving fiscal policy could be easier to implement, so digitization can serve as a catalyst for macroeconomic policy innovations aiming to guide economies towards socially and environmentally sustainable directions. Thus, the crypto challenge could be the ‘Tesla-moment’ of monetary and, more broadly, macroeconomic policy.

NOTES   1. The views contained in this chapter are those of the authors and are not necessarily the same as the official views of the Magyar Nemzeti Bank.   2. The better known include Bitcoin, Ethereum and Ripple, but in 2019 there were almost 2000 cryptocurrencies in circulation.   3. Especially the FAANG companies: Facebook, Apple, Amazon, Netflix, and Alphabet behind Google.  4. Jerome Powell, the chair of the US Federal Reserve (Fed) argued at his hearing by the Financial Services Committee of the US House of Representatives, in July 2019, that the Libra project cannot progress until the severe consumer protection, privacy, counterfeiting and financial stability issues are resolved.   5. Currently, deposits in the European Union are covered by an insurance scheme up to 100 000 euros.   6. In practice, during the past couple of decades, in critical large-value payment systems it became requirement to settle each transaction using reserves in real time gross settlement systems (RTGS). However, this technical complication does not materially affect our conclusions. See Rossi (2007) and Bindseil (2014).   7. See Richard Werner’s (2014) case study conducted with a small bank.  8. For a more detailed account see Lavoie (2014, pp. 192–218). It is the mechanism named ‘banking principle’ by Keynes, and can be traced back to Schumpeter, Schacht, Schumacher and others, and served as a basis for an alternative monetary theory (Kregel 2021a, 2021b). We return to this when discussing the deposit insurance and the international aspect of digital central bank currency.   9. In some countries, currency is only banknotes, since coins are issued by the treasuries as in the UK or the USA. In most continental countries, currency consists also of coins issued by the central banks.

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10. The Bank of England is an exemption, where it is traditionally required to designate a portion of government bonds as asset counterpart of the currency liability, a reflection of the division of the Bank into an Issue Department and a Banking Department. See Darbyshire (2019). 11. See Kregel (2019, 2021a, 2021b, 2021c). In this light, it does not seem to be necessary for the central bank to retain all the reserves transferred to it by the banks in parallel with the deposits converted into central bank digital currency. 12. For example, the Economic Impact Payments by the US Treasury (n.d.) are frequently mentioned as examples for helicopter money. 13. Alan Greenspan famously said in 1996 that there was ‘irrational exuberance’ on the stock markets trying to cool them. After failing to halt the growth of asset prices implemented, the actual interest rate rose, markets took this as a done deal and continued their ascent until their collapse in 2000 (Russolillo 2016). 14. One recalls the debate about the definition of fiscal and monetary policies between the monetarists and the Keynesians in the seventies. See Chick (1983, pp. 319–20).

REFERENCES Ábel I., K. Lehmann and A. Tapaszti (2016), ‘The controversial treatment of money and banks in macroeconomics’, Financial and Economic Review, 15 (2), 33–58. Aglietta, M. (2005), Macroéconomie Financière, Paris: Editions La Découverte. Aglietta, M., P. Ould-Ahmed and J.F. Ponsot (2016), La Monnaie. Entre Dettes et Souverai neté, Paris: Odile Jacob. Andolfatto, D. (2018), ‘Blockchain: what it is, what it does, and why you probably don’t need one’, Federal Reserve Bank of St. Louis Review, 100 (2), 87–95, doi:10.20955/r.2018.87-95. Amato M. and L. Fantacci (2014), Saving the Market from Capitalism, Cambridge: Polity Press. Bank for International Settlements (BIS) (2018), ‘Central bank digital currencies’, BIS Committee on Payments and Market Infrastructures (CPMI), Markets Committee Paper No. 174, 12 March, accessed 7 April 2021 at https://www.bis. org/cpmi/publ/d174.htm. Bank for International Settlements (BIS) (2021), ‘Ready, steady, go? – Results of the third BIS survey on central bank digital currency’, BIS Papers, No.114, January. Bank of England (2020), ‘Central bank digital currency: opportunities, challenges and design’, discussion paper, accessed 22 December 2020 at https://www.bankof​ england.co.uk/paper/2020/central-bank-digital-currency-opportunities-challeng​ es-an​d-design-discussion-paper​. Bartsch, E., J. Boivin, S. Fisher and P. Hildebrand (2019), ‘Dealing with the next downturn: from unconventional monetary policy to unprecedented policy coordination’, Blackrock Investment Institute, Taipei, accessed 4 June 2021 at https://www.blackrock.com/corporate/literature/whitepaper/bii-macroperspectives-august-2019.pdf. Bernanke, B. and M. Gertler (1995), ‘Inside the black box: the credit channel of monetary policy transmission’, Journal of Economic Perspectives, 9 (4), 27–48. Bezemer, D., J. Ryan-Collins, F. van Lerven and L. Zhang (2018), ‘Credit where it’s due: a historical, theoretical and empirical review of credit guidance policies

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in the 20th century’, Working Paper No. IIPP WP 2018–11, UCL Institute for Innovation and Public Purpose, London, accessed 10 February 2021 at https:// www.ucl.ac.uk/bartlett/public-purpose/wp2018-11. Bindseil, U. (2004), Monetary Policy Implementation. Theory, Past and Present, Oxford: Oxford University Press. Bindseil, U. (2014), Monetary Policy Operations and the Financial System, Oxford: Oxford University Press. Bindseil, U. (2020), ‘Tiered CBDC and the financial system’, ECB Working Paper No. 2351, European Central Bank, Frankfurt, January, accessed 1 February 2021 at https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2351~c8c18bbd60.en.pdf. Bindseil, U. and F. Panetta (2020), ‘Central bank digital currency r­emunerati​on in a world with low or negative nominal interest rates’, VoxEU.org, 5  October, n​ -​ wo​ rl​ accessed 1 February 2021 at https://voxeu.org/article/cbdc-remuneratio​ d-low-or-negative-nominal-interest-rates. Bofinger, P. and T. Haas (2020), ‘CBDC: can central banks succeed in the marketplace for digital monies?’, CEPR Discussion Paper No. 15489, Centre for Economic Policy Research, London, accessed 7 March 2022 at https://cepr.org/ active/publications/discussion_papers/dp.php?dpno=15489. Bofinger, P. and T. Haas (2021), ‘Central bank digital currencies risk becoming a gigantic flop’, Voxeu.org, 1 February, accessed 2 February 2021 at https://voxeu. org/article/central-bank-digital-currencies-risk-becoming-gigantic-flop. Borio, C. (2003), ‘A tale of two perspectives’, BIS Working Papers, No. 127, accessed 4 September 2010 at https://www.bis.org/publ/work127.htm. Borio, C. (2018), ‘On money, debt, trust and central banking’, keynote speech, Thirty-sixth Annual Monetary Conference, Cato Institute, Washington, DC, 15 November. Borio, C. and P. Disyatat (2009), ‘Unconventional monetary policies: an appraisal’, BIS Working Papers, No. 292, accessed at https://www.bis.org/publ/work292.pdf. Bossone, B. and M. Costa (2018), ‘Money as equity: for an “­ accounting view” of money’, Economonitor, 12 February, assessed 4 March 2021 at https://www. thestreet.com/economonitor/financial-markets/mo​ney-as-e​quity-for-an-acc​ou​nt​ i​ng-vi​ew-of-mo​ney. Carstens, A. (2018), ‘Money in the digital age: what role for central banks?’, lecture, House of Finance, Goethe University, Frankfurt, 6 February. Chick, V. (1983), Macroeconomics after Keynes, London: Phillip Allan. Cœuré, B. (2019), ‘Introductory remarks to the Committee on the Digital Agenda of the Deutscher Bundestag’, Bank for International Settlements, Basel, accessed 25 January 2021 at https://www.bis.org/cpmi/speeches/sp190925.htm. Darbyshire, R. (2019), ‘Thoughts on digital fiat currencies from an accountant’s perspective’, Long Finance, 10 May, accessed 24  March 2021 at https://www. longfinance.net/news/pamphleteers/thoughts-on-digital-fiat-currencies-from-anaccountants-perspective/​. Delli Gatti, D. and R. Tamborini (2002), ‘Imperfect capital markets: a new macroeconomic paradigm?’, in R. Backhouse and A. Salanti (eds), Macroeconomics and the Real World. Volume 2: Keynesian Economics, Unemployment and, Policy, Oxford: Oxford University Press, pp. 169–202. Desan, M. (2014), Making Money: Coin, Currency, and the Coming of Capitalism, Oxford: Oxford University Press. Diamond, D.W. and P.H. Dybvig (1983), ‘Bank runs, deposit insurance, and ­liquidity’, Journal of Political Economy, 91 (3), 401–19.

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Disyatat, P. (2010), ‘The bank lending channel revisited’, BIS Working Paper, No. 297, accessed 5 May 2019 at https://www.bis.org/publ/work297.pdf. Dow, S. (2018), ‘Why digital currency won’t save us’, Institute for New Economic Thinking, New York, https://www.ineteconomics.org/perspectives/blog/why-dig​ it​al-c​u​rrency-w​ont-save-us. European Central Bank (ECB) (2020), ‘Report on a digital euro October 2020’, ECB, Frankfurt. European Parliament (2019), ‘DRAFT REPORT on the Council recommendation on the appointment of the President of the European Central Bank’, Committee on Economic and Monetary Affairs, 2019/0810(NLE), 29, August, accessed 5 January 2021at https://www.europarl.europa.eu/meedocs/2014_2019/plmrep/ COMMITTEES/ECON/PR/2019/09-04/1187645EN.pdf. Fratianni M. (1995), ‘Bank deposit insurance in the European Union’, in B. Eichengreen, J. Frieden and J. von Hagen (eds), Politics and Institutions in an Integrated Europe, Berlin: Springer, Berlin, Heidelberg. Frost, J., L. Gambacorta, Y. Huang, H.S. Shin and P. Zbinden (2019), ‘BigTech and the changing structure of financial inter-mediation’, Bank for International Settlements, Basel, 8 April. Friedman, M. (1969), The Optimum Quantity of Money and Other Essays, Chicago, IL: Aldine. Fullwiler, S. (2008), ‘Modern central bank operations: the general principles’, accessed 14 April 2021 at https://core.ac.uk/download/pdf/207650683.pdf. Geopolitikai Közhasznú Alapítvány (2016), Geopolitics of Virtual Space, Budapest: OSZK. Gesell, S. (1916), Die Natuerliche Wirtschaftsordnung, Rudolf Zitzmann Verlag, English trans. 1958, The Natural Economic Order, London: Peter Owen. Graeber, D. (2011), Debt – The First 5,000 Years, New York: First Melville House Printing. Harari, Y.N. (2018), Money, New York: Vintage Classics. Kelton, S. (2020), The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy, New York: Public Affairs. Kolozsi, P.P. (2017), ‘What can we learn from the large banker dynasties? Report about the annual conference of EABH’, Financial and Economic Review, 16 (3), 168–72. Kregel, J.A. (1990), ‘Market design and competition as constraint to self-­interested behaviour’, in K. Groenveld, J.A.H. Maks and J. Muyskens (eds), Economic Policy and the Market Process – Austrian and Mainstream Economics, Amsterdam: North-Holland, pp. 45–57. Kregel, J.A. (1992), ‘Universal banking, US banking reform and financial competition in the EEC’, Banca Nazionale del Lavoro Quarterly Review, 182 (September), 231–54. Kregel, J.A. (1993), ‘Bank supervision: the real hurdle to European monetary union’, Journal of Economic Issues, 27 (2), 667–76. Kregel, J.A. (1998), ‘Keynes and New Keynesians on market competition’, in R.J. Rotheim (ed.), New Keynesian Economics – Post Keynesian Alternatives, London: Routledge, pp. 39–50. Kregel, J.A. (2015), ‘Emerging markets and the international financial architecture: a blueprint for reform’, Revista de Economia Política, 35 (2), 285–305, accessed 3 January 2016 at http://www.scielo.br/scielo.php?script=sci_arttext&p id=S0101-31572015000200285.

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Kregel, J.A. (2019), ‘Globalization, nationalism, and clearing systems’, Public Policy Brief, No. 47, Levy Economics Institute of Bard College, Annandaleon-Hudson, NY, accessed 7 March 2020 at http://www.levyinstitute.org/pubs/ ppb_147.pdf. Kregel, J.A. (2021a), ‘Keynes’s clearing union is alive and well and living in your mobile phone’, Policy Note 2021/1, Levy Economics Institute of Bard College, Annandale-on-Hudson, NY, accessed 25 January 2021 at http://www.levyinstit​ ute.org/publications/keyness-clearing-union-is-alive-and-well-and-living-in-you​ r-​​m​obile-phone​. Kregel, J. A. (2021b), ‘The economic problem: from barter to commodity money to electronic money’, Working Paper No. 982, Levy Economics Institute of Bard College, Annandale-on-Hudson, NY, accessed 3 February 2021 at http://www. levyinstitute.org/pubs/wp_982.pdf. Kregel, J.A. (2021c), ‘Another Bretton Woods reform moment. Let us look seriously at the clearing union’, Public Policy Brief, No. 154, February, Levy Economics Institute of Bard College, Annandale-on-Hudson, NY, accessed 10 May 2021 at http://www.levyinstitute.org/publications/another-bretton-woods-reform-mom​e​ n​t-​let-us​-look-ser​iously-at-the-clearing-union​. Lavoie, M. (2014), Post-Keynesian Economics. New Foundations, Cheltenham, UK and Northampton, MA, USA: Edward Elgar. Lazonick, W. (2013), ‘The financialization of the U.S. corporation: what has been lost, and how it can be regained’, Seattle University Law Review, 36 (857), ­857–909, accessed 5 December 2016 at https://www.conferenceboard.org/ retrievefil​e.cfm?filename=The-Financialization-of-the-US-Corporation.pdf&ty​ pe​=subsite.​ Levine, M. (2019), ‘Facebook will make the money now’, Bloomberg Opinion, Libra White Paper, 18 June. Libra Association Members (2019), ‘An introduction to Libra’, White Paper, June, accessed 18 April 2020 at https://libra.org/en-US/wp-content/uploads/ sites/23/2019/06/LibraWhitePaper_en_US.pdf. Mazzucato, M. and R. Wray (2015), ‘Financing the capital development of the economy: a Keynes–Schumpeter–Minsky synthesis’, Working Paper No. 837, May, Levy Economics Institute of the Bard College, Annandale-on-Hudson, NY, accessed 4 September 2017 at http://www.levyinstitute.org/pubs/wp_837.pdf. Mancini-Grifolli, T., M.S.M. Peria, I. Agur, A. Ari, J. Kiff, A. Popescu and C. Rochon (2018), ‘Casting light on central bank digital currencies’, IMF Staff Discussion Note, November, accessed 5 February 2020 at https://www.imf. org/en/Publications/Staff-Discussion-Notes/Issues/2018/11/13/Casting-Light-onCentral-Bank-Digital-Currencies-46233. Meaning, J., B. Dyson, J. Barker and E. Clayton (2018), ‘Broadening narrow money: monetary policy with a central bank digital currency’, Bank of England Staff Working Paper, No. 724, accessed 7 April 2021 at https://www.­bankofenglan​d.​ co​.uk/-/media/boe/files/working-paper/2018/broadening-narrow-money-moneta​ ry-​p​o​l​icy-with-a​-central-bank-digi​tal-currenc​y.pd​f. Minsky, H. (1986), Stabilizing an Unstable Economy, New Haven, CT: Yale University Press. Mitchell, W., R. Wray and M. Muysken (2019), Macroeconomics, London: Palgrave Macmillan. Positive Money (2020), ‘Central bank digital currency. Opportunities, challenges and design. A Positive Money response’, March, accessed 10 January 2021 at

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http://positivemoney.org/wp-content/uploads/2020/07/Positive-Money-Respon​s​ e-t​o-t​he-Ban​ks-CBDC-discussion-paper-March-2020.pdf. Riksbank (2017), ‘The Riksbank’s e-krona project’, report 1, accessed 23 February 2021 at https://www.riksbank.se/globalassets/media/rapporter/e-krona/2017/rap​ p​o​rt_ekr​ona_uppdat​erad_170920_eng.pdf. Rochon, L.P. (2000), ‘Horizontalism and New Keynesian economics: the role of scarcity, savings and sticky prices’, in L.P. Rochon and M. Vernengo (eds), Credit, Interest Rates and the Open Economy, Cheltenham, UK and Northampton, MA, USA: Edward Elgar, pp. 120–39. Rogoff, K. (2004), ‘Costs and benefits to phasing out paper currency’, NBER Macroeconomic Annuals, 29, 445–56, accessed 18 March 2021 at https://www. journals.uchicago.edu/doi/full/10.1086/680657. Rogoff, K. (2016), ‘The case against cash’, Project Syndicate, 5 September, accessed 23 October 2019 at https://www.project-syndicate.org/commentary/ dangers-of-paper-currency-by-kenneth-rogoff-2016-09?barrier=accesspaylog. Rossi, S. (2007), Money and Payments in Theory and Practice, London: Routledge. Russolillo, S. (2016), ‘Irrational exuberance 30 years later’, Wall Street Journal, 3  December, accessed 3 May 2020 at https://www.wsj.com/articles/irra​tionalexube​rance-alan-greenspans-call-20-years-later-1480773602. Schwartz, A. (1991), quoted in R.L. Hetzel (1991), ‘Too big to fail’, Economic Quarterly (Federal Reserve Bank of Richmond), 77 (November–December), 3–15, accessed 22 September 2001 at https://fraser.stlouisf​ed.org/title/economic-quart​ erly-federal-reserve-bank-richmo​nd-960/november-december-1991-477369. Scott, B. (2021), ‘How to win a bitcoin street fight (without mortal combat)’, CoinDesk, 22 February, accessed on 20 April 2021 at https://www.coindesk.com/ bitcoin-street-fight-mortal-combat. Tcherneva, P. (2008), ‘Keynes’s approach to full employment. Aggregate or targeted demand?’, Working Paper No. 542, Levy Economics Institute of Bard College, Annandale-on-Hudson, NY, accessed 16 November 2010 at http://www. levyinstitute.org/publications/keyness-approach-to-full-employment. Tily, G. (2010), Keynes Betrayed. The General Theory, the Rate of Interest and ‘Keynesian’ Economics, London: Palgrave Macmillan. US Treasury (n.d.), ‘Assistance for American families and workers. Economic impact payments’, accessed 6 March 2022 at https://home.treasury.gov/ policy-issues/coronavirus/assistance-for-American-families-and-workers. Werner, R. (2014), ‘Can banks individually create money out of nothing? The theories and the empirical evidence’, International Review of Financial Analysis, 36 (December), 1–19.

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5. CBDC: functional scope, pricing and controls Ulrich Bindseil, Fabio Panetta and Ignacio Terol1 1.  INTRODUCTION: WHY CBDC? Around four years after the first publications on central bank digital currency and the appearance of the acronym ‘CBDC’ (Barrdear and Kumhof 2016; Dyson and Hodgson 2016), the European Central Bank (ECB) published in October 2020 its first report on a possible Eurosystem-issued CBDC, the digital euro, ‘for use in retail transactions available to the general public – that is, including citizens and non-bank firms – rather than only being available to traditional participants (typically banks) in the large-value payment system managed by the central bank’ (ECB 2020, p. 6).2 This followed the publication of similar reports by for example Sveriges Riksbank (2017, 2018) and the Bank of England (2020). Central banks consider issuing CBDC given their responsibility to sustain confidence in their currency by maintaining public access and full usability of central bank money in a world in which consumers and firms turn increasingly to electronic payments. Commercial bank money (and other regulated forms of money, for example, electronic money) are the liability of different private issuers. They are perceived by the public to be interchangeable at the same value. This is because commercial bank money is anchored to central bank money, that is, the form of the currency that defines the unit of account. This anchoring is necessary for central banks to preserve monetary and financial stability. It is sustained by a set of mechanisms,3 one of which is the public’s confidence that it can exchange bank deposits for cash upon demand. If demand to use  cash for payments continues to decline, the anchoring is debilitated as the convertibility into central bank money becomes increasingly a theoretical construct, instead of a daily experience. The liquidity of cash fades slowly if the spheres of commerce in which it can be used shrink over time (for example, with the growth of e-commerce or after the impact of 120

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the COVID-19 shock). With  CBDC, central banks seek to preserve the usability of central bank money in a changing world in which increasing numbers of people and merchants prefer the convenience of electronic means of payments. A wide adoption of stablecoins would also undermine the anchoring to central bank money, depending on their design and systemic nature. Stablecoins4 issue their own money with the promise to offer a stable value as regards a currency or basket of currencies, or even commodities (by stating they will invest in relevant assets, not necessarily through the commitment to convert into assets or even into central bank money), and a wide network for payments (by leveraging on the existing customer base of large technology firms and the corresponding incentives to establish closed loops). Monetary strategic autonomy also plays a role in the motivation for CBDC, because (1) the ability to pay safely/efficiently is a basic necessity for any society and economy, (2) the payment industry is a network industry in which relatively few firms can gain significant market power and (3) there are funding privileges associated with being the issuer of the predominant means of exchange. The Eurosystem has put a high emphasis on the strategic autonomy motivation as payment instruments controlled and supervised from abroad have achieved a dominant position in important segments of the European retail payments market. These are policy motives for central banks and the legislator to consider the issuance of CBDC. Yet they do not capture what may motivate citizens and merchants to adopt and use a CBDC as a digital means of payment. This chapter helps to answer this question. The chapter considers that in order to make CBDC successful, central banks need to establish the digital currency as a means of payment of widespread use, while avoiding that it becomes a significant store of value. The chapter examines the store of value function of money in sections 2 and 3. Section 2 revisits the concerns that the introduction of a CBDC, if not properly designed, could be too successful, leading to undesirable bank disintermediation and an excessive reliance on CBDC as an investment class. Section 3 analyses possible ways to mitigate the impact of CBDC on bank balance sheets and financial accounts. The payment function of CBDC, and the question of how to make CBDC successful as means of payment without excessively crowding out other electronic means of payment is analysed in section 4. In view of their status as risk free entity, central banks have a comparative advantage as an issuer of money with regards to the store of value function. In the field of physical cash payments, they had a monopoly position as sole issuers of banknotes. In contrast, central banks have no experience in providing a digital means of exchange directly to the public. It looks

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paradoxical that central banks must avoid being ‘too successful’ in the area where it is easier for them to be successful, while trying to be successful in the area where they may seem to have less comparative advantages. This paradox is only apparent, however. Unlike private p ­ layers – who maximize profits by leveraging on their competitive advantage – central banks operate in the interest of society, setting goals of public – not private – interest. In particular, when it comes to retail payments, central banks aim to promote a competitive and efficient market for the provision of payment services in line with the needs of users. Section 5 discusses the functionality of CBDC for cross-border and foreign exchange (FX) payments and how this may affect the adoption of CBDC. A discussion of the international use of CBDC should address concrete questions such as (1) should the local CBDC be used to pay abroad? (2) Should the foreign CBDC be used to pay locally? (3) Should CBDC be accessible by non-residents, or should every international payment with CBDC necessarily imply an FX conversion? (4) Should FX conversion be from CBDC into CBDC or into commercial bank money, or should both be possible? Comprehensive international payment functionality of CBDC would, if successful, further increase the attractiveness of CBDC in general and its financial system footprint. Section 6 concludes.

2. CBDC AS STORE OF VALUE AND BANK BALANCE SHEET DISINTERMEDIATION The CPMI-Markets Committee (2018, p. 2, and various further publications) supports the view that there could be a risk that CBDC could ­disintermediate commercial banks, aggravating bank run dynamics in a crisis: A general purpose CBDC could give rise to higher instability of commercial bank deposit funding. Even if designed primarily with payment purposes in mind, in periods of stress a flight towards the central bank may occur on a fast and large scale, challenging commercial banks and the central bank to manage such situations.

Recent model-based studies, such as Andolfatto (2018) and Chiu et al. (2020) have taken a more differentiated perspective and argued that the result that CBDC crowds out banking is unavoidable only in models where banks have no market power; in which case the CBDC would shift deposits away from the banking system, thereby reducing bank lending. If, instead,

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banks have market power in the deposit market, the introduction of the CBDC could lead to improved economic outcomes, as it would improve competition, incentivizing banks to offer better services and/or higher remuneration rates to depositors. ‘In this case, issuing a CBDC would not necessarily crowd out private banking. In fact, the CBDC would serve as an outside option for households, thus limiting banks’ market power, and improve the efficiency of bank intermediation’ (Chiu et al. 2020, p. 1). It may, however, be argued that central banks have a structural advantage over commercial banks, given that they offer the settlement asset that is by definition the safest in the economy. While commercial banks can become more competitive and offer higher remuneration, customers’ sensitivity to deposit remuneration may be relatively low in a crisis.5 Moreover, higher deposit remuneration would worsen banks’ profitability and their perceived viability, and their ability to build strong capital buffers, which all would probably adversely affect depositor confidence. An important part of the potential effect of CBDC on banks can be illustrated by a stylized financial account in a two-bank system which captures the flow of funds caused by four possible forms of bank deposit outflows: ● ● ● ●

α flow into deposits with other banks, within the banking system; β flow into banknotes; λ flow into CBDC; and µ flow into (government, foreign central banks) deposits with the central bank.

To simplify, we assume that the flows β, λ and µ affect the two banks ­symmetrically. This should be the case for any general effects on a homogeneous banking system, or a banking confidence crisis which depositors do not attribute to specific banks. In this context we can also assume α = 0. In contrast, a bank specific crisis can be approximated by α >0; β = 0, λ = 0, µ = 0. In Table 5.1 it is assumed that the banking system compensates deposit outflows with increased recourse to central bank credit, that is, that the central bank acts as compensating party. In reality, banks do not need to rely exclusively on an increased recourse to the central bank but could also tap the capital market (and the central bank in this case could match increases of its monetary liabilities by increased outright holdings of bonds).6 Two issues arise when deposits with banks are substituted with bond issuance or central bank credit. First, deposits are in normal times the cheapest funding source, followed by central bank credit, followed by bond issuance, followed by equity issuance (for example, Bindseil 2018).

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Table 5.1 Financial accounts representation of bank disintermediation, distinguishing three flows Non-bank sectors (including households, corporates, governments, pension and investment funds, insurance companies, rest of the world) Real assets: E Sight deposits bank 1: D1 – α – β/2 – λ/2 – µ/2 Sight deposits bank 2: D2 + α – β/2 – λ/2 – µ/2 Banknotes: B + β Non-bank deposits with CB: D3 + µ CBDC: + λ

Household equity: E Liabilities to banks: D1 + D2 + D3 + B + C

Bank 1 Sight deposits: D1 – α – β/2 – λ/2 – µ/2

Loans to corp. and govt: D1 + B/2 + D3/2

CB credit: B/2 + D3/2 + α + β/2 + λ/2 + µ/2 Bank 2 Sight deposits: D2 + α – β/2 – λ/2 – µ/2

Loans to corp. and govt: D2 + B/2 + D3/2

CB credit: B/2 + D3/2 – α + β/2 + λ/2 + µ/2 Central bank

Credit to banks: B + D3 + β + λ + µ

Banknotes: B + β CBDC: + λ Bank deposits: 0 Non-bank deposits: D3 + µ

Therefore, substituting deposits will make bank funding more expensive, and reduce banks’ competitiveness relative to other forms of funding of non-financial companies (NFCs) and households. This per se would not need to be a problem, unless (1) there are particular synergies between deposit collection and lending, which CBDC would undermine, (2) the transition to a smaller banking system would be accompanied by disruptions, for example, because banks are better placed to lend to small and medium enterprises (SMEs). Second, an increased reliance on central bank credit may make collateral constraints binding and may therefore eventually force the central bank to broaden its collateral framework. This  is taken up further in section 3.2.

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2.1 How Likely is it that CBDC Leads to Material Bank Disintermediation Central bank digital currency adds a further form of possible deposit outflows that is apparently identical to that of banknotes. As with any alternative form of money, however, its impact would depend on its properties in relation to convenience, motivation and merits in specific circumstances. Being a riskless and fully liquid asset with no holding costs (as it can be assumed that CBDC accounts/wallets will be made available free of charge to citizens), a CBDC would create an additional channel for deposit outflows that would probably have some impact, in particular, in abnormal circumstances. In addition to structural disintermediation, a CBDC – if not properly designed – could facilitate deposit runs in times of crisis, during banking crises. While runs from deposits into banknotes are limited by the risks and costs of storing large amounts of banknotes at home or in other places, there would be no such limitations if households and institutional investors were able to hold unlimited amounts of CBDC (a riskless asset  with no storage costs). A crisis-related run from bank deposits into  low-risk financial assets (such as gold-related assets and highly rated  government  debt) is already possible in ‘electronic’ form and therefore does not pose the same security issues as a run into cash (except for physical gold). However, this type of run (1) is disincentivized through the price mechanism (as the safe assets will become very expensive in a crisis); and (2)  on aggregate, does not reduce deposits with banks, as for the investor it would reduce exposure to default risk, but increase market and liquidity risk; and (3) may not appear to be an option for all  citizens, notably not  for those who have relatively limited financial  wealth and no experience with  these  financial investments. Therefore, it is plausible that a CBDC – if it were to be supplied in unlimited quantities and without other control tools, such as banknotes – could make bank runs worse, as it would neither create physical security issues nor be subject to scarcity-related price disincentives (Bindseil and Panetta 2020). 2.2 An International Usage of CBDC Could Increase the Size and Velocity of International Capital Flows The flows of funds mechanics of this are shown in Bindseil (2018, annex). Ferrari, Mehl and Stracca (2020) and IMF (2020) discuss in more detail the possible flow of funds implications of CBDC that is used internationally. All conclude that the international use of CBDC could make ­international

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capital flows more volatile and thereby create liquidity challenges for banks – in both the issuing and the recipient country. Monetary policy transmission will also be affected. Section 5 takes up the international usage of CBDC in the means of payments context. 2.3  Relevance of the Level of Short-Term Interest Rates A number of central banks have implemented a negative interest rate policy (NIRP), notably in the euro area and Denmark, Sweden, Japan and Switzerland. Issuing unremunerated CBDCs without limits on access or quantities would, however, imply the end of NIRP. It would also imply that NIRP would no longer be possible in the future and would probably lift long-term nominal yields – even those in positive t­ erritory – as  NIRP  scenarios would no longer be factored into expectations. If the  least risky  asset in the economy – a liquid central bank liability in domestic  currency, such as a CBDC – offers a return of zero, no other financial instrument can yield a negative rate, as its holders would otherwise substitute it with CBDC. Therefore, effective constraints on access to and/or limits on holdings of CBDC would be necessary to preserve the ability to conduct NIRP following a future issuance of a zero-remunerated CBDC.

3.  MITIGANTS TO AN EXCESSIVE STOCK OF CBDC A number of measures have been proposed to prevent a permanent or temporary excessive flow of funds into CBDC. 3.1  Limited Convertibility This approach was proposed by Kumhof and Noone (2018, p. 1) who assume inter alia that, at least in a situation of financial instability ‘CBDC and reserves are distinct, and not convertible into each other’  and ‘No  guaranteed, on-demand convertibility of bank deposits into CBDC  at  commercial banks (and therefore by implication at the central bank)’. Suspending convertibility would stop the potential outflow of  bank deposits into CBDC, but it contradicts the sacrosanct principle of  convertibility of different forms of a currency, which is at the  very  basis  of the nature of currency, and it may also create additional  negative dynamics  if money holders anticipate convertibility suspensions (which are well known from vulnerable fixed exchange rate regimes).

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3.2  Simple Per Capita Limits Panetta (2018, p. 29) suggests addressing the structural disintermediation and bank-run issues associated with CBDC by ‘setting a ceiling on the amount of CBDC that each individual investor can hold’. The ECB (2019) provides a proof of concept for a distributed ledger technology (DLT)-based CBDC solution which would also allow the implementation of caps in the wallets of CBDC holders. Again, payments into a wallet/ account leading to excess holdings would simply be rejected. However, simple caps raise a number of issues: as noted also by Panetta (2018, fn 19), ‘a  ceiling on individual holdings of CBDC could limit the number or  size of payments, as the recipients’ holdings of CBDC would have to be  known in order to finalize the payment’. The risk that payments would  be rejected for a reason that cannot be known to the payer in advance would imply a significant friction undermining the efficiency of payments. 3.3  Per Capita Limits with Waterfall to Designated Account A possible way to address the above-mentioned concern would be that any payment that would imply an excess of CBDC holdings relative to a limit would be accepted but would trigger an automatic transfer of the excess from the CBDC account/wallet to a designated account with a commercial bank or another intermediary. Each registered holder of a CBDC account/wallet would have to designate this ‘waterfall’ account, also implying that CBDC users should continue to have accounts with intermediaries. For example, if the limit on an individual CBDC account would be CAP, and the level of CBDC held on the account would at some point in time be x < CAP, and an incoming payment y would be such that x + y > CAP, then an automatic transfer from the CBDC account to the associated bank account would be triggered with the transferred amount being x + y – CAP. For citizens without a bank account or that would not designate one, the simple limits model would apply. However, these citizens would not be prevented from opening a CBDC account in the absence of a linked commercial bank account and in view of the financial inclusion objective. One further problem with limits is that they cannot be calibrated as easily for firms as for citizens, since firms are of very diverse size and needs. Also for that reason, limits could undermine the usefulness of CBDC for industry and commerce.

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3.4 Tiered Remuneration with Possible Worsening of Tier 2 Remuneration in Crisis Situations Bindseil and Panetta (2020) argue that a two-tier remuneration system could be a good solution to the risk that CBDC could disintermediate the banking system in both normal times and crisis times, while avoiding the drawbacks of hard limits. This had also been proposed previously by Panetta (2018), who however did not envisage a negative remuneration for the second tier. Indeed, tiering may be needed only in a low or negative interest rate environment. If short-term market rates are at a level of, for example, 4 percent, then a remuneration of CBDC at 0 percent, that is, similar to banknotes, provides sufficient disincentives against an excessive reliance on CBDC as form of investment. However, in the current euro area interest rate environment, risk-free assets have a negative yield with the exception of banknotes, which are costly and/or risky to store in large amounts. Therefore, the proposal worked out in Bindseil (2018) relies on the idea that CBDC accounts would up to a certain threshold CAP be remunerated at a relatively favorable rate, r1 (for example, 0 percent in the current negative interest rate environment), while holdings beyond CAP would be remunerated at a less favorable rate, r2 (for example, slightly below the rate of other risk-free assets). This tiered remuneration would prevent CBDC from undermining the stance of monetary policy and avoid structural bank disintermediation (as it would enable the use of CBDC as means of payment, while disincentivizing the use of CBDC as large-scale investment). It would also allow the central bank to act in the event of a bank run by, if needed, lowering further the remuneration of tier 2 CBDC. It avoids, in a crisis situation, the need to push into negative territory the remuneration of all CBDC holdings. Thereby, tiering could help in reducing the scope for popular criticism of the central bank (financial repression, expropriation of money holders, and so on). People wanting to avoid moving inadvertently into the worse conditions of tier 2 (for example, where negative interest rates would apply) could decide to set a self-imposed ceiling on their maximum desired CBDC holdings, which would function similarly to the waterfall mechanism described previously. Account holders of CBDC could determine the threshold beyond which any holdings would automatically be transferred to an associated bank account. This threshold could take any level, that is, also higher than the tier 1 threshold. The central bank would need to communicate clearly at an early stage that the remuneration of tier 2 CBDC is not meant to be attractive and may be made particularly unattractive in a crisis if need be. For tier 1 CBDC, the central bank can commit to never charging negative rates. Moreover, the central bank can commit to never reducing the amount of tier 1 CBDC to below a certain level.

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For corporates (non-bank financial companies and non-financial companies), the tier 1 allowance could be calculated to be proportional to some measure of their size and thereby presumed cash payment needs. Simplicity and controllability of the assignments should be ensured. Alternatively, a simpler and more viable approach might be to assign a tier 1 ceiling of zero to all corporates. Further analysis is needed to find solutions which strike the right balance between simplicity, efficiency and fairness. Non-residents, if allowed to open accounts, might also have a tier 1 ceiling of zero. For some, such as tourists, who may want to hold relatively limited amounts for relatively short periods of time, the economic relevance of imposing negative remuneration would be negligible anyway, and pragmatic and proportional solutions should be found. In normal times, that is, times of financial stability, Bindseil and Panetta (2020) consider the following illustrative example for the remuneration of the two tiers (whereby iDFR is the rate of remuneration of the ECB’s deposit facility)7: r1 = max(0, iDFR – 2%); r2 = min(0, iDFR – 0.5%). That is: the remuneration of tier 1 CBDC will be either 2 percent below the rate of the ECB’s deposit facility, or zero, whichever is higher. The remuneration of tier 2 CBDC will be 0.5 percent below the rate of the ECB’s deposit facility, or zero, whichever is lower. Other formulas could be designed. In crisis times, that is, when risks of a run into CBDC materialize, r2 could be further reduced. This could raise a number of issues related to the signaling effects of the central bank’s decision to lower the remuneration of tier 2,8 which should be carefully considered. Any of the options above require an adequate legal basis in the respective monetary area, which either needs to be given anyway, or that may need to be established specifically in the context of the issuance of CBDC. For example, tiered remuneration or limits require the identifiability of holders of CBDC, in an account relationship, that is, not compatible with a pure bearer instrument (also often termed a token-based CBDC). This may be relevant if CBDC would be issued only on the basis of a provision in the respective central bank law that entitles the central bank to issue banknotes.

4. CBDC AS MEANS OF PAYMENT: FACTORS THAT MAY DETERMINE USAGE We now turn to the payment function of CBDC and to the factors that may determine its usage. We start, in section 4.1, by reflecting on why people pay with the currently available form of central bank money, banknotes, as a basis to consider which of these elements may affect usage if central bank money also takes a digital form. Section 4.2 discusses in

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which segment of the payment market the use of CBDC would most likely be. Section 4.3 considers what could be a definition of ‘success’ for central banks in offering a CBDC as a means of payment. We then turn to the conditions for success: Section 4.4 reflects on a first condition: legal tender status resulting in merchant acceptance; Section 4.5 reflects on a second condition: what could motivate supervised intermediaries to distribute CBDC, considering that they are themselves distributing their own payment products? Section 4.6 sets out the condition that citizens/consumers see a value in using CBDC as means of payments within a wide array of payment products. It ends with section 4.6 which considers what levers are available to the central bank to achieve the proposed CBDC objective. 4.1  Why Do People Pay with Banknotes? With increased digitalization, many countries are experiencing a decline in the use of cash for payments, despite the increase in the stock of cash issued. In the euro area only about 20 percent of the cash stock is used for payment transactions (compared with 35 percent 15 years ago), with the remainder used as store of value in the euro area or abroad.9 Before considering why people might pay in the future with CBDC, it is appropriate to examine why people pay with the current form of central bank money available: banknotes. Literature and surveys indicate people pay with banknotes10 as owing to: ● ● ● ● ● ● ● ●

habit;11 better ability to perceive the value of money in a material form;12 barriers or lack of ability to access digital means of payments (children, elderly who might not be able or comfortable to pay digitally); anonymity; absence of explicit cost; instant finality of payment; absence of financial services in rural areas; above all, for their very high reachability/wide reach in face-to-face payments.13 Paying with cash in a store is always an option provided that: (1) most physical stores continue to accept cash, whether owing to its legal tender character or to the demand to pay with cash by sufficient clients, and (2) people regularly hold cash in their wallets in case of need,14 even if they use it infrequently. Both conditions are interdependent: if one falters, the other is likely to falter as well.

The legal tender status is closely associated to the nature of central bank money. It is a crucial enabler for banknotes to leverage network effects.

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People may not be consciously paying with banknotes because they are central bank money,15 but they may be indirectly paying with banknotes as a result of the high reachability/network effects which legal tender confers on banknotes. In turn, this legal privilege can only be conferred on instruments which have central bank money inside, because regulation establishes central bank money as the ultimate settlement asset, that is, as the anchor with which other legally recognized forms of money need to be convertible at par. Concerning usage costs and cost recovery of banknotes, the universal approach taken by central banks has been to offer issuance services and distribution free of charge. However, this approach may have been based on the presumption that banknote issuance was anyway a highly profitable service as long as these interest-rate free liabilities could be matched with interest-bearing assets, leading to solid profits for central banks. This seigniorage, in turn, allows for regular transfers of profits to governments. In the negative interest rate environment, as has been prevailing in the euro area for some years, this approach has not been questioned either. However, with CBDC, the central bank moves close to the environment of private issuers of digital means of payments, and competition issues related to the possibility of CBDC being offered to citizens free of charge could be perceived to be relevant. 4.2  CBDC: For Which Type of Payments? This section provides some preliminary considerations on the value of introducing CBDC in various payment segments. Payment segments are defined by the business need they serve. For each payment segment, the payment instruments which are more commonly used in the European Union (EU)16 are described in Table 5.2. If a cross-currency dimension is added to the payments segments in Table 5.2, new categories emerge, for example, remittances (P2P + crossborder/cross-currency), or the use of local currency when buying abroad (POI + cross-border/cross-currency). After the payment segments have been defined, possible criteria could be identified to discern whether central banks should aim to introduce or discourage CBDC. Criteria which may be used to encourage the introduction of CBDC in a certain segment include: 1. Legacy/use case currently covered by banknotes. It may be easier to argue for the use of CBDC in segments where the use of banknotes was traditionally strong, but where a declining trend is observed as

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Table 5.2 Payment instruments frequently used in the EU for different payment segments Payment segment

Frequent payment instruments in the segment in the EU (varies per country)

Person to person (P2P) payments

Cash, mobile applications supporting various payment instruments, (instant) credit transfers Cash, cards, mobile applications supporting various payment instruments E-commerce solutions supporting various possible payment instruments (including web-based wallets), cards Direct debit, standing orders Specific applications generating (instant) transfers or wholesale payments

Physical point of interaction (POI) payments E-commerce payments Recurrent payments Corporate/business to business (B2B) payments

a result of increased digitalization. Also, if the use of banknotes is high and stable in that market segment, there may be less pressure to introduce CBDC into it. This may argue for covering P2P and physical POI payments. 2. Adapt to and facilitate innovations in commerce. Commerce has changed substantially since banknotes were introduced, with ­e-commerce occupying a growing share. Beyond legacy considerations, a f­ orward-looking approach is also required. A CBDC would not have the physical restriction of banknotes to be used in e-commerce. When it comes to innovations which are at an infancy stage within the private sector (for example, smart contracts), central banks may wish to assess carefully the added value they may provide against the investment required to make CBDC available in that segment. 3. Strategic autonomy. Related considerations may advocate deploying CBDC to a segment if (a) a large share of payments in the market segment is concentrated in providers over which the state has limited influence (for example, foreign intermediaries or foreign technological companies); and (b) if disruptions in the segment would be particularly damaging for the domestic economy and citizens. Depending on the specific country/currency situation, this may apply in P2P, physical POI or e-commerce POI segments. 4. Market power and abuse. A segment which is more prone to abuse of market power is also a natural candidate for the availability of CBDC. This facilitates the alternative of a public provider with no

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aim to exploit market power. Depending on the specific country/ currency situation, this may apply in P2P, physical POI or e-commerce POI segments. 5. Limited access to financial services. Public policy considerations lead to how CBDC may facilitate access to financial services. This could be the case of rural areas (owing to insufficient capillarity of bank branch or automated teller machine, ATM, networks) or low-income people (who cannot afford the cost of using existing digital means of payment). Factors that may discourage or restrict the introduction of CBDC in payment segments include: 1. Compatibility with limited use as store of value. Central banks will need to set incentives against, or restrictions on the store of value capabilities of CBDC, in order to avoid it generating adverse effects on the functioning of the financial system. Depending on how these incentives or restrictions to a store of value function are configured by the central bank, this may impact the possibility of or the convenience of making multiple high-value payments. For example, limits may impact the practicality of using CBDC for corporate activity. 2. Digital central bank money already exists in the payment value chain. In some segments, central bank money settlement is already part of the payment value chain, even if this is not visible to payer and payee. This might reduce the need for CBDC in this segment in the short run. For example, credit transfers and direct debits often imply a net settlement in central bank money. Instant payments sometimes settle directly in central bank money (notably in the euro area if relying on TARGET Instant Payment Settlement, TIPS, as settlement platform) and sometimes not. 4.3  A Possible CBDC Usage Objective: Width versus Depth In the mid of the twentieth century, banknotes could be used and were effectively used in almost all daily transactions. This is no longer the case at the start of the twenty-first century because paying with banknotes is no longer common for wage and salary payments, less popular for point-of-sale payments (owing to the convenience and speed of modern contactless electronic payments) and it has become impossible/impractical in growing sections of commerce (that is, e-commerce, or where the speed of payment or automation are key factors, for example, bus rides or on highways).

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Central banks have never set a usage objective for banknotes as a means of exchange. Yet they have become concerned in those instances where banknote usage declined steeply in recent years. Arguably, not setting a banknote usage objective is an implicit consequence of: (1) that the use of cash has traditionally been dominant in certain segments; (2) the difficulty of measuring the effective usage of banknotes as means of payment (that is, through surveys or merchant data); (3) the difficulty of influencing the effective usage of banknotes as a means of payment,  once in circulation; (4) the possible conflict of interest between the role of central banks as suppliers of cash and that of supervisors/overseers of providers of alternative means of payment (for example, banks and ­payment companies). These four factors do not apply in a CBDC context, at least not to the same extent. There is no assurance that CBDCs will be the dominant digital means of payment. Moreover, central banks could easily monitor the use of CBDC. Finally, CBDC payments would remain intermediated by regulated institutions: thus, a higher usage objective would not result in the crowding out of supervised intermediaries. In the future, central banks might therefore be less reluctant to set objectives for the use of CBDCs. Given that they will not set the objective to reach a dominant market share, central banks may instead aim at ensuring broad access to central bank money within its currency area, without displacing payments relying on private payment instruments at the aggregate level or in any specific segment. Central banks might prefer a situation where a large portion of the population uses CBDC on a regular basis for a small fraction of their payments instead of a situation  in  which  a minority of the population relies on CBDC for the  overwhelming majority of their day-to-day payments. This is in line  with the  idea that  paying with  central bank money should be a credible option  in as  many circumstances and for as many payers as possible, such  as to ensure CBDC’s benefits  in (1)  enhancing competition and  thereby lowering costs of payments, (2)  ensuring that the co-existence  and thus the interchangeability between the two forms of money is well-anchored, and (3) that the strategic autonomy of payments is ensured. Central banks may identify reasons to set different objectives per segment. For example, the use of cash in a certain segment could be a reason to set or to alter the CBDC penetration objective in that segment. In a digital context, it would probably be possible to measure whether this objective is met or not. Section 4.7 considers what levers a central bank would have to reach its objective.

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4.4  First Success Factor: Widespread Merchant Acceptance The ability to pay anywhere is one of the basic success elements for a CBDC. As for banknotes, a public network needs to be set up, based on two concurrent features of central bank money: (1) it is the safest/most stable payment asset in the economy, and (2) only central bank money can be legal tender. These are two crucial and inseparable features. In normal times, neither payer nor payee will put excessive emphasis on the quality of most of the payment asset that are normally used. In times of financial crisis however, lack of confidence/awareness on the (low) quality of private payment assets can bring commerce to a halt, contaminating the real economy. In order to prevent this risk a public institution, the central bank, was granted the exclusive right to issue sovereign money, in the form of banknotes, and made the use of banknotes an option always available for citizens to discharge debts. The enforceability of legal tender to impose acceptability of banknotes by merchants has varied over time and across different countries.17 Regarding the exclusive right to issue banknotes, most central bank statutes refer to the visible form (that is, the payment instrument: ­banknotes18) rather than to its internal content (that is, the payment asset: central bank money). The institutional and legislative changes that gave the central bank the role to issue banknotes took place when paper money was the only form that central bank money could take from a technological standpoint in order to process payments between any individuals with immediate finality. This suggests that new legislative acts may be required for central bank money to be legal tender if it takes a digital form (that is, CBDC). Making CBDC legal tender raises a number of questions. The main reference is that of banknotes: ●

●

With cash, merchants do not face any fee. Nor do they require any acceptance device. This may not be so for CBDC. However, banknotes imply processing costs, both internal and external. Moreover, merchants must take the risk of holding cash or pay theft insurance. They also face charges by suppliers of cash/coins for making change or depositing cash at their banks. To whom legal tender generates enforceable obligations may potentially differ in the cash and CBDC spheres. Cash acceptance by merchants is impractical in the e-commerce sphere, while legal tender provisions for CBDC may require some exceptions for merchants who do not have the basic necessary device for accepting non-cash

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payments.19 One option is to construe the legal tender application in CBDC as enforcing non-discrimination on those merchants who are already accepting electronic payments. Finally, in practice currently the very large majority of merchants cannot afford the luxury of accepting cash only. They are therefore subject to the market power of providers of digital payment services, which in the recent past was sometimes exercised to the point of inducing competition authorities to introduce price-capping regulations. The choice of a business model for the CBDC has the potential to alter the relative bargaining power of merchants vis-à-vis payment providers.

The key variable to preserve or alter the current equilibrium would probably be the possibility, or not, to apply a merchant service charge (MSC). In the context of CBDC, an MSC would raise a number of considerations, such as: its compatibility with legal tender; whether the absence of an MSC (and the implied cost recovery) would imply a competitive disadvantage for private payment solutions; what would be the optimal level of the MSC and whether it should be determined by the central bank.20 When granting CBDC the legal tender status, another key issue is the possible impact of technical standards on competition. Developing  the CBDC on the basis of the existing standards would limit the overall investment required. It would also help secure the widespread adoption of CBDC; for example, since payment through a QR code scan is scarcely used in Europe, basing the legal tender requirement only on the provision of a QR code may limit the adoption of CBDC. However, from a competition perspective if a standard is made mandatory it needs to be an open standard for easy adoption by any provider of payment terminals. For example, if a certain near field communication (NFC) standard is set as legal tender, but it is the proprietary technology of one company, that company would be given an undue competitive advantage. Understanding intellectual property rights in the payment terminal market is key when specifying how legal tender should be applied. Another issue is whether the acceptance standard applied for legal tender can or cannot be re-used by payment instruments based on commercial bank money. This would never imply that the merchant is under an obligation to accept such payment. A parallel can be established in the physical world, where public roads reduce the costs of reaching merchants’ stores without generating any form of obligation to buy from them. These collaborative mechanisms are not new to central banks and commercial banks (for example, SEPA21 standards in the euro area). Facilitating the standard to be chosen for CBDC to be made available as a public good to

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regulated payment service providers (PSPs) would also facilitate interoperability of CBDC with private payment solutions (for example, that any payment can be made from a CBDC account/wallet to a commercial bank money account, and vice versa). 4.5  Second Condition for Success: Efficient Distribution of CBDC In its report (ECB 2020, the Eurosystem expresses the view that a digital euro should be distributed preferably by supervised intermediaries, such as banks and other payment providers This would have a number of advantages, such as leveraging the expertise and resources of the financial sector in the provision of end-user services and easing the conversion from commercial bank money into central bank money, and vice-versa, and facilitating reliance on the customer authentication and compliance checks done by financial institutions. Commercial banks have an interest in the continued use of central bank money, as it impacts their long-term strategic positioning. Already, the provision of cash distribution services for banks represents a cost rather than a source of revenues, but they need to do it because it is inherent to their business model to provide conversion of their sight deposits into cash at par, upon demand, within a very short notice period. The convertibility of their core liabilities (sight deposits) at par with central bank money is an essential element of the special nature of banks. If central bank money were not demanded at all by citizens, either in physical form or in digital form, bank deposits would not be inherently different from other forms of debt. What would be characterized as money in such a scenario? The long-term equilibrium could depend more on which payment assets large global payment platforms agree to offer within their portfolio, or which instruments large e-commerce platforms accept for payments, as this might become the characteristic that would effectively confer liquidity to that payment asset. It would depend less on the monetary stability of that payment asset. This scenario of loss of monetary sovereignty would be incompatible with monetary and financial stability,22 and would thus be undesirable for public authorities, especially central banks. However, it would be undesirable also for commercial banks, which would lose their central role in financial intermediation. We cannot rule out the possibility that the distribution of CBDC should be incentivized. If so, the incentives could take the form of premia paid to supervised intermediaries. In any event, central banks need to define a business model which preserves a competitive payments landscape. In the rest of this section we distinguish two types of services (offered by two different actors) that are necessary for the distribution of the CBDC:

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(1) CBDC onboarding and funding services, which includes the operations required for the opening, managing and closing of a CBDC account, as well as for its funding and de-funding through an associated commercial bank account or via cash; and (2) payment services within the payment segments foreseen for CBDC. CBDC onboarding and funding services A key factor sustaining the reachability of cash is that people in general hold banknotes in their wallets in case of need, even if they would use them infrequently. The equivalent network effect in CBDC would be to create as much as possible a process by which citizens own a CBDC account/wallet, although different persons would fund it to a different extent and use it to pay with it or not. A CBDC account/wallet would probably need to be associated with (1) a funding/defunding liquidity source, most often bank account; and (2) a unique identity and identifier code (for example, IBAN in the EU) to which a mobile phone number and/or e-mail address can be linked to serve as alias. End-users should be able to set floors, which would trigger automated funding requests, and caps, which would trigger automated defunding orders. The ability to define a floor would be particularly relevant for consumers/payers not worrying about having sufficient CBDC funds  to make payments; surveys on payment preference show this is a  critical  factor for success in a digital payment instrument. Merchants may  defund  the  CBDC  from all sales received to a commercial-bank money account prior to the time of the day at which remuneration is calculated. Deposit-taking institutions already run Know Your Customer (KYC) processes when opening accounts for their clients. They are thus well positioned to take care of the opening of a CBDC account. Incentives for deposit-taking institutions to actively encourage their clients to open a CBDC account/wallet may be driven also by competition between banks to link the funding/defunding of the CBDC account/wallet to their own commercial bank account, in those instances where citizens have more than one bank account. The possible compensation by the central bank for the service provided would also matter. To onboard unbanked persons, a central bank would need to go beyond  this, for example, by widening the range of entities who may do KYC/onboarding and by incentivizing banks to perform the KYC/ onboarding of those who are not their clients. Funding services for the  unbanked need also to be considered, for example, by facilitating the convertibility between banknotes and CBDC when paying in a supermarket.

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Payment services Incentives for PSPs to offer CBDC payment services will depend on the impact on: (1) costs – does the distribution represent an additional cost for PSPs or does it allow them to save costs? (2) Revenues – does it generate new revenues or does it undermine existing revenue sources? (3) Exclusivity – should the possibility of offering CBDC payment services be available at any time to any PSP, or is it something they should compete for? 1. Cost impact. What costs the front-end providers of CBDC payment services and central banks, respectively, will bear needs to be defined precisely. The higher the number of cost items borne by PSPs, the more central banks will need to consider whether there is an equivalent revenue or additional business source to incentivize the provision of the service. Payment service providers may bear some of the following costs in addition to those already borne when processing commercial bank money payments: (a) end-user support and servicing (for example, on questions related to a service outage or individual payments); (b) processing and network costs to connect to CBDC back-end infrastructure; (c) maintenance and upgrading of terminal infrastructure and solutions (no additional marginal cost if the terminal is also used for non-CBDC payments; see section 4.4); and (d) responsibility for fraudulent payments conducted with a CBDC payment instrument as well as the costs related to resolving individual cases. 2. Revenue impact. The revenue impact for PSPs will depend on: (a) The possibility for PSPs to reach a wider range of merchants to whom to offer their services, also thanks to the possibility to apply the standards of the CBDC (having legal tender status) to payment instruments based on commercial bank money (see 4.4). ● Whether PSPs would be able to obtain revenue for basic CBDC payments at the POI with a CBDC payment instrument they have issued. The possible sources for this revenue might be an MSC, and/or compensation paid by the Eurosystem to intermediaries as a fraction of the additional seigniorage revenues generated by the issuance of a CBDC. Furthermore, while the introduction of CBDC would be designed to have a limited impact on bank deposits (see section 3), this impact could be quantified and temporarily returned to the payment industry as an incentive for offering CBDC payments. The impact of CBDC would be neutral for the payment industry as a whole,

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while those market participants who are most efficient in the provision of payment services would benefit. 3. Exclusivity (certification versus licensing). A further consideration is whether the possibility of offering CBDC payment services should be available to any PSP meeting the technical requirements that the central bank would set (that is, through a certification process). An alternative would be to provide a limited number of licenses to a limited number of PSPs to offer CBDC payment services for a defined period of time. Payment service providers winning a tender would then have the certainty that the perceived advantages of offering CBDC payment services would be theirs for a defined period of time, generating in turn the incentive to invest in the promotion of CBDC. The duration of the license could be made conditional on reaching the central bank objective, in order to protect the central bank in the event that the results are suboptimal. Further issues Three further relevant considerations will need to be addressed. First, from the perspective of monetary sovereignty, the question arises as to what extent it would be acceptable for non-domestic firms or subsidiaries of non-domestic firms to play a significant role in distributing the digital euro. Probably this outcome would not be ideal, given that reducing external dependencies may be one of the objectives of introducing a CBDC. Central bank measures to avoid an undesired outcome need also to be consistent with financial regulation and trade agreements. Second, should CBDC have its own mobile application (app) or should it be integrated in the app of the PSPs? A central bank may wish to facilitate the visibility and branding of its CBDC payment and liquidity ­management services through a separate mobile app available to citizens and merchants. It may also prefer the higher degree of control and independence of a separate app, and the ability to control, for example, the privacy of payments data. As soon as the deposit-taking institution has brought onboard a citizen or merchant, this app would be available to them for making payments. Alternatively, CBDC wallets could be integrated into existing payment apps, for example, of PSPs. Depending on the choice, either the PSPs or third parties would need to support the relevant app. Third, should CBDC be integrated, or allowed to be integrated, into e-commerce payment solutions, as one of the possible wallets from which to pay? If so, what limitations may apply to the payment solution provider (for example, the possibility to charge or not an MSC, and up to what level)?

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4.6 Third Condition for Success: End-User Demand by Consumers to Pay with CBDC The motto ‘pay anywhere, pay safely, pay privately’ summarizes the incentive for consumers to choose to pay with CBDC. Central banks would presumably prefer consumers not to make the largest share of their P2P and POI payments with CBDC, but some strong use instances should exist. The following uses could motivate a large part of the population to make some of their P2P and POI payments with CBDC: ●

● ● ●

● ●

●

In currency areas, such as the eurozone, where no P2P solution covers a broad section of the population already, CBDC may provide a fertile ground for P2P payments beyond the reach of the existing private solutions. If this P2P solution already exists (for example, Swish in Sweden, Tikkie in the Netherlands and Bizum in Spain), CBDC may require additional features to obtain a large take-up in this segment. At the POI and in e-commerce, merchants strongly encourage the use of CBDC and cash. At the POI and in e-commerce, CBDC is as convenient to use as existing private payment solutions. Use instances where privacy is important for the consumer; he or she understands the privacy level configurations which CBDC allows and stands ready to select the preferred option. Financial inclusion – facilitating access to digital payments to those who would otherwise only make use of cash. E-identity and CBDC combined use case – most people hold an identity (ID) card and cash in their physical wallets since they may sometimes need either of the two. In a digital equivalent where a person is asked to register and pay for a service, both e-identity and CBDC could be combined to do this for maximum convenience and with explicit consent both for sharing the e-identity and to make the payment. International payments between two currency areas, subject to the two central banks agreeing on the mechanism to offer cross-border/ cross-currency P2P/POI payments in a way that each citizen is always holding CBDC in their own currency (see section 5).

Use cases are complementary, and end-users may expect a CBDC with a broad set of use cases as a general precondition for embracing CBDC as one of their regular means of payment. Moreover, end-user demand will benefit from the convenience of onboarding to CBDC and transferring

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commercial bank money smoothly to their CBDC wallet, and vice versa, including through automated sweeping rules.

5.  THE INTERNATIONAL DIMENSION The literature on the international dimension of CBDC has highlighted that using a CBDC for cross-border payments could have substantial benefits but would also come with potential risks. A number of studies focus on the financial stability risks of large-scale international use of CBDC. For example, Bindseil (2018) explores the flow of funds implications and related financial stability risks of asymmetric cross-border holdings of CBDC, suggesting that it will be in the interest of both jurisdictions and their central banks that the CBDC cannot be held in unlimited amounts across borders (for example, through a remuneration which makes it less attractive as store of value relative to other cross-border investments). For the example of an unconstrained international usability of CBDC, Ferrari et al. (2020, p. 3) note that: the presence of a CBDC amplifies the international spill-overs of shocks, thereby increasing international linkages. … CBDC creates a new international arbitrage condition that links together interest rates, the exchange rate and the remuneration of the CBDC. … This leads to stronger exchange rate movements in response to shocks in the presence of a CBDC – foreign agents rebalance much more into CBDC than they would into bonds, if the latter were the only internationally traded asset, because of the CBDC’s hybrid nature.

In view of these potential risks, we might want to consider an alternative, extreme approach whereby no cross-border usage and positions of CBDC would be allowed at all, so that cross-border payments would have to continue to rely on solutions provided by the private sector only. However, a number of publications by central banks, such as ECB (2020, p. 14), have emphasized the potential benefits of using CBDC for improving cross-border payments. Building Block 19 of the Financial Stability Board (FSB)/G20 work on cross-border payments focuses on the potential benefits of cross-border use of CBDC (Stage 2 report, technical annex): CBDCs can enable cross-border payments either through the availability of domestic CBDC to users from other currency areas or through the domestically issued CBDC, in conjunction with the CBDC arrangement on the side of the receiving jurisdiction. This building block is aimed at providing prospective domestic CBDC implementations with the necessary guidance on interoperability and interfacing with international infrastructures to enable cross-border transactions.

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In this context, there is a literature stressing the importance of interoperability of CBDCs for future cross-border payments, suggesting that early considerations of this issue will maximize the benefits of CBDC for international payments. A group of central banks and the Bank for International Settlements (BIS), in 2020, published a report23 concluding that ‘CBDC systems could be designed to interoperate to facilitate ­cross-border and cross-currency payments’. Auer et al. (2021, p. i) develop this argument in detail and argue that: Cross-border payments are inefficient, and technology could play a role in making them better. One means could be through interoperating central bank digital currencies (CBDCs), forming multi-CBDC (mCBDC) arrangements. … benefits are especially relevant for emerging market economies poorly served by the existing correspondent banking arrangements. Yet competing priorities and history show that these benefits will be difficult to achieve unless central banks incorporate cross-border considerations in their CBDC development from the start and coordinate internationally to avoid the mistakes of the past.

Another perspective supporting the cross-border use of CBDC is that promoting the international use of a currency through the issuance of a digital currency. In a communication of January 2021,24 the European Commission discusses the digital euro in the context of strengthening the international role of the euro. The Eurosystem digital euro report discussed the matter in the context of one scenario (scenario 6) under which the issuance of the digital euro could become beneficial (ECB 2020, p. 14): Euro area leaders recently stressed that a strong international role of the euro is an important factor in reinforcing European economic autonomy. The issuance of CBDCs by major foreign central banks could enhance the status of other international currencies at the expense of the euro. In such a situation, the Eurosystem might consider issuing a digital euro in part to support the international role of the euro, stimulating demand for the euro among foreign investors. A cooperative approach to interoperable designs of CBDCs across currencies could contribute to strengthening the international role of the euro and to improving cross-currency payments also without having to grant ­non-euro area residents’ access to the digital euro. Moreover, a digital euro could help to fill gaps or correct inefficiencies in existing cross-currency payment infrastructures, notably those for transfers of remittances, through improved interoperability among payment systems dealing in different currencies.

The report therefore concludes that: ‘The digital euro should be potentially accessible outside the euro area in a way that is consistent with the objectives of the Eurosystem and convenient to non-euro area residents.’ In its recent report on the international role of the euro (IRE), the ECB examines how issuance of a CBDC could impact the international role of a currency

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(proxied by its share in global export payments).25 The analysis suggests that a CBDC would have a positive impact on the global use of the currency, as it would reduce frictions and costs of cross-border payments. This positive impact of a CBDC on the international use of the c­ urrency could also benefit from a wholesale dimension, as large transactions between financial intermediaries (for example, invoicing in global trade, use as reserve currency and/or investment vehicle) are important in determining the international role of a currency.26 However, the international role of a currency also depends on other factors, such as the stability of economic fundamentals, the size of the economy and the size of efficiency of capital markets. Moreover, we might argue that when all major currency areas would issue digital currency and make them available for international use, a zero-sum game would occur, in that any currency could only expand its role at the expense of the international importance of other currencies. For this reason, we may wonder if the perception of a digital euro, or of other CBDCs, to serve these objectives is not creating risks of a global noncooperative competition to promote international usage of own currencies. However, competition is in principle also useful and can improve the quality and availability of international means of payments for the benefit of the international economy, that is, be more than a zero-sum game. Also, in view of the strategic importance of the matter for every major monetary authority, it is preferable to agree on common rules for such a competition, to prevent that CBDC issuance facilitates destabilizing the international monetary system (for example, by increasing the volatility of international capital flows). Consider the following international user/use categories for CBDC, whereby we distinguish usages including a currency conversion and usages without currency conversion: 1. Use of domestic CBDC to purchase goods and services abroad with currency conversion. Central bank digital currencies could in ­principle  cover a similar international usability for e-commerce as international credit card schemes (ICSs) such as Visa and Mastercard. How ambitious and realistic is it for a CBDC to be competitive in this regard, and would that depend on international interoperability issues between CBDCs? ‘Co-branding’ with an ICS would probably not be considered desirable by public authorities, in view of the limitations this would imply for strategic autonomy and for level playing-field considerations. However, it needs to be recognized that the main card schemes combine decades of experience and investments into global usability with large economies of scale through their global customer

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base. Establishing a competitive independent alternative would at least require significant investments, and probably coordination between central banks.27 Central banks moving almost simultaneously towards developing CBDCs could share at an early stage technical standards, and think about possible interoperability. An alternative view would be that coordination with domestic stakeholders (citizens, firms, payment industry, public authorities and legislators) is already overwhelmingly complex, and that it is challenging to add simultaneously a global dimension to it. In this view, CBDCs would be developed with a view to domestic POI payments first, and interoperability and cross-border use would be considered for future releases, once several CBDCs had appeared. Ideally, cross-border functionality and interoperability would be considered from the start under an open architecture. 2. Foreigners entering the currency area to pay with domestic CBDC with currency conversion when obtaining the domestic CBDC. Solutions through which foreigners coming into a CBDC-issuing currency area could pay with that CBDC appear per se less challenging. However, the uploading of CBDC holdings, for example, on a card or an application, should be as efficient as withdrawing cash from an ATM. Also, it should be kept in mind that travelers typically rely on ICSs, which can be used immediately without any set-up costs. Before using CBDC, the traveler would need to register or, at least for low values, obtain a card and upload funds to it. It may be more efficient for the (short-term) traveler, and perhaps even from an economic perspective, to simply rely on this solution. An onboarding of travelers to CBDC may become more attractive for longer stays, especially if the efficiency of registration and the uploading of funds can be solved efficiently. Solutions for temporary visitors ideally would be within the scope of CBDC projects, even if a solution is not strictly necessary from the first CBDC release on because of the continued existence of ICSs and banknotes. 3. Remittance-like cross-currency payments in CBDC with FX conversion. Central banks might consider for some time in the more distant future having a global CBDC-based payment system (a single global payments area in CBDC, similar to the current Single European Payment Area  – SEPA – in commercial bank money) for everyone with addressable accounts (for example, through some proxies, such as phone numbers) and automated FX conversion layer (assuming that anti-money laundering and counter terrorist financing – AML/CFT – issues would be solved efficiently, and so on). Then, cross-border holdings of CBDC would not be necessary as each CBDC could stay domestic, and every cross-border payment in CBDC would be

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converted at the border. The FX conversion layer could be organized through requesting competing market makers with accounts in both currencies to commit quotes (for up to a specific value), and whenever a cross-currency CBDC transfer is initiated, the best quote offered among all market makers is hit and executed instantaneously. When deciding on engaging in such an idea, central banks face the questions of to what extent they want to change the international payment system and whether or not they want to enter the core business of the international payments industry. This all-encompassing solution would also cover the use instances in the previous points listed, while not requiring any cross-border holdings (and thereby avoiding the problem of additional capital flows, as discussed, for example, in Ferrari et al. 2020). 4. Cross-border payments without FX conversion would normally require a foreign resident to be able to hold and use CBDC, even without travelling into the CBDC-issuing jurisdiction. As a work-around for foreign importers to pay a domestic exporter who asks to receive CBDC, the foreign importer could initiate a payment on its side in its domestic currency but require an internationally active bank (a  correspondent bank) to make a conversion in the CBDC-issuing country into CBDC (with or without the involvement of another correspondent bank). If a foreign importer could hold domestic CBDC and pay directly with it to the domestic exporter without further bank involvement, then this could go a long way to substituting international payment services offered by banks. The FSB/G20 initiative on cross-border payments considers that private cross-border payments have not progressed enough in respect of speed and cost-efficiency, and considers this a role of CBDC. However, a significant challenge in international payments has been high compliance costs and risks, and related de-risking and implied lack of competition. Cross-border payments in CBDCs would also have to comply with AML/CFT rules. However, CBDC appears as a possible way to improve cross-border payments that should be explored in relation to building block 19 of the G20 Roadmap to assess precisely the opportunities and challenges related to the interoperability of CBDCs. 5. Foreign residents using CBDC for payments between them (within one, or between two jurisdictions), without FX conversion. These use instances imply that a foreign means of payment would be used fully outside the issuing jurisdiction and would fall under a truly international use of a currency. It would require cross-border holdings of CBDC, and it would probably emerge only in the context of internationally dominating CBDCs, for example, a US dollar-CBDC, perhaps

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co-existing with few other contenders, such as a euro-CBDC. This use raises most issues from the perspective of international currency competition, strategic autonomy of foreign countries, and cross-border capital flows. Ideally, this usage would take place within a mutually agreed framework, taking into account flow of fund implications and risks to international financial stability. In summary, there are international payment use instances for CBDC, but their immediate realization also faces several challenges. First, crossborder holdings should only be allowed in the context of an international consensus and a set of rules, and would probably need some safeguards against facilitating large and fast capital flows. Second, key reasons which have contributed to make cross-border payments (in particular, remittances) inefficient would also apply to CBDC cross-border use, such as AML/CFT compliance in the context of heterogeneous and ambiguous global implementation of rules, and the implied legal uncertainty and risk. Progress in these fields would benefit private and CBDC-based international payments alike. Third, international card payments schemes are relatively efficient for small-value payments and may seem to reduce the immediate necessity to deploy CBDC for international travelers and retail e-commerce, although in the medium term these use instances should be in-scope. A fully effective cross-border CBDC network with automatic currency conversion layer (supported by competing private market makers) is possible for the medium to longer-term future, in particular after CBDCs is effectively deployed for domestic usage and if compliance with AML/CFT rules in international payments has been made more efficient. It is important to keep this scenario in mind and to ensure that design decisions taken on CBDC with a view to their domestic use facilitate a future cross-border use.

6. CONCLUSIONS Central banks will want to predict and control as far as possible the eventual role that CBDC will play in the financial accounts of economic sectors and as means of payments in the economy. Neither a minor usage of CBDC, in which the investments made on it are not recovered from the point of view of society, nor an excessive role of CBDC, in which it crowds out the private financial sector (and its innovativeness) or even undermines financial stability by damaging the financial sector’s economic viability, can be accepted. How we ensure that neither of these two scenarios ­materializes is therefore important, not trivial.

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This chapter started from a clear distinction between (1) the flow of fund effects of an introduction of CBDC, relating mainly to the store of value function of CBDC, and thus controlling against the risk of balance sheet disintermediation of banks, and (2) the role of means of payments of CBDC. The former seems relatively well controllable through limits and/ or interest rate incentives, while steering the second is more complex in view of the need to understand and secure the network effect for a new payment option. The balance sheet effects (store of value function) and market share in payments of CBDC are linked. For example, if CBDC is very attractive as a means of payment, it will attract many citizens to open CBDC accounts, and this could be the basis for potentially large flows of funds. Similarly, if citizens are attracted by the store of value function and this leads most citizens to rapidly open CBDC accounts, then also the usage as means of payment will benefit from this, as the incremental step to use CBDC as means of payments will be low for these citizens. This also applies to the level of holdings and the level of payment activities: if CBDC is used daily as a standard POI means of payments by a citizen, the required stock of CBDC necessitated as liquid reserve for payments is higher (and so on). Also, the two functions of money show a significant disconnect. This chapter also considered whether the central bank should define a CBDC usage objective and, if so, how to achieve it. A number of parameters available to central banks will determine the take-up of CBDC, and some of these parameters will also help to make it relatively predictable: (1)  the legal tender status of CBDC; (2) the functional scope  of CBDC (with all its details and complementarities); (3) the convenience of the usage of CBDC and to what extent it satisfies the needs of citizens, such as the protection of their data; (4) the scope of free CBDC payment services; (5) the incentives to private sector financial firms and merchants to ­support the usage of CBDC, including the charges levied and/or compensations paid to service providers to support the distribution of CBDC; and (6) the built-in controls to prevent an excessive stock of CBDC, that is, an excessive reliance on it as store of value. Designing a CBDC from scratch obviously creates the temptation to give it the most comprehensive and state-of-the art functionality and to base it on the most innovative technology. For example, it has been suggested that CBDC should: (1) be offered in the form of all major payment instruments, including cards, mobile payments and desktop access, and be as convenient as existing private solutions; (2) allow also for fully anonymous payments to protect privacy; (3) allow also for offline payments; (4) allow for instant credit transfers to any commercial bank account and direct debits; (5) be programmable and allow for ‘smart contracts’ for advanced use

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cases in industry and commerce; (6) ensure financial inclusion (meaning potentially to be also usable for the non-banked and those without mobile phones); and (7) be available for international usages, and to strengthen the international role of a currency. Supporters of a broad functional scope for CBDC could argue that the central bank is in a unique position in relation to credibility and economies of scale, in that, at least in large currency areas, even very significant investments into a comprehensive CBDC based on newly built technology can easily be justified. Also, supporters of a broad functional scope will argue that a too narrow scope may make CBDC insufficiently attractive and may lead to low demand, implying that the potential benefits of CBDC remain unachieved. Alternatively, supporters of a narrower functional scope aim to minimize the possibility of crowding out the private sector. They also argue that a broad-scope CBDC can become hard to manage from a project perspective, postponing time to market, and that a broad scope may go beyond the user and policy needs and thereby be inefficient. As regards the latter, the payments industry provides some examples of promising functionality and technologies which in the end did not take off because usage remained mediocre. This dichotomy between a narrow and a broad scope could also suggest the benefits of an open architecture where additional useful functionalities can be added as they become sufficiently clear and as they can be added to the digital euro from a policy and project perspective. What exactly should be within the scope of the functionality of CBDC also depends on where possible gaps are in meeting current needs of citizens and firms, and/or in which fields it is plausible that CBDC could offer better value and efficiency for society than alternatives can. The chapter proposes some criteria for central banks to decide to which payment segments a CBDC is best (or worst) suited. Moreover, central banks need to define the CBDC business model in collaboration with the three key stakeholders who may draw advantages from it: consumers, merchants and supervised intermediaries. Their respective ability to improve the existing situation depends on the actions taken by others, noting that reconciling initially conflicting interests will be important. This chapter identifies three conditions for success: (1) legal tender resulting in effective merchant adoption, which requires defining what legal tender implies exactly in a digital context and whether/how other payment solutions may benefit from the standard it generates; (2) incentives for supervised intermediaries, which requires an understanding of how their cost and revenue structure can be impacted by various fee/ compensation structures; and (3) end-user demand by consumers to pay with CBDC and the identification of the transactions for which CBDC is more likely to be used without necessarily becoming invasive.

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Last but not least, determining cost recovery principles and fee/compensation structures should be based on a comprehensive analysis of partially alternative and partially complementary approaches, including (1) cost recovery; (2) alignment with existing private-sector solutions; (3)  alignment with the approach taken by central banks for banknotes; (4)  a ­welfare-economic, comprehensive microeconomic analysis; (v) the idea to achieve a market share that is considered desirable, and therefore to adequately incentivise the various parties to use CBDC. While there can be little doubts on the merits of CBDC and on the need for central banks to follow the change of retail payments habits and technology to continue servicing citizens and firms, this chapter has illustrated the complexity of the technical challenges ahead. Designing CBDC well in order to achieve its objectives in a controlled manner will require deep dives not only into the economic nature of money as means of payment and store of value, but also into the rich ecosystems of digital retail payments.

NOTES  1. European Central Bank. Opinions expressed in this chapter are our own, and not necessarily those of the ECB. We would like to thank, for their helpful comments, George  Kalogeropoulos, Jean-Francois Jamet, Andrea Pinna, Mirjam Plooij, Jürgen Schaaf, and a number of colleagues from the Eurosystem task force on digital euro.   2. While retail CBDC can be regarded as a fundamental innovation as it grants non-banks (households, non-bank firms and public sector entities) general access to digital central bank money, wholesale CBDC already exists, since banks have accounts with central banks and these accounts are digital. The term ‘wholesale CBDC’ is typically used in a potentially misleading way for the idea of changing the technology behind the access of banks to digital central bank money from the current conventional technology to a blockchain/distributed ledger technology.   3. Other mechanisms are banking regulation and supervision or deposit insurance.   4. For a definition of stablecoins, see, for example, a 2019 report by the G7/IMF/CPMI, accessed 8 March 2022 at https://www.bis.org/cpmi/publ/d187.pdf.   5. See DNB (2021) study.   6. Currently, for example, euro area banks hold large excess reserves, and the first effect of deposit outflows would be a decrease in excess reserves. In that event, the central bank balance-sheet size would not increase, and commercial banks would not need additional central bank funding.   7. The rate on the deposit facility is the floor of the corridor represented by the monetary policy rates, that is, the rate of remuneration of the excess reserves of commercial banks deposited at the ECB.  8. The decision to lower the remuneration of tier 2 could in theory be interpreted by investors as an indication that the central banks consider a crisis imminent, leading to self-fulfilling instability. This, however, holds for all financial crisis measures of central  banks without being considered a reason to question the credibility of these measures.   9. See Zamora-Pérez (2021).

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10. More information in SPACE study, including the impact of demographics, see https://www.ecb.europa.eu/pub/pdf/other/ecb.spacereport202012~bb2038bbb6.en.pdf (acc­essed 8 March 2022). 11. See Van der Cruijsen et al. (2017). 12. See Hernandez et al. (2014). 13. This does not apply to e-commerce where cash has only a very limited presence. 14. In turn, one of the key factors in paying with cards is not having to worry about ‘carrying enough cash’. See Esselink and Hernandez (2017). 15. Some people are aware that with banknotes the intrinsic nature of the payment asset (that is, central bank money) is safer. In normal times, this will not normally affect their payment decisions (only in times of crisis, Gresham’s law would argue for the consumer using the least safe payment asset). Beyond the safer nature of the payment asset, banknotes (as a bearer-based payment instrument) are still subject to theft or destruction and thus not necessarily a safer form of holding money. 16. References: ‘Study on the payment attitudes of consumers in the euro area (SPACE)’, December 2020, accessed 8 March 2022 at https://www.ecb.europa.eu/pub/pdf/other/ ecb.spacereport202012~bb2038bbb6.en.pdf; and ‘The future of payments series 2  – Part I. Post Covid-19: what executives are thinking and doing’, 13 January 2021, accessed 8 March 2022 at https://www.dbresearch.com/PROD/RPS_EN-PROD/PROD​ 0​000000000515432/The_Future_of_Payments_Series_2_-_Part_I__Post_Cov.pdf ?unde​ fined&reallo​ad=V~IlfF~24n0/IO​cDrBy​L5TF4e1DfoSxp​xe​E0qDnk​KaQd​Ha/cIh8hn​4​ q​H​e​V​g8OW​a2. 17. The EU Commission Recommendation of 2010 sets mandatory acceptance as a rule, subject to possible exceptions and subject to the good faith principle. A similar logic would need to be transposed to CBDC; https://eur-lex.europa.eu/legal-content/EN/ TXT/PDF/?uri=CELEX:32010H0191&from=EN (accessed 17 March 2022). 18. In the euro area, in accordance with Article 128(1) of the Treaty on the Functioning of the European Union, the Governing Council of the ECB shall have the exclusive right to authorize the issue of euro banknotes within the European Union. The ECB and the national central banks may issue these notes. 19. For example, elderly semi-professional merchants in traditional vegetable or traditional goods markets may be only able to accept cash, as they lack an electronic device. If no exception to a legal tender status of CBDC is envisaged, then the state may have to provide the necessary devices. See IMF publication in this respect: https://www. imf.org/en/Publications/WP/Issues/2020/11/20/Legal-Aspects-of-Central-Bank-DigitalCurrency-Central-Bank-and-Monetary-Law-Considerations-49827 (accessed 8 March 2022). 20. In this instance, the level should be agreed with competition authorities. 21. Single Euro Payments Area (SEPA). 22. See Panetta (2020). 23. ‘Central bank digital currencies: foundational principles and core features’, joint report by The Bank of Canada, European Central Bank, Bank of Japan, Sveriges Riksbank, Swiss National Bank, Bank of England, Board of Governors of the Federal Reserve and Bank for International Settlements, accessed 17 March 2022 at https://www.bis.org/ publ/othp33.htm. 24. https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52021DC0032&fr om=EN (accessed 17 March 2022). 25. For the 2021 report see: https://www.ecb.europa.eu/pub/ire/html/ecb.ire202106~a058f84​ c61.en.html (accessed 17 March 2022); in particular the special feature ‘B: Central bank digital currency and global currencies’. 26. For example, the report on the international role of the euro uses a composite index to assess the evolution of the international role of the euro, comprising FX reserves, international debt, international loans, FX turnover and SWIFT volumes. 27. From a front-end perspective, developing and implementing dynamic currency conversion services at the merchant level for consumers is an innovation to be used for multiple

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Central banking, monetary policy and the future of money payment products, not only for CBDC or credit cards. From a back-end perspective the technical conversion and settlement needs to be addressed. If solved in the international/ SEPA (non-cards) infrastructure it could be deployed for all non-card payment products, including CBDC.

REFERENCES Andolfatto, D. (2018), ‘Assessing the impact of central bank digital currency on private banks’, FRB St Louis Working Paper No. 25, Federal Reserve Board, USA. Auer, R., P. Haene and H. Holden (2021), ‘Multi-CBDC arrangements and the future of cross-border payments’, BIS Paper No 115, Bank for International Settlements, Basel, March. Bank of England (2020), ‘Central bank digital currency – opportunities, challenges and design’, discussion paper, Bank of England, London, March. Barrdear, J. and M. Kumhof (2016), ‘The macroeconomics of central bank issued digital currencies’, Staff Working Paper No. 605, Bank of England, London. Bindseil, U. (2020), ‘Tiered CBDC and the financial system’, ECB Occasional Paper No 2351, European Central Bank, Frankfurt am Main, January. Bindseil, U. and F. Panetta (2020), ‘Central bank digital currency remuneration in a world with low or negative nominal interest rates’, VoxEU, 5 October, accessed 8  March 2022 at https://voxeu.org/article/cbdc-remuneration-w​orldlow-or-negati​ve-nominal-interest-rates. Chiu, J., M. Davoodalhosseini, J. Jiang and Y. Zhu (2020), ‘Bank market power and central bank digital currency: theory and quantitative assessment’, Bank of Canada Staff Working Paper No. 20, Bank of Canada, Ottawa. CPMI Markets Committee (2018), ‘Central bank digital currencies’, Bank for International Settlements, Basel, March. De Nederlandsche Bank (DNB) (2021), ‘What triggers the consumer adoption of a CBDC’, DNB Working Paper No. 709, De Nederlandsche Bank, Amsterdam, April. Dyson, B. and G. Hodgson (2016), ‘Digital cash: why central banks should start issuing electronic money’, Positive Money, accessed 17 March 2022 at https:// positivemoney.org/publications/digital-cash/. Esselink, H. and Hernandez, L. (2017), ‘The use of cash by households in the euro area’, Occasional Paper Series No. 201, European Central Bank, Frankfurt am Main, November, s. 12, accessed at https://www.ecb.europa.eu/pub/pdf/scpops/ ecb.op201.en.pdf. European Central Bank (ECB) (2019), ‘Exploring anonymity in central bank digital currencies’, Infocus, No. 4, December, accessed 8 March 2022 at https://www.ecb.europa.eu/paym/intro/publications/pdf/ecb.mipinfocus191217.en. pdf. European Central Bank (ECB) (2020), ‘Report on a digital euro’, October, ECB, Frankfurt. Ferrari, M., A. Mehl and L. Stracca (2020), ‘The international dimension of a central bank digital currency’, VoxEU, 12 October. Financial Stability Board (FSB) (2020), ‘Enhancing cross-border payments: building blocks of a global roadmap’, Stage 2 report to the G20, FSB, Basel.

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Hernandez, L., N. Jonker and A. Kosse (2014), ‘Cash versus debit card: the role of budget control’, De Nederlandsche Bank (DNB), Amsterdam. International Monetary Fund (IMF) (2020), Digital Money across Borders: MacroFinancial Implications, Policy Paper No. 2020/050, IMF, Washington, DC. Juks, R. (2018), ‘When a central bank digital currency meets private money: effects of an e-krona on banks’, Sveriges Riksbank Economic Review, 3, special issue, 79–98. Kumhof, M. and C. Noone (2018), ‘Central bank digital currencies – design principles and balance sheet implications’, Bank of England Staff Working Paper No. 725, Bank of England, London. Panetta, F (2018), ‘21st century cash: central banking, technological innovation and digital currency’, in E. Gnan and D. Masciandaro (eds), Do We Need Central Bank Digital Currency? SUERF Conference Proceedings 2018/2, Vienna: SUERF, pp. 23–32. Sveriges Riksbank (2017), ‘The Riksbank’s e-krona project – report 1’, September, Sveriges Riksbank, Stockholm. Sveriges Riksbank (2018), ‘The Riksbank’s e-krona project – report 2’, October, Sveriges Riksbank, Stockholm. Van der Cruijsen, C.A.B., L. Hernandez and N. Jonker (2017), ‘In love with the debit card but still married to cash’, Applied Economics, 49 (30), 2989–3004. Zamora-Pérez, A. (2021), ‘The paradox of banknotes: understanding the demand for cash beyond transactional use’, ECB Economic Bulletin, issue 2/2021.

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6. Money creation and liquid funding needs are compatible1 Marco Gross and Christoph Siebenbrunner 1. INTRODUCTION Three structural features of monetary systems form the starting point for this chapter. They include (1) a two-layer structure comprising a private sector agent deposit system with commercial banks, parallel to a commercial bank deposit (reserve) system with central banks, with the two being separate and not allowing transfers between the two, that is, these reserves cannot be ‘lent out’ to the private sector (Sheard 2013); (2) money is created upon the creation of bank loans (Werner 2014, 2016), while principal repayment implies money destruction, both of which are an accounting reality and imply that it would be better if banks were not be termed ‘intermediaries’; and (3) the money stock is endogenously and elastically driven by demand and constrained loosely by regulation. The constraints to credit creation include capital regulation, banks’ conditionality on an incremental profit prospect and, eventually, demand (McLeay et al. 2014a, 2014b).2 Against this background, some misleading views of how bank lending functions have come about and have persisted for a long time. These include the financial intermediation and the fractional reserve views of banking, which can be subsumed under a generic ‘loanable funds’ heading. They have a micro perspective in falsely interpreting the need for liquid funds as meaning that banks ‘pass deposits (money) on’ when creating loans.3 This understanding is, moreover, related to the deceptive notion that ‘savings finance investment’, which should instead be phrased as ‘savings (tautologically) equal investment’ (Lavoie 1992; Davidson 1993; Shapiro 2005). The money creation understanding matters for seeing the role of monetary and macroprudential policy in qualitative and quantitative terms. The intermediation view of banking has implied the loss of relevance of banks and bank credit in macroeconomic models and led to them being dropped in dynamic stochastic general equilibrium (DSGE) models for a 154

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long time. Banks were and still are regularly implemented as if they were non-bank financial intermediaries, which implies the risk of underestimating financial accelerator effects.4 Against this combined backdrop, our objective is to highlight that the money creation reality and the notion of ‘liquid funding needs’5 are compatible, and thereby joining a stream of academic and policy-orientated literature aiming to convey the money creation understanding. We sense that the reason why some skepticism with the money creation view persists may lie in the presence of another economic reality, that is, the need for ‘liquid funding’ with which the money creation view may seem to be incompatible at first sight. Our aim is to emphasize that they are compatible. We follow two routes to that end. First, we develop a series of balance sheet examples based on doubleentry bookkeeping principles. Unlike in the existing related literature, we focus not only on bank lending (money creation) but also lay out the lending process through centralized non-bank financial institutions and decentralized market-based intermediation. After laying out some required definitions in section 3, we put forward the balance sheet examples in section 4. Second, we develop a simple stock-flow consistent agent-based model (ABM) to illustrate the monetary system dynamics related to the loan and money creation process. The ABM methodology lends itself usefully to implementing the money creation view correctly as it is built on a stockflow consistent, integrated balance sheet structure; in our model, for a population of private sector agents, banks and a central bank.6 Using the model, we highlight that liquid funds are required to back the transfer of newly created, initially illiquid loans and deposits in a multi-bank system. Liquid funding needs do not negate that banks create money ‘out of nothing’. Based on the ABM, we simulate the hypothetical case of compressing the commercial banking system down to a ‘singular’ system (section  5). When considering only one commercial bank and no physical cash, liquid funding (reserve) needs would vanish, liquidity risk cease to exist, and conventional, interest-based monetary policy lose its impact on the economy. The reason for this is that central bank reserves would no longer be needed, as all cross-agent transfers would take place on the one commercial bank’s electronic deposit pool. It is a hypothetical, yet valuable in our view, additional insight. In section 6 we close the chapter with a short discussion related to central bank digital currencies (CBDCs), where we emphasize two points: (1) an important question is how CBDC systems would be designed in terms of credit provision, which, if backed 100 percent by the new digital

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currency, would resemble the Chicago plan of the 1930s; and (2) even if people may not use CBDCs much, their introduction may nonetheless strengthen monetary policy’s ‘control potential’ over the economy if the CBDC would be interest-bearing.

2. LITERATURE Figure  6.1 presents a series of papers and books spanning the past century; categorized into three groups. These include the intermediation, the fractional reserve and the money creation view. The intermediation view assumes that banks ‘pass on money’ when granting loans, for neither individual banks nor the banking system to create money when doing so. The fractional reserve view posits that individual banks do not, but the banking system does, create money when granting loans. If its unrealistic assumption of new loans being converted 100 percent to physical cash and redeposited elsewhere was dropped, it would collapse to the third view, the money creation understanding under which both individual banks as well as the banking system create money when granting loans.

Financial intermediation view

Fractional reserve view

Money creation reality

Mises 1912, Keynes 1936, Harod 1939, Gurley/Shaw 1955/60, Sealey/Lindley 1977, Baltensperger 1980, Diamond/Dybvig 1983, Bernanke/Blinder 1988, Gorton/Pennacchi 1990, Bencivenga/Smith 1991, Riordan 1993, Bernanke/Gertler 1995, Myers/Rajan 1998, Rajan 1998, Diamond/Rajan 2001, Kashyap et al. 2002, Allen/Gale 2004a/b, Casu et al. 2006, Cecchetti 2008, Dewatripont et al. 2010, Gertler.Kiyotaki 2011, Hanson et al. 2001, Admati/Hellwig 2012, Eggertsson/Krugman 2012, Stein 2014, Krugman 2015

Marshall 1888/90, Phillips 1920, Crick 1927, Hayek 1929, Keynes 1930, Lutz 1939, Whittlesey 1994, Samuelson 1948, Alhadeff 1954, Culbertson 1958, Aschheim 1959, Smith 1959, Solomon 1959, Smith 1966, Goodfriend 1991, Samuelson/Nordhaus 1995, Stiglitz 1997

Macleod 1856, Wicksell 1898/1907/35/36, Knapp 1905, Withers 1909/18, Schumpeter 1912/54, Howe 1915, Cassel 1918, Hawtery 1919, Hahn 1920, Keynes 1924, Moeller 1925, Knight 1933, Douglas 1935, Fisher 1936, Graham 1936, Simons 1936, Douglas et al. 1939, Towers 1939, Culbertson 1958, Smith 1959, Holmes 1969, Moore 1979/83, Minsky 1960/75/86/93, Graziani 1989, Kydland/Prescott 1990, Le Bourva 1992, FED Chicago 1994, King 1994, White 2002, Freedman 2003, Bindseil 2004, Werner 2005, Berry et al. 2007, Tucker 2007, Goodhart 2010, Constâncio 2011, Disyatat 2011, ECB 2011, Ryan-Collins et al. 2011, Benes/Kumhof 2012, Borio 2012, Carpenter/ Demiralp 2012, ECB 2012, King 2012, Turner 2013, McLeay et al. 2014a, Werner 2014/16, Cheng/Wener 2015, Jakab/Kumhof 2015, Bundesbank 2017

Source:  The authors.

Figure 6.1  Literature review

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The intermediation versus money creation debate is inherently intertwined with the opposing views of monetarists and post-Keynesians. Monetarists, led by Friedman, think that the money supply is exogenous, with central banks setting the monetary base and thereby believed to be acting as though the effective money stock can be controlled through the money multiplier process. Money supply endogeneity, however, has its origin in Keynes (1930) and was made more explicit by Robinson (1956), Davidson (1978), Kaldor (1982), and Moore (1986). The institutional reality is in line with the latter, as documented in the numerous references, including from central banks, under the money creation view in Figure 6.1.7 A significant literature stream in line with the money creation view had evolved between the end of the nineteenth century and the Great Depression in 1929. Useful entry points to the early literature include MacLeod, Wicksell, Knapp, Schumpeter, and others in Figure 6.1 under the money creation view.8 The money creation view came to the fore (of policy) when the Chicago plan was proposed following the Great Depression in 1929. The idea was to deprive commercial banks of their credit and hence money creation ability by introducing a 100 percent reserve system (Knight 1933; Currie 1934; Douglas 1935; Fisher 1936; Graham 1936; Simons 1934, 1936). The ­rationale for doing so stemmed from the understanding that the money creation ability of commercial banks was allegedly the root cause of the depression at the time, and of recurrently evolving endogenous business and financial cycle dynamics more generally. The Chicago economists’ proposal was revived a second time by the end of the Great Depression period in 1939 (Douglas et al. 1939), when a first post-depression, smallerscale recession occurred that was conceived to be the result of the Federal Reserve (FED) raising reserve requirements that year. Neither the initial nor the second attempt to implement the 100 percent reserve plan succeeded.9 The money creation view became increasingly repressed during the 1940–50s, with the intermediation view fading into mainstream economics. This development seems to have had its origin in books and papers by Gurley and Shaw (1955, 1956, 1960). The intermediation view implied that the role of bank credit was significantly diminished, which we may see as the reason why, subsequently, DSGE models largely dropped banks and bank credit. After the Global Financial Crisis (GFC) of 2007–09, the money creation view re-surfaced, including through central bank communication. RyanCollins et al. (2011), McLeay et al. (2014a, 20414b), Werner (2014, 2016), Deutsche Bundesbank (2017), and others, all aimed at reviving the money creation understanding. In the long intermittent period, a few names that kept being aligned with the money creation view included, for example,

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Minsky (1978), Moore (1979, 1983), Le Bourva (1992), Werner (2005) and Godley and Lavoie (2007). Past and contemporary DSGE models were and still are largely based on the intermediation view, implying the risk of underestimating (probably overlooking altogether) the role of banks, credit and financial accelerator effects. A sizable set of DSGE model papers could be cited under the financial intermediation view in Figure  6.1. Papers that refer to banks as ‘intermediaries’ usually tend to thereby show their affiliation with the intermediation view. An assessment of the consequences of falsely assuming the intermediation view in DSGE models is presented in Jakab and Kumhof (2015). A useful reference from RBC theorists and hence the neoclassical/newclassical stream in the literature in support of endogenous money, which are rare, are Kydland and Prescott (1990, p. 15), deserving space here: There is no evidence that either the monetary base or M1 leads the cycle, although some economists still believe this monetary myth. Both the monetary base and M1 series are generally procyclical and, if anything, the monetary base lags the cycle slightly … The fact that the transaction component of real cash balances (M1) moves contemporaneously with the cycle while the much larger non-transaction component (M2) leads the cycle suggests that credit arrangements could play a significant role in future business cycle theory.

How cross-border monetary flows are understood in relation to domestic (versus global) money supply is a matter of scope. Monetary flows into a country, for example, in the form of foreign currency deposits (liability) together with reserves (assets) to domestic banks, add to the money stock, that is, mean money creation, as long as a local economy perspective is assumed. From a global perspective, it depends on whether the money inflows are generated via foreign bank loans (money creation at the global level) or the channeling of existing funds (no money creation at the global level). Ponomarenko (2017) focuses on this one form of leakage, the ‘foreign sector’, and discusses the importance of banks’ net foreign asset-liability stock position and related flows for influencing deposit stock dynamics, in particular in emerging market economies. We close our literature review with two observations. First, the money creation understanding appears to be to an extent cyclical, in that it reappears after ‘heavy recessions’, such as the depressions in the 1930s and in 2007–09. ‘Normal’ recessions of intermediate levels of severity do not seem to have sufficed to let the understanding resurface, as only deep recessions imply drastic needs for rethinking and possibly significant policy action. Second, the money creation literature has, by our reading,

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not sufficiently emphasized how the need for liquid funding squares with the money creation view. This is the aim of this chapter. We thereby aim to help promote the endogenous money view, which represents a fundamental pillar of post-Keynesian economics.10

3. DEFINITIONS Following standard textbooks (for example, Mankiw 2010), we define money as any medium that has three properties, so conceived by a sufficient portion of the population: (1) store of value, for money to allow its holder to conserve purchasing power over time; (2) unit of account, for money to serve as a reference in which the value of goods and services is measured; and (3) medium of exchange, as money is meant to flow for settling transactions. This is a social definition that hinges on agents’ acceptance of a medium as money. We refer to this definition of money as social money.11 The primary form of money is legally mandated currencies, managed by central banks who define different monetary aggregates to measure the economy-wide stock of money. Monetary aggregates generally include only fiat money, which we use synonymously with legal money and legal tender. Legal money is a medium that is prescribed to be money by law and regulation. Neither social nor legal money need to have intrinsic value, or be backed by gold or any other medium, to conform with the above definitions. Most forms of money involve a liability by some party (for example, physical cash is a liability of the central bank). We use this observation as our defining criterion for a bank, by which we denote an entity whose liabilities at least in part include legal money. We consider legal money to be social money if the liabilities are redeemable at par value at all times. By ‘at par’ we refer to the initial nominal value that a money holder deposited on a bank’s deposit account, without it being at risk of fluctuations in that nominal value. This means that no secondary market must be approached for redeeming at par holdings before transferring them, whether into physical cash or in electronic form to other banks. An example of a situation where bank deposits are conceived to no longer fulfill this criterion is a bank run (Diamond and Dybvig 1983), although the holding may not be redeemable at par only temporarily, and later become available again. We define commercial banks’ liabilities that represent legal money as deposits. Deposits at the central bank can usually be held only by banks or by the government and are referred to as reserves; these are usually not included in definitions of monetary aggregates as they do not conform

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with the defining characteristics of social money. Other economic agents can hold central bank-issued money in the form of physical cash. In addition to legal money, there are historic examples of media that were socially accepted and therefore served as money within our social definition. Examples include gold and other metals in use since antiquity, private contenders to publicly managed money, such as cryptocurrencies and similar digital items, forms of free money as suggested by Silvio Gesell (Dillard 1942), or consumable goods, such as cigarettes, in situations where other forms of money are not readily available, such as prisoner-of-war camps (Radford 1945). Non-fiat money can, but need not necessarily, consist of physical goods, as some of these examples show. We would also classify the historic forms of free banking (Dowd 2002), that is, currencies that are issued and managed by commercial banks, as fiat money.12 Total money can be seen as the combined value of all items falling under the social definition of money. It consists of (1) commercial bank money; in our examples, deposits. (2) Central bank money: central bank liabilities that are socially accepted money and not held as an asset by a bank; in our examples, cash not held by banks, and government reserves. (3) Nonbank money, that is, all other forms of socially accepted money not included in the quantities above. The social and legal definitions of money coincide in practice: private agents usually accept both commercial and central bank money as money, while forms of nonbank money (for example, gold or cryptocurrencies) are usually not accepted widely enough to be considered money in the social sense. Most money is created through bank lending, which occurs when banks create a deposit through granting a loan, thereby increasing the money stock. Nonbank lending occurs when an economic agent passes existing legal money stocks to another agent, leaving total money stocks unchanged. The notion of liquid funding needs refers to the need for commercial banks to hold reserves at their central bank accounts for cross-bank settlement of customer deposits or for converting them to cash should depositors demand the conversion. Individual banks can satisfy their liquid funding needs in three ways: (1) by receiving existing deposits (liability side) together with reserves (asset side) from other banks; (2) by borrowing them through money markets from other banks; or (3) by borrowing them from the central bank. It is the first option among these three, the pull of existing deposits (together with reserves), that supposedly contributes to the prevalence of the deceived intermediation view. Only the third option offers a system-wide expansion of reserves, or system-wide destruction through banks’ repayment of reserves. Our definition of liquid

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funding needs is compatible with more generic definitions of the kind put forward in the IMF’s Global Financial Stability Report (GFSR) of 2008, whereby ‘funding liquidity is the ability of a solvent institution to make agreed-upon payments in a timely fashion’ (IMF 2008, p. xi). These payments (probably to other banks) require the availability of reserves. We can equate our notion of nonbank lending with shadow banking. The Financial Stability Board (FSB 2014, p.  4) defines shadow banking as a ‘system of credit intermediation that involves entities and activities fully or partially outside the regular banking system’. We will come back to some details of this definition and what components it effectively comprises in section 4. We define nonbank agents as including households, nonfinancial firms, nonbank financial firms, such as pension  funds,  insurance companies and investment funds, as well as state governments (both central and local). Nonbank financial institutions include firm types such as money market funds (MMFs), investment funds, hedge funds,  captive financial institutions and money lenders, broker-dealers, structured finance vehicles, trust companies and real estate investment trusts (REITs). They all have in common that they temporarily channel  existing money stocks from one subset of economic agents to others. The distinction between bank and nonbank lending is important from a system perspective. Both bank lending and nonbank lending create leverage for the borrower in the same way; while bank lending does, and nonbank lending does not, however, increase system-wide money stocks upon the creation of debt through these two channels (and similarly decrease and do not decrease through repayment in the two categories).

4. BALANCE SHEET STOCK AND FLOW MECHANICS UNDER BANK AND NONBANK LENDING13 4.1 Initialization We begin with a tabula rasa economy, that is, all agents start with empty balance sheets. To show how money can be introduced into an economy without money, we first assume that the private sector agent and the bank agent each gains possession of some real assets, for example, gold (for our example, it does not matter whether these assets have the quality of nonfiat money or not). So far, there is no fiat money in the system. Both agents then transfer their assets to a central bank agent in exchange for newly created currency. The initial currency endowments of the agents

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correspond to the outside (fiat) money in the system, since all other assets (including all non-fiat money) were transferred to the central bank. The assumption of an initial asset transfer ensures that the central bank starts with zero equity. In principle, a central bank could also distribute currency without receiving any assets in exchange, in which event it would start with negative equity. This negative equity would equal the amount of currency, unless it gained possession of assets in a different manner, for example, through endowment by a sovereign. The one bank agent can be seen as the consolidated banking system. Figure  6.2 shows the booking statements (flows) and the consequent balance sheet positions (stocks) after initialization. Both the private sector and the bank agent are endowed with physical cash—that is, central bank money. Note that the cash held by the bank agent is not included in the total money stock, hence total money at the end of this example consists of 100 units of central bank money. In the online companion, we present the booking statements occurring when the private sector agent deposits its cash with the bank, and when the bank converts this cash into central bank reserves. Agent:

#

Bank

DEBIT:

(1) Cash

Private Agent (1) Cash Central Bank

Equity

100

Equity 100

(1) Assets 150

Bank

Cash 50

CREDIT: 50

Cash

50 150

Private Sector Agent

Equity 50

Total Assets: 50

Cash 100

Equity 100

Total Assets: 100

Central Bank Assets 150

Cash 150

Total Assets: 150

Notes: The first panel shows the booking statements (flows) using standard double-entry

Notes:  The first panel shows thefollowing bookingsyntax: statements (flows) using standard double-entry bookkeeping conventions and the bookkeeping conventions and the following syntax: [Agent] ([i]) [D-Account] [Amount] [C-Account] [Amount]

  Where [Agnt][Agent] ([i]) [D-Account] [Amount] [C-Account] [Amount] denotes the agent making the booking statement, [i] represents a counting variable used denotes to record transactions booked by the agent along our series of example where [Agent] theallagent making the booking statement, [i] represents a counting transactions. [D-Account] and [C-Account] accounts debited credited by variable used to record all transactions booked byare thethe agent along our seriesand of example [Amount], respectively. transactions. [D-Account] and [C-Account] are the accounts debited and credited by [Amount], respectively. The second panel shows the resulting balance sheets after all booking statements have been   made, The second panel resulting balance sheets all booking statements have where the sizeshows of thethe shapes is proportional to theafter logarithm of total assets. been made, where the size of the shapes is proportional to the logarithm of total assets.

Source:  The authors.

Figure 6.2  Initializing the balance sheets

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4.2 Granting and Repayment of Loans to the Private Sector The creation of loans implies the creation of deposits. These may not initially be backed by central bank reserve amounts of the bank that grants the loan, and may not be liquid in case the newly created deposit would want to be transferred across banks in an electronic manner (or, equivalently for that matter, be converted into cash). Figure 6.3 shows the booking statements and resulting balance sheet structure. The bank has three options for obtaining reserves to accomplish a crossbank transfer of a newly created deposit. First, it may borrow reserves from other banks through the interbank market. Second, it may incentivize The first booking statements correspond to a simple initialization with 50 units of bank money. Money creation happens in the second statements, which grow the total money stock to 150, still entirely in the form of commercial bank money. In the online companion we further demonstrate how the repayment of the loan decreases the money stock again, as well as the redistributive effects of interest and bank dividend payments. Agent:

#

Bank

DEBIT:

CREDIT:

(1) Reserves 100

Private Agent (1) Deposits Central Bank

(1) Assets

Bank

Deposits 50

Agent:

#

DEBIT:

Equity 50

Bank

Deposits 150

Total Assets: 200

Assets 100

Reserves 100

Total Assets: 100

Deposits 100 Loans

100

Private Sector Agent Equity 50

Central Bank

CREDIT: 100

Private Agent (2) Deposits 100

Reserves 100

50

Reserves 100

Total Assets: 50

(2) Loans

Loans 100

Equity

Deposits 50

Total Assets: 100

Bank

50 50

Private Sector Agent Equity 50

Reserves 100

50 100

Equity Deposits

Deposits 150

Equity 50 Loans 100

Total Assets: 150

Central Bank

Assets 100

Reserves 100

Total Assets: 100

Source:  The authors.

Figure 6.3  Loan creation for the private sector

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depositors of other banks to move their deposits to itself, which would flow along with reserves. Third, it may borrow reserves from the central bank. Various interest payment flows are involved, which we do not present in detail here. Loan interest rates imply interest income for the banks, which can in turn be assumed to be distributed back to private sector agents through dividends, which are an expense along with deposit interest. Net  interest income flows with the private sector add to residual equity of banks; they leave the size of the banking system’s consolidated balance sheet unchanged. Interest expense flows for central bank borrowing let the consolidated reserve stock shrink (all else equal), while remuneration on reserves increases reserve stocks.14 4.3 Bank versus Nonbank Lending (Example Involving a Sovereign Borrower) Lending by nonbank financial institutions does not change total money stocks (Figure  6.4). It implies a temporary reallocation of existing monetary funds from one agent to another. In the example, the household sector invests part of its existing money holdings (deposits) in sovereign bonds. The total money stock remains constant throughout the example and  would be no different conceptually if it was set up for  a  nonfinancial corporate firm’s bond issuance instead of a sovereign  one. In Figure  6.4,  we  abstract from the fact that primary market  dealers  (banks)  organize a primary market bond issuance in reality, which in the first instance means money creation in an identical manner as when a  bank would grant a loan. Yet subsequently, private sector investors  invest their existing money holdings, hence negating the money creation process, akin to a loan securitization process (see Section 4.4). The purchase of bonds issued by banks destroys money temporarily. Bonds issued by banks are excluded from our, and from most typical, definitions of the money stock, rightly so as bank bonds are not necessarily redeemable at par for immediate transaction purposes (and we cannot ‘go shopping’ with bonds). Hence, if bonds are purchased by private sector agents with deposits, this transaction has the effect of temporarily reducing the total money stock. Their repayment means a subsequent feed of that money back to the system. Interest paid on top of the bond principal would increase the money stock to levels exceeding the nominal money stock before the bank bond issuance. For the latter reason, the bank’s residual equity might want to be included in monetary aggregates (see section 4.5).

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Money creation and liquid funding needs are compatible ­165 The private sector agent and the bank both start with simple, non-empty balance sheets. The government starts with an empty balance sheet. In the second step, the government issues 100 units worth of bonds, which are purchased directly by the private sector agent, using its bank deposits as payment. The total money stock consists of 200 units of commercial bank money throughout the entire example. The booking statements by the central bank are analogous to the previous examples and omitted here for brevity. Agent:

#

Bank

DEBIT:

CREDIT:

(1) Reserves 200

Deposits 200

Private Agent (1) Deposits 200 Bank

Reserves 200

Private Sector Agent

Deposits 200

Total Assets: 200

Agent:

#

Bank

Equity 200

Deposits 200

Government

Equity 200

Total Assets: 200

DEBIT:

(2) Deposits

Total Assets: 0

CREDIT: 100

Gov. Deposits 100

Private Agent (2) Gov. Bonds 100

Deposits

100

Government

Bonds

100

(1) Deposits

Bank Reserves 200

100

Private Sector Agent

Deposits 100

Deposits 100

Gov. Deposits 100

Gov. Bonds 100

Total Assets: 200

Equity 200

Total Assets: 200

Government Deposits 100

Bonds 100

Total Assets: 100

Source:  The authors.

Figure 6.4  Nonbank lending (primary sovereign bond market auction) The question arises whether the choice between bank loan and bond finance would make a difference for macroeconomic dynamics at large. It appears that not much academic research has been conducted on this issue thus far. When private sector agents’ money holdings are invested in sovereign bonds, they cannot be spent otherwise. They subtract from the purchasing power of private sector agents, who chose to do so with their savings stocks, which, however, they do not plan to spend momentarily anyhow. From that perspective alone, system dynamics may not differ much when comparing a loan versus bond finance for the sovereign case.

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Banks granting loans to the sovereign implies a stronger sovereign bank nexus. The banking system’s solvency risk would be more tightly connected to variation in sovereign risk. This additional tie would come on top of explicit and implicit guarantees that the sovereign may carry with regard to the banks’ liabilities to the private sector. 4.4 Securitization The purchase of loans through securitization implies the destruction of money stocks (Figure 6.5). The purchase price is paid in the form of bank money, which is destroyed in the process of the purchase. The destruction of money through securitization is preceded by the creation of money through loans (see section 4.2), which are about to be securitized. Hence, the eventual outcome of the securitization – here assumed to occur to 100 percent – would render the provision of bank credit equivalent to the nonbank financial intermediation case (see section 4.3), that is, the initially newly created money will be neutralized by an investment based on existing money stocks, invested by nonbank financial or nonfinancial agents.15 4.5 Banks’ Financial Net Worth Bank equity (financial net worth) could be considered as being part of the money stock (albeit as being a residual accounting object). It is not, however, included by central banks in their monetary aggregates. It can be seen from two related perspectives: first, when banks pay salaries or face other operational costs, for example, for building/purchasing their real estate where their business would be located, they transfer money to the respective private agents’ accounts (which may or may not be at their own bank, which is irrelevant for the argument we make here). The expenses are booked against the bank’s residual equity. Hence, this process would mean money creation if banks’ equity would not be part of the money stock. Second, the moment that a bank is founded, an initial amount of capital (asset perspective) and corresponding equity (liability perspective) is financed from the existing private sector money stock and hence would  mean money destruction if bank equity was not part of the money stock. We may consider seeing only the difference of actual residual capital stocks of the banking system and their regulatory minimum as an addition to the money stock, since the regulatory minimum level is ‘locked’ and hence not available for transaction purposes, and thus not serving the means of payment function of money.

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Money creation and liquid funding needs are compatible ­167 We distinguish between two types of private sector agents: a household, which starts the example with only a loan and corresponding money holdings of 100, and an investment fund, which starts the example with 100 units of money holdings. The total money stock at the start of the example thus consists of 200 units of commercial bank money. The bank then converts the loan into asset-backed securities (ABS), leaving money stocks unchanged. The fund then uses its money holdings to purchase the ABS at face value, a transaction that reduces total money stocks to 100 units of commercial bank money. The bank removes the corresponding asset from its balance sheet, thus treating the transaction as a “true sale” arrangement. Agent: Bank

#

DEBIT:

CREDIT:

(1) Reserves 100 Loans

Fund

100

(1) Deposits 100

Household (1) Deposits 100 Bank Loans 100 Reserves 100

Ret. Deposits 100 WS Deposits 100

Total Assets: 200

Agent: # Bank

Wholesale Deposits 100 Retail Deposits

100

Equity

100

Loans

100

Investment Fund

Equity 100

Deposits 100

Total Assets: 100

DEBIT:

ABS 100 Reserves 100

Ret. Deposits 100 WS Deposits 100

Total Assets: 200

Agent: #

Deposits 100

Loans 100

Total Assets: 100

CREDIT:

(2) Asset-Backed Securities 100 Bank

Household

Retail Deposits 100

Investment Fund

Deposits 100

Equity 100

Total Assets: 100

DEBIT:

Household

Deposits 100

Loans 100

Total Assets: 100

CREDIT:

Bank

(3) Wholesale Deposits 100

Asset-Backed Securities 100

Fund

(2) Asset-Backed Sec.

Deposits

100

100

Source:  The authors.

Figure 6.5  Securitization The choice as to whether adding residual equity as part of the money stock, depends on whether we would see commercial banks as part of the private sector. The addition of bank equity above regulatory requirementsimplied equity to monetary aggregates may not make a notable difference quantitatively. We are just making a conceptual point here.

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5. AGENT-BASED MODEL (ABM) SIMULATION We now present a monetary ABM to illustrate how banks, even when they are unconstrained by regulation in their ability to create money, can face a situation of liquid funding (reserve) shortfalls. In the model, the central bank is willing to refinance the banks unconditionally. In reality, the central bank may be constrained by its mandate or unwilling to do so, thus making it possible that solvent banks fail due to illiquidity. The model has one central bank (CB), b = 1, …,B commercial banks, and n = 1, …, N private sector agents. There is no physical cash by assumption, for all money in possession of the N private agents is being held in electronic form in deposit accounts at the B banks. Private agents can be seen simultaneously both as consumers and firms. Figure  6.6 shows  a  schematic of the components of the ABM. The model is very  stylized, involving hardly any behavioral elements for the model agents. The  model’s stylized nature and the absence of behavioral rules mean that it is not meant to be fitted to real world data. The model’s sole purpose lies in making some conceptual points about money creation and liquid funding and transfer processes, to reflect reality in these specific respects. Initialize bank and private sector balance sheets

• Money stocks drawn from uniform distribution • N private sector agents assigned to B "house banks" • Money holdings are bank deposits, no loans yet

Draw spending pattern

• Private agents receive spending signal if draw from uniform distribution > spending propensity parameter • The spending agents find a random partner for spending the money with (excl. themselves) • Spending private agents inform house bank about how much they transfer to whom

Cross-bank transfers

• Banks compute net transfer needs across banks, can be positive or negative. Sums to zero system-wide. • If a bank's liquid funds fall short of positive liquid funding transfer need, pull shortfall from central bank agent • Banks with outstanding central bank debt pay policy rate

Loan creation and repayment process

• Banks get random signal to grant one-period loans to their yet-non-loan holding depositors • Interest rate is set s.t. bank profits are zero • Loan holding private agents pay principal and interest

Note:  The schematic summarizes the main features and building blocks of the ABM. See text for details. Source:  The authors.

Figure 6.6  Agent-based model structure

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Money creation and liquid funding needs are compatible ­169

The three agent sets’ individual balance sheets are initialized using a random drawing procedure and are integrated for all balance sheets to be cross-consistent and connected. Private sector agents’ money stocks are drawn from a uniform distribution. The N private sector agents are assigned permanently to the B banks. The private agents’ money holdings are held in electronic form in their bank deposit accounts. The spending process in the model is random. Each period, all private sector agents receive random signals to spend, in which event they get a randomly chosen other private agent assigned as a recipient. The random spending signal is based on a uniform random draw, which is compared to a threshold parameter, and which we refer to as the ‘spending propensity’. Spending flows are uniform random and set as a percentage of money holdings. The latter parameter we term the ‘spending fraction’. A cross-bank net settlement process follows. Banks compute their net deposit transfer needs, which can be positive or negative in a given period, and which sum to zero at the system level at all times (net financial flows sum to zero just as net financial asset stocks do, since each agent’s financial asset must be another agent’s liability). If a bank’s liquid funding needs exceed their available reserve amount at the CB agent’s account, they borrow the required residual reserve amount from the CB. In the model, the bank agents do not have the option to borrow reserves from other banks or to actively incentivize private sector agents from other banks to move deposits, together with reserves, into a bank. This does not affect the generality of the conclusions we will draw later. A random loan creation and subsequent repayment process follows. There are random loan-granting signals for the banks to create uncollateralized credit for the private sector agents at an endogenous loan interest rate i. The random signal is again based on a uniform random draw and a threshold model parameter on the [0,1] interval, which is referred to as the ‘loan-granting propensity’. On the liability side of the banks, deposits imply a zero expense by assumption. The only expense flows that banks face in the model is for CB reserve borrowing, with r denoting the CB funding rate. We will later see that the relation between the loan interest rate i and the CB rate r depends on how many banks there are and how frequent intrabank transfers are. The policy rate follows a white noise random Normal process.16 The model abstracts from numerous other economic realities. First, none of the agents can default. Second, there is no money market. Should non-zero net transfers need to be backed by liquid funds that are temporarily unavailable at the bank, the CB’s standing borrowing facility will have to be called upon. Third, there is no explicit distinction between

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consumption and investment flows. The term ‘spending’ is meant to be the neutral expression comprising both household consumption and firm investment flows. Fourth, profit margins are set to zero in the model, although they would be positive and a function of competition in the system (the number of banks) in reality. All these features are on purpose excluded from the scope of the model for its structure to be reduced to the essentials that are needed to make our points. Importantly, the addition of any of these ‘relevant realities’ would not change the conclusions that we draw from the model. A baseline simulation was run with B = 30 banks, N = 500 private agents, and T = 600 periods. The threshold spending propensity parameter was set to 25 percent, the spending fraction to 50 percent and the loangranting probability to 75 percent. The system aggregates for various stocks and flows for the aggregate private and banking sectors are depicted in Figures 6.7 and 6.8. Private sector money holdings (=deposit stock)

455

195

445

190

440

185

435

180

430

175

425

170

420

165

415

160

410 405

100

200

300

400

500

Banking system capital ra
o

150

2.5 2 1.5 1 0.5 0

0.062 0.06 0.058 0.056

100

200

300

400

500

Private sector capital ra
o

0.64

0.064

100

200

300

400

500

Bank reserves over TA

0.66

0.63

0.43

0.62

0.42

0.61

0.41

0.6

0.4

0.59

0.39

0.58

0.38

0.56 6

0.65

× 10–3

100

200

300

400

500

Central bank funding over TA

0.36 2.5

100

200

300

400

500

400

500

400

500

Loan to deposit ra
o

0

100

200

300

Loan interest rate

× 10–3

2

4

0.63

0

0.37 0

5

0.64

0 0.44

0.57 0

Central bank funding stock

3

155 0

0.066

0.054

Loan stock

200

450

1.5

3

0.62

1

2

0.61 0.6

1

0.59

0

0

100

200

300

400

500

0.5

0

100

200

300

400

500

0

0

100

200

300

Source:  The authors.

Figure 6.7 Exemplary simulation path for selected model variables (stock variables)

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Money creation and liquid funding needs are compatible ­171 Total spending flows

70

New loan principal flows

90 85

85

60

80

80

55

75

75

50

70

70

45

65

65

40

60

60

35

55

30

0

100

200

300

400

500

Loan interest payment flows

0.14

50

55 0

0.1 0.08

100

200

300

400

500

Central bank interest payment flows

0.06

0.12

50

0.05

0.022

0.04

0.021 0.02

0.02

0.019

0.02

0.01

0.018

0

0

0.04

0

100

200

300

400

Percentage of agents spending

0.22

500

100

200

300

400

500

2.6 2.2

1.6

100

200

300

400

0

500

100

200

300

400

500

Percentage of loan receiving agents

0.24

1.2 1

500

0.26

1.4

0.12

400

0.28

1.8

0.14

300

0.3

2

0.16

0

0.017

200

0.32

2.4

0.18

100

Policy rate

× 10–4 Spending flows over previous period money holdings 2.8 0.34

0.2

0.1

0

0

0.023

0.03

0.06

Principal repayment flows

90

65

0

100

200

300

400

500

0.22

0

100

200

300

400

500

Source:  The authors.

Figure 6.8 Exemplary simulation path for selected model variables (flow variables) Figure  6.9 shows how a reduced subset of model variables behaves as a function of the number of banks. The CB funding over bank equity ratio, the percentage of banks pulling CB reserves, and the loan interest rate all fall monotonically with a decreasing number of banks, while the policy rate remains at a mean of 2 percent with some stochastic fluctuation (not shown in Figure 6.9). The size of the aggregate banking system and private sector balance sheets remain unaffected, as do all spending frequencies, spending flows, loan flows, loan stocks, and so on. The correlation between the policy rate and the loan interest rate falls to zero. Hence the only effect that the variation of the number of banks has is that the same amount of monetary flows through the system need to be settled in an increasingly course-grained banking system in which a rising share of transfers must be backed by liquid funds that are not initially available in the system and have therefore to be pulled from the CB. Importantly, we do not argue that the effective loan interest rate would fall toward

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172 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 50

Central banking, monetary policy and the future of money Central bank debt / bank equity

2.5%

0.05% 0.04%

1.5%

0.03%

1.0%

0.02%

0.5% 40

20 30 Number of banks

10

0

Loan / deposit rao

0.0% 50

0.01% 40

20 30 Number of banks

10

% of agents spending

20% 18%

45% 40%

16%

35%

14% 12%

30% 40

20 30 Number of banks

10

0

10% 50

Loan interest rate

0.06%

2.0%

50%

25% 50

% of banks pulling central bank funding

40

20 30 Number of banks

10

0

0.00% 50

40% 35% 30% 25% 20% 15% 10% 5% 0% 0 50

40

20 30 Number of banks

10

0

Correlaon (policy rate, loan interest rate)

40

20 30 Number of banks

10

0

Note:  Figure 6.9 illustrates the effect of reducing the number of banks in a banking system on selected variables. Dark gray lines depict the median, lighter gray lines the 25th/75th percentiles from 500 simulation rounds of the model, each for 300 periods forward in time. The model does not take account of elements of competition. The loan interest rate is defined as the periodic loan interest payment flows over the outstanding principal before an annuity payment is instructed. Source:  The authors.

Figure 6.9  Compressing the banking system down to a ‘singular’ system zero in reality if the number of banks was compressed toward one; the effect of falling competition, and hence more sizable profit margins, may dominate and do the opposite to effective loan rates. The conclusion in respect of the vanishing correlation of policy rates with loan interest rates, however, would keep holding up, which is the main point we wish to make.

6. CENTRAL BANK DIGITAL CURRENCY (CBDC) Numerous central banks around the world are considering introducing retail CBDCs: their introduction would mean that private sector agents’ money holdings can be held as an electronic central bank liability. Commercial banks have held their reserves in electronic form at their central bank accounts for decades, which is in conformity with the CBDC definition and just being confined to banks; although banks’ reserves do not qualify as money since they cannot be spent with the private sector. Useful entry points to the recent discussions around retail CBDC design, its underlying rationale, costs, benefits, and so on, can be found in Mancini-Griffoli et al. (2018), Barontini and Holden (2019) and Bindseil (2020).17, 18

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Money creation and liquid funding needs are compatible ­173

Key to the design of CBDCs will be whether they will be ­interest-bearing. If not, the public’s interest in holding their money in CBDC form or using them for transaction purposes might be limited. If they are, central banks’ control over bank funding costs might be enhanced, even if people may not use CBDCs or only to a small extent. This is because banks might set their deposit rates in a more closely connected manner to the central banks’ CBDC interest rate, to avoid commercial deposit outflows to CBDC, as these would be more costly than deposits. Depending on the brand power of a central bank and the convenience and benefit implied by CBDC according to its design (for example, regarding privacy), a CBDC may constitute a more potent competitor than an existing bank in a sizable multi-bank system and a CBDC interest rate therefore serve as a more influential lower bound, for the pass-through of policy rates to bank funding costs to strengthen. More structural, quantitative research is warranted in this context. An unregulated introduction of CBDC may create the risk of a ­cliff-effect threatening to undermine financial stability. It is conceivable that the benefits of CBDC will not immediately be internalized by private sector agents. In a healthy economy, old conventions in respect of the treatment of bank deposits as money may continue to hold, in particular when commercial bank deposit interest rates would be set at a margin above a CBDC rate (whether itself zero or positive). This may change abruptly at the onset of a crisis, however. If the viability of private banks would be called into question, agents may disregard the higher interest on bank deposits and collectively flee into CBDC. This would constitute an electronic bank run, with all the known consequences for banks’ liquidity (reserve shortage/insufficiency). Given the relative inconvenience of physical cash compared with bank deposits, the promise of deposit insurance is an adequate tool for mitigating this risk in the current monetary system. This may no longer be the case in a system where a convenient alternative to deposit money is available. Regulations regarding the use of CBDC can address some of the financial stability risks posed by its introduction. While a CBDC would conceivably be treated as legal tender, the sovereign still can restrict its use as social money. By imposing limits on how much CBDC can be held by any one individual (stock constraints), the sovereign could effectively curtail its use as a store of value. Further imposing limits on transaction volumes (flow constraints) can be used to reduce its use as a medium of payment, restricting its use to smaller transactions and thereby rendering it more similar in usability to physical cash. In addition to stock and flow constraints, a tiered remuneration system, similar to the tiering for rates on banks’ required and excess reserves, has been proposed (Bindseil 2020).

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Conventional central bank policy tools can further mitigate the risks from introducing CBDCs. The interest rate on CBDC deposits can be an effective tool, and will be important, for managing the desirability of CBDC holdings relative to bank deposits, and even negative interest rates on these deposits could be implemented; although they might be effective only if physical cash no longer existed, as people would otherwise convert their money holdings to cash, obviating the effectiveness of negative rates on CBDCs. Moreover, small differences in interest rates are unlikely to prevent a bank run. In the event of a bank run, the central bank in principle has unlimited resources to refinance banks. In practice it may be constrained, however, by its mandate to do so: if banks with solvency problems are hit by bank runs, then these may be short of sufficiently high-quality collateral which would be needed to borrow reserves from the central bank ­(including through emergency liquidity assistance programs). As with deposit money, a crucial question is how the lending process under a CBDC system would work. In principle, the introduction of a CBDC could occur through open market transactions, for example, the purchase of government bonds on secondary markets, or even through more radical options amounting to ‘helicopter money’ distributions. In an economy that fully transitions to central bank money, it seems unlikely, however, that these actions could sustain sufficiently high money creation flows to avoid deflationary tendencies. We are thus interested in how lending that is denoted directly in CBDC could occur, and what role commercial banks would play in such a system. Figure 6.10 presents two possible implementations of such a system.19 If the risks of transitioning to a CBDC are well managed, it could constitute a viable option to switch the economy to a ‘full money’ system (a discussion of related pro and contra arguments is beyond the scope of this chapter). We merely caution here that the transition, if not well managed, could induce unintended consequences. If well managed, however, a CBDC may be a useful tool for ensuring a smooth and gradual transition toward a full money system. The move to a 100 percent CBDC reserve system can come into existence in three ways. First, if imposed by a central bank when requiring loans granted in commercial bank deposit form to be backed 100 percent by central bank reserves (CBDC); second, by granting loans in CBDC on the central bank balance sheet directly; or third, when private sector agents would choose to shift virtually all their commercial bank deposits (created through commercial bank loans and deposits) to their CBDC accounts. In the first two cases, the move to the full money system would be imposed, while the third scenario could come about without even being intended by a regulator.

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Money creation and liquid funding needs are compatible ­175 One option for banks is to directly grant loans denoted in CBDC. The banks would first obtain CBDC from the central bank, which they could then pass on to private sector agents in the form of a loan. Lending in such a system would resemble a loanable funds process, or a 100 percent reserve system, respectively. It still implies money creation at the system level if banks’ own CBDC holdings are not counted as money. A definition of a monetary aggregate might want to be reconsidered in this case, however, since the CBDC holding of the bank could be used directly as a means of payments by the bank (unlike its reserve holdings at a central bank currently).19 Agent:

#

DEBIT:

CREDIT:

Bank

(1) CBDC

Central Bank

(1) Assets 100

CBDC

100

Bank

(2) Loans

50

CBDC

50

50

Loans

50

Private Agent (1) CBDC

100

Bank

Equity 100

Private Sector Agent

CBDC 50 Loans 50

Equity 100

Loans 50

CBDC 50

Total Assets: 100

Total Assets: 50

Central Bank Assets 100

CBDC 100

Total Assets: 100

An alternative approach to lending denoted in CBDC would be for the central bank to grant such loans directly to private sector agents. Commercial banks could still play a role in such a system, for example, by subsequently purchasing the loans from the central bank. If the commercial bank commits to this purchase before the loan is granted, it would allow the central bank to effectively shift the burden of screening and monitoring debtors to the commercial bank. This would include the initial loan granting and contract design process, which a central bank can likely not and does not want to manage itself. Commercial banks would in that sense act as an “operating arm” of the central bank. The example booking statements below, where the commercial bank uses CBDC instead of reserves to purchase the loan from the central bank, result in the same final balance sheet composition as the above sequence. However, in this system, the central bank bears the credit risk until the transfer to the commercial bank is complete, which implies a specific kind of settlement risk (a discussion related to the notion of “Herstatt risk” can be found in the online companion). Agent:

#

DEBIT:

CREDIT:

Bank

(1) CBDC

100

Central Bank

(1) Assets 100

Equity 100 CBDC

100

Central Bank

(2) Loans

50

CBDC

50

Private Agent (1) CDBC

50

Loans

50

Central Bank

(3) CBDC

50

Loans

50

Bank

(2) Loans

50

CBDC

50

Source:  The authors.

Figure 6.10  CBDC-denoted lending

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7. CONCLUSIONS We have highlighted in this chapter that money creation and liquid funding needs are compatible, and that both are an institutional and market infrastructure-implied reality. Liquid funding needs in the form of commercial banks’ reserves in their central bank accounts are relevant to back payment transfers in a multibank system. Reserve needs, whether addressed ex ante or ex post relative to the loan creation process, and whether based on pulling deposits along with reserves from other banks, through interbank markets or standing borrowing facilities from a central bank, do not negate that banks create deposits, and hence money, ‘out of nothing’ upon the creation of loans. We have considered a thought experiment – assuming that a commercial banking system was reduced to a singular system and that cash be absent – in which the central bank would lose its control of economic dynamics through interest-based policy since liquid funding (reserve) needs would cease to exist.20 We have illustrated this based on a simple, stock-flow consistent monetary ABM. The conclusions we draw from our (short) discussion of CBDCs are twofold: first, the decision whether to provide CBDCs in an interestbearing form or not might make a notable difference for the implied additional potential for central banks to steer economic dynamics. More research will be needed in this context. Second, an important question that should be explored in detail concerns how a loan-granting process would be designed in a system with a CBDC parallel to commercial bank money. A 100 percent backing of loans by digital CBDC, if designed in this way, would imply an implementation of the Chicago plan as considered in the 1930s after the Great Depression. It would mark a highly significant change to the financial system structure. Pure financial intermediary business, which is flourishing as part of financial technology (fintech) developments in many countries (for example, in the form of peer-to-peer lending), may not be able to fully replace bank lending. This is a conclusion that is tangential to our main conclusions. Pure intermediaries’ lending potential is bound by standing  money stocks in the system that are not required for transaction purposes  (that  is, saved), while banks’ lending implies money creation, and hence is more elastic and bound only by regulatory requirements and demand. While for various readers (for example, central bank practitioners, post-Keynesian economists and others) the content of this chapter may be considered as already established knowledge, we have chosen its angle, as reflected right in the chapter title, to further promote and elucidate the

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understanding of money creation. Moreover, while our literature review led us to conclude that the money creation understanding was to an extent cyclical historically, resurfacing after ‘heavy recessions’, such as the Great Depression of the 1930s and the Global Financial Crisis of 2007–09, we believe that the emergence of CBDC will mean that the correct understanding will become more persistent in the future.

NOTES  1. A working paper version of this paper was published under the title ‘Money creation in fiat and digital currency systems’, IMF Working Paper No. 19/285, December 2019. The paper has benefited from useful discussions with, and comments and suggestions received from, Ulrich Bindseil, Vítor Constâncio, Michal Andrle, Erdem Başçı, Sascha Buetzer, Martin Čihák, Alessandro Ferracci, Matheus Grasselli, Tommaso ­Mancini-Griffoli, Sander van der Hoog, Mariam El Hamiani Khatat, Alexey Ponomarenko, Louis-Philippe Rochon, Tomohiro Tsuruga, the participants of  the  Conference on New Analytical Tools and Techniques for Economic Policymaking at the OECD (Paris, April 2019), and an IMF-internal seminar in Spring 2019. An online companion to this paper is available at www.siebenbrunner.com/ moneycreation.   2. More references are provided in section 2.   3. We may hypothesize about the reasons why the intermediation view has come about: it may be the enhanced complexity of the financial system and significant rise in the number of banking institutions and financial systems generally, in the US, Europe, and elsewhere in the world, throughout the twentieth century, which may have led to a loss of system perspective.   4. Given that bank lending does not mean intermediation (but money creation), while non-bank financial firms’ lending implies pure intermediation, the way the term ‘disintermediation’ is used is misleading. It conceives bank lending as an intermediation process and the move toward non-bank (shadow bank) lending as a move away from this intermediation.   5. A formal definition of ‘liquid funding’ follows in section 3.   6. The flow consistency of the ABM resembles the philosophy of flow of funds (FoF) analysis, albeit at a micro-agent level instead of at a sector level (Duesenberry 1962; Be Duc and Le Breton 2009; Winkler 2010). Stock-flow consistency is one of the defining criteria of most macro ABMs, with some selected entry points to the related literature being Tesfatsion (2003, 2006a, 2006b), Lavoie and Godley (2006), LeBaron and Tesfatsion (2008) and Fagiolo and Roventini (2016). Stock-flow consistency is a defining criterion of numerous models in the field of post-Keynesian economics (Godley and Lavoie 2007; Lavoie 2014). Macro ABMs that feature stock-flow consistency are flourishing; a useful entry point to that field are Dawid and Delli Gatti (2018) and Dawid et al. (2018).   7. In addition to seeing the institutional reality, empirical evidence has been documented, confirming that causality runs from loan volumes to deposits to reserves, that is, the opposite sequence to that which monetarist theory suggests. This evidence can be found in Kaldor (1982) for the UK, Moore (1983) for the US, Vera (2001) for Spain, Lavoie (2005) for Canada and Vymyatnina (2006) for Russia.   8. Rochon and Rossi (2013) argue that we should differentiate two groups of endogenous money supporters: Wicksell for example, and others, does not go as far as rejecting the meaning of the natural rate of interest and hence would, in the authors’ view, not qualify as the endogenous money view as promoted by post-Keynesians.

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  9. It has been observed that part of the origin of the Great Depression in the 1930s may have lain in the FED’s ‘failure to understand the role of money’ (Bernanke 2006) at the time. In that context, the origin of defining and empirically measuring monetary aggregates in the US can also be traced back to the 1930s. The first empirical definition of a money stock that came close to that which the US FED still defines as M1 can be found in Currie (1934). 10. Examples that illustrate how pervasive the endogenous money view is in post-Keynesian economics include, for example, Keen (2014, 2015) and Graziani (1989, 1995); see also references therein. 11. Money has been dubbed a ‘social institution’ in Giannini (2011). 12. The difference between free money and free banking is that the latter involves liabilities by banks while the former does not. In the complete absence of legal tender (or perhaps even a sovereign), an exact distinction is difficult. The ‘accelerated money’ principle of Gesell clashes with the concept of money being a store of value. A more in-depth discussion of free banking, free and accelerated money, is beyond the scope of this paper. 13. We provide an online companion to this paper, available at http://www.siebenbrunner. com/moneycreation/, where extended versions of the examples discussed in this section can be found. 14. Since commercial bank reserves at banks’ central bank accounts are usually not included in broad monetary aggregates, these central bank interest payment flows by definition do not affect the aggregates. 15. The amount of money destroyed corresponds with the purchase price of the securitized loans, which is not necessarily equal to the value of the loan and hence the money that was initially created when granting the loan. 16. With a mean of 2 percent and a standard deviation of 1 percentage point. This setting is entirely ad hoc. Changing this mean and variance, or endogenizing it via a Taylor rule structure, would not change the conclusions we draw from the model. 17. Selected additional entry points to the related evolving literature include the following (see also references therein): Davoodalhosseini (2018) discusses the welfare implications that the existence of CBDCs next to deposits and cash may have. Estimates based on his calibrated model suggest a permanent gain in consumption, at 0.6 percent for Canada and 1.6 percent for the US. Engert and Fung (2017) argue, among other issues, that reducing the effective zero lower bound does not provide a compelling reason for issuing CBDC; as well as that ‘helicopter money’ considerations may not work as theorized if a CBDC is meant to be anonymous and when foreigners may hold it as well. Barrdear and Kumhof (2016) and Fernández-Villaverde and Sanches (2016) appear to be among the few papers that present larger-scale structural models to explore the impact of CBDCs. 18. A recent, updated survey conducted by the Boar et al. (2020) suggests that 40 percent of central banks have advanced from conceptual CBDC research to a proof-of-concept stage; 10 percent are likely to issue a CDBC within three years, another 20 percent within six years. Six major central banks and the BIS created a group to explore CBDC use cases; see https://www.bankofengland.co.uk/news/2020/january/central-banksgroup-to-assess-digital-currencies (accessed 10 March 2022). 19. Further details are presented in the online companion. 20. Central banks may still be able to influence macro-financial dynamics through the conduct of macroprudential policies. The thought experiment here concerns only conventional interest-rate based monetary policy instruments.

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Solomon, E. (1959), ‘Financial institutions in the savings–investment process’, Conference on Savings and Residential Financing, Chicago, IL: US Savings and Loan League, pp. 10–55. Stein, J.C. (2014), ‘Banks as patient debt investors’, speech at American Economic Association/American Finance Association joint luncheon, Philadelphia, PA, 3 January. Stiglitz, J. (1997), Economics, New York: W.W. Norton. Tesfatsion, L. (2003), ‘Agent-based computational economics: modeling economies as complex adaptive systems’, Information Sciences, 149 (4), 262–8. Tesfatsion, L. (2006a), ‘Agent-based computational modeling and macroeconomics’, in D. Colander (ed.), Post-Walrasian Macroeconomics: Beyond the Dynamic Stochastic General Equilibrium Model, Cambridge, MA: Cambridge University Press, pp. 175–202. Tesfatsion, L. (2006b), ‘Agent-based computational economics: a constructive approach to economic theory’, in L.  Tesfatsion and K.  Judd (eds), Handbook  of  Computational Economics, vol. 2, Amsterdam: North Holland, pp. 831–80. Towers, G. (1939), Minutes of proceedings and evidence respecting the Bank of Canada. Tucker, P. (2007), ‘Money and credit: banking and the macroeconomy’, speech at Monetary Policy and the Markets Conference, Bank of England, London, 13 December. Turner, A. (2013), ‘Credit, money and leverage: what Wicksell, Hayek and Fisher knew and modern macroeconomists forgot’, Stockholm School of Economics Working Paper for ‘Towards a Sustainable Financial System’ conference, Stockholm, 12–13 September. Vera, A.P. (2001), ‘The endogenous money hypothesis: some evidence from Spain (1987–1998)’, Journal of Post Keynesian Economics, 23 (3), 509–26. Vymyatnina, Y. (2006), ‘How much control does Bank of Russia have over money supply?’, Research in International Business and Finance, 20 (2), 131–44. Werner, R.A. (2005), New Paradigm in Macroeconomics: Solving the Riddle of Japanese Macroeconomic Performance, London: Palgrave Macmillan. Werner, R.A. (2014), ‘Can banks individually create money out of nothing? The theories and the empirical evidence’, International Review of Financial Analysis, 36 (December), 1–19. Werner, R.A. (2016), ‘A lost century in economics: three theories of banking and the conclusive evidence’, International Review of Financial Analysis, 46 (July), 361–79. White, W. (2002), ‘Changing views on how best to conduct monetary policy: the last fifty years’, speech at the Reserve Bank of India, Mumbai, 14 December 2001, updated October 2002, accessed 22 March 2022 at https://www.bis.org/ speeches/sp011214.htm. Whittlesey, C.R. (1944), ‘Problems of our domestic money and banking system’, American Economic Review, 34 (1), pt 2, supplement, 245–59. Wicksell, K. (1898), Geldzins und Gueterpreise: Eine Studie ueber die den Tauschwert des Geldes bestimmenden Ursachen, Jena: Fischer. Wicksell, K. (1907), ‘The influence of the rate of interest on prices’, Economic Journal, 17 (66), 213–20. Wicksell, K. (1935), Lectures on Political Economy, Volume II:  Money, London: George Routledge & Sons.

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Wicksell, K. (1936), Interest and Prices – a Study of the Causes Regulating the Value of Money, New York: Sentry Press. Winkler, B. (2010), ‘Cross-checking and the flow of funds’, in L. Papademos and J. Stark (eds), Enhancing Monetary Analysis, Frankfurt: European Central Bank, pp. 355–80. Withers, H. (1909), The Meaning of Money, London: Smith, Elder. Withers, H. (1918), The Business of Finance, London: John Murray.

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7. The Swedish e-krona: a means of guaranteeing the possibility of making payments for all Eva Julin1 1. INTRODUCTION Payments and payment systems are essential parts of our society. There is no modern society where people do not use various types of payment instrument to buy and sell everything from goods for survival to long-term investments and savings. The entire modern economy is based on being able to make payments. In prehistoric times, we exchanged goods with one another, now we instead exchange means of payment in the form of cash or we make digital transactions via accounts. Not so very long ago, banknotes usually had a corresponding value in gold or other metals. This direct link has now disappeared in most countries (Söderberg 2018). Currently, we use what is often termed ‘fiat money’,2 where the general public’s trust in the state creates a belief in the value of the means of payment issued. The state guarantees that the currency issued by that country provides the basic qualities for money, namely, a store of value, unit of account and mode of payment. In Sweden, the state has issued banknotes and coins for hundreds of years that have been used by the general public. However, over the past decade, something new has happened: digitalization and globalization have affected payment patterns in a revolutionary manner. Fewer consumers are using cash as a means of payment, and the younger generation in particular have rejected it. In Sweden, most young people no longer have a relationship with banknotes and coins, which is a huge difference compared with earlier generations. The reality now is that many shops and other establishments in Sweden will not even accept cash payments and less than 10 per cent of payments made by the general public are in cash.3 We appear to be on a very fast-moving path towards the cashless society. As the legal means of payment is not always accepted, the legal issuer of this means of payment needs to rethink its product. Analysing the 187

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consequences and taking a stand on potential measures when the national means of payment no longer functions in practice is a responsibility the state should take. Sweden’s central bank, the Riksbank, has therefore been analysing central bank digital currency (CBDC), since 2016 to see whether this could act as a complement to cash (for example, Sveriges Riksbank 2017, 2018; Armelius et  al. 2018, 2020a, 2020b, 2020c; Juks 2018, 2020; Nessén et  al. 2018; Segendorf 2018; Söderberg 2018a, 2018b; Bergman 2020; Gustafsson and Lagerwall 2020). In this chapter, we limit ourselves to a discussion of CBDCs as a money issued by a central bank to enable smaller payments, a general purpose CBDC, and we focus on a Swedish version, which we term an e-krona. The arguments in favour of an e-krona have been described in various ways in reports and speeches published by the Riksbank (for example, Skingsley 2016; Sveriges Riksbank 2017, 2018; Armelius et  al. 2020a) but the conclusions as to why an e-krona is needed and what objectives it should attain have not been presented in a collective form. One reason for this is that the Riksbank has not taken an official stance on these issues. With this descriptive analysis, we discuss why a CBDC might be needed and what objectives it could attain. We use Sweden and the e-krona as a starting point. It is important to note that no decision to launch an e-krona has been taken yet. Extensive work is being conducted at the bank in a pilot project, through cooperation in international work and policy work within the different departments of the Riksbank. All of this contributes to the Riksbank’s total knowledge and capacity to make carefully considered decisions regarding an e-krona. Currently, a government inquiry4 on the future of the payment system is under way, initiated by the Riksdag (the Swedish parliament). One of the questions this inquiry will look at is the need of the e-krona. A decision on the e-krona will probably therefore take a few years. This chapter begins, in section 2, with a general discussion of the arguments in favour of a CBDC and then, in section 3, moves on to focus on the Swedish e-krona. In section 4, we discuss how a CBDC can be designed from the perspective of being similar to cash. Section 5 describes a possible design of a Swedish e-krona and section 6 how the objectives of an e-krona could be attained. Section 7 touches on some questions regarding monetary policy and financial stability. In conclusion, we provide a summary in section 8. The central bank world is currently at a turning point, where a great deal concerning digitalization and possible CBDCs is still an open question, but where developments are moving very fast. The future will show the advantages and disadvantages of various solutions. Central banks around the world will probably gradually adapt and develop various digital techniques

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and new payment methods over the coming decades, before we entirely abandon cash in favour of a digital means of payment. The stances and arguments in this chapter are based on a subjective analysis, mainly of the work produced in the Riksbank’s e-krona pilot project.5 However, the messages and conclusions in the chapter are solely those of the author. Others can probably argue in favour of drawing different conclusions as regards the e-krona. This is not surprising. Questions regarding CBDCs are often discussed in a sphere that touches on politics, philosophy, economics and values.

2. WHY IS A CBDC NEEDED? Digital developments regarding forms of payment move quickly, and the use of digital forms of payment is often considered to promote simplicity and availability. There are several other factors that are usually put forward as arguments in favour of introducing a digital central bank currency. Some of the common general arguments mentioned are (without any special order): ●

●

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Factors related to cash, such as difficulties in the area of cash handling and distribution, which may be considered costly and risky. This could be anything from problems delivering cash to all regions in a country with difficult terrain or inadequate infrastructure, to risks of cash transport robberies; or factors related to a rapid decline in the use of cash, as now in the Nordic countries. Other currencies that push out the national currency. A CBDC could be interesting in a situation related to problems with dollarization of the economy. An own CBDC could increase the accessibility and attractiveness of the national currency. The trend towards more cryptocurrencies and private initiatives is increasing every year. Private agents are introducing different payment services at an increasingly rapid pace, as well as crypto-assets that, in future, may become more widely accepted, not least as a means of payment. The first and perhaps most well-known example is Bitcoin, which was created in 2009 by the pseudonym Satoshi Nakamato. This was followed by many other crypto-assets  – by 2018, there were more than 1700 of these (see Coin Market Cap 2018). Libra, which was initiated by Facebook in 2018/19 to issue its own ‘stablecoin’ made regimes around the world take the question of digital currencies seriously. What would it mean for the role of the state if we had a private digital currency that spread globally? Can

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central banks fulfil their roles as lender of last resort if companies and the financial market begin to hold private crypto-assets as a large and important part of their cash and reserves? Is state participation necessary on an increasingly privatized digital payment market? In addition, the past year’s COVID-19 pandemic has increased interest in discussing digital currencies and CBDCs. The pandemic has also meant a general decline in demand for cash, even in countries where there has not previously been a tendency towards this.6 In summary, questions regarding CBDCs are not an unknown, distant science fiction project. There is now a broad debate on CBDCs among researchers, economists and central banks. More than 80  per  cent (BIS 2021) of the world’s central banks are analysing this field. The European Central Bank (ECB), the International Monetary Fund (IMF) and other organizations have their own extensive CBDC analysis and/or projects, for example, PricewaterhouseCoopers (PwC), the ECB and the IMF. There are also examples of countries that have already introduced their own CBDCs. The Bahamas, Korea and Cambodia are usually mentioned, as well as China’s far-reaching project with regional tests of a Chinese CBDC.7 Several countries in Africa are also abandoning cash in favour of digital modes of payment issued by private agents or sometimes in collaboration with the state. One example is South Africa’s project (SARB)8 perhaps starting in 2022. However, the motives behind the debate still vary and depend, to a large degree, on national circumstances. Different regions and countries probably will have different bases for their CBDCs. There is no uniform standard for what a CBDC actually is and what criteria it should meet, as there is for banknotes and coins. Analysis and knowledge in this field are moving forward, however, and there are some established grounds that many central banks support.9 In the future, we will probably see general recommendations and agreements from governments and central banks on this matter (for example, a BIS/CBDC coalition).

3. WHY INTRODUCE A CBDC: SWEDEN In this section, we review the arguments we have previously mentioned as to why a country would choose to introduce a CBDC, and we look at how these arguments fare in a Swedish context. First, we can exclude a few factors; the coronavirus pandemic10 has not been a driving force behind digitalization in Sweden. Developments have been reinforced by the pandemic, but the pandemic is not the cause ­leading

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to the digitalization trend. However, the use of cash appears to have declined during the pandemic in Sweden, too. This is partly owing to cash primarily being used in physical shops, cafés and restaurants, where activity decreased heavily at the start of the pandemic. Moreover, cash is used more by elderly people, who have presumably stayed at home more than other groups during the pandemic. However, it could also be an effect of many actors having chosen to refuse to accept cash. Although it is too easy to draw any conclusions regarding the pandemic, it is probable that when several groups in society, such as the elderly, have become used to digital payment solutions, this can have a more permanent effects on payment patterns. In Sweden, however, the digital trend began before the pandemic, so it has merely been reinforced. The argument for introducing a CBDC because other currencies are pushing out the national currency cannot be said to apply in Sweden. There is no tendency towards other currencies being used as substitutes for the Swedish krona in day-to-day payments. The other arguments regarding factors around cash and the role of the state are relevant for Sweden, however. We review them next. 3.1 Factors Related to Cash In Sweden, we can note that the most important trigger for the Riksbank beginning its work on the e-krona in 2016 was the rapid decline in the use of cash.11 Seen in relation to gross domestic product (GDP), cash in circulation in Sweden has fallen since the 1950s, from around 10 per cent in 1950 to just over 1 per cent today. Around 2010, the volume of banknotes and coins in circulation fell in terms of nominal value from around SEK100 billion to just over SEK50 billion in 2018 (see Figure 7.1). Similar developments to those in Sweden, with rapid digitalization and a decline in the use of cash, are now visible in other parts of the world, particularly in the other Nordic countries. However, the Nordic countries have had slightly different approaches to the CBDC issue. Sweden, Iceland and Norway have begun CBDC projects, while Denmark has taken a stance against introducing or producing a Danish CBDC. Finland, as part of the euro area, is working with other countries on CBDC issues from a European perspective.12 In Sweden, cash is being used more rarely for payments made by the general public. Surveys carried out by the Riksbank on the Swedish people’s payment patterns show a clear picture of the digitalization of payment forms in recent years. The most recent survey, from 2020, shows that the proportion of those who paid for their most recent purchase in cash has decreased from 39 per cent in 2010 to 9 per cent in 2020 (see Figure 7.2).

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100000

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1951 1954 1957 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020

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Nominal value as share of GDP (right)

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Figure 7.1  Cash appears to disappear in Sweden Percentage of people paying for their most recent purchase in cash. 40 35 30 25 20 15 10 5 0

2010

2012

2014

2016

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Source:  Riksbank.

Figure 7.2  Cash is marginalized in Sweden In this situation, we feel that cash has had its day as an efficient means of payment in Sweden. The banks and other payment service providers have contributed by offering new, attractive modes of payment that have pushed out cash in favour of digital alternatives. An increasing number of bank

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branches are now cash-free and the Swedish Bankers’ Association opposes proposals for a law that would give banks responsibility for providing cash services throughout the country.13 The general public has also driven this development and shown a demand for new digital services, and this trend has been under way for more than a decade. We cannot see that the trend will turn, even if the banks’ cash management were to involve greater efficiency and availability to consumers. We therefore assume in this chapter that the Swedish general public will want to continue to make digital payments, even if access to cash services were to be high, the cost of cash services to be low and the efficiency of the cash market to be high. The digital payment market is here to stay. The reduced use of cash was the start of the Riksbank’s analysis of the e-krona. However, that cash appears to have had its day in Sweden is perhaps not sufficient argument for introducing an e-krona? Many say that payments are functioning simply and efficiently with the private alternatives that are available. We think that there is reason to carefully analyse the alternatives, in the form of regulation, for instance, before launching an e-krona. However, cash is the only state-guaranteed mode of payment available to the general public. All the other payment alternatives are privately guaranteed. So the question we want to ask ourselves is whether it matters if the general public does not have access to a state-guaranteed mode of payment, not whether cash in itself is necessary for future payments. We then move on to focus on the remaining argument for a CBDC, which may be relevant for Sweden, namely, the marginalized role the state may have in the future payment market. 3.2 The Role of the State is Marginalized The Swedish monetary system has a long history. In the eleventh century14 there were coins in circulation in Sweden that were issued by the king. Both private and state means of payment have circulated side by side during different periods, as they are now doing in practice. More recently, the system during 1831–1904 is often mentioned as a good example of a time when both private and state banknotes were available to the general public (Ögren 2006). It is worth noting, however, that the banknote-issuing private banks’ banknotes could be redeemed for state Riksbank notes, which could also be redeemed for precious metals. Sweden therefore never had a situation where the general public was without access to state banknotes, nor a situation where the exchange rate between private banks’ notes risked deviating from those of the Riksbank. Different banknotes also had the same value throughout the country. They were always redeemable one for one against state banknotes. Several factors could explain why the Swedish

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system with private issuance of banknotes was stable, but common to them all is that they can be traced back to some form of state regulation or state back-up (Söderberg 2018a). We can therefore question whether the private banknotes in Sweden would have functioned as effectively without this state backing. International experiences indicate that if this backing did not exist, private banknotes would have different values and the system would not be as effective (Söderberg 2018a). What we see currently is that private money is superseding state money, as shown in Figures 7.1 and 7.2. We now have a situation where we consider it can be assumed that the general public has an overall trust in the monetary system, in that their private digital money can be exchanged for state-guaranteed money (cash). We think it is probable that this system has meant that private and state money have a one-to-one exchange rate. The general public can rely on there being a state alternative as a complement to private bank money, that is, cash. If cash were not available, we do not know whether the general public’s confidence would remain unchanged as regards private money. Nor do we know whether the exchange rate for various private bank deposits would vary in a crisis or times of unease. This is not entirely unlikely from a historical point of view (the UK and the USA). Also, we know that, in both Sweden and Norway, the states have historically shown that they protect commercial bank money during periods of crisis. The risk of holding money in private banks’ accounts is also low, as there are legal deposit guarantees for the general public’s bank holdings up to just over SEK1 million.15 Some would probably say, therefore, that there is good reason to believe that commercial bank money would be secure, even in a new crisis, but we would claim that this conclusion has no empirical evidence to support it. We would consider it misleading to change other fundamentals of the current monetary system without a thorough analysis of the consequences. If we choose not to issue a state mode of payment that can be used by the general public in everyday life, it must be a deliberate choice, not just something that occurs on the initiative of the private market. As far as we know, there is, currently, no smoothly functioning economy where the state means of payment has been entirely superseded. So we therefore cannot comment with empirical backing on what would happen if the state were to withdraw entirely from the payment market for retail payments. Our conclusion is that further research and empirical examples are required of these mechanisms before we can draw any definite conclusions. The issue is whether it is worth the risk, in the short term, to allow the payment market for retail payments to become entirely private before we have the answers to these questions. We consider that the risk of this development could be greater than the risk of introducing a CBDC. However, this then assumes

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that a CBDC is adapted to the needs of the environment in which it works. A Swedish CBDC will resolve the problems on the Swedish payment market and not potential problems on the financial markets in general or in other regions. On the basis of this reasoning, we believe an e-krona is needed, as a complement to or replacement, in the long run, for cash, to be certain that the state maintains confidence in the monetary system’s capacity for private money to always be exchangeable for state money. We also assume that the e-krona needs to be able to be used by the general public in their day-to-day lives to create confidence in the system. The general public must be able to feel in possession of these values, in the same way that cash can be possessed by individuals. The money we currently deposit in private accounts is locked in to private actors. This means that, if there was no possibility of exchanging it for cash or a CBDC, there is no guarantee that the general public would have confidence in these private bank deposits in the event of a crisis or financial unease (compare this with queues for withdrawal of cash at banks in times of crisis). It is thus not enough merely to issue a state means of payment, there must also be systems for making it available. We leave the question of whether private alternatives could ultimately offer the same stability on the payment market, as state alternatives have provided until now. There is no empirical research we can use here. It can probably be assumed that sufficiently large, financially strong and credible companies or consortiums could, in theory, supply money that functions well as a unit of account and means of payment and is sufficiently non-volatile to function as an effective money in normal times. The  stablecoins that are taking form could, again in theory, meet  these conditions.  However, what would ultimately transpire in relation to availability, pricing and technological developments in respect of these  entirely  private  products is something of which we have no knowledge.

4. HOW SHOULD A CBDC FOR SWEDEN BE DESIGNED? We think that a cash-like e-krona would be the most natural solution for a country such as Sweden. There are no significant problems on the financial market, or questions regarding monetary policy or financial stability, that we currently need to resolve as regards a CBDC. In Sweden, the question of introducing a CBDC concerns the issue of cash disappearing. Our starting point is that the general public should be able to continue to acquire

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and hold state-guaranteed money. We believe that this creates confidence in the monetary system. There are also other advantages with the state continuing to be a participant in the payment market. We will return to these factors. As we have discussed, the purpose of a CBDC could be different in different countries. As we have cash as our starting point, we first list some of the properties of cash, to see if these can, or should, be passed on to an e-krona. 4.1 Some Important Properties of Cash 1. Cash is technology neutral and can change owner without technical aids after it has been delivered by the central bank to the general public. No special technology is needed to manage cash. You can store it in your pocket, under your mattress or in your wallet, just as you choose. 2. Cash entails own responsibility for safety and risk. When you hold cash, you are yourself responsible for its safety and the risk in holding the cash. If you store cash in a safe, a bank vault or a torn trouser pocket, it is your choice. You yourself decide what level of risk you want and what costs you are prepared to pay for safety. 3. Cash can be considered to be available to everyone in society. It is intuitive, easy to use and requires no special knowledge of technology. Even small children and elderly people with little experience of technology can use cash. There are also many groups with special needs, such as the visually impaired, who can use cash, as it is normally adapted to various functional variations. 4. Cash can be used for payments in times of disruption, crisis and contingency. Cash can also be used in times of war. It can be stored at home by members of the public, it can easily change owner and it requires no technology, Internet connection or electricity. It is cash that the general public has historically queued outside banks to withdraw in the event of a financial crisis. Cash is normally considered to be the means of payment that will probably dominate in the event of considerable unease, crisis or war (Riksbank 2021). It should be noted that this is all true, but we must also remember that cash requires a distribution chain dependent on electricity and suppliers of transport and checks. If cash is not used in day-to-day life, then there may be difficulties in returning to the use of cash in times of unease. So this contingency property for cash can be regarded as weakening over time. We will come back to this. 5. Cash is anonymous. Cash can be used without identification. It strengthens integrity and gives the general public the opportunity to

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execute payments without tracking or checking. However, it must be added, in practice this only applies when you have withdrawn cash from your bank accounts and you pay in small sums or peer to peer. The legislation has undergone extensive changes over the past decade. For digital payments, the legislation in Europe is such that small sums are allowed to be entirely anonymous. Traders have far-reaching requirements concerning money-laundering checks and the Know Your Customer (KYC) process so, in practice, it is not so easy to pay large amounts anonymously.   In Europe, the question of integrity is perhaps the most important for the general public as regards CBDC. An ECB survey in 202116 states that the general public and actors primarily want a CBDC to provide integrity (43  per  cent), followed by security (18  per  cent), the ability to pay across the euro area (11  per  cent), no additional  costs  (9  per  cent) and offline usability (8  per  cent). However, there is another scenario. Almost nine out of ten bank customers in an international survey made in 202117 said they were willing to share their customer data in exchange for better service and tailored services. The properties mentioned above can be considered as typical for cash. Should these properties be a part of new digital central bank money? They may not even be possible to translate to a CBDC. Let us consider the difference between cash and digital central bank currencies, to see what should be passed on. Here, we are mainly looking at the situation in Sweden and a potential e-krona. 4.2 What Properties of Cash Should Be Included in a Swedish E-Krona? 1. Technology neutrality. We are already dependent on technical payment systems for our payments in Sweden. The question of avoiding technology for payments, which is possible when using cash, is thus outmoded in our opinion. A technological infrastructure is a necessary condition for efficient payments in the future. The question we should ask instead is which digital infrastructure we want for future payments. This is a complex and comprehensive question. Technologies are developing at a rapid pace and it is difficult to say that one or other technology is so researched and established that it is specifically this one that should be used for an e-krona or an e-krona system. We believe that the technology, both in itself and for the actual digital means of payment, must be very flexible and able to change and develop over time. The technology must be scalable, interoperable

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and relatively easy to implement in the existing infrastructure.18 That is, we believe that a technology-neutral approach to the formulation of the infrastructure for an e-krona is a good way to go. A technological payment infrastructure and technology for one or more different payment instruments is a necessary condition for future payments, but the question of choosing a particular technology is something we will leave to future analyses. 2. Safety and risk. When the general public’s assets are stored in a digital technical system that they do not have control of themselves, they will probably not accept storing their money as uncertainly as if they had  cash in their own wallets. We believe that the general public will consider that it should be possible to restore the value of lost or damaged digital wallets and that the technical systems in an  e-krona  infrastructure must be sufficiently safe to avoid cyberattacks or significant  disruptions to a large degree. The general public  will probably have very  high requirements for safety with regard to a Swedish e-krona  if it is widely accepted; indeed these requirements will probably be higher than they are for the private market. 3. Accessible to all. We think that, if the most important argument for a CBDC is to maintain confidence in the national monetary system, the  general public must be familiar with and find it easy to use an e-krona. The e-krona must therefore be accessible to everyone. In the same way as cash, the e-krona must be available to all groups in society, it must be intuitive and simple to use, and not require considerable technical knowledge. Everyone, including small children, tourists and those with a functional variation should be able to use the e-krona. Even those who are not able, willing or permitted to have bank accounts should be able, to some extent, to use the e-krona for payments.   An accessibility target this high probably requires the state to guarantee and pay for a supply of e-krona adapted to, for instance, functional variations. It does not seem probable that commercial actors will be interested in, or have business reasons for supplying, this type of e-krona service to a sufficiently large extent. However, we think this is an issue of democracy, and the e-krona should be regarded as a collective utility. The e-krona must also be accessible every minute of every day, in real time, in the same way as cash and current digital payments via Swish.19 This is a requirement we believe the general public will have of the e-krona if it is to be used in everyday life. Accessibility also includes being accessible during times of unease and instability. We will come back to this.

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4. Possibility of functioning in the event of disruptions, crises and contingency. The accessibility target means that the e-krona shall be accessible even in disruptions. If we start with cash, it can be stored at home by the general public, it can easily change owner and, in the new digital world, is considered as ‘contingency money’ above all else. However, if we assume that cash is not used in day-to-day life and the infrastructure for cash becomes increasingly marginalized, then it will not be possible to use cash effectively in a serious crisis or war situation, either. Nor will the general public have an intuitive feeling for cash, and traders will not have access to a functioning infrastructure for cash management. We think there is a risk that cash will soon have had its day as regards contingency planning. This need not be tomorrow, but with the current speed of developments, it is not unlikely that, within 10 years or so in Sweden, cash will not be considered to function effectively in times of crisis. In this situation, an e-krona can play an important role.   There will be significant demands made in many areas if the e-krona is to contribute fully to contingency planning in the area of payments. The e-krona needs to function when other payments do not. This means that the e-krona must be designed so that it either  bridges  over  a vulnerability that exists in the current system, or that it can be used as an alternative when other payments are not available. This applies regardless of whether we find ourselves in a normal situation, a peacetime crisis or a state of heightened preparedness.   Building in redundancy, safety and accessibility at the level required for preparedness for serious crises and wars makes high demands of the technical infrastructure and will probably be very costly. If the state forces private actors, for instance, through regulation, to supply an infrastructure for payments at this high level, there is a risk that small companies will be pushed out and only large actors will be able to participate in the future payment market. This creates further oligopoly tendencies on the market and does not favour our objective of competition on the payment market (see section 6). 5. Anonymity and integrity. Anonymity for large-value payments is a thing of the past. In Sweden, the regulations require traders to carry out money-laundering checks and KYC, so it is no longer simple to pay anonymously amounts of more than SEK5 000. This is why the question arises of whether there is a reason, or even a legal opportunity, to have an anonymous e-krona. We think that it may be self-evident to indicate that it is not an objective in itself that an e-krona can be used anonymously. The Riksbank follows the same regulatory framework

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as payment service suppliers in general, which makes it impossible to have anonymous holdings in excess of EUR150. An e-krona will therefore not be anonymous above this amount.   However, there is a difference between anonymity and integrity. A growing category of companies has the commercialization of user data as a business strategy. An e-krona could ensure that the data generated in connection with purchases was not stored and used commercially. To support personal integrity, the state could guarantee  that transaction data for an e-krona was not gathered and used,  other than  in certain specific cases. These instances might include giving up personal data in criminal proceedings after a court decision. In this way, the state can guarantee that there is at least one payment alternative that protects integrity in the digital future.

5. A SWEDISH E-KRONA: CONCLUSIONS Some of the properties of cash we want to, and can, include in a digital krona, while others are less important. The objective, based on our own reasoning, is that the e-krona should enable: ●

● ●

access to state digital money that the general public can use and hold  as a means of payment as a complement to/replacement for cash; payments during disruptions, unease and emergency preparedness; and integrity.

An e-krona that is based on the properties of accessibility for all, in normal times and in crises, will create confidence in the monetary system through a continued state presence on the payment market. An e-krona that can also reinforce the possibility for integrity for citizens’ payments creates trust in the payment system. This objective is based on the belief that the state is needed as a guarantor for specific values to be attained and that payments are a collective utility. Having said this, there are probably many other alternatives that could be appropriate. For example, it could be argued that the private sector, voluntarily or with legal requirements, could provide an adequate payment system for the future. But then we have deliberately chosen a payment system that means that everyone is dependent on private options for ­payments in everyday life.

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6. HOW SHALL THE OBJECTIVES FOR AN E-KRONA BE ATTAINED? Competition and high potential for private initiatives on the payment market mean that we have satisfactory conditions for an e-krona environment. However, what we see on the current Swedish payment market is that there are tendencies towards an oligopoly as regards the underlying infrastructure for payments. This is not abnormal on this type of market with natural networking effects (Bergman 2020). A few large banks dominate the Swedish payment market, while smaller actors find it difficult to compete with the larger actors. The Riksbank has, in many contexts (in speeches by Ingves 2019 and Skingsley 2016), indicated that increased competition and innovation on the payment market are desirable developments. We believe that healthy competition on the payment market, and the possibility for smaller actors also to take an active part in the e-krona system, would be a key to success. On a payment market where there are many actors, e-krona services in various forms are supplied by many different actors. A large number of actors can contribute to creating new, innovative products, ultimately leading to lower prices. Competition can also contribute to increased accessibility, scalability and operability. We believe that a distribution model with intermediaries, where payment service providers offer a spectrum of different services based on the central components supplied by the Riksbank, is a beneficial tactic for creating a functioning e-krona environment. This is in line with the cash model that Sweden currently has, where intermediaries supply cash to the general public. Healthy competition can also contribute to the objectives of high-quality payment ability, even during unease, crisis and emergency preparedness. Even if competition does not automatically lead to increased emergency preparedness on the payment market, it can probably increase resilience. In an e-krona environment with competition, innovation and many other participants, we can assume that the general public would have a comprehensive knowledge of the digital environment, that they are used to managing minor disruptions to the e-krona system and have trust in the system as a whole. This creates favourable conditions for holding the system operative even during a crisis. A mode of payment that is not used sufficiently in normal times risks not functioning painlessly in times of crisis or emergency preparedness. However, we think that the market cannot be expected to have scope for this cost of preparedness for infrastructure, technology, safety, and so on. If emergency preparedness is to be an overarching objective, and always exist, the state would probably have to take responsibility and bear a large

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part of the cost, in line with the argument that the e-krona is a collective utility. It is also probable that the state must take some responsibility and bear the costs if the objective of accessibility for all groups in society is to be attained, that is, the responsibility for ensuring the e-krona is adapted  to  different groups. The Riksbank itself, or in collaboration with other authorities, can produce or subsidise the development of these services. Offering all of its citizens access to state-guaranteed money in a safe digital infrastructure is a reasonable requirement in a modern society. In this, too, we think that the e-krona can be regarded as a collective utility.

7. QUESTIONS OF MONETARY POLICY AND FINANCIAL STABILITY We need to mention something about policy questions regarding the e-krona. This chapter has been limited to questions regarding the properties of an appropriate e-krona as a complement to cash, and has not made any analysis based on central banks’ other policy activities. A CBDC will not make things difficult for monetary policy and financial stability.20 This is a basic requirement for an e-krona. Below are noted some of the thoughts on policy aspects that need to be taken into account when producing an e-krona and which require further analysis before a decision on an e-krona is made. 7.1 Interest Interest rate setting on a CBDC needs to be understood in respect of the capability, if necessary, to regulate demand for CBDCs, which, under some circumstances, may take place at a level that impedes the central bank’s policy tasks. The starting point has been that both positive and negative interest rates can be applied to a CBDC to govern demand for it. Differentiated interest-rate setting has also been discussed, where arguments have been put forward that it might also be an advantage if large holdings could be allocated a different interest rate to that for smaller holdings. In the Swedish context, where we consider that the main arguments in favour of an e-krona are that the state shall remain as a participant in the payment market as a back stop for monopoly tendencies on the payment market and the total privatization of the payment market, perhaps the question of interest is not as important as it would be had we other

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starting points. The Riksbank has stated in reports (2017, 2018) that an infrastructure for an e-krona should include the technical possibility to set interest on an e-krona. The system should be technically constructed in this way, but whether an interest rate will be set on an e-krona further ahead is a question for future Executive Boards. Here, we would merely note that there is a need for more detailed analysis of interest-rate setting and the significance of interest for a future e-krona. One question that must be analysed is whether it is reasonable to have a complement to cash as an objective for an e-krona and, at the same time, give the e-krona a property that cash does not have, namely, interest. What would happen to the credibility of the e-krona if a negative interest rate were set? Will the general public wish to find other, safer alternatives to the e-krona? Will the argument that an e-krona is guaranteed by the state be negatively affected, especially if it is surrounded by traditional cash with no negative interest rates? There is probably most consistency in having a legal design of the e-krona as a dematerialisation of physical cash. The e-krona could build on what has proved to work by giving it the same legal characteristics as physical cash as far as possible. So, when not interest bearing in this concept The Riksbank should instead be able to issue rules and regulations for technical or monetary restrictions on the electronic wallets for the digital e-krona and/or charge fees or provide compensation for them. 7.2 Limited Holdings Should it be possible, for monetary policy reasons or financial stability reasons, to limit holdings of e-krona? Should the central bank be able to set levels of maximum amount, number of transactions and maximum transaction amount? The question of limits to holdings, as with the question of interest, is usually seen in the light of a desire to regulate the demand for e-krona so that it does not cause problems for monetary policy or financial stability. Similar to the arguments regarding interest rates, the Riksbank (2017, 2018) has chosen to say that the starting point is that there should be a technical possibility to limit holdings of e-krona. There is also a need to build in a function for limiting the payment amount. This function should be open to different limits for different actors. The question of different limits will probably need further investigation and analysis at any given time. A future Executive Board will need to take a stance on the appropriateness of limits for the e-krona in the same way that it now steers the framework for implementing monetary policy and setting different rates or limiting eligible assets accepted into the settlement system as collateral, and so on.

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It is reasonable that the limits should vary over time, based on the general economic situation prevailing. In general, we recommend caution when considering significant limitations. The e-krona should be generally accessible and easy to use. Moreover, if a comparison with cash is to be made, the central banks do not normally govern their cash supply through regulation. Nor is it common for central banks to deny the general public or the market access to cash.

8. CONCLUSIONS Digitalization has entailed large and rapid changes on payment markets around the world. New technology and new patterns in consumption and payments have led to a decline in the role of cash, and to digital modes of payment gaining importance. This structural change is visible on a global scale. The change is particularly visible in the Nordic countries. Here, there is a rapid technological development in the area of financial technology (fintech). Together with the economic possibilities in the financial sector, this enables a technology-interested general public to adopt technological innovations that facilitate day-to-day life. In Sweden, the use of cash has been declining steadily for a decade or so. Currently, the outstanding amount of cash in Sweden corresponds to around 1  per  cent of GDP, compared with around 10 per cent in other parts of Europe. In this chapter, we have focused on the question of why a state would choose to issue a CBDC. The focus has been on the Swedish situation and the Swedish e-krona. We think that it is unavoidable that countries and regions will introduce electronic money in various forms when the traditional mode of payment, cash, disappears as an efficient and viable alternative for small payments. In Sweden, the population already prefers digital modes of payment over cash. Currently, these initiatives are private. This chapter puts forward the view that smoothly functioning and reliable modes of payment should be regarded as a collective utility and that the public sector should continue to be involved in the payment market. The most important reason for this is that the state has a responsibility to maintain confidence in the monetary system. No modern state has voluntarily ceased to issue a means of payment to the general public. The general public currently has access to money that is issued or entirely backed up by the state. Without a state-guaranteed means of payment, there is a risk that confidence in the economic system will change fundamentally in a way that we cannot foresee today. Internationally, we also see an increase in competition from big technology companies’ private initiatives with digital currencies. This development

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moves very rapidly and the consequences are difficult to oversee. Although we do not know exactly how stablecoins and other forms of privately issued digital currencies will develop, and what this might mean for the Swedish market, all else being equal it gives weight to the argument for introducing a digital krona. The introduction of a well-designed e-krona could contribute to ensuring that the general public in Sweden has access to a functioning stateissued, risk-free means of payment even in a digital future. By issuing an e-krona, the state becomes an actor among others on the digital payment market. The state can contribute to variety and competition on the payment market through a decentralized distribution model for an e-krona. The e-krona can also contribute to continued confidence in the reliability of the monetary system, increase the possibility for functioning payments even in times of unease and crisis, and give the general public a means of payment with a high level of integrity.

NOTES  1. The author would like to thank many colleagues in the e-krona pilot division and the Payments Department at the Riksbank for their valuable comments and for the knowledge that has provided a base for this chapter. The chapter is largely based on reports and articles previously published by the Riksbank, which are listed in the References. However, the views expressed in this chapter are solely those of the author and should not be attributed to anyone else. Nor are these views to be regarded as the Riksbank’s official position or the opinion of the Executive Board on these issues. The Executive Board of the Riksbank has not yet taken a decision on issuing an e-krona, or on what form it would take.   2. Fiat money – fiat is Latin for ‘let it be done’.   3. ‘Payments in Sweden’ report 2020 (Sveriges Riksbank 2020).   4. Published 11 December 2020, accessed 10 October 2021 at https://www.regeringen.se/ rattsliga-dokument/kommittedirektiv/2020/12/dir.-2020133/.   5. Description of the pilot project, including creating an e-krona system in a digital test environment together with Accenture, and action plan can be found at the Riksbank’s homepage, accessed 20 February 2020 at https://www.riksbank.se/en-gb/payments-cash/e-krona/technical-solution-for-the-e-krona-pilot/ and 6 April 2021 at https://www. riksbank.se/en-gb/press-and-published/notices-and-press-releases/press-releases/2021/asolution-for-the-e-krona-based-on-blockchain-technology-has-been-tested/.   6. For example, https://www.bis.org/review/r201022h.pdf and https://www.bis.org/review/ r200616a.pdf (both accessed 10 October 2021).  7. Initiatives can be found at the central banks’ homepages and in many articles and speeches: https://www.centralbankbahamas.com/digital-payments, https://www.bok. or.kr/eng/search/search.do, https://bakong.nbc.org.kh/en/ and https://www.cpbebank. com/Remittance/Local-Remittance/Bakong-Payment-System (all accessed 19 March 2022).  8. https://www.resbank.co.za/content/dam/sarb/publications/media-releases/2021/cbdc-/Fea sibility%20study%20for%20a%20general-purpose%20retail%20central%20bank%20digi tal%20currency.pdf (accessed 10 October 2021).   9. CBDC coalition PM, https://www.bis.org/publ/othp33.pdf (accessed 19 March 2022). 10. Conclusions from the report, Sveriges Riksbank (2020).

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11. Riksbank’s e-krona reports (2017, 2018). 12. For example, Norges Bank’s (2018, 2019, 2020) three published CBDC reports, Finland’s bank 2020 annual report (Finlands Bank 2020), and a speech, for example, by Governor Callesen (Nationalbanken 2017). 13. Svenska bankföreningen (2018). 14. Special issues of Sveriges Riksbank Economic Review in 2018 (vol. 3) and 2020 (vol. 3) on e-krona. 15. https://www.riksgalden.se/en/our-operations/deposit-insurance/how-the-deposit-insura​ nce-works/ (accessed 19 March 2022). 16. Published on 13 April 2021, accessed 19 March 2022 at https://www.ecb.europa.​eu/ pub/pdf/other/Eurosystem_report_on_the_public_consultation_on_a_digital_euro~​5​3​ 9fa8cd8d.en.pdf ?6757062fde1f25e6f70ffe806e4c33e4. 17. ‘World retail banking report 2021’ (Capgemini 2021). The report includes insights from 23 markets, over 8500 banking customers and over 130 senior executives of leading banks and non-banking firms across regions. 18. The Riksbank’s e-krona pilot, report 1 (Sveriges Riksbank 2021). 19. Swish is a technique for a real-time system for digital payments in Sweden through an application (app) jointly owned by the bank and used by around 7 million Swedes. This  includes participation from private persons and small associations and large companies. 20. CBDC coalition.

REFERENCES Armelius, H., P. Boel, C.A.  Claussen and M.  Nessén (2018), ‘The rationale for issuing e-krona in the digital era’, Sveriges Riksbank Economic Review, 3 (special issue), 6–19. Armelius, H., G. Guibourg, A.T. Levin, and G. Söderberg (2020a), ‘The rationale for issuing e-krona in the digital era’, Sveriges Riksbank Economic Review, 2 (special issue), 6–18. Armelius, H., C.A.  Claussen and S.  Hendry (2020b), ‘Is central bank currency fundamental to the monetary system?’, Sveriges Riksbank Economic Review, 2 (special issue), 19–32. Armelius, H., G.  Guibourg, S.  Johansson and J.  Schmalholz (2020c), ‘E-krona design models: pros, cons and trade-offs’, Sveriges Riksbank Economic Review, 2 (special issue), 80–96. Bank for International Settlements (BIS) (2020), ‘Central bank digital currencies: foundational principles and core features’, accessed 19 March 2022 at https:// www.bis.org/publ/othp33.pdf. Bank for International Settlements (BIS) (2021), ‘BIS Innovation Hub work on central bank digital currency (CBDC)’, accessed 19 March 2022 at https://www. bis.org/about/bisih/topics/cbdc.htm. Bergman, M. (2020), ‘Competitive aspects of an e-krona’, Sveriges Riksbank Economic Review, 2 (special issue), 33–54. Brainard, L. (2020), Member of the Board of Governors of the Federal Reserve System, at the Federal Reserve Board and Federal Reserve Bank of San Francisco’s Innovation Office Hours’, speech (via webcast), San Francisco, CA, 13 August. Capgemini (2021), ‘World retail banking report 2021’, accessed 19 March 2022 at https://www.capgemini.com/news/world-retail-banking-report-2021-to-create​-

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new-value-banks-can-adopt-banking-as-a-service-to-embed-finance-in-consu​m​ er-lifestyles/. Coin Market Cap (2018), accessed 19 March 2022 at https://coinmarketcap.com/ historical/20180107/. Finlands Bank (2020), ‘Årsberättelse 2020’ (‘Annual report 2020’), accessed at https://arsberattelse.finlandsbank.fi/2020/verksamhetsberattelse/pengar-och-bet​ alningar/en-digital-euro-skulle-vara-en-tredje-form-av-euron/. Gustafsson, P. and B.  Lagerwall (2020), ‘The Riksbank’s seigniorage and the e-krona’, Sveriges Riksbank Economic Review, 2 (special issue), 55–61. Juks, R. (2018), ‘When a central bank digital currency meets private money: effects of an e-krona on banks’, Sveriges Riksbank Economic Review, 3 (special issue), 62–79. Juks, R. (2020), ‘Central bank digital currencies, supply of bank loans and liquidity provision by central banks’, Sveriges Riksbank Economic Review, 2 (special issue), 79–99. Nationalbanken (2017), ‘Publikationer, Digitale-centralbankpenge i Danmark?’ (‘Analysis, central bank digital currency in Denmark?’), speech by Tal Per Callesen, 15 December, accessed 19 March 2022 at https://www.nationalbank en.dk. Nessén, M., P. Sellin and P.Å. Sommar (2018a), ‘The implications of an e-krona for the Riksbank’s operational framework for implementing monetary policy’, Sveriges Riksbank Economic Review, 3 (special issue), 29–42. Norges Bank (2018), Central Bank Digital Currencies Series: Norges Bank Papers, 1, Norges Bank, Oslo. Norges Bank (2019), Central Bank Digital Currencies Series: Norges Bank Papers, 2, Norges Bank, Oslo. Norges Bank (2020), Central Bank Digital Currencies Series: Norges Bank Papers, 2, Norges Bank, Oslo. Ögren, A. (2006), ‘Free or central banking? Liquidity and financial deepening in Sweden, 1834–1913’, Explorations in Economic History, 43 (1), 64–93. Riksbank (2021), ‘Riksbank payments report 2021’, 3 November, accessed 19 March 2022 at https://www.riksbank.se/en-gb/payments--cash/payments-in-sweden/pay​ ments-report-2021/3.-the-riksbanks-work-and-policy/the-position-of-​cash-as-le​ gal-tender-needs-strengthening/. Segendorf, B. (2018), ‘How many e-kronas are needed for payments?’, Sveriges Riksbank Economic Review, 3 (special issue), 66–78. Skingsley, C. (2016), ‘Should the Riksbank issue e-krona?’,  Sveriges  Riksbank, 16 November, accessed 19 March 2022 at https://www.riksbank.​se/​sv/​press-ochpublicerat/riksbanken-play/2016/skingsley-borde-riksbanken-ge-ut-e-kronor/. Söderberg, G. (2018a), ‘Why did the Riksbank get a monopoly on banknotes?’, Sveriges Riksbank Economic Review, 3 (special issue), 6–16. Söderberg, G. (2018b), ‘What is money and what type of money would an e-krona be?’, Sveriges Riksbank Economic Review, 3 (special issue), 17–28. Svenska bankföreningens (2018), ‘Remissvar på delbetänkandet tryggad tillgång till kontanter’ (‘Response to the Riksbank Committee’s interim report secured access to cash’) (SOU 2018:42), October, accessed 19 March 2022 at https://www.swedishbankers.se/om-oss/press/pressmeddelanden/foerslaget-om-k​ ontantkrav-kan-vara-olagligt/#. Sveriges Riksbank (2017), ‘The Riksbank’s e-krona project’, report 1, Sveriges Riksbank, Stockholm.

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Sveriges Riksbank (2018), ‘The Riksbank’s e-krona project’, report 2, Sveriges Riksbank, Stockholm. Sveriges Riksbank (2020), ‘Payments in Sweden’, official Swedish statistics, Sveriges Riksbank, Stockholm. Sveriges Riksbank (2021), ‘E-krona pilot project phase 1’, April, accessed 19 March 2022 at https://www.riksbank.se/globalassets/media/rapporter/e-krona/2021/ekrona-pilot-phase-1.pdf.

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8. Programmable central bank digital currency for monetary circuits of production Andrés Arauz 1. INTRODUCTION Central bank digital currency (CBDC) is now a certainty. While Ecuador’s CBDC was the first of the modern era (Arauz et  al. 2021), China’s digital currency/electronic payment (DC/EP) deployment was the first of any major economy. Central banks everywhere are developing research projects and major pilots (Auer et al. 2021; Kiff 2021). While some issues remain unsolved, it is clear that central bank digital currencies will be part of the monetary landscape. Most analyses of CBDCs have focused on the payment system dynamics and the financial stability impacts on the commercial banking system. Very little has been written on the impacts of CBDCs on production (Andresen 2019). I extend Parguez and Seccareccia (2000) and Graziani’s (2003) circuit-theory based approaches in respect of the monetary theory of production, and explore the characteristics that CBDCs should have with an activist central bank in mind, especially a central bank that is low in the international money hierarchy and sympathetic to development concerns of its country. Furthermore, in this chapter I present a viable accounting innovation for fungibility between bank money and central bank money: the contingent liability on the CBDC ledger. The embedded characteristics together with the digital currency itself are contemporarily named ‘programmable money’. Privately issued programmable money already exists. Specific cryptocurrencies or tokens have been created with underlying smart contracts. A smart contract is a self-executable piece of code that does not require human validation. In the context of programmable money, it implies a change in a characteristic of that money or an execution of a transfer of property of that money. Several leading central banks and technology firms have discussed (and patented) programmable money in the context of CBDCs. IBM has even 209

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labeled CBDCs as the ‘re-nationalization’ of new programmable money (Lund et al. 2019). A successful CBDC that can guarantee real-time gross settlement, by definition, should rest on a unique ledger. That ledger can be a conventional database similar to a telecommunications company ledger for airtime or it can be a unique blockchain curated and permissioned by the central bank. A Federal Reserve publication shows that programmable money does not require blockchain technology (Lee 2021). In any event, it should be compliant with international payment information and security standards. While digital currencies with self-executable smart contracts may sound exotic, it helps to frame the discussion in terms of betterknown quasi-monetary instruments: mobile-phone airtime, airline miles or food stamps. Central bank digital currencies can be flexibly designed to promote and foster production with three macro objectives in mind: avoid capital flight, avoid hoarding by ensuring circuit completion and facilitate interaction of multiple circuits via fungibility. In order to reach these objectives, I chose to focus on three programmable variables: time value, holder type and redeemer type. Privacy issues are not discussed in this chapter, but it suffices to say that privacy is desirable as well as technologically and legally possible for central bank digital currencies with zero-knowledge proof systems and empirical evidence provided by zcash and monero (Grey 2021a, 2021b). Specific avoidance techniques are discussed. This chapter is divided into five sections. This introduction is the first. The second section presents the monetary circuit theory behind CBDC programmable money. It also discusses the design objectives in the framework of monetary circuit theory. The third section shows the wide scope of programmable variables. After a brief assessment, the three most powerful variables are selected for programmable money design. The fourth section covers some shortfalls and risks for programmable money. The fifth section concludes.

2. MONETARY CIRCUIT OBJECTIVES OF LOW-HIERARCHY ECONOMIES Money is created with a bank’s loan to a firm. A firm spends that money on labor. Workers buy the goods of the firm. The firm repays the loan to the bank. Money is destroyed and the circuit has been completed. This is a simplified version of the monetary circuit. Let’s analyze the information dynamics of the circuit. The loan and the resulting deposit is registered in the ledger of the bank. The firm’s wage bill is also registered in the bank’s

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ledger, in as many accounts as the firm has workers. All the other transactions are also now part of the bank’s book records. Even if money is destroyed when the loan is repaid, the information remains with the bank. If there are many bank loans, and firms buy inputs from other firms, or if workers buy consumer goods from other firms, as long as it’s the same bank, the bank is aware of all the movements and can closely monitor the evolution of the circuit. If new loans are required for other players or to account for interest and profits, the bank creates money and makes it possible for a previous circuit to close based on a new circuit such as a consumer loan to be repaid by a future salary or a loan to an intermediategoods firm that must sell inputs to the original firm. Each loan has a term sheet with partial amortizations, and new circuits can provide liquidity to the system to cover these partial repayments (Solorza 2005). If there is more than one bank involved, the information and the circuit dynamics evolve. While the monetary circuit behaves in a similar manner to that described above if we group all banks as ‘the banking sector’, complexities arise. First, if there are two banks or more, one of them must be the correspondent bank; that is, the central bank.1 When payments occur outside the first bank, the transaction must be settled with (the hierarchically above) central bank money (Arauz 2021). Second, the information on the transactions is now siloed. Each bank can only see its clients’ movements, but is unaware of the rest. From above, the central bank can only register the interbank payments (Arauz 2019b). There is no certainty as to the behavior of the circuits. Banks must now reinforce their underwriting process and reinforce information requirements to make sure that money will be repaid and money destroyed before it is transferred elsewhere. If that does not occur, banks must now ask for a loan from another bank or from the central bank. An interbank circuit is created. If part of the production process involves imports, the dynamics become even more complex. Payments for imports are settled with money that is hierarchically above both importing and exporting countries, that is, ‘hard currency’. To pay for imports, a bank must have an account abroad, with hard currency. The information on the foreign account is only handled by the foreign bank. How did that hard currency get there in the first place? Either from a previous export or a foreign-debt loan from a hard currencyissuing bank. The latter is a foreign-debt circuit. What makes a hard currency? The answer is beyond the scope of this chapter, but it suffices to say that history has codified them (and their banks) into international law (Pistor 2019). I define international money hierarchy according to correspondent account dynamics for cross-border payments. Hard currency-issuing central banks are high in the international money hierarchy, and among those, the US Federal Reserve is highest. Just

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below these central banks are transnational megabanks headquartered in hard-currency jurisdictions. Below these megabanks are peripheral central banks. This is why I name them low-hierarchy countries. In a modern economy, many circuits are occurring simultaneously. Some are very simple, such as wage advances. Others are more complex and involve production. Interbank circuits are very important for financial stability. Foreign-debt circuits are crucial for trade. These circuits follow bank dynamics and are thus arranged hierarchically. Money that is created and exits its circuit generates liquidity shortfalls for the circuit-creating bank; the bank’s reserves are drained. While some exits are necessary for the production process, such as buying inputs from other firms at other banks or such as acquiring imports from abroad, there are other exits that do not contribute to production. For countries in the monetary periphery, those low in the international money hierarchy, exits from domestic circuits are especially damaging. Central banks lose hard-currency international reserves and domestic banks lose central bank money, an extension of Schmitt’s (2000) double charge.2 While cross-border payments for imports may be related to export-orientated production, and hard-currency inflows may occur at a later date, non-import outgoing capital flows are pure exits. Aside from the impact on exchange and interest rates, capital flight avoids the completion of previously created circuits affecting the interbank credit market and the production sphere. I follow Guttman’s (1998) intuition for re-regulation of money, including capital controls, with a central bank ledger. It is therefore crucial for a regulator of a peripheral country to avoid capital flight. This is the first objective for a programmable CBDC (Parguez 2015). In order to better explain this objective, think again in terms of mobile airtime. Assume that as part of its marketing strategy the mobile phone company gave out twice the purchased airtime. Therefore, if you bought $5 worth of airtime, you were credited with $10. Now, imagine that you go to the mobile phone company and request $10 back in cash. The mobile phone company would incur a loss. It has to design the airtime ‘money’ to avoid ‘capital flight’. Global Financial Integrity (GFI 2020), a non-governmental organization, has estimated trade-related illicit financial flows of 1343 ­low-hierarchy countries to 36 high-hierarchy countries. The sum of the ‘value gaps identified in trade’ over the 10-year period 2008–17 is USD 5.5 trillion; low-hierarchy countries with the largest gaps relative to their bilateral trade are The Gambia, 37 percent, Togo, 30 percent, The Maldives, 27 percent and Malawi, 27 percent. The average sizes of the value gaps as a percentage of total trade within South–South trade and within North–South trade are both 20 percent. In their 2006–15 estimates, which were separated into

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inflows and outflows, average outflow gaps for sub-Saharan Africa (underinvoice of exports and over-invoice of imports) fluctuated between 6.9 and 11.2 percent of total trade. Capital flight is a form of hoarding hard currency in banks abroad, with effects on several key circuits of a modern low-hierarchy economy. However, hoarding can also occur in domestic circuits with domestic currency. If firms or capitalists hoard money out of circulation that is not replaced with new loans, then a cycle of default, bankruptcy, unemployment, restructuring and concentration happens. The completion of circuits by avoiding the hoarding of liquidity should be a priority of domestic regulators, to preserve production. This is the second objective for a programmable CBDC. Imagine a circuit where the local government issues food stamps. They are distributed to local organizations to be further distributed to i­ ndividuals in need. Individuals go to supermarkets and use the food stamps to acquire food. Supermarkets redeem the food stamps with the government and receive cash. The government recirculates the food stamps to the local organizations. If one of the individuals or one of the local organizations decides to hoard food stamps and does not use them to acquire food, there will be less supermarket sales and the amount of available stamps in the next cycle will be reduced. If this behavior continues repeatedly, the hoarder will have created a food insecurity crisis. Therefore, the government must design the stamps in a way that hoarding is not possible or not attractive and/or must recalibrate the issuance of stamps at every cycle. Every loan is a new circuit and, owing to fungibility, money from one circuit may be used in another circuit or to complete a previous circuit. Fungibility of money issued by the same bank is trivial. Fungibility among different bank monies is dependent on the liquidity dimensions of the payment systems. Different bank monies are on different ledgers. However, owing to explicit government guarantees, such as deposit insurance and access to lending of last resort, modern bank monies’ fungibility is also trivial. Fungibility of bank money is a key characteristic that allows intertwining of circuits and the continuation of the production economy. Programmable central bank digital currency must allow for inter-circuit fungibility, even if circuits are created by hierarchically inferior banks. This is the third objective for a programmable CBDC. Imagine you have won 50  000 air miles from an airline. Can you use those miles with another company? Usually not, but perhaps you can transfer those miles to an allied airline for a fee or for a higher price. Imagine the flight you need costs 75 000 miles. Your partner has 30 000 miles but at another airline. Since airline miles are not fungible between airlines, you cannot use your partner’s miles for your travel. If aggregate

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travel (production) is to be maximized, then a systemic approach would be for airline miles’ interoperability. This is fungibility. It is important for production to occur because money from different circuits can be used interchangeably.

3. PROGRAMMABLE VARIABLES Central bank digital currency is issued by a central bank. Thus, it is a liability of a central bank. It must be issued on a ledger. It can be a conventional database or a permissioned blockchain. Either should allow for embedded programmable algorithms. The smart-contract technology that makes this possible is available, although further fine-tuning is also possible and desirable. Interaction with users and firms should be very straightforward, ideally compatible with the most basic mobile technology4 but with an open innovation environment.5 While there are innumerable design characteristics that programmable CBDC could have, they should respond to policy objectives. Intended standardization of CBDCs by hegemonic central banks or industry associations usually ignore the low-hierarchy reality and needs of most countries. While most of the discussion on programmable money is focused on the real-time, cross-border settlement of financial instruments high-above in the international money hierarchy (OMFIF 2019; ISO 2021), this chapter focuses on production needs of peripheral economies with developmentand innovation-orientated regulators and monetary authorities. The three objectives are avoid capital flight, avoid hoarding and support domestic fungibility. To avoid capital flight, a CBDC must have bounded convertibility and limited transferability. As CBDCs are issued by domestic central banks, it is easy to program that they cannot be convertible to another currency and that they cannot be push-transferred abroad. However, if a foreign entity decides to open a registry in the domestic CBDC in order to receive digital currency, this should be welcome for a low-hierarchy central bank. In this respect, the main worry for a domestic regulator is how to curtail residents from using foreign CBDCs, especially high-hierarchy CBDCs such as digital dollars or digital euros. As a gesture of Foreign Account Tax Compliance Act (FATCA) reciprocity, transparent blockchain registers of foreign holders for high-hierarchy CBDCs would be optimal for low-hierarchy countries’ regulatory enforcement purposes. Then there is the issue of convertibility. While it may seem fairly straightforward that low-hierarchy CBDCs should be convertible to and from domestic bank money via the central-bank managed payment system, the

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design should discourage flight away from bank deposits (OMFIF 2019). Therefore, a size-dependent oxidation variable should be programmed into CBDC. That is, if a citizen holds more CBDC than the commercial banks’ deposit insurance cap, a large negative interest (that is, oxidation) rate should apply for the amount of excess. Convertibility into bank money can also be the intermediate step prior to capital flight, so complementary limitations for bank money convertibility and transferability into hard currency abroad should accompany the regulatory design. Since banks already have access to central bank money, they should be restricted from holding CBDC. This can be programmed into the ledger. In order to avoid hoarding, the key programmable variables are time, magnitude and the type of holder. Hoarding must be defined as maintaining an amount of CBDC out of circulation for a minimum period of time. Society should agree what a minimum amount should be. A satisfactory starting point could be the threshold for deposit insurance, as mentioned above. If this amount is withheld for a period longer than that which is required for circuits to complete (which can be calculated according to the original loan that created this money) then oxidation should apply (Marshall 2018, p. 50). Fungibility is the most complicated objective. It entails interaction among circuits. Suppose the original circuit is a five-year loan for a new factory. The firm hires workers and purchases capital goods from a second firm. The second firm had requested a second one-year loan from the bank in order to manufacture the capital goods and to purchase raw materials from a third firm. The third firm had requested a third 90-day loan from the bank in order to hire workers and to exploit raw materials from nature. There may be many more loans and many more expenses. Government puts additional money into circulation with net spending. The government’s money also has an associated circuit, but it is not time defined. The government’s net spending helps to complete circuits that are short of liquidity elsewhere in the circuit. Government can borrow from the central bank (overdraw or sell securities) or spend fiscal money directly on the CBDC ledger. Although not a matter of this chapter, the government’s promise to procure the factory goods would be the initial demand for the first circuit. Money should be able to flow, with fungibility but with the programmed characteristics, among all of these circuits. While this seems complex, it already occurs; most bank loans are not delivered in cash to the borrower, they are transferred directly from the bank to the borrower’s supplier, precisely to avoid exits from the circuit. Whether the programmable characteristics should be the same as the original circuit or adapted to the ensuing circuit is a matter for further research. In order for the CBDC to be fungible, it must be on one ledger. The ledger can be permissioned. Government can create CBDC directly in the

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ledger; issuance limits and resulting central bank (CB)-Treasury balance sheet positions can be sorted institutionally. Banks can create CBDC similarly to how they currently create bank money in the CB unit of account. I propose they now create bank money on their own books but also on the CBDC ledger. The money created by banks would not be CB liabilities, but they would be contingent liabilities, in view of the lender of last resort implicit guarantees. If a user exits from a bank-created circuit into the CBDC, fungibility and convertibility must be guaranteed. As part of the design of these guarantees, central banks will require bank-created money to incorporate programmable properties aligned with the abovementioned objectives, in a similar fashion to how central banks currently regulate banks’ participation in the payment systems. This CB contingentliability fungible with CB-liability would allow central banks, and the broader public, to monitor the circuits of the economy in real time. That is, monetary units created by banks would have a mirror contingent-liability register at the CB ledger. This model contrasts with the pure tokenization of bank money (Deutsche Bundesbank 2020) and dispels the Gosbank fear (Kaminska 2016), and simultaneously allows for big and open anonymized data to be available to the economy for policy, risk management, business opportunities and open innovation. Fully capturing the existing circuits in the economy, and their interaction, will allow for fine-tuning of policy variables and of programmable money algorithms. Programmable money can be further designed according to industryspecific value chains, by using invoice data to correctly specify the corresponding circuits. In small developing economies, value chains quickly encounter the need for imports or payment for raw materials from the non-financially included agricultural sector (Arauz et al. 2021). The design of an overarching CBDC must take these issues into account. In the first instance, by accompanying the monetary policy with industrial policy of strategic import substitution and, in the second, with telecommunications, technological and cautious financial inclusion policies (Correa and Girón 2019). Programmable self-executable smart contracts that condition transactions on real economy physical movement of goods, according to current technology,6 are faulty, easily avoidable and easily hackable. It is preferable to stick to financial variables inherently related to production.

4. ASSOCIATED RISKS WITH PROGRAMMABLE MONEY The risk of a unique ledger is that of weaponization of money. The central bank is closer to a leviathan than the current dispersed payment and

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l­ending system. This risk can be mitigated by open-sourced, democratically controlled algorithms with zero-knowledge proof requirements. Hierarchical shadow banking alternatives to the programmable properties of the CBDC will inevitably emerge. For example, traders will simulate transactions to buy CBDC and deliver either bank money, physical cash or, even, transfers abroad. Hoarders will develop distributed holding mechanisms with a hierarchically lower clearing system among them. This clearing system may also evolve into a shadow banking system with ‘CBDC certificates’ as liabilities. This already occurs with cryptocurrency exchanges, cryptocurrency lightning network and the Chivo Wallet government cryptocurrency initiative in El Salvador. These mechanisms could be detected, regulated and enforced with network analysis, but it would be wise to evaluate the necessity to regulate prior to taking action.

5. CONCLUSIONS Central bank digital currencies are undoubtedly part of the monetary panorama. Financial technology opens an opportunity for low-hierarchy peripheral economies to promote programmable central bank money for the purposes of production. I briefly introduced some of the available technologies for the CBDC ledger. Capital flight that breaks production circuits is to be avoided. Hoarding that breaks circuits, concentrates production and increases inequality is also to be avoided. Money can be programmed with these characteristics for these objectives. I show there are some risks and avoidance techniques that can be used to neutralize the embedded programmable characteristics, but I argue they can be detected with big data network analysis. Finally, I present an accounting innovation crucial for the CBDC to be fungible with currently existing bank money: registering bank money as contingent liabilities in the CBDC ledger.

NOTES 1. While theoretically all banks can be correspondent banks for each other, network economies and magnitude of money flows tend to centralization. When a lender of last resort for the interbank market is required, a central bank becomes a necessity. 2. For dollarized or unilaterally euroized countries, physical dollars and euros in circulation replacement for a domestic xenodollar- or xenoeuro-CBDC optimizes the use of hard currency for cross-border transactions instead of for domestic payments (Andresen et al. 2019; Arauz 2019a). 3. While GFI considers China to be developing country number 135, I have struck out China from the quantitative results as it is a high-hierarchy jurisdiction, especially after

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the renminbi was included in the International Monetary Fund’s Special Drawing Right basket. 4. Such as the Global System for Mobiles (GSM) Unstructured Supplementary Service Data (USSD) protocol. 5. Such as Application Programming Interfaces (APIs). The International Standards Organization (ISO) TC 68 has created a CBDC working group with Stanley Young, from JP Morgan as convenor. JP Morgan is a privately owned institution high up in the international money hierarchy (Arauz 2021), the ISO working group should be proactive in including low-hierarchy economies’ concerns. 6. Even with Internet-of-things technology and with Amazon-type surveillance of goods, it would be too costly to incorporate into a universally accessible programmable money.

REFERENCES Andresen, T. (2019), ‘Aprovechar el dinero digital del Banco Central para estimular la actividad económica doméstica’ (‘Exploiting Central Bank digital money to stimulate domestic economic activity’), Ola Financiera, 12 (33), doi:10.22201/ fe.18701442e.2019.33.70103. Andresen, T., S.  Keen and M.  Cattaneo (2019), ‘Nueve años de crisis del euro. Ya es tiempo de pensar en algo nuevo’ (‘Nine years of euro crisis: it is time for something new’), Ola Financiera, 12 (33), doi:10.22201/fe.18701442e.2019.33. 70104. Arauz, A. (2019a), ‘Dólares y xenodólares: el sistema de pagos como política monetaria en el Ecuador dolarizado’ (‘Dollars and xenodollars: payments system as monetary policy in dollarized Ecuador’), Observatorio de la Dolarización, 24 January, accessed 30 June 2021 at https://dolarizacion.org/2019/01/24/dolares-​ y-xenodolares-el-sistema-de-pagos-como-politica-monetaria-en-el-ecuador-dol​ arizado/. Arauz, A. (2019b), ‘Geografía política de los datos del dinero’ (‘Political geography of money data’), Ola Financiera, 12 (33), doi:10.22201/fe.18701442e.2019.33. 70102. Arauz, A. (2021), ‘Criptoactivos como sistemas de pagos interbancarios’ (‘Cryptoassets as interbank payment systems’), in M.  Meireles and C.  Maya (eds), Finanzas Desreguladas, Financiamiento y Desarrollo: un Balance Crítico, Mexico City: IIEC and UNAM, pp. 253–74. Arauz, A., R. Garratt and D. Ramos (2021), ‘Dinero Electrónico: the rise and fall of Ecuador’s central bank digital currency’, Latin American Journal of Central Banking, 2 (2), doi:10.1016/j.latcb.2021.100030. Auer, R., G. Cornelli and J. Frost (2021), ‘Rise of the central bank digital currencies: drivers, approaches and technologies’, BIS Working Paper No. 880, Bank for Internationbal Settlements, Basel, original 24 August 2020, updated April 2021. Correa, E. and A.  Girón (2019), ‘Financial inclusion and financialization: Latin American main trends after the Great Crisis’, Journal of Economic Issues, 53 (2), 496–501, doi:10.1080/00213624.2019.1594544. Deutsche Bundesbank (2020), ‘Money in programmable applications’, Deutsches Bundesbank, Frankfurt, December, accessed 30 June 2021 at https://www. bundesbank.de/resource/blob/855148/ebaab681009124d4331e8e327cfaf97c/mL/​ 2020-12-21-programmierbare-zahlung-anlage-data.pdf.

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Global Financial Integrity (GFI) (2020), ‘Trade-related illicit financial flows in 135 developing countries: 2008–2017’, GFI, Washington, DC, accessed 30 June 2021 at https://gfintegrity.org/report/trade-related-illicit-financial-flows-​ i​n-​135-developing-countries-2008-2017/. Graziani, A. (2003), The Monetary Theory of Production, Cambridge: Cambridge University Press. Grey, R. (2021a), ‘Testimony before the US house of representatives committee on financial services task force on financial technology’, hearing on ‘Digitizing the dollar: investigating the technological infrastructure, privacy, and financial inclusion implications of central bank digital currencies’, US House Committee on Financial Services, Washington, DC, 15 June. Grey, R. (2021b), ‘Rohan Grey on a privacy-preserving digital dollar vs Monero’, Monero Talks, YouTube, accessed 30 June 2021 at https://youtu.be/FQ2fEYfqjMY. Guttmann, R. (1998), ‘The international monetary system in transition’, Economia politica, Società editrice il Mulino, 3, 419–36. International Standards Organization (ISO) (2021), ‘Central bank digital currencies’, Call for Experts and Recent Publications, ISO/TC 68, ISO, Geneva, March, accessed 30 June 2021 at https://committee.iso.org/sites/tc68/home/news/ content-left-area/news-and-updates/central-bank-digital-currencies.html. Kaminska, I. (2016), ‘Cbank digital currencies and the path to Gosbankification’, Financial Times, 29 July, accessed 30 June 2021 at https://www.ft.com/content/ cdab16f7-ae35-3258-a4ce-648d4add849c. Kiff, J. (2021), ‘Jurisdictions where retail CBDC is being explored’, Kiffmeister Chronicles, accessed 30 June 2021 at http://kiffmeister.blogspot.com/2019/12/ countries-where-retail-cbdc-is-being.html. Lee, A. (2021), ‘What is programmable money?’, FEDS Notes, Washington, DC:  Board of Governors of the Federal Reserve System, 23 June, doi:10.17016/2380-7172.2915. Lund, J., J. McCaleb, M. Kennedy and N. Drury (2019), ‘Charting the evolution of programmable money’, IBM Institute for Business Value, March, accessed 30  June 2021 at https://www.ibm.com/thought-leadership/institute-businessvalue/rep​o​r​t​/programmoneyevo#. Marshall, W. (2018), ‘Deflación y criptomonedas’ (‘Deflation and cryptocurrencies’), Ola Financiera, 11 (30), doi:10.22201/fe.18701442e.2018.30.65515. Official Monetary and Financial Institutions Forum (OMFIF) (2019), ‘Retail CBDCs: the next payments frontier’, accessed 30 June 2021 at https://www.om​ f​i​f.org/wp-content/uploads/2019/11/Retail-CBDCs-The-next-payments-frontier. pdf. Parguez, A. (2015), ‘El doble circuito monetario depredador: los costos de la plena integración al sistema financiero y productivo multinacional’, Ola Financiera, (6), May–August, accessed 30 June 2021 at http://olafinanciera.unam.mx/ new_web/06/pdfs/Parguez-OlaFin-6.pdf. Parguez, A. and M. Seccareccia (2000), ‘The credit theory of money: the monetary circuit approach’, in J.  Smithin (ed.), What is Money? London: Routledge, pp. 101–23. Pistor, K. (2019), The Code of Capital: How the Law Creates Wealth and Inequality, Princeton, NJ: Princeton University Press. Schmitt, B. (2000), ‘The double charge of external debt servicing’, research notes, accessed 30 June 2021 at https://econwpa.ub.uni-muenchen.de/econ-wp/mac/ papers/0004/0004019.pdf.

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Solorza, M. (2005), ‘Teoría del Circuito Monetario y Banca Extranjera en México, 1850–1930’ (‘Theory of the monetary circuit and foreign banks in Mexico, 1850–1930’), PhD thesis, National Autonomous University of Mexico (UNAM), Mexico City.

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9. Large-scale currency circuits as anti-crisis mechanism: the Argentine Redes de Trueque Georgina M. Gómez 1. INTRODUCTION For over 10 years between 1995 and 2006, Argentina had the largest non-governmental currency system in the world, Redes de Trueque (RTs). Complementary Currency Systems (CCSs) are networks of households or businesses that exchange goods and services using self-organized means of payment, which are always of voluntary acceptance and may or may not be pegged to the national currency. The Argentine RTs are paradigmatic in how they countered the economic demise of the regular economy, although they existed before and after the crisis. In the four years between 1999 and 2002 the Argentine gross domestic product (GDP) shrunk by a total of 25  per  cent, marking a downturn characterized as the worst fall in any major capitalist economy not at war (Gerchunoff and Llach 2005; Llach 2004). In that traumatic period for many Argentines, the RTs were the lifebuoys to which 2.5 million low-income households clung to stay afloat and their complementary currencies became a symbol of the resilience of the grassroots economy. Women, informal workers, and lowincome households benefited the most. While the role of the Argentine RTs for economic survival and recovery is well established, the experience has not repeated elsewhere in any remotely similar form in the last 25 years. The reason for this cannot be the absence of economic or monetary crises in the world. The Systemic Banking Crises database (Laeven and Valencia 2010) reports that between 1970 and 2010, there were 145 banking crises, 208 monetary crashes and 72 sovereigndebt crises, and some sources emphasize that this totals no less than 425 systemic crises in three decades (Lietaer et  al. 2012). The International Monetary Fund (IMF) World Economic Outlook describes the contraction of economic activity in 2020 as ‘unprecedented in living  memory’ (IMF 2021, p. 1). The economic devastation caused by the pandemic and 221

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its containment policies shows an output contraction of over 10 per cent in several countries (IMF 2021, p.  8), and the loss of income affected women, youth and informal workers most severely. The report estimates that an additional 95 million people are suffering extreme poverty in 2020. While governments hope that economic output and employment will bounce back on their own, some have implemented whatever expansionary policies their budgets and political perceptions allow them. In the meantime, grassroots groups have launched various projects to regenerate livelihoods at the local level, including complementary currency initiatives (see Adriano 2021) that remain, overall, small. In the context of post-pandemic economic recovery and for future crisis scenarios, it is important to understand the factors that generated such an effective counter-cyclical mechanism in Argentina, and not elsewhere. This chapter revisits the experience of the Redes de Trueque (RTs) 25 years after their origins to investigate the generative conditions that led to their development and the income effects on low-income groups. What factors facilitated the emergence, growth and persistence of the RTs? The RTs have been well researched but there are notable gaps in the interpretation of their origins and effects, with a generalized perception that they were primarily a reaction to the crisis. As indicated, there have been many crises but none of them generated a similar compensatory mechanism, so the explanation must be completed by considering other factors. In turn, the interpretation as counter-cyclical mechanism is tainted because the field research was rarely conducted before or after the crisis (1999 to 2003), although some notable exceptions studied the first years of the experience (Coraggio 1998; DeMeulenaere 2000; Morisio 1998; and a few others). In addition, there is a divide between the work authored by Argentine researchers, often in Spanish and in ­non-peer-reviewed publications, and the work of international scholars; their interests and ­understandings sometimes differ. This chapter presents an analysis of the context based on national statistics, secondary data and primary data gathered in the second half of 2004, the second half of 2006 and November 2013, as part of a major research project.

2. GENERATIVE CONDITIONS OF COMPLEMENTARY CURRENCY SYSTEMS There is considerable evidence in economic history on the use of multiple currencies during and outside periods of economic crisis (Fantacci 2008; Gómez 2018; Ingham 2004; Kuroda 2008b; Marmefelt 2019; Tymoigne and Wray 2006). Taking the past two centuries of history, in emergency

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situations when states have collapsed owing to wars and revolutions, monetary systems fell apart and alternative means of payment appeared to keep economies functioning at a local level (Greco 2001; Kuroda 2007; Schuldt 1997). Pick (1978) has documented hundreds of complementary currencies used in emergency situations. Three examples of the collapse of monetary systems in the twentieth century were the First World War in the German-speaking countries (Offe and Heinze 1992; Onken 1983), the Great Depression in the USA (Colacelli and Blackburn 2009; Fisher 1933; Gatch 2008) and the Civil War in Spain (Sánchez Asiaín 1999, 2013). The emergence of non-governmental or alternative currencies was common to these three historical cases, when groups of actors at the local level took the creation of currencies into their hands as official money vanished or became seriously disrupted. The issuers included municipalities, temporary or military authorities, notable leaders of high reputation, large producers or traders, and other figures with sufficient legitimacy to print money and make it acceptable. The connection between crisis and the disappearance of means of payment implies a political or an economic vacuum, and what was partially replaced at the local level was the function of money as temporary means of exchange and unit of account, not as reserve of value. Several instances of economic demise in Asia have similarly led to the emergence of means of exchange that protect local economic activity (Hayashi and Utashiro 2020; Kuroda 2018). The Great Depression was another case of severe economic distress and scarcity of means of payment (Kindleberger 1989) that enabled the emergence of dozens of local currencies called stamp script (Fisher 1933; Gatch 2008). Issuers included local authorities, large retail shops, traders and local associations of various kinds. Colacelli and Blackburn (2009) compared the stamp script in the USA during the Great Depression and the RTs in Argentina during the crisis of 1999–2002. They show that the amount of national currency in Argentina shrunk drastically during the crisis of 1999–2002, in part owing to the currency board policy, and this monetary crunch supported the acceptance of other means of payment. However, they indicate that the RTs were abandoned when the government issued higher amounts of pesos in 2002 and 2003, but this reasoning is historically incorrect. The RTs continued running at least until 2013, the last period of data collection by this chapter’s author. The research by Colacelli and Blackburn (2009) makes no reference to the unequal impact of the downturn on marginalized groups. While a socioeconomic demise may generate the conditions for the emergence of complementary currency systems, a question that remains is what keeps them running? As expressed by Vallet (2016, p. 480), it is ‘not uncommon to see such projects arising during turbulent times, but it is

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uncommon to see them endure and flourish’. The expectation is that one currency would prevail and suffocate the others. In pioneering research to define an answer, Kiyotaki and Wright (1989, 1993) studied multiple currencies in competition for their acceptability as means of exchange. Their models show that under certain conditions a multiple currency system was possible and stable (Kiyotaki and Wright 1989), although one currency would be preferred over others (Kiyotaki and Wright 1993). Several researchers followed that line of enquiry, although referring to the simultaneous circulation of a domestic and a foreign currency, such as the spontaneous dollarization of monetary systems in developing countries in which dollars are used as reserve of value. Still, in a review of the literature on ‘multiple payment systems’, Craig and Waller (2000) first refer to foreign and domestic currencies and then add ‘privately issued’ means of payment in the form of commodity-backed currencies issued by non-governmental entities. Cavalcanti and Wallace (1999) also study public and private types of currency and show that two currencies can circulate simultaneously if the official supply of money is not sufficient. Argentina was described as a ‘monetary disorder’ with episodes of ‘missing money’ (Mogliani et  al. 2009) and it presents the simultaneous use of pesos and dollars (Guidotti and Rodríguez 1992; Kubo 2017; Ozsoz and Rengifo 2016). The circulation of multiple currencies may occur in times of peace and this situation can be stable in the longer term. The circulation of various currencies at the same time in the same territory has been termed monetary plurality and it implies more than one unit of account or more than one currency, or both at the same time (Blanc et al. 2018; Gómez 2018). Some authors argue that the critical factor that enables monetary plurality is not only an economic demise but the governments’ relinquishment of sovereignty to decide on monetary policy, hence enabling other actors to intervene in monetary matters (Lo Vuolo and Pereira 2017; Magnin and Nenovsky 2020). Indeed, Argentina had a currency board when RTs was launched and the government was limited in its decisions on monetary policy. While there appears to be a general link between economic downturns and the emergence of complementary currencies, an understudied connection is that between currencies and their specific uses and users. Historically, a person’s relationship with money depended on social status, and up to a hundred years ago the poor in many countries would use money occasionally and in urban areas (Cohen 1999; Lucassen and Zuijderduijn 2014). The various currencies in circulation were not equally accessible to all and were not chosen uniformly for all transactions by everyone (Lucassen and  Zuijderduijn 2014). With the settling of central banks in modern times and the monetization of trade across the world,

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currency supplied by the state appears uniform across the entire territory and in equal terms for all socioeconomic groups. However, this uniformity has been contested; Lucassen and Zuijderduijn (2014) edited a ground-breaking collection of studies in several continents and historical periods on the relationship between different means of payment and the socioeconomic background of their users. For example, Lucassen (2014) studies the case of India in colonial times and shows that economies based on waged labour required vast amounts of small-denomination currency when wages were low and income distribution was extremely regressive. When small change was insufficient in these economies, the poor could not pay and get paid. In recent times, the demonetization in India following the decision of the central bank to withdraw bank notes of high denomination to reduce suspicious cash payments, suggests that economies with large informal sectors require high-denomination currency (Guérin et al. 2017; Midthanpally 2017). The level of financial exclusion is critical in this; in developing countries, only a fraction of the population uses banks or has access to means of payment other than cash (Demirgüç-Kunt and Klapper 2013; Kempson and Whyley 1998; Lokshin and Yemtsov 2001; Sarma 2008). In turn, some authors argue that the state monopoly over money has rarely been accomplished anywhere and most countries have systems of points, miles, tokens, stamps and vouchers that enable certain types of trade which cannot be completed without them (Blanc 2016). These are tiny niches but may be plenty in number and significance, especially for low-income groups. The reasoning relates to the Polanyian discussion on all-purpose money versus special-purpose money (Blanc 2018; Saiag 2014). So, under conditions of monetary plurality it is conceivable that the various currencies would not do the same but each of them would be fitting or exclusive for specific uses and users. The implication is that for some social groups it may be difficult or costly to obtain the means of exchange that are most appropriate for a particular trade, for their socioeconomic segment or geographical situation, as suggested by Lucassen (2014) and Kuroda (2008a). The stable matches between social groups, the product traded and the most adequate currency for that transaction are termed currency circuits (Gómez 2018; Kuroda 2008a). Parallel currency circuits pair different groups and their trade with specific currencies, which implies that some currencies are used by the better-off and others are the ‘money of the poor’ (Baubeau 2019). Collins (2000) set the basis to explain why the uses of currencies are stratified by socioeconomic groups and become an expression of inequalities. Collins (2000) advanced Zelizer’s original argument and claimed that the stratification of currencies represents class inequalities. It is not about

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the meanings or ‘earmarking’ of money (Zelizer 1989), which is only a tangential explanation in this instance, but refers to Simmel’s conception of money as ‘a relationship with the economic community that accepts the money’ (Simmel 2004, p. 176). Collins discusses the existence of an ‘ultimate lower class on the margins of society’ who receive complementary currencies that only allow certain kinds of expenditures (for example, food stamps). The ‘currencies of the poor’ are inferior because they are highly specific and lack the ‘freedom’ of more generally negotiable currencies. In summary, monetary plurality is far from a historical anomaly but there are some specific generative conditions that facilitate their emergence. Complementary currency systems have been associated with periods of war, depression, emergency and other instances of political and economic demise, but also with governments’ relinquishment of monetary sovereignty, loss of control over monetary affairs and stringency of currency. In turn, there is mounting research on the socioeconomic stratification of currencies by users and uses, as an expression of class inequalities. Low-income groups would normally suffer the most from the generalized scarcity of means of payment and economic downturns, so complementary currency circuits would support these groups the most. The specific literature on complementary currencies underlines the link between alternative means of payment and low-income groups, but the more established currency search models (Blanc et  al. 2018; Calvo and Végh 1992; Cavalcanti and Wallace 1999; Craig and Waller 2000; Kiyotaki and Wright 1989; Shevchenko and Wright 2004) are dismissive of complementary currencies owing to their minuscule niche size or, as Fare and Ould-Ahmed (2014) suggest, because means of payment that do not come from the state are not considered ‘proper’ modern money (Dodd 2005; Ingham 2004; Wray 1998). While they may be niches, complementary currency systems give the poor and unemployed the opportunity to transform their labour time into purchasing power (Offe and Heinze 1992; Williams et al. 2001). The next section briefly reviews the characteristics of the RTs to further explore which of these generative conditions were present and in what ways they supported the development of the RTs in Argentina.

3. WHAT WERE THE REDES DE TRUEQUE? The first node of what would later be the RTs was launched in Bernal, a low- to middle-income suburb in Buenos Aires, in the first half of 1995. A group of three environmentalists and 25 neighbours of the disenfranchised middle class formed an exchange network to trade home-grown

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vegetables, homemade foods, handicrafts and artisanal toiletries. They met every Saturday in a garage and participants could take goods for a similar value of those they had brought, with some flexibility to solve the problem of equivalence of values. To enter the network, participants received a small amount of currency as a small loan. After that, they had to provide a service or sell products they made, bought, received, reused, repaired or recycled in order to trade in the complementary currency system. The scheme was economically effective and socially meaningful, and it appeared positively in a television show one year after its start. By the end of 1996, there were 1000 participants spread in 17 locations or nodes in the metropolitan area of Buenos Aires. In what appears to be the first academic research on the RTs, Morisio (1998, p.  10) reports that by the end of 1997 there were 66 nodes in the largest network and an estimate of 13  200 registered members. The initiative continued growing and gained government’s support, which translated into the sponsorship of two large RT meetings. By 1999, the various Redes de Trueque across the country reached an estimate of 180 000 participants in 200 nodes (Ovalles 2002), some of which had several thousand members who attended the markets every week. During the crisis, they grew at a spectacular speed, as discussed in the next section. Figure 9.1 shows estimations of the RTs’ evolution from various sources up to the final period of data collection in 2013, although the data require significant caution. These are unofficial figures based on consultancy research for the period 1995 to 2002 (Ovalles 2002) and rough estimates 5000

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Figure 9.1  Size of RTs in participants and Trueque nodes

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from Gómez (2009) based on the records of the RTs organizations, that rarely had accurate bookkeeping. For example, there is some grey literature documented by members and organizers, but these are hard to obtain and not always rigorous (Covas 2001; De Sanzo et  al. 1998; Primavera 1999a, 1999b). For years in which several figures of membership were available, Figure  9.1 shows the smallest number (for example, the newspaper Clarín estimated 6 million members at the peak in 2002. A representative country-wide sample implemented by Fiszbein et al. (2003) estimates membership at 4.2 million participants in August 2002, but Figure 9.1 takes the lower figures of January, 2002). The real membership of the RTs is unknowable. There are a few other aspects that characterized and differentiated the RTs from other CCSs around the world, other than the scale. The first is the organization. What is generically known as Redes de Trueque were a diverse group of complementary currencies and networks circulating in parallel (same time and space) among lower-income segments of the population, and these currencies were accepted along other parallel currencies issued by national and provincial governments (Gómez and Dini  2016). They formed an unusually diverse ‘monetary ecosystem’ (Lietaer et  al. 2010). Some RTs were local and involved a few dozen participants, while others covered the national territory and were organized in networks of thousands of nodes and up to 1.5 million members in one network, according to their own records. Nowhere has a similar attempt been made to create a national, private, yet not-for-profit monetary system as were the RTs (Primavera 2010). A second characteristic that distinguished the Redes de Trueque from other contemporary CCS was the favourable state intervention at the national level, at least until the RTs reached their peak. At the local level, many municipal governments offered meeting places and even accepted the use of the complementary currency as payment for municipal taxes (Hintze 2003; Plasencia and Gutierrez 2006). In current days, local government support for local currencies has become more common (Blanc and Fare 2013) but at that time it rarely happened (Powell 2002). A third aspect concerns the profile of RT participants. Initially, they were impoverished middle-class members with some accumulated assets and skills. González Bombal (2002) presented the RT as a new form of sociability of the disenfranchised middle class. The findings on socioeconomic background were later confirmed by other authors who identified the gender aspect of the initiative, and this was the fourth property of the RT: it was a network of women. Up to 90  per  cent of the participants in some nodes were women and 70 per cent of the local organizers were women. The typical situation in the household was of an unemployed

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male breadwinner while another household member, usually women, participated in the RT to earn additional but vital income. Many women discovered that care work or what they had regarded as a hobby could become a valuable income-earning activity (Lecaro and Altschuler 2002; Parysow and Bogani 2002; Pereyra 2006).

4.  RTS AND THE ARGENTINE ECONOMY The crisis at the turn of the millennium was the end of a development paradigm in Argentina. The import substitution industrialization strategy that the country had followed since the 1930s was running down and had caused recurrent cycles of growth followed by inflation, devaluation, recession and then recovery again (Gerchunoff and Llach 2005). In the 1980s the downturns became deeper and included two periods of hyperinflation, in 1989 and 1990. The social and economic impacts of hyperinflation were traumatic for many Argentines and opened the path to a series of Washington Consensus structural reforms that included severe fiscal discipline, opening of the economy, monetary restraint, privatization and deregulation. To curb inflation, in 1991 the peso was pegged to the dollar at parity as part of a currency board policy named the Convertibility Plan. The Argentine government committed by law to only issue money if capital flew in. The policy acknowledged that the Argentine economy was already significantly dollarized and allowed the public to nominate bank accounts in dollars. In daily practice, the dollar was reserve of value, and contracts or assets such as real estate were regularly priced in dollars as unit of account. While the government decided not to abandon the national currency (peso), with this policy it relinquished monetary sovereignty in most other respects. The Convertibility Plan was initially successful in curbing inflation and boosting economic growth. However, in 1995 an economic crisis hit the ‘modernized’ Argentine economy. It caused massive disruptions in the balance of payments and the government managed to stick to the currency board by allowing a drop in the monetary base of 18 per cent (base money is defined as currency in circulation, reserve deposits and accounts of banking institutions in national currency with the central bank). The recession skimmed 5 per cent off the national product and the unemployment rate, which historically was under 6  per  cent, soared to 18.4  per  cent. It became evident that while the structural reforms had brought an economic bonanza to part of the Argentine population, they also caused the ruin of other groups that could not find employment and became disenfranchised. In that context of deindustrialization and fiscal crisis, the RTs were

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launched as a grassroots niche initiative, a network of neighbours resisting impoverishment together. Section 2 discussed the generative conditions for the appearance of CCSs in history, including a general economic demise with a deep recession and unemployment, a crunch of the means of payment or ‘missing money’ scenario and the relinquishment of monetary sovereignty. These conditions were all present in the Argentine case, but to varying degrees and at different times, and only combined simultaneously in the crisis of 2000–2001. Figure 9.2 shows the evolution of the number of participants in the RTs and the amount of cash. The RT was launched in a year when means of payment fell and later grew during the worst years of the economic crisis, 2000 and 2001. However, the two curves show no obvious connection after the crisis. The currency board was abandoned in January 2002 and the monetary base more than doubled that year, ending the scarcity of regular currency. In turn, that year the Argentine government reclaimed part of its monetary sovereignty, although the dollar continued to be preferred as reserve of value and, in some contexts, as unit of account, also. In relation to the economic crisis, Figure  9.3 shows the depth of the downturn in output and its relationship to the RT membership; an inverse relationship between them is visible around the economic demise of 1999–2003. Figure  9.4 shows that the RT membership increased when unemployment and poverty grew. In a country with a modest welfare state such as Argentina, poverty and unemployment go together, but it could be a 3 000 000

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Figure 9.2 Relationship between RT membership and monetary base, 1995–2006

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Figure 9.3 Relationship between membership in the RT and GDP, 1995–2006

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Figure 9.4 Relationship between RT membership and unemployment and poverty rates, 1995–2006

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matter of time before the unemployed sink into poverty, and this may not happen at all (they can resort to savings, temporary employment, training, help from kin, and so on, and join the RTs only after these other strategies are exhausted). Groups outside the labour market are captured by the poverty measurement but not in the unemployment indicator. During the crisis, a quarter of the population ended up living in extreme poverty and over half of the population had incomes below the poverty line, according to official calculations (Cruces and Wodon 2003; Fiszbein et al. 2003). The interdependence between the scale of the RTs and either unemployment or poverty is evident during the economic collapse (1999–2002). Individuals, especially those who were poorer, entered the RTs when the household faced a tight labour market. Outside the period of crisis, the relationship is less clear. Figures 9.3 and 9.4 confirm the counter-cyclical position of the RTs during the crisis of 1999–2002, but that is only part of the story. The development of RTs can be analysed in three differentiated periods, which are broken down in three graphs in Figure 9.5 to focus on the variations (adjusted scales for participants, per sub-period). The demise of the industrial development strategy and monetary stringency provided the main conditions that gave origin to RTs and their initial rise. Between 1995 and 1998, they expanded at the same time as the output was growing, unemployment was falling and poverty stayed steady. It was a pro-cyclical sub-period for RTs to spread as local niches that protected economic activity at the local level across the country. One of the founders of the RT, Horacio Covas, referred mainly to this period when he asserted that RTs functioned best as a pro-cyclical grassroots innovation: a large niche in which participants cooperated and had a small amount of capital to Thousands

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Figure 9.5 Relationship between membership in the RT and GDP, three sub-periods 1995–2006

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feed into production and exchange (interview in Luján, 4 November 2006). Members were diverse and included a majority of women, a minority of activists seeking to build an alternative economy, and a mainstay of disenfranchised middle-class and marginalized groups. The second sub-period, between 1999 and 2002, marked the worst four years in Argentine economic history, with the regular economy melting down and a sharp increase in unemployment and poverty. The RTs’ membership increased sharply and reached a peak estimated at 2.5 million (Ovalles 2002) or 4.2 million participants (Fiszbein et al. 2003). In 2002 the government abolished the currency board, hence reclaiming its monetary sovereignty, and became active in social protection with a subsidy for the poorest households. The RTs declined as the regular economy recovered, as has happened in other instances of emergency secondary currencies (Colacelli and Blackburn 2009; Gómez and von Prittwitz und Gaffron 2018). The curve of membership has the shape of an inverted V: participants massively sheltered themselves in the RTs during the collapse of the regular economy and they massively abandoned them. The RTs already lost products, cohesion and creativeness around 2002. The economic emergency gave a boost to the amount of participants in the RTs but it also unveiled the damage caused by the rivalry between factions and the organizational weaknesses of what had been conceived as a niche (Seyfang and Longhurst 2013). Nevertheless, the significance of the counter-cyclical period was paramount as the RTs allowed thousands of households to stay alive without depending on the government’s help. The final sub-period, between 2003 and 2006, shows the vigorous recovery of output, employment and income. With a massive cash transfer ­ programme for the poor and a loose monetary policy, the GDP grew at average yearly rates of 9 per cent in those four years. The government actively withdrew other secondary currencies that circulated at the provincial level (Gómez and Dini 2016; Théret 2018). The RTs became fragmented in dozens of smaller networks and some disappeared completely while others retained several thousand members. By the end of 2006, membership was about a tenth of the number reached in the crisis, raising questions of how it fell so quickly but also why so many people still saw value in the RTs. Despite their rise and decline, the RTs celebrated a decade of life and could boast that they were the largest CCS in the world. In this period there was still research on the RTs, which disclosed that a majority of women, structural poor and neighbours participated for the social and economic benefits. Of the generative conditions that historically have given rise to CCSs, the timeline presented here suggests that the evolution of RTs had

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multiple causes and these affected the Argentine economy differently at the various times. The RTs developed their own dynamics and were well established when the economic emergency began and they reached their peak. Along the entire decade of the RTs, some degree of interdependence existed between the number of participants and the percentage of the population marginalized under the poverty line or seeking employment, but this relationship was stronger in the crisis period and weaker in the first and final sub-periods. The demise of the industrial development strategy and  the relinquishment of monetary sovereignty were crucial in the origins and adoption of RTs, including the first years of the crisis, but less so later.  During the economic recovery, RTs returned to their pre-crisis scale, as grassroots niches where neighbours in lowincome areas resisted  poverty  together and could recognize other participants’  faces. Such a counter-cyclical economic space was not strictly necessary when the economy was  growing and monetary sovereignty was again in the hands of the government, yet thousands of participants remained  in the RTs. The next  section  explores the socioeconomic stratification of currencies  (Collins 2000; Gómez 2018; Lucassen and Zuijderduijn 2014; Polillo 2011) and how RTs became the currency circuit of the poor.

5. STRATIFICATION OF CURRENCY CIRCUITS The crisis of 1999–2002 was an extreme emergency that pushed over 50 per cent of the population below the poverty line. However, the demise of the industrial development paradigm had started earlier and the adjustment policies of the 1990s had additional impoverishment effects. Already during the hyperinflationary crisis of 1989–90 marginalization became widespread across the country and affected most strata of society in a country where about 70  per  cent of the population had declared itself to be part of the middle class (Tenti Fanfani 1993). The term ‘new poor’  was  used to describe households whose situation depended on their  previous status: they had low incomes but significant education, savings and assets, personal capabilities and social networks (Lvovich 2000;  Minujín 1995; Murmis and Feldman 1993). They understood the world differently from the structural poor; they were poor with resources, skills and a voice to make their demands heard. During the 1990s and especially the crisis of 1998–2002, larger numbers of households fell into poverty. In June and July 2002, a World Bank team ran a study with a representative sample of 2800 households with the goal of identifying the

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impact of the economic crisis on Argentines and, unlike the official household data, this study included smaller cities of less than 2000 inhabitants (Fiszbein et  al. 2003). The study found that 53.7  per  cent of the population was poor and 23.8 per cent was extremely poor in June 2002, in line which similar levels as the official indicators. In turn, the study reported that 11.3  per  cent of the total population participated in the Redes de Trueque, which is equivalent to 4.2 million people. The RTs had the highest incidence among the low-income population: 20.2 per cent of the households of the lowest income bracket (quintile 1) and 15.4 per cent of the second lowest income stratum were RT participants during the counter-cyclical period (1999–2002). In the third quintile the participation incidence is 11.7 per cent, similar to the population average. Almost two-thirds of the RT participants were in quintiles I and II and had monthly average incomes of 32 pesos (USD11.25) and 85.9 pesos (USD30.14) per person in each quintile, respectively. Table 9.1 presents the data of the income distribution of Argentina, the average income in pesos per quintile, and the incidence of participation in the RTs per quintile. Compared with these figures, the additional income that the poorest RT participants could make in the RTs was extremely significant. Colacelli and Blackburn (2005) estimated for their sample of 639 observations that the monthly equivalent in pesos of the goods and services that households procured in the RT was on average 272 pesos, with a median of 100 pesos (USD35). The conversion of the trade in the RT (in complementary Table 9.1 Data on income, Argentina and Redes de Trueque, June/July 2002 Quintile

Distribution income Argentina (%)

Average income per capita in pesos (*)

Incidence RT per quintile (%)

I (+) II III IV V National

3.1 8.1 13.8 22.7 52.3 100.0

 32.0  85.9 146.3 240.9 564.7 214.6

20.2 15.4 11.7  5.5  3.9 11.3

Notes:  Quintile I includes households with no reported income in pesos. (*) average monthly income per capita in pesos, based on the representative sample data of the study. The official estimation is a mean income of 233 pesos per capita in May 2002 (Permanent Household Survey, INDEC). Source:  Fiszbein et al. (2003, pp. 153, 165).

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currency) into pesos is inevitably inaccurate (prices almost never followed those in the regular economy), but the estimation suggests that the RT multiplied the average incomes of households in quintiles I and II in the period 2002. That is, the poor and unemployed sharply increased their consumption during the crisis, and perhaps survived the demise thanks to participating in the RTs. After the crisis, the significance of participation in the RTs per household shrank but did not disappear. Based on data gathered in several locations in the second half of 2004, Gómez (2010) reported that 360 out of 386 participants in the RT had irregular and insufficient incomes in pesos, according to their own self-definitions, so they participated in the complementary currency circuit to complement income. A minority had no reported income in pesos and lived on various charities and networks. Of those surveyed, 303 respondents could assess how much of their household consumption proceeded from the RTs. In this group, 42 per cent estimated that about half of their consumption proceeded from the RTs; the other half was covered with informal earnings and governments’ subsidies in pesos. In turn, 33 per cent of the participants covered a quarter of their consumption in the RTs and 18 per cent covered 75 per cent of their basic needs in the RTs, which implied that some members of the household had to reduce or directly go without food on the days that the RTs nodes did not meet. That is, 42 per cent of the participants doubled their consumption by procuring themselves goods and services in the RTs and 18 per cent quadrupled it. Despite GDP growth rates of 9 per cent for four years, there were significant segments of the population that were unable to satisfy their basic needs in the regular economy. So, while RTs had many weaknesses and were perceived as an inferior economic circuit, they offered low-income groups a suitable alternative to increase their consumption in comparison to the regular economy. In this line, Pearson (2003) suggested at the end of the crisis that participation in the RTs enabled poor households to reserve their minimal income in national currency for purposes that could only be obtained in pesos. As shown, the persistence of the RTs after the crisis goes beyond a temporary failure of the economy in pesos to obtain for low-income groups a consumption level above the poverty line. The crisis of 1999–2002 showed the poor that it was possible to increase their income by developing an additional currency circuit in which resources could be exchanged or shared. The conditions in the RTs were more suitable for them to increase their consumption than those offered in the regular economy with national currency. The most affected social groups typically included women carrying out unpaid work in their homes and contributing to the

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household’s welfare by participating in the RTs. Other groups were the elderly with minimal or no pension, the working poor and occasional informal workers. Hence, the final generative condition for the emergence and development of a complementary currency system of the scale and impact reached by the RT relates to the inclusion and exclusion situation of low-income groups in the regular economy, in comparison with those in the ­complementary currency circuit.

6. CONCLUSIONS The Redes de Trueque in Argentina have been an incredibly effective counter-cyclical mechanism during the economic demise of 1998–2002, that skimmed 25  per  cent of the GDP of the country in four years. However, in various other economic downturns around the world in the past decades, no similar large-scale project of a complementary currency system has emerged. In the economic crisis caused by the pandemic and its contention policies, it is worth revisiting the factors that enabled the development of the Redes de Trueque in Argentina and the implications for other complementary currency systems. This chapter discussed various generative conditions for the appearance of large-scale complementary currency systems from both an empirical and a theoretical point of view. It has identified that secondary currencies appear in periods of general economic demise with deep recession, unemployment and poverty. In addition, the list of generative factors includes crunches of the means of payment, missing money and the relinquishment of monetary sovereignty by the state. The chapter has argued that these conditions were all present in the Argentine case, but to varying degrees and at different times, and they coincided during most of the crisis of 1999 to 2001. The RTs flourished and reached their peak membership and number of nodes across the country precisely during the crisis. The simultaneous occurrence of these generative factors reflects the complexity of the phenomenon and at the same time makes it extremely unlikely that a similar CCS would develop again as a compensation counter-cyclical mechanism. The existence of a crisis, however deep it may be, is only one of the factors that generate a large-scale and long-lasting CCS. The chapter has also underlined that the RTs were already well established as an income-generation alternative before the crisis and continued to be perceived as an effective poverty-alleviation mechanism after the crisis. That is, the RTs did not start with the crisis and they were not a solution created with the purpose of mitigating falls of income caused

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by the crisis. In addition, in 2001 the government regained its decisionmaking powers over monetary policy and after a sharp devaluation, the economy started rebounding strongly in 2003. By then, the RTs were already crumbling owing to their limitations and mismanagement, yet they retained their appeal to hundreds of participants and celebrated a decade of existence as the largest complementary currency system in the world. This study suggested that the persistence of the RTs relates to the match between the complementary currencies and their members, which effectively paired users and uses of the means of payment. There is a connection between currencies and their uses and users, or the ‘community that accepts the money’, as expressed by Simmel (2004, p.  176). Means of payments are a living expression of class stratification, as elaborated by other authors (Collins 2000; Polillo 2011), in the various segments of the class hierarchy. In Argentina, episodes of missing money led some social strata to adopt foreign currencies such as the US dollar as reserve of value and unit of account, while the lowest income strata developed complementary currencies and integrated these as the currencies of the poor. The socioeconomic stratification of uses and users of currencies appears as an additional factor in the proliferation of currency circuits of the poor and for the poor. These findings are also consistent with Vallet (2016), who argues that complementary currency systems create stable economic networks which are likely to play a flexible and counter-cyclical role in a crisis. In what ways can the Redes de Trueque serve as an inspiration of a counter-cyclical mechanism to help low-income social groups affected by economic crisis? The case of the RTs is relevant in countries with severe economic downturns, which also experience governments with constrained or relinquished monetary sovereignty, stringency of currency, and widespread unemployment and severe poverty. The last generative condition is the pairing of users and uses of the currency into stable currency circuits in a way so that the CCSs provide additional opportunities for income generation. Thus, the monetary ecosystems increase the possibilities of income generation for various social groups and this cannot be created on the spot to offset the effects of a crisis. While the currency circuits of  the poor may act as vehicles of socioeconomic inequalities  that  make  up  the  empirical reality of class, as argued by Collins (2000), in Argentina, the Redes de Trueque significantly expanded the consumption possibilities among low-income households. Therefore, complementary currencies do not necessarily offset class inequalities but they support the survival efforts of low-income groups to survive with dignity.

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REFERENCES Adriano, A. (2021), ‘Innovation sparks community currencies  – IMF F&D’, Finance and Development, International Monetary Fund, Washington, DC, accessed June 2021 at https://www.imf.org/external/pubs/ft/fandd/2021/03/ technological-innovation-fueling-community-currencies-adriano.htm. Baubeau, P. (2019), ‘Formes monétaires et structures sociales: l’évolution de la propriété privée de la monnaie’ (‘Monetary forms and social structures: the evolution of money’s private property’), Revue de l’euro, 54, doi:10.25517/ RESUME-PKSF7RR-2019. Blanc, J. (2016), ‘Unpacking monetary complementarity and competition: a conceptual framework’, Cambridge Journal of Economics, 41 (1), 239–57, doi:10.1093/cje/bew024. Blanc, J. (2018), ‘Making sense of the plurality of money’, in G.M.  Gomez (ed.), Monetary Plurality in Local, Regional and Global Economies, London: Routledge, pp. 48–66. Blanc, J. and M.  Fare (2013), ‘Understanding the role of governments and administrations in the implementation of community and complementary currencies’, Annals of Public and Cooperative Economics, 84 (1), 63–81, doi:10.1111/ apce.12003. Blanc, J., L.  Desmedt, L.  Le Maux, J.  Marques-Pereira, P.  Ould-Ahmed and B.  Théret (2018), ‘Monetary plurality in economic theory’, in G.M.  Gomez (ed.), Monetary Plurality in Local, Regional and Global Economies, London: Routledge, pp. 18–47. Calvo, G.A. and C. Végh (1992), ‘Currency substitution in developing countries: an introduction’, IMF Working Paper No. 92/40, International Monetary Fund, Washington, DC, accessed 17 March 2022 at https://papers.ssrn.com/ abstract=884762. Cavalcanti, R.D.O. and N. Wallace (1999), ‘Inside and outside money as alternative media of exchange.’ Journal of Money, Credit and Banking, 31 (3), 443–57, doi:10.2307/2601062. Cohen, B.J. (1999), ‘The new geography of money’, in E. Gilbert (ed.), NationsStates and Money. The Past, Present and Future of National Currencies, London: Routledge, pp. 121–38. Colacelli, M. and D. Blackburn (2009), ‘Secondary currency: an empirical analysis’. Journal of Monetary Economics, 56 (3), 295–308. Collins, R. (2000), ‘Situational stratification: a micro-macro theory of inequality’, Sociological Theory, 18 (1), 17–43, doi:10.1111/0735-2751.00086. Coraggio, J.L. (1998), ‘Las Redes de trueque como institución de la economía popular’ (‘The Redes de Trueque as an institution of the grassroots economy’), in S. Hintze (ed.), Trueque y Economía solidaria, Buffalo, NY: Prometeo Libros, pp. 259–78. Covas, H. (2001), La Nueva Relación de los Gobiernos Locales: El Rol de la Red del Trueque (The New Relation of Local Governments: The Role of the Red de Trueque), Buenos Aires: Programa de Autosuficiencia Regional. Craig, B.R. and C.J. Waller (2000), ‘Dual-currency economies as multiple-payment systems’, Federal Reserve Bank of Cleveland, Economic Review, 1 (January), 2–13, accessed 17 March 2022 at https://www.clevelandfed.org/~/media/content/​ newsroom%20and%20events/publications/discontinued%20publications/econo​

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10. Community-based alternative currencies as drivers of new monetary arrangements Jérôme Blanc and Marie Fare 1. INTRODUCTION Since the end of the Bretton Woods system, monetary plurality has been an increasingly critical issue that generates a great deal of debate. It certainly contradicts the common view of monetary sovereignty as based on the ‘one nation, one money’ concept, as Cohen (1998, p.  27) coined it. The phenomenon has been growing while taking new forms, from dollarization processes in countries that underwent inflationary crises and their aftermaths (with many examples from the 1970s to the 1990s), to the rise of cryptocurrencies and related financial technology (fintech) innovation since the 2010s. With the latter, monetary plurality gained momentum among the public, while monetary creativity started to be considered seriously, as a threat over monetary sovereignty and control, as well as an opportunity for central banks to implement innovative digital cash. In between dollarization and blockchain-based currencies, rose less conspicuous monetary schemes that were based on community initiatives. The latter, often termed community or complementary currencies (hereafter CCs) appeared in the 1980s and soared throughout the period while experiencing innovation and diversification. They have generally been sharing common features, although they have been taking a variety of forms. They are built by groups of people with a conception of the general interest and the intention to contribute to it through the implementation of a monetary scheme. They are dedicated to small communities or territories, deserving to be considered ‘local’ schemes. They are grounded in a critical stance against the monetary system, which states that shaping an alternative system may help solve problems, and they are built outside governments, be they local, and outside the banking system as well, although some categories of schemes may seek to develop links with banks 245

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and look for supports from public authorities. They eventually constitute community and participation-based monetary initiatives. Community or complementary currencies may be presented as experiences that fall under the category of transformative monetary plurality, that is, a category of money that is created as a tool for socio-economic transformation on the long run (Blanc and Théret forthcoming). This chapter deals with the transformative power of CCs on money itself (it is not the place here to assess their effectiveness as regards their own socio-economic objectives). They have not been threatening monetary sovereignty and monetary policy as dollarization processes have and, in a different manner, as cryptocurrencies increasingly have appeared to have the capacity to do in the early 2020s. Community or complementary currencies, nevertheless, experienced in many countries rough contact with public authorities, finding here and there smart ways of existing and developing, sometimes deadly opposition, but more frequently a benign neglect under control. In some instances, law was adapted to grant them a place. They thus entered the monetary system. That is why the question of the possible contribution of community and participation-based monetary initiatives to changing money appears to be relevant; most probably not as main drivers for change, but as second role that may change features of monetary systems by complementing them with new layers. We first show how CCs emerged and developed from a twin process of spreading and differentiation to highlight their diversity and the general trend of innovation that leads to new categories of schemes (section 2). We then examine the diversity of relationships they developed with regulatory authorities over time, ranging from threats (including direct prohibition) to integration within appropriate legal frameworks (section 3). We then turn to the three main objectives they pursue, namely, a territorialization of activities, the stimulation of exchanges and the transformation of practices, lifestyles and social representations (section 4). They may thus be considered structuring tools for territorial development, leading to the proposal of types of monetary arrangements that give place to monetary subsidiarity and the possibility of monetary commons to emerge (­section 5). Section 6 concludes.

2. BIRTH AND DEVELOPMENT OF COMMUNITY AND PARTICIPATION-BASED CURRENCIES The 1980s experienced the birth and first spreading of a new type of currencies, in the wake of the economic crisis that started in the 1970s in northern countries, and as possible localized solutions to consequent social

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damages, while national social protection systems and government action proved to be deficient in the face of rising social needs. Those solutions were named grassroots initiatives (for example, Seyfang and Smith 2007; Collom 2011), a term that emphasizes their specific character of monetary schemes implemented by groupings of people, for themselves, and outside banks and public authorities. Although the contemporary history of industrialized countries displays various examples and a few periods of burgeoning similar experiences, with notably Robert Owen’s English experiences of 1832–34 and the great wave of emergency currencies in the worst periods of the Great Depression in North America as well as in Europe, from 1930 to 1934, nothing compares to the contemporary wave of experiences that started in North America in the first half of the 1980s. It is not the place here to develop a history of these currencies. It is, however, meaningful to highlight their diversity and the general trend of innovation that leads to new categories of schemes, as in this section, but also the type of exchanges they support and the transformations they promote, their technical articulation to the formal monetary system and their general proximity to public authorities, as we cover in subsequent sections. The variety of those schemes is addressed by various authors (for example, Blanc 2011; Martignoni 2012; Seyfang and Longhurst 2013; Fare 2016). In this chapter, we use a taxonomy of seven groups of alternative currencies (Blanc 2018), of which six refer to what are commonly considered CCs (Table 10.1). Each of these gathers homogenous and sometimes very numerous experiences. They are built from observations (notably of networks) rather than from ideal types to which real experiences could be compared. This taxonomy focuses on experiences and does not cover the high number of proposals and plans, as far as they have no counterpart in the real world of monetary uses. Furthermore, it has no pretension to cover all experiences. It nevertheless includes most experiences, those remaining being most probably isolated. It is eventually highly dependent on historical context and should then be revised together with future developments. The groups of alternative currencies we display in this chapter are different from existing categorizations. As other observers, we distinguish LETS-like systems (group 1) and time-based systems (group 2). However, contrary to Blanc (2011) and Fare (2016), we separate inconvertible local currencies (group 3) from convertible local currencies (group 4), since this technical difference generates significant discrepancies, especially in the relationships they may develop with local governments or in their legal framing. Moreover, while Seyfang and Longhurst (2013) separate local currencies (referring to HOUR-like systems in their mapping) and barter markets (referring to the Argentinian Trueque systems), they are merged in group 3 since they are not so different: they mostly rely on lump-sum

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Table 10.1 Six groups of CCs Group

Contents

Origin and some important experiences

Main purported transformations

Group 1

General mutual credit with focus on individuals and sometimes small businesses

1983 LETS (starting in Canada)

Group 2

Mutual credit between individuals for time-based services

Group 3

Lump-sum based inconvertible local currencies

Group 4

Convertible local currencies

Group 5

Green practices reward schemes

Group 6

Business-to-business mutual credit

1973 Voluntary Labour Bank (Japan), time dollars and time banks (starting in the USA), Accorderies (Canada, France) 1991 Ithaca HOUR (USA), Trueque (Argentine), Bangla Pesa (Kenya) 1998 Palmas (Brazil), Chiemgauer (Germany), Bristol Pound (UK), Eusko (France) 2000 NU Spaarpas (Netherlands), SOL (France), e-Portemonee (Belgium) Years 1990 RES (Belgium), Sardex (Italy)

Empowering people and strengthening proximity social cohesion, through reciprocity and socially embedded market exchange Empowering people and strengthening proximity social cohesion, through reciprocity in time services Promoting an inclusive popular economy of proximity Promoting an inclusive popular economy of proximity, and reorienting production, trading and consumption patterns Reorientating consumption patterns and stimulating waste management Promoting an economy based on small and medium-sized enterprises that form a community

Source:  The authors.

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issuance of an inconvertible currency.1 All categories considered, Seyfang and Longhurst (2013, pp.  70–71) count ‘a total of 39 nationally-based currency groupings, in 23 countries, across six continents, representing a total of 3418 local projects’. Our taxonomy completes this with two groups of alternative currencies, less numerous: reward schemes based on a specific currency (group 5) and business-to-business (B2B) mutual credit systems (group 6). While Blanc (2018) proposes a seventh group around cryptocurrencies, this chapter, which is focused on CCs as communitybased monetary initiatives, considers crypto-based currencies only as far as they serve as a technical basis for digital schemes of groups 1 to 6.2 As an approximation, in 2017 there were 5000 schemes in more than 50 countries (Blanc 2018). Those groups are not independent from each other. The existence of various models or groups that cross through borders proceeds from a twin process of spreading and differentiation, through which experience is accumulated while serving newcomers and innovators. The process has been taking four main forms since the 1980s (Blanc and Fare 2012). The first is an open dissemination that supports innovation through possibilities of adaptation and change. It relies on information-spreading that the development of digital tools and communication greatly facilitated from the 1990s onwards. Smooth spin-offs provide a second form, which also enables differentiation: though autonomous and free to evolve, the spin-offs are related by common principles that may be formulated in charters that do not prevent local adaptation and innovation. Community development banks in Brazil, starting with the Banco Palmas (Melo 2009; Carvalho de França Filho et al. 2012), or convertible local currencies in France (Blanc and Fare 2018), fall under this form. A third form is provided by franchised spin-offs, wherein the control of the founding schemes over the spin-offs may require contractualization. The model is replicated under strict observance of the founding principles. Any deviating experience may be rejected outside the network, possibly generating a new model. The Lintonian model of LETSystem (Lee et al. 2004) or the Accorderies in Quebec (Fare 2009–10, 2011b) could be considered examples of this third form. Finally, there are centralized development processes, where a unique founding model replicates in other places, as for example in Italy, with the replication of the Sardinian B2B mutual credit system named Sardex (Bazzani 2020). In this spreading dynamics, innovation takes two forms. It may come from a significant differentiation when creating a scheme, possibly through a dissemination process that enables the creativity of project holders facing the specificities of local constraints and aspirations. Thus was created the Ithaca HOUR, in the USA, after the failure of a LETS experience (Jacob et al. 2004); so did the Trueque that became so important in Argentina at

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the end of the millennium (Gómez 2009). However, innovation may also come from minor differentiations, in the form of incremental changes (as did, for example, the contractualization of two networks of local currencies in France with a social finance organization, in 2018). Hence, CCs spread and differentiate in the same movement, in the context of development of an experimentation culture and of a rising awareness that money may be a tool to be adapted to purposes that are yet to be defined by empowered groups of citizens. The idea that implementing a monetary scheme in the framework of a non-profit organization, a cooperative, a social enterprise or any type of small and medium-sized enterprise (SME) is possible is increasingly popular in a rising number of countries in which organized civil societies exist.

3. RELATIONSHIPS WITH REGULATORY AUTHORITIES: FROM PROHIBITION TO INSTITUTIONALIZATION This process of differentiation and multiplication has elicited varying reactions from regulatory authorities. We show that the situations are diverse depending on the context of emergence and the type of CCs. 3.1 A Diversity of Situations Elaborating on the possible contribution of CCs to the future of money requires an analysis of how CCs have been perceived and treated by public authorities thus far, especially those monetary schemes often built in reaction to the existing monetary system and without formalized connections to its institutions. However, as they are generally territorially anchored schemes, the way they are perceived by central or national authorities and whether or not they are integrated in the regulatory framework must be distinguished from their relationships with local governments (which are dealt with in another section). A first possibility is provided by the ordinary inclusion of CCs in an already existing and enabling regulatory framework. This seems to be the general case of groups 5 and 6, which are frequently built either in relation to local governments (group 5), or as professional B2B schemes (group 6). Consequently, they generally do not take the form of activist-led schemes with a high propensity to mistrust governments and authorities, and a requirement of their actual implementation is to comply with existing regulatory frameworks. As far as rewarding schemes are concerned (that is, group 5), the regulatory framework may be either that of customer

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loyalty programs that use loyalty points as the basis of their reward scheme, or that of service vouchers that are widespread in the world. There is thus nothing really demanding as regards regulatory frameworks, and the obstacle may be the possible inclusion of these reward schemes into a circulating medium, such as a convertible local currency (group 4). As far as B2B mutual credit systems are concerned (group 6), the effectively implemented B2B mutual credit schemes can hardly be found outside any already existing legal framework, owing to the formalism and professionalism that these schemes require in order to be trusted by potential users. Consequently, we may observe advocacies for regulatory adaptation (for example, in France, Sofred Consultants – Groupement CeSAAr and DGCIS 2013) or the non-development of these schemes in countries without enabling law, rather than their development against or outside the existing regulatory framework. In contrast to groups 5 and 6, groups 1 to 4 seem more widely led by activists whose aspiration to social transformation may require bypassing regulations, and/or to test toleration from authorities (Blanc and Fare 2013). When regulatory frameworks are not exactly suitable for CCs, four main types of reactions of central and regulatory authorities may be distinguished: mistrust, suspicion and threats, possibly leading to a ban; toleration, which may come about from disinterest and neglect while subject to reversal; regulatory adaptation, which expresses the recognition of a utility to CCs; and creation of an appropriate legal framework. Those reactions may be combined or take turns through time. Moreover, they may refer to four main motives for concern or interest: monetary and financial regulation and monetary sovereignty; tax rules; social benefits; and community development. For the first of these, the specter of breaking monetary or banking laws haunts many CC promoters and activists. Some past histories led to worries about prohibition: the Austrian experience of Wörgl in 1932–34 and the French experience in the late 1950s. The prohibition that put an end to those experiments fueled feelings akin to conspiracy theories in which banks, central banks and financial authorities would be mortal enemies of CC initiatives. As to tax rules and social benefits, the phantasm is somehow a reversal, where authorities may perceive CCs as tax evasion schemes or ways to accumulate undeclared labor earnings with undue social benefits. On the contrary, the latter motive of community development may lead authorities to tolerate and even support the projects. Various cases of receptions by authorities are developed next, gathering them according to the previously mentioned groups 1 to 4. Table 10.2 summarizes this variety of receptions. The aim is not to provide the reader

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Table 10.2 Various types of reception by authorities Monetary and financial regulation Prohibition

Taxation and social benefits

Community development

Group 3: Bangla Pesa (Kenya, temporary) Group 4: Banco Palmas (Brazil, temporary), Senegal (SENXALISS, definitive stop) and Thailand (Bia Kud Chum, temporary)

Toleration within limits

Group 1: SEL (France)

Regulatory adaptation

Group 4: Community Group 1: SEL development banks and LETS (Belgium, Ireland, (Brazil) Netherlands, Australia …) Group 2: Time dollar (USA)

Law passing

Group 4: Community development banks (Brazil, failed) and Complementary local currencies (France, passed)

Group 1: SEL (France, failed), Trueque (Argentina, failed), Trueque (Venezuela, passed) Group 2: Banche del tempo (Italy, passed)

Source:  The authors.

with an exhaustive account of all reactions, but to show their diversity and how a series of conflicts were eventually solved. A blind spot occurs as some projects did not turn into actual experiences owing to deadlocks before launching. 3.2 LETS and Time Banks: Toleration and Non-Monetary Regulation We do not know of cases of prohibition of mutual credit systems from groups 1 and 2. Mutual credit refers to multilateral debt and credit

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clearing. It has been compared to Keynes’s bancor system (Amato and Fantacci  2018). It does not imply the issuance of a circulating medium, and there is no such thing as a money supply that would be constituted by issued means of payment, since issuance is replaced by recording transactions. Moreover, credits are not convertible into national currencies. There are consequently no circulating paper notes that could be considered a monetary sovereignty bypass and lead to threats, if not prohibition, for monetary motives. Threats, thus, came from other sources of possible institutional conflict, namely, tax issues and social benefits. In 1996, a Belgian jobseeker participating in a SEL (the local counterpart of LETS) lost his benefits and had to pay back what benefits he had received because he had not declared his participation in the scheme to the job center (ONEM). However, after some general reflection at ministerial level, rules were laid down for making these first group schemes legitimate and for protecting them (Watteau 1999). In France, a case for undeclared employment was brought in 1997–98 by the Building and Public Works Federation and the Ariège chamber of building trades and small businesses (Capeb) against SEL participants; two SEL members had repaired the roof of a third and had been paid with SEL credits. Having been found guilty by the trial court, the case against the SEL participants was dismissed by the appeal court (Laacher 2003). The trial created a stir in France: it asserted once and for all that non-professional mutual assistance was lawful within the context of a SEL where transactions were evaluated and settled in a unit that could not be meaningfully converted into the national currency; it thereby closed the door on the deployment of business transactions as they could have been developed elsewhere in the world. Elsewhere, outcomes for first and second groups schemes have been generally positive, although setting limits: continued welfare allowances for beneficiaries in Ireland; tax exemption up to a specific annual amount and validation of transactions in the form of an occasional helping hand in the Netherlands; recognition of the difference between LETS credits and income, and then encouragement for welfare beneficiaries to participate in LETS in Australia; tax exemption for transactions as part of time dollar schemes in the USA, the Internal Revenue Service (IRS) rules recognizing that time banking was not to be treated in the same way as commercial barter (Cahn 2004) and so on (Watteau 1999, pp. 397–8). Here and there, attempts to create a specific legal framework were noticed from the 1990s to the beginning of the 2000s. While this did not generate anything tangible in France for the SEL, the Italian Banche del Tempo was recognized by the combination of the law of 8 June 1990 allowing municipal councils to coordinate ‘public and private time’ within

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the municipal area in the service of its inhabitants, and a subsequent law of 8 March 2000 that made ‘provision for the support for maternity and paternity, for the right to health care and to education and training and for coordination of time in the city’. It counted time banks as tools for mutual assistance and social inclusion and laid down explicitly that local governments should promote time banks and support them financially (Amorevole et al. 1998). 3.3 Argentinian Trueque and Local Kenyan Pesa: Between Temporary Prohibition, Toleration and Monetary Regulation Community or complementary currencies of group 3 are closer to group 4 as regards their socio-economic motives, but closer to groups 1 and 2 as to their issuing principle. They mix the mutual credit principle with a circulating medium, through the rule of lump-sum issuance when members enter the network and/or on some occasions, such as marketplace setting and management. Once members have spent the lump sum they received, they are constrained to produce, sell or give things in order to obtain some money, as they would in LETS or time bank systems. That is why the role of members have sometimes been considered ‘prosumers’, after Alvin Toffler’s conceptualization of the merged figure of consumer and producer (Toffler 1980). Community or complementary currencies of this group took various forms, of which the most known were the HOUR-like systems in the US mostly during the 1990s, after the Ithaca HOUR’s case (Collom 2005), the Argentinian Trueque systems (Gómez 2009) that soared from the middle of the 1990s and experienced an unparalleled boom and bust during 2000–2002, and the local Pesa experiences in Kenya in the 2010s (Dissaux 2018). United States cases easily complied with the monetary regulatory framework, on the basis of a strong history of monetary plurality that still allow the possibility of paper note issuance (Solomon 1996). In Argentina, no significant threats were noted, and a bill was drafted during the triumphant days of the Trueque, although it was abandoned without warning when the schemes collapsed after the first quarter 2002 (Hintze 2003). In Venezuela, the impetus behind the CC dynamic came initially from the Ministerio del Poder Popular para la Economía Popular (MINEP). In June 2008, and then in 2010, a legal framework was set up to give place to ‘communal currencies’ (Dittmer 2016). This was achieved primarily in the form of Argentina-like Trueque systems as ways to implement a solidarity economy based on community networks. However, the presence of paper notes could lead to concerns of authorities over monetary regulation, with fears of counterfeiting, bank regulation avoidance or monetary sovereignty bypass. This was what happened

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in Kenya in 2013. At the time of launching the Bangla-Pesa, in May 2013, six members of the launching team were arrested and prosecuted for forgery, with concerns over the suspected secessionism of the founding group. Media exposure and international supports, as well as postponements of hearings, led to the charges being dropped a few months later. This allowed a more secure implementation and soaring of the Bangla-Pesa and spinoffs based on this model (Ng’ombeni-Pesa, Gatina-pesa, Kangemi-Pesa, Lindi-Pesa, and so on) (Dissaux 2018). 3.4 Convertible Local Currencies: Between Prohibition and Regulatory Change Community or complementary currencies of group 4, namely, convertible local currencies (CLCs), were probably the schemes that were of biggest interest to local governments, sometimes raising concerns of central authorities. Convertible local currencies aim at circulating locally as tools for promoting an in-place economy made of small and medium-sized businesses anchored in the territory and possibly developing ecologically virtuous practices, as well as promoting socio-economic projects especially developed by non-profit organizations. As for the lump-sum based currencies in group 3, the existence of a circulating medium sometimes led to concerns by monetary authorities, as in Germany, Brazil, Thailand, Indonesia and Senegal. However, while, for the latter two a ban or threat definitively stopped the projects, the German case resulted in a type of reversible benign neglect and the Brazilian case led to constructive discussion. France provided another situation, with positive change in the monetary regulatory framework. In Brazil, the Banco Central do Brasil (BCB) investigated the local currency during 2003, first accusing the Banco Palmas of issuing false currency, before dismissing the charges (Melo 2009, pp.  235–9). After a period of observation and mistrust, the Banco do Brasil (BB), which had been assigned the mission of developing micro-credit for poor sectors of the population, observed how effective the Banco Palmas could be in supporting this objective and set up a partnership with the Palmas Institute to develop community banks circulating micro-credit for the central bank’s account. Subsequently, the Palmas Institute, set up at Fortaleza to disseminate the Banco Palmas model, signed a partnership agreement with the Office of the National Secretary to the Solidarity Economy (SENAES) to circulate the working methods of community development banks in the poorer Brazilian districts and villages. In 2009, the SENAES validated the principles and granted its formal support. However, those political and financial supports failed to adapt the legal framework, despite

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draft laws intended to set up a ‘national system of national credit and solidarity-based development’ and a ‘national segment of solidarity-based popular finance’, to establish a regulatory framework supporting the use of ‘social currencies’ through public policies of solidarity-based finance at the federal, state and municipal levels of government (Freire 2011, p. 73). The reception of the German Regio paper currencies by authorities were very different. In the mid-2000s, the Bundesbank commissioned a report from a mainstream academic economist, Gerhard Rösl, with the problem of currency competition in perspective. In a tightly argued paper, he concluded that German CCs were harmless owing to their small size and their near-zero economic impact. The danger of competition or of any challenge to the monopoly on circulation of the euro appeared negligible (Rösl 2006). The Bundesbank could then let things develop without concern, though a possible important extension of these schemes could lead to a revision of this policy. In France, the combined dynamics of CLCs at the beginning of the 2010, creation of an inter-ministerial mission on CCs, and the opportunity of a draft law on the social and solidarity economy led to regulatory changes in 2014, with the introduction of a section of the Monetary and Financial Code on ‘titles of complementary local currencies’. Only those organizations that fall under the framework of the social and solidarity economy may issue these titles, such as associations or cooperatives. The legal framework was modified again by a law in 2016 that opened up the possibility that ‘payment service providers’ develop digital payments without authorization or authorized exemption, with a few conditions. With the French law, national currency regulations were thus modified for the first time in Europe, if not the world, since the emergence of CCs in the 1980s. Moreover, a conflict between a local government and the central state went to court in 2017–18 and eventually generated a jurisprudence that makes possible local government’s expenses in local currencies, through the issuing association (Laurence 2020). All those adaptations suggest that CCs could be a driver of institutional change as to monetary systems.

4. TERRITORIAL AND PARTICIPATORY ALTERNATIVE CURRENCIES AS TOOLS FOR COMMUNITIES AND LOCAL GOVERNMENTS Beyond their necessary consideration by the regulatory authorities at the central or national level, the territorial nature of CCs gives them a possible role in the territorial dynamics. Hence their possible connection to local governments and even their integration as tools for their economic, social

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or environmental policies, which may be considered parts of territorial development policies. In any CC project, the goal(s) must be central to the process of creating, implementing and developing the scheme. These objectives determine many organizational and monetary characteristics. The plasticity of monetary arrangements allows them to be adapted to the goals that the actors have defined, and the integration of CCs into a territory opens up different development potentials, the nature of which, whether sustainable or not, depends on the political, social and operational choices made during the configuration of the CC and then on the monitoring of their implementation and the mobilized means, which may be human, institutional, financial or technical. From a territorial perspective, we propose a synthesis of the main issues that these currencies aim to address, distinguishing three of them: territorialization of activities, stimulation of exchanges, and transformation of lifestyle practices and social representations (Fare 2011a, 2016). 4.1 Territorialization of Activities By creating a community based on the use of the currency, CCs schemes generally trigger spatial and socio-economic proximities (Boschma 2005), which generate cooperation processes. In these instances, the networking of actors via a bottom-up approach promotes the emergence of a community of solidarity potentially able to generate a programming process for sustainable territorial development. The design of the monetary arrangement, selected through collective decision making, depends on the development jointly defined and adopted by the community to meet the identified needs. In this regard, the territorialization of activities is a process that stems from an active construction by the territory’s actors. Furthermore, when CCs facilitate social inclusion, via the active participation of their members and the implementation of participatory practices, they help to promote governance that is both collective and territorial. By affecting learning and strengthening citizenship, they are thought to contribute to developing the appropriation of the territory by citizens. The positive externalities involve promoting the development of a territorial governance based on a common project, namely, sustainable territorial development. The CCs schemes are thereby thought to lay down foundations for governance at the territorial level that is renewed by the existence of a spill-over effect (Colletis et  al. 2005) of CCs through the contributions they make to territorial dynamics. Finally, as their use is confined in a given territory, which is a bounded space, CCs promote the territorialization of economic activities and

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therefore an endogenous territorial development. Through limitations to their uses, they help increase consumption inside the territory and create resources in the community. It is a matter of strengthening the economy of proximity, which depends on the propensity to consume locally, and aims to satisfy the needs of the people in place: this economy of proximity makes it possible to generate internal incomes via their endogenization, as stated in the theory of the consumption base (Markusen 2007). 4.2 Stimulation of Exchanges The second objective of CCs is to stimulate exchanges. With the limitation of the use of CCs to bounded spaces, transactions should turn away from external producers (which limits outgoing income flows) in favor of the local producers who are members of the monetary network. Mechanically, this should result in an increase in the volume of internal transactions through an increase in the marginal propensity to consume locally produced goods (Talandier 2013). This does not mean, however, that the overall volume of trade has increased, as it may only be a case of import detour or substitution. Nevertheless, this increase in local internal expenditure should, in a second stage, through a multiplier effect (Lafuente-Sampietro 2021), induce effects on local production and employment. This corresponds to an additional injection of money at the local level and can be compared with any other injection of money. However, with CCs, it should have an increased and specific effect on the local economy, since the leakage of money is limited by the validity constraints of the latter. The local multiplier is as high as the territory’s actors are able to respond to an increase in demand, which in turn depends on the diversity of goods and services they offer, so that incomes are not spent outside. This is why the construction of local economic circuits must be encouraged. Community or complementary currencies may contribute to this, through monetary rules that limit leakages and a proper building of the network of actors that accept payments in CCs. Various factors that stimulate exchanges can be identified: some relate to the scope of the scheme, others to monetary and financial mechanisms. First, stimulation varies with the scope of the scheme, which is dependent on the diversity of its users and on the diversity of transactions. Indeed, the more users and the more varied they are, the more likely it is that there will be a high and strong level of exchanges. However, for categories of CCs that strongly rely on mutual trust (such as CCs of groups 1, 2 and 3), effectiveness may suffer from an excessively high number of users, when the benefits of mutual recognition and trust vanish, and let exchanges

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become disembedded from social cohesion and driven by transaction costs only. Secondly, specific monetary and financial mechanisms may be implemented as drivers of monetary circulation, such as demurrage and access to credit. A first mechanism that stimulates monetary circulation is provided by impediments to holding money such as ‘rusting money’, or ‘demurrage’. Its principles were theorized by Silvio Gesell (1958) who, in the context of a monetary and land-based critique of capitalism, proposed to free money from interest and land from rent in order to develop a market socialism: for Gesell, money must be a means of payment, not a means of storing wealth. According to his principle of demurrage, the sum that each paper note represents decreases regularly (Gesell proposed a loss to the tune of 0.1 percent per week). Since the 1980s, a series of CCs implemented various forms of demurrage (Godschalk 2012). Beyond the rejection of hoarding as a source of accumulation by a few, the demurrage would allow money to circulate more rapidly and would therefore be a source of dynamization. If this effect is sometimes contested, or limited, the symbolic function of demurrage is nonetheless there. Moreover, the resources collected thanks to the demurrage may be used as commons, money being shared according to collective deliberation over its uses. A second option for boosting exchanges consists of promoting access to credit, either intrinsically and automatically through mutual credit or by setting up ad hoc microcredit systems for production and/or consumption. As to mutual credit, CCs of group 1, 2 and 6 are based on automatic open access to credit, free of interest and most generally within limits. As seen previously, money is created during the exchange by simultaneous debiting and crediting of accounts. These are purely scriptural systems of mutual credit, in which the overall balance of members’ accounts is always zero, while each person’s account is moved by his or her exchanges (the account is credited when one ‘gives’ and debited when one ‘receives’). In order to avoid free-riders and destructive distrust when someone benefits from the scheme without contributing to it, limits are generally established on the credits or debits any user may accumulate; demurrage or time limits for the use of credits may also be implemented. The stimulation effect can be also increased by introducing consumer or production microcredit. This coupling of CC and microcredit is a powerful lever for localization. Indeed, we previously emphasized that one of the conditions for promoting sustainable local development is the diversity of supply. In this context, microcredit can be a lever for increasing and ­diversifying supply in a territory and thus improve localization, resilience and dynamization (Ruddick 2011). However, this association of microcredit and CCs is rare, and it may be observed mainly in groups

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3 and 4, as in some of Argentina’s Trueque schemes or in Brazil’s Fortaleza, where the Palmas Bank grants microcredits for production and consumption. These first two objectives (territorialization and stimulation of exchanges) are, on the one hand, dependent on the limitation of convertibility of CC incomes into national currencies. Indeed, the less possible it is to convert CCs, the more CC incomes cannot be used outside the bounded space of CCs. This explains why some schemes allow only professionals to convert back their gains and/or establish conversion fees or taxes. On the other hand, the diversity of goods and services offered within the local monetary network, the variety of actors and the size of the network are key factors in the success of a CC insofar as they allow supply and demand to be matched within the network. 4.3 Transformation of Practices, Lifestyles and Social Representations The third potentiality of CCs relates to changes in practices, lifestyles and social representations. Community or complementary currencies have a transformative potential since they act at the very heart of our representations of wealth, value and the place of money in our societies. More precisely, it may be shown that they imply a process of deconstruction and reconstruction of our framework of values, and that they allow us to experiment with new practices. First, two key stages in the construction process of a CC scheme can be isolated. At first, the design of a CC project requires the definition of the objectives pursued. This stage is a key moment in this questioning of the framework of values, in that it is organized precisely around the collective  questioning of the desired society. As a vector of exchange, money acts at the very heart of interrelationships: it is a social link. Through its form (for example, paper/digital), the way it is issued (through conversion, mutual credit, lump sum, and so on) and withdrew, its rules of operation and circulation, it has the capacity to allow, favor and give priority to this or that type of exchange, one model of relationship or another. It therefore requires that the empowered persons who participate in this design stage answer a series of questions: what exchanges, for what purpose, between whom, for whom and how? Similarly, this stage also opens the need to understand how the current system works, identify the flaws that justify the project of launching a CC initiative (why not pursue the same objectives using official money?) and deal with crucial questions prior to the construction of the scheme (circulation of money, governance and decision-making, and so on) as responses to those flaws and as drivers of the desired changes. They thus lead to questioning and dissecting

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the objectives and operating mode (in particular around the question of power) of the monetary system as it exists today. The second stage will see the new framework of values (the ethical project) embodied in the concrete modalities of circulation and operation of the currency put in place. Every currency is based on an ethical project, in that it carries a set of values that its institution seeks to achieve and disseminate. Specific values are indeed the raison d’être of community and participation-based alternative currencies. This important issue can be understood within the framework developed by Aglietta et  al. (2020) to account for forms of trust in money from a transdisciplinary perspective. They identify three forms of this trust: methodical, hierarchical and ethical. While methodical confidence refers to the observation of the effectiveness of money in everyday use, and hierarchical confidence expresses the credibility of the organization that issues, manages and controls the circulation of money, the ethical confidence refers to collective adherence to the ultimate values that give meaning to society: here the underlying ethical project of money is activated. However, the operationality of the ethical project takes forms that depend on groups of CCs. For convertible local currencies of group 4, for example, this deconstruction/reconstruction work is embodied in the processes of defining a charter and, sometimes, criteria for accrediting professional providers (Blanc and Fare 2016). The realization of this project requires the integration of professional providers and individuals to be made conditional upon its stated values. In other groups of CCs, it is through reflection on the criteria for accounting for exchanges that this deconstruction/reconstruction process may take place. This applies to time exchange in CCs of group 2. The plurality of the concept of wealth is put center stage and eventually acknowledged by the submission of exchanges to the rule of accounting services in time spent for them, thus introducing new practices by valuing activities and skills that are not accounted for by the conventional economy, such as domestic activities or volunteer work. Two factors in the evolution of practices can then be highlighted. First, CCs question consumption practices. Their development should generate changes in consumption habits towards responsible consumption, or decoupling of improved well-being and consumption, through a process of de-commodification of the satisfaction of needs. The second factor in the evolution of practices lies in the introduction of social and environmental values into market and non-market relations. Since CCs frequently position themselves in opposition to the dominant economic model, they result in shared representations based on the introduction of ethical, social and/or environmental values as the very foundation of

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their creation. This anchoring is more or less radical, ranging from the integration of environmental, social and ethical values into market relations and production (as in convertible local currencies of group 4) to the desire for a more or less thorough withdrawal from the market and market mechanisms (as in particular LETS and time banks of groups 1 and 2) and a turn to reciprocity. By de-constructing social representations, by heightening awareness of the challenges of sustainability and by setting up new socio-economic relations and new consumption practices, CCs might thus have a direct impact on the emergence of a form of ecological citizenship.

5. CCS AS STRUCTURING TOOLS FOR TERRITORIAL DEVELOPMENT The diversity of the objectives of CCs illustrate how CCs can be analyzed as tools for territorial development and how local authorities could take hold of these CCs to strengthen or support them. This requires conceiving CCs not as tools for specific actions or sectors, but as transversal tools that integrate social, economic and environmental dimensions. Under this viewpoint, territories are built through the mobilization and the cooperation of actors: territories are not defined as geographical areas or as administrative areas but are created from a social construction. 5.1 Territorial Innovation and CCs as Potential Public Policy Tools Community or complementary currencies have been analyzed in relation to grassroots innovation (Seyfang and Smith 2007; Seyfang and Longhurst 2013; Barinaga et  al. 2019), social innovation (Blanc and Fare 2012) or socio-technical innovation (Fama and Musolino 2020). In all cases, innovation is implemented by groups of persons in their own living places to prompt social and ecological transformations, from a territorial basis. Their territories constitute the basic unit, though unnatural and to be defined by themselves, on which a wider project of social transformation may take place. All this makes the concept of territorial development as defined by Torre (2019) highly relevant to analyze CCs. For Torre (2019, p.  4), territorial development is to be distinguished from local development, ‘mostly related to production’, and from regional development, ‘rather macro-economic’. It refers to ‘relatively small geographical areas’ and notably emphasizes the role of a variety of territorial stakeholders (not only producers). It also refers to ‘cooperation and social construction processes’ that may promote, through ‘new social and

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i­nstitutional practices’, ‘the desire of local actor’s networks to choose and develop their own development model, be it through collective actions or clear ­opposition to the intentions of States or larger corporations’. For Torre (2019), territorial development is prompted by the two driving forces of production and territorial governance, both being underpinned by combinations of geographical and organized proximity relations, and being widened from a narrow conception of development based on the sole development of production. That is why civil society organizations and other non-market actors of the territory may contribute to territorial development. Proximity relations are also to be considered due to their contribution to what Torre terms ‘territorial innovations’, and which includes ‘social and institutional innovation’, the latter being close to the meanings of ‘social innovation’ generally identified in the literature, that is, a type of innovation that ought to reach the people’s needs and aspirations by their own creativity and ought to contribute to social change (Montgomery 2016; Avelino et al. 2019). Community or complementary currencies constitute social innovations, as seen previously. They are close to the territorial innovations considered by Torre (2019, p.  4): ‘above all social and organizational in nature’, as well as ‘modest and frugal’. They are projects of empowered communities that create new spaces for cooperation of various categories of actors of the territory. In any event, they cannot succeed without an appropriation process by the actors. This process relates to the spread of innovation and the implementation of a territorial governance. The diversity of CCs eventually underlines their ability to mobilize a variety of actors, including local governments, according to specific or combined objectives. As possible drivers to support a territorial development process, CC-issuing associations could serve as coordinators and facilitators for cooperation networks between local actors. As regards this approach to territorial development, public authorities can acknowledge CCs as potential public policy tools. They consequently might support CCs by providing material and human resources, or directly integrate CCs into their public policies. These supports appear to be conditions for the success of CCs, or at least categories of them (Kim et al. 2016; Blanc and Fare 2018; Spano and Martin 2018). As noted previously, there is a variety of CCs, and local governments may therefore use them to reach ends that are compatible with them. Thus far, they have promoted very unevenly CC schemes with social, environmental or economic objectives, all three often being intertwined, which make the three ordinary pillars of sustainability (Michel and Hudon 2015). On the social side, CCs may combine both logic of revitalizing convivial community bonds (contributing to social cohesion) and logic of fighting

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poverty and exclusion. While this type of objective could be found in CCs of groups 1 to 4, public supports mostly concerned time-based exchanges of group 2, such as time dollar in the US (Cahn 2004; Collom et al. 2012) or the Accorderies in Quebec and France (Fare 2009–10). Supports were far less developed within LETS-like systems of group 1, probably owing to their more critical stance that may lead to some voluntary distance to central and even local governments. The same could be said of important parts of lump-sum based local currencies of group 3, such as the Trueque in Argentina. Eventually, convertible local currencies of group 4 seem to be included in social policies at the local level on rare occasions only, through the distribution of social support to deprived people, for example as the primary feature of the local currency of the city of Maricá (Brazil), or in the margins of the experiences of Toulouse (France). On the environmental side, CCs often promote sustainability through the stimulation of responsible consumption, production and waste management. This may be done by the orientation of payments in CCs to local productions and/or organic food products (mainly groups 3 and 4), by the emphasis on the importance of re-using goods through transferring them from person to person (mainly group 1), by the stimulation of proper waste management, if not the reduction of consumption in order to reduce waste (mainly group 5). Local governments proved to be more committed to fund the specific reward schemes of group 5 (such as the e-portemonee in Belgium or the Nu-Sparpaas in Rotterdam, the Netherlands) than to support CCs of other groups, whose positive effects on the environment may seem less directly assessable. As to the economic side, B2B mutual credit schemes of group 6, such as the Sardex, are best suited to promote a dynamic local economy of SMEs (Bazzani 2020). Local governments, however, have instead been developing supports for convertible local currencies of group 4, in a twin attempt to stimulate local economies and promote qualitative changes in consumption patterns. To conclude, CCs might support a territorial development strategy in that their leverage effect increases when they are combined with other mechanisms and instruments of the policies implemented by local governments and their partners (Fare 2016; Blanc and Fare 2018). The best example of this is the experience of the Eusko (a local currency in the Northern Basque country of southwest France), whose circulation, number of individual and professional users and diversified partnerships, with associations as well as SMEs and local governments who take part of the circulation of the convertible local currency (CLC), tend to look similar to what would be a CLC supporting a territorial development process (Edme-Sanjurjo et al. 2020).

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5.2 Towards Subsidiarity-Based Monetary Arrangements When starting this chapter, emphasis was placed on the variety of monetary plurality. What we termed a ‘transformative monetary plurality’ may be shaped by two apparently opposite drivers. On one side, the well-known competition approaches promote a plurality of competing currencies. In the final decades of the twentieth century, historical proposals such as free banking were superseded by Hayek’s approach to denationalizing money and the stream of so-called new monetary economics. Competitive currencies were considered means of constraining governments and central banks. As to experiences, the Bitcoin project was often considered a concrete achievement of the Hayekian approach. However, on the other side emerged complementarity approaches to money, which state that monetary plurality may be useful to complete the official monetary system where it is not consistent or to cope with issuing monopoly’s failures (for example, Lietaer et al. 2009; Amato and Fantacci 2018), with no view of generating competition. This chapter develops this position, focusing on recent and specific forms of plurality, based on monetary creativity of a series of actors who belong neither to the banking or financial system, nor to government administration and public organizations, while not attempting to serve as a substitute for them or contributing to their decline. In this approach, various forms of complementarity may be distinguished, which leave place for hybridization between competition and complementarity (Blanc 2017). Complementarity notably arises when currencies are used for distinct spheres of uses or when they can be used simultaneously in a payment. Community or complementary currencies challenge the dominant monetary imaginary by opening the way to a monetary plurality that prescribes transformation. They raise awareness about the plasticity of monetary systems at the scale of a territory or a community, as well as the possibilities opened up by the use of monetary principles for purposes defined by specific groups of actors, including citizens. This allows for innovative thinking and forms of monetary subsidiarity (Fare 2011a, 2016). The latter refer to monetary arrangements in which, at each relevant scale of action, a specific currency is set up, whose objectives and forms, as well as the territory or community of use, are clearly defined, and which is linked to other currencies, whether they are subsidiary as well or the national currency. Consequently, monetary arrangements may be thought, designed and implemented as including the subsidiarity principle for various types of socio-economic actions. As far as subsidiarity is concerned, the dynamics of CC creation cannot be planned and designed according to a top-down approach, but should be let as a possibility that actors at the lower levels

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might seize, or not. This principle of subsidiarity-based monetary arrangements would require an integrated territorial approach that delineates relevant levels of action and the relevance of possible subsidiary monetary arrangements for each level. This subsidiarity-based monetary approach is a call for bypassing the twin pitfalls of technocratic and government approaches to money matters, leaving a place for decentralization and citizen control over sections of money issuance. This opens up thinking of money in terms of commons (Servet and Swaton 2017; Dissaux and Fare 2018; Meyer and Hudon 2018). Commons are not like this by nature, but by social construction and effective uses: self-organization, rules transparency, collective regulation, participation of stakeholders, no surplus appropriation by individuals, cooperation between members, participative and collective governance, and so on. Commons eventually refer to a quality granted to a resource after its institution as a commons through political action (Dardot and Laval 2015). Conceived as a resource for a community, money could thus be built as a commons.

6. CONCLUSION This chapter was introduced with an overview of recent forms of monetary plurality. Among them, the complex set of community and participation-based alternative currencies contribute to a transformative monetary plurality. Community or complementary currencies, as they are frequently coined, shape a transformative plurality based on complementarity between currencies rather than competition. Its six constitutive groups include mutual credit schemes (groups 1, 2 and 6), lump-sum based inconvertible currencies (group 3), convertible local currencies (group  4)  and reward schemes (group 5). They are built in reference to a desired future, as tools for changes that may be summarized by objectives of territorialization of activities, stimulation of exchanges and transformation of practices, lifestyles and social representations. They are designed and implemented by associative groups of people that are neither linked to the banking and financial sector, nor to government administration and public organizations. Although, since their first inception in the 1980s, they sometimes faced prohibition or strong threats, the movement went on developing, finding new forms, penetrating new countries, using technological innovation as levers for social innovation. In a few instances, regulatory frameworks evolved and offered them a legal space, thus regulating them. While it never became the norm, local governments became interested in the development of various types

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of CCs and supported them, sometimes becoming partners and users, enabling then the rise of territorial governances based on the monetary project. All this leads to thinking of CCs as potential drivers of institutional change in money. Acknowledging their role as transversal policy tools at local and community levels should lead to shaping a new monetary arrangement based on subsidiarity principles, wherein CCs compose new monetary layers that do not substitute for national currencies but complete them, generating plurality within the official monetary system and opening spaces for monetary commons.

NOTES 1. Moreover, the term ‘barter’ is irrelevant since the Argentinian schemes are not less monetary than HOUR-like systems. 2. In Blanc (2018), we warn that a seventh group of ‘alternative currencies’ constituted by cryptocurrencies should be considered cautiously and with an eye on their further development. It nevertheless should be stressed that most of the so-called ‘cryptocurrencies’ are not currencies at all under the combined viewpoint of the stated aims of their founders and their actual uses.

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Lafuente-Sampietro, O. (2021), ‘The multiplier effect of convertible local currencies: case study on two French schemes’, Université Lyon 2, UMR 5206 Triangle. https://halshs.archives-ouvertes.fr/halshs-03324625. Laurence, N. (2020), ‘Monetary contestation as a driving force of institutional change: the French case of Eusko’, paper presented at the Thirty-Second Annual Meeting of the SASE, Amsterdam, 18 July. Lee, R., A.  Leyshon, T.  Aldridge, J.  Tooke, C.  Williams and N.  Thrift (2004), ‘Making geographies and histories? Constructing local circuits of value’, Environment and Planning D: Society and Space, 22 (4), 595–617, doi:10.1068/ d50j. Lietaer, B., R. Ulanowicz and S. Goerner (2009), ‘Options for managing a systemic bank crisis’, S.A.P.I.EN.S.  Surveys and Perspectives Integrating Environment and Society, 2 (1), accessed 1 July 2021 at http://journals.openedition.org/ sapiens/747. Markusen, A. (2007), ‘A consumption base theory of development: an application to the rural cultural economy’, Agricultural and Resource Economics Review, 36 (1), 1–15. Martignoni, J. (2012), ‘A new approach to a typology of complementary currencies’, International Journal of Community Currency Research, 16 (A), 1–17. Melo, J. (2009), Viva Favela! Quand les Démunis Prennent Leur Destin en Main (Viva Favela! When the Poor Take Their Destiny into Their Hands), Neuilly-surSeine: M. Lafon. Meyer, C. and M. Hudon (2018), ‘Money and the commons: an investigation of complementary currencies and their ethical implications’, Journal of Business Ethics, 160 (1), 1–16, doi:10.1007/s10551-018-3923-1. Michel, A. and M. Hudon (2015), ‘Community currencies and sustainable development: a systematic review’, Ecological Economics, 116 (August), 160–71, doi:10.1016/j.ecolecon.2015.04.023. Montgomery, T. (2016), ‘Are social innovation paradigms incommensurable?’, VOLUNTAS: International Journal of Voluntary and Nonprofit Organizations, 27 (4), 1979–2000, doi:10.1007/s11266-016-9688-1. Rösl, G. (2006), ‘Regional currencies in Germany  – local competition for the Euro?’, Deutsche Bundesbank Discussion Paper No. 43, Deutsche Bundesbank, Frankfurt. Ruddick, W. (2011), ‘Eco-Pesa: an evaluation of a complementary currency programme in Kenya’s informal settlements’, International Journal of Community Currency Research, 15 (A), 1–12. Servet, J.-M. and S. Swaton (2017), ‘Penser la dimension de commun de la monnaie à partir de l’exemple des monnaies complémentaires locales’ (‘Thinking about the commons dimension of money using the example of complementary local currencies’), Revue Interventions économiques. Papers in Political Economy, 59, accessed at 21 December 2017 at http://journals.openedition.org/ interventionseconomiques/3943. Seyfang, G. and N.  Longhurst (2013), ‘Growing green money? Mapping community currencies for sustainable development’, Ecological Economics, 86 (February), 65–77, doi:10.1016/j.ecolecon.2012.11.003. Seyfang, D.G. and D.A.  Smith (2007), ‘Grassroots innovations for sustainable development: towards a new research and policy agenda’, Environmental Politics, 16 (4), 584–603, doi:10.1080/09644010701419121.

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Sofred Consultants  – Groupement CeSAAr and DGCIS (2013), Potentiel et Perspectives de Développement des Plates-formes d’Echanges Interentreprises (Potential and Prospects for the Development of Business-to-Business Trading Platforms), Paris: Pôle interministériel de prospective et d’anticipation des mutations économiques. Solomon, L.D. (1996), Rethinking our Centralized Monetary System: the Case for a System of Local Currencies, Westport, CT: Praeger. Spano, A. and J. Martin (2018), ‘Complementary currencies: what role should they be playing in local and regional government?’, Public Money & Management, 38 (2), 139–46, doi:10.1080/09540962.2018.1407162. Talandier, M. (2013), ‘Redefining the in-place economy and women’s role in the local economy of highland areas’, Journal of Alpine Research / Revue de géographie alpine, 101–1, doi:10.4000/rga.2033. Toffler, A. (1980), The Third Wave, London: Collins. Torre, A. (2019), ‘Territorial development and proximity relationships’, in R. Capello and P. Nijkamp (eds), Handbook of Regional Growth and Development Theories, Cheltenham, UK and Northampton, MA, USA:  Edward Elgar, pp. 326–43, doi:10.4337/9781788970020.00024. Watteau, E. (1999), ‘Les SEL en Belgique’, in J.-M.  Servet (ed.), Exclusion et Liens Financiers. Rapport du Centre Walras 1999–2000, Paris: Economica, pp. 394–400.

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11. ‘In money we trust’: the issue of confidence in money in the Swiss WIR system Guillaume Vallet1 1. INTRODUCTION As Dodd (2014) argues, the 2008 crisis – the ‘Great Recession’ – displayed several signs indicative of a general mistrust of money. Questions pertaining to confidence in money gained momentum, prime among which was confidence in national  – or international, in the case of the euro – currencies. Alternative or complementary monetary systems rose to the fore, as evidenced by the growing demand for local currencies, mobile money or cryptocurrencies, such as Bitcoin. Whether in the form of mutual credit systems  – consumers to businesses (C to B), mutual credit systems businesses to businesses (B to B) – or of cryptocurrencies, mobile money or local currencies, complementary monetary systems have expanded considerably, from below 100 (in 1983) to 5000 (in 2018) (Blanc 2018). Of particular interest is the recent boom of local currencies: there were no more than 20 local currencies in circulation worldwide in 1983, compared with around 230 in 2018 (Blanc 2018). The European continent produced a number of cases worth examining: while the SARDEX was launched in Italy (in 2009), France saw the birth of the SoNantes (2015), the Gonette (2015) and the Cairn (2015), while Switzerland claimed the Léman (2015)  – a Geneva-based currency. The rise of local currencies, predicated on the general mistrust of money, challenges money’s conventional properties of unity and uniqueness. Within the conventional framework, the rise of local currencies should not be dismissed as a side effect of a confidence crisis toward national currencies. Various other factors also merit attention, in particular a growing enthusiasm for local trade, new economic networks and social bonds. As noted by Aglietta and Orléan (1984), confidence in money requires focusing on the motives for accepting money in a given territory. 272

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This  involves not only the three traditional functions of money (unit of account, medium of exchange and store of value), but also the nature of monetary policy. According to these authors, in order to explain confidence in money, it is necessary to examine the institutions that issue and create money (states, central banks and banks) as well as its users (economic actors, namely, households and firms). Money requires strong ties binding together these institutions and money users. Money must have a specific social and political underpinning (Aglietta 2014), and confidence in money requires more than credibility alone. French institutionalists emphasize that confidence in money results from three keystones2 tightly intertwined with each other (Aglietta and Orléan 2002; Théret 2007): methodical confidence, hierarchical confidence and ethical confidence. The relationship between confidence in local currencies and confidence in national currency merits more attention. In particular, does confidence in a local currency undermine confidence in the national currency and threaten the existing monetary order, or does it complement it? This chapter addresses the issue of sustaining confidence in money, especially a national unitary monetary order characterized by monetary plurality. It focuses on the local WIR currency in Switzerland, which has been in circulation for over 80 years. The success and longevity of the WIR challenge the requirements of sustainability for local currencies in contexts of monetary plurality. The WIR is all the more fascinating now as traditional Swiss banks have suffered a confidence crisis following the Great Recession: while the market share of these banks has decreased, small local banks, ethical banks or alternative banks, such as the WIR Bank, which oversees WIR issuance, have prospered (Vallet 2016). The Swiss sovereign money initiative of June 2018, intended to compel commercial banks to reach an equal balance of deposits and loans, and to grant the Swiss National Bank (SNB) a monopoly over money issuance, is also revealing of the general defiance toward traditional banks in Switzerland. In a country where banking and financial activities account for roughly 15 percent of gross domestic product (GDP), questioning the overarching principles governing monetary circulation – encompassing both currency preferences and confidence in their regulatory bodies – has become key. I seek to demonstrate that confidence in the WIR relies on a harmonious combination of the three aforementioned keystones, by virtue of which the WIR is efficiently embedded in the Swiss monetary framework. Towards this end, and relying on French institutionalists’ approach, I refer to the concept of ‘process’ when dealing with confidence in money. This process has three aspects:

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‘Process’ refers to motion, which implies that money is an organic institution evolving over time, and passing through different stages of evolution, because of the differing motives of users. Motion is not always consistent with a linear trend: there can be phases of breaks or regression. However, motion is dynamic in the long term. There are economic and social forces triggering this motion. These forces are triggered by money users and the institutions holding money, through their decisions and policies, respectively. Although users and institutions matter, attitudes related to the use of money are crucial (Vallet 2016). These forces must converge to create an overall stable process, which relies on an organized system bringing together the users and money-holding institutions.

The keystones of confidence in money bind the users and institutions issuing and holding money in a complex relationship (Dodd 2014) and, in turn, create a stable process. Consequently, the concept of process is key to understanding the dynamics of money, as well as the changing motives underlying its acceptance and uniting its users. The chapter is organized as follows. Section 2 takes a theoretical view of the three keystones of confidence in money (methodical, hierarchical and ethical). The third section sheds light on the WIR’s historical trajectory. The fourth section applies the three keystones of confidence in money to the WIR. The fifth section provides concluding remarks.

2. CONFIDENCE: METHODOLOGICAL, HIERARCHICAL AND ETHICAL: THE FORMULA AT THE HEART OF THE FRENCH INSTITUTIONALIST VISION In this section, I introduce the three forms of confidence in money identified by the French institutionalists, as well as their interconnections. 2.1 Methodical Confidence Methodical confidence refers to social conformity as a consequence of the use of money in monetary transactions and settlements. Social conformity in this context implies mutual trust between users, which transcends the contracts for each transaction. The choice of currency is determined by each user on the basis of what appears to them to be the majority choice, which facilitates debt repayment.

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Therefore, methodical confidence emerges through social interactions, in connection with human desires rooted in nature and society. Following Marx (1887 [1990]), Girard (1972) and Simmel (1907 [1978]), Aglietta (2014) observes that human aspirations mimic society’s dominant aspirations. Social interactions create habits, as people imitate each other, spreading behaviors within a community. Imitation thereby creates stability through the spread of common habits. These references to sociology of money were useful for French institutionalists as they create a bridge between social interactions and macroeconomics. Specifically, applied to money, this epistemological stance makes it possible to emphasize the notion of the plurality of money forms in several monetary regimes and to insist on the issue of confidence (Aglietta 2018, p. 5; Orléan 2019). However, social interactions constitute a double-edged sword. On the one hand, they create interdependencies. On the other, to satisfy individuals and pacify social interactions, a common ‘social anchor’, separated from individuals, is required to create mutual confidence and reduce the uncertainty that characterizes human relationships (Orléan 2019). The following quotation speaks volumes of the existing interconnections between methodical confidence and the sociology of money: What was missing was a theoretical reflection on money. It was necessary to construct a conceptualization of money in order to understand what Marx said about reversing forms of the M-A-M value, to obtain A-M-A', i.e. the logic of finance, or making money with money. I read philosophers like Georg Simmel and Max Weber. Then André Orléan and I came across René Girard’s ‘Violence and the Sacred’, where we read about the logic of the endogenous process of expelling the violence of desire for what other people have through polarization of the ‘mimetic victim’. This process applies to the expulsion of liquidity from the world of goods, because liquidity is what everyone wants because everyone else wants it. We were the only ones to bring Girard closer to the study of economic phenomena. The implementation of this analysis of the monetary process as a collective entity resulting from unanimous polarization, defined a collective confidence which originated from the mimetic model. In this approach to money, the link to sociology was theoretical and it was exactly what we needed. However, this form of expulsion is unstable as such, since the point of convergence can be arbitrary; so it may be destroyed by polarization on another focal point. Indeed, money experiences existential crises. Yet, at the same time, what Girard was showing us was the possibility of institutionalizing expulsion. Obviously for him this was at another level of anthropological analysis: the question of rituals and sacrifice, or in other words, the institutions in societies that have no state. For us this expulsion from mercantile societies was in fact the institutionalization imposed by sovereignty, that is to say, by an entity which legitimizes money as a public good. Hence the notion of ambivalence. At the

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same time, the ambivalent nature of money makes it possible to understand that money is a fundamental institution, but one which escapes political discretion, even while being legitimized by the constitutional order. This concept of money is effective for interpreting debates on monetary doctrine, the responsibilities of central banks, the role of regulations and the limits of discretion. (Aglietta 2018, p. 2, original emphasis)

Money as a social anchor emerges from social and political compromise (Théret 2007): it forges a social link among a community of users. As stated previously, money contributes to social order in that it involves the emergence of a valuation that is collectively defined and accepted. Money gradually grew into becoming an institution over time, the result of a collective choice. Nevertheless, the sustainability of money also rests on users who are moved by differing, sometimes conflicting, motives. This causes the demand for money to remain invariably unstable and contributes to the emergence of multiple forms of money, which is evidence that money in an organic institution (Dodd 2014). Moreover, as the unit of account, money enables a collective measure of ‘things’, which is relevant to each user of money: ‘Otherwise, there is no reason to assume that the unit coveted by one individual would gain status as a common referent for value’ (Desan 2016, p. 21). Hence, money generates economic value through social interactions that express economic production and trade in monetary terms within a given community. French institutionalists stress that money and production are intertwined; large-scale production requires money to be socially recognizable and used for purchasing goods. This relationship between production and money is consistent with the idea that money does not originate in the market; on the contrary, it is in money that the market originates (Aglietta 2014). This explains why this relationship is akin to hierarchical confidence. 2.2 Hierarchical Confidence For French institutionalists, hierarchical confidence in money first rests on the trust that users place in the institutions holding their money. After coming into existence (through social interactions), money crystallizes itself into institutions transcending individuals and embodying a specific culture. These institutions are the banks, the central bank and the state. Money is embedded in a complex relationship with the state, existing simultaneously outside the state and within its system. Although monetary creation takes place privately through bank loans (private debt), it is also a common good that the state actively supervises. Money can only exist through a system of payments governed by rules (Aglietta et  al. 2016).

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State-sanctioned rules and payments systems facilitate the circulation of private debt, which builds unity and confidence in the system. Moreover, national debt and taxation generates monetary transactions in a given area (Weber 1922 [1978]). Using national currency to pay public debt or taxes contributes to legitimizing it. In addition, the choice of an official unit of account installs either a hierarchy among currencies or the monopoly of one currency over time which is most regarded as trustworthy. Secondly, hierarchical confidence in money refers to the belief that these institutions will ensure the stability of money. In preserving the value of money (guaranteeing the safety of savings and maintaining a stable purchasing power) and securing transactions, it is essential that money users put their trust in the institutions holding their money. These two features of hierarchical confidence account for money’s growing legitimacy and acceptability over time. From a French institutionalist standpoint, the law should be seen as the foremost stage of the monetary process in that it originates in the state itself. Specifically, laws are expected to fulfill obligations in respect of securing money, prime among which is the management of the central bank. The law facilitates the stabilization and regulation of the use of money through the protection of the system of monetary settlements and payments. The settlements and payments system rests on three main interrelated features supporting hierarchical confidence (Aglietta and Orléan 1998): 1. The system is shaped by the choice of a unit of account on the basis of its consensual nature. This unit of account enables the measurement of production, wealth, trade and, most importantly, debt: all private debt must become convertible into the most widely accepted currency: If public tribunals recognize the official unit alone as the way of settling debts and other obligations, it will become the means of choice. Doing so allows officials to endorse certain exchange and not other, to condition deals, and to police commitment. In other words, it allows them to make a market in the image they ordain. (Desan 2015, p. 8)

2. Hierarchical confidence is associated with the devising of rules for mintage, namely, the legal framework regulating access to the currency used for payments and settlements. At stake here is the regulation of the monetary creation process. Since users need money to produce and consume, institutions holding money have to supply money according to users’ needs. However, mintage must be regulated in order to avoid

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harmful discrepancies between the collective and private facets of money (Aglietta et al. 2016): since money can be used for every payment, it could also be hoarded for the same reason. 3.  Finally, hierarchical confidence rests on the designing of principles governing the settlements of transactions in order to secure these transactions and to regulate risk management implied by credit–debit relationships. These principles define the ways debts are contracted and settled, and the types of guarantees requested for each transaction. On the whole, these principles secure the relationships between banks over time as well as all final payments in the entire economy. Taken altogether, these three features ensure the stable functioning of monetary systems. To explore these themes further, the following issues should be noted. First, although hierarchical confidence is consistent with the existence of local currencies in a Nation-state (Théret 2016), the law implemented by the state entails a hierarchy between the currencies circulating in the territory the state regulates, in accordance with the will of the nation. With that aim in mind, the choice by the state to accept a single currency for the settlement of taxes is paramount. Given that the state is endowed with tax-raising powers in a given territory, and given that taxes represent the state’s main source of income, the state will subsequently devise a unit of account of superior status with the purpose of quantifying production, which in turn makes possible the estimation of tax dues. As Bell (2001, p. 160) writes, ‘the debt of the State, which is required in payment of taxes and is backed by its power to make and enforce laws, is the most acceptable money in the pyramid and, therefore, occupies the first tier’. As Aglietta et al. (2016) emphasize, this choice entails a convergence of individuals’ demand for this currency: every user wants this currency since they know it will be useful for paying their taxes. This legitimatizes the use of this currency, relegating other currencies to different but subordinated purposes. For this reason, public debt is useful, but on the condition that it participates in reinforcing the three previously mentioned features of the system of settlement and payments. When public debt is denominated in the currency used for tax payments, economic actors are willing to hold it, since they will be able to settle their taxes through the revenues stemming from the public debt. More broadly, the circulation of that currency also fosters the convergence of economic and social forces subtending the process through the interconnections of economic actors within the monetary circuit. Second, as regards these interconnections of economic actors within the monetary circuit, the state ought to build strong linkages with banks.

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On  the one hand, such linkages can be built through the issuance and holding of public debt by banks. On the other, banks can benefit from the public debt as bondholders since this debt entails stable revenues for them. Also, these bonds are useful for banks as they are increasingly required to contract secure loans on the interbank market as mortgage guarantees for the transaction. In summary, if banking and financial transactions are more secured, the banking sector is more resistant, and will be able to support entrepreneurial projects. However, the previous framework can function only on condition that the law devises clear rules for banks’ activities. These rules must ensure banks’ lending is dedicated to productive purpose, avoiding speculative motives as much as they can. In particular, these rules deal with risk management associated with the use of money; they aim to create the required stability of the settlements and payments system, participating in turn in the stability of the banking system. This could be helpful to prevent a systemic risk in the banking sector from occurring. As a counterpart to compliance with these rules, the state is involved in helping the banking system if needed. Thirdly, in its task of supervising and supporting the system of settlements and payments in which banks are involved, the state is associated with the central bank. On the one hand, banks create money in the currency the state places the most confidence in, while relying on the central bank for refunding in that currency. On the other, since the central bank  relies on a stable banking system to ensure the efficiency of the monetary policy transmission mechanisms to the economy, the central bank also deals with systemic risk. The central bank must then be in charge of the supervision of the settlement and payments system along with the state. Broadly, beyond debates on the independence of the central bank towards the state, organic links (Aglietta 2014) between them remain. Organic links mean that these two institutions must work together, since they have reciprocal obligations towards the payments and settlements system. On the one hand, the central bank is accountable to the law of the state, and the state safeguards central bank-held holdings. This enables the preservation of the status of money as common good. Therefore, depending on the needs of the economy, the central bank’s monetary policies must seek the best way to build a solid reputation, by aiming to serve the common good: to reach full employment, to control inflation, to manage exchange rate movements, and so on. However, the central bank purchases and holds government bonds, although in different ways according to the degree of political independence of the central bank (Aglietta 2014). Depending on the motives of the

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central bank, this policy can be helpful either for financing public spending or to preserve the value of the public debt. In the latter case, the goal of the central bank is to protect the public debt from speculative attacks by financial markets. In summary, hierarchical confidence rests on the positive articulation of the linkages between the state, the central bank and the banks. These linkages take time to be built, and do not refer to a linear trend: they are created through a process over time. The following subsection investigates ethical confidence to explore the extent to which money is bound up with norms and values. 2.3 Ethical Confidence French institutionalist authors agree with most economists that no monetary system can be considered immutable. Indeed, as Théret (2016) argues, if money users are, for whatever motive, not satisfied with their current monetary system, they will seek other monetary arrangements (barter, cryptocurrencies or new local currencies that could oppose state regulations), or even reject money outright. Therefore, French institutionalist authors claim that, should money last over time, it needs to conform to the social norms and values belonging to a community, since money creates fundamental social bonds between users (Aglietta 2014). For that reason, when confidence in money is at stake, devising social norms and values associated with the use of money in the community is key (Aglietta and Orléan 1998, 2002). These values and norms determine what money is and could become, and determines how it may be used. Putting our trust in money is tantamount to devising social principles of living and attitudes towards money within a community, since money influences social relationships (Vallet 2016). Ethical confidence appears, therefore, anchored to the institutions supporting money. Although this cultural aspect of money is closely connected to the nation-state, local currencies also have a cultural aspect through the creation of various social bonds. Borrowing from Simmel (1907 [1978]), French institutionalists stress that devising social norms and values concerns ethics, since policymakers are required to make appropriate choices as regards the management of a common resource involving the whole community (Aglietta et  al. 2016). A  community must be the counterpart of a common resource, implying that each actor in the community has the right to access it while recognizing the same right for others. Management of a common resource goes beyond reciprocity: it involves sharing in a specific spatial and social framework.

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When the common resource is money, at stake are transactions within the community as well as the social bond uniting all members within it: ‘Money mediates belonging to the group and a community of values. It appears as the political form of a payment community that is none other than the social whole represented in monetary form’ (Théret 2007, p. 48). Its territory is therefore not exactly that of physical space but instead that of an economic space underpinned by social norms and values. The reference to social norms and values transforms a mere monetary system into a monetary community. Ethical confidence in money underpins money’s existence. According to French institutionalist authors, ethical confidence in money ought to rest on two keystones (Aglietta et al. 2016): 1. Money is related to social values and rules, which makes plain what attitude to follow when using money. 2. Each user adopts this attitude. For Théret (2008), this implies that each user recognizes the monetary system. To achieve that aim, the monetary order must be subordinate to rules that users have chosen, conferring social legitimacy on these rules. Ethical confidence deals with social compromise ruling the monetary system, as the collective choice of the unit of account embodies. The latter embodies a relationship between each individual and a community sharing the same monetary language (Théret 2008, p. 830). Therefore, ethical confidence in money is not about an individual cost– benefit analysis regarding its use, but the opposite: ethical confidence is social since the values and norms associated with money implies that money issuance, distribution and circulation ensure the reproduction of the community in accordance with its values and norms (Théret 2008). For that reason, ethical confidence is intertwined with the other two types of confidence in money. Specifically, ethical confidence and methodical confidence have in common the social dimension of the collective emergence  of the unit of account; ethical confidence and hierarchical confidence are linked by the necessary congruence between the social values  and norms, on the one hand, and the monetary system protected by institutions, on the other. Consequently, French institutionalist authors  claim that money could not be associated with a spontaneous order. All three aspects of monetary confidence posited by French institutionalists are necessary to make sense of the architecture of monetary systems such as that of the WIR.

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3. A CONCISE HISTORY OF THE WIR The WIR system was designed during the Great Depression (16 October 1934) by Paul Enz and Werner Zimmermann, two entrepreneurs from the German-speaking part of Switzerland. At the time, Switzerland was plagued with serious economic ills, particularly its banking sector. Many banks collapsed (for example, the Banque de Genève in 1931); others, deemed ‘too big to fail’ were saved by either the SNB or the government (for example, the Banque Populaire Suisse in 1933). Zimmermann and Enz set out to launch a cooperative to help small businesses sustain trade. Their goal was to preserve economic linkages among small businesses, given that around 20 percent of bank notes were hoarded in 1930s Switzerland (Ponsot and Vallet 2013). This paved the way for the creation of a specific currency that encouraged trade and credit access among the cooperative’s members. The project materialized in 1936, with the opening of a local bank, which supplied credit in the form of a new currency named the ‘WIR’ – meaning ‘we’ in German. Zimmermann and Enz were inspired by Silvio Gesell’s (1916 [1948]) theory of money, which holds that hoarding money causes under-consumption crises in a monetary production economy. When ­ individuals hoard money, the supply of money cannot transform human needs into demand (Ilgmann 2015). According to Gesell, the cost of hoarding money has to be raised using a tax on unspent money to encourage consumption, which he summed up with the phrase ‘melting money’. Gesell (1916 [1948], pp.  212–13) advocated a monthly meltdown of 0.5 percent on the initial value of the bank note (a type of tax). Taxing money provides an incentive to spend; instead of losing money, users prefer purchasing products that are useful for their own business, which would also have a positive impact on employment (Gesell 1916 [1948], pp. 207–9). Unlike inflation, which is erratic and unpredictable, and thereby disrupting trade, known depreciation would not negatively affect trade. Gesell (1916 [1948]) thought that interest rates must be kept as low as possible, and that taxing money hoards is tantamount to pushing down interest to its socially optimal level. This induces a rise in investment. Moreover, low interest rates lower prices and create incentives to contract loans (Gesell 1916 [1948]). Gesell distinguished between the demand for money and the desire for money by speculators and usurers. The desire for money concerns speculation and economic power exerted by humans on others. It arises in the monetary sphere, where the interest rate is the key variable regulating the desire for money. Money can confer exorbitant power on economic actors.

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On the one hand, it can be stored; on the other, it is an asset whose liquidity empowers its holder. Holders of money can also speculate according to the level of demand for money (Ilgmann 2015, pp. 542–3). On the whole, Gesell’s vision neither matches laissez-faire nor collectivism. Gesell called for a new monetary framework, akin to a ‘freeeconomy movement’ (Ilgmann 2015, p.  542), or even to ‘an anarchist social economy’ (Ilgmann 2015, p.  534); those were popular aspirations at the  time  in  Germany and in German-speaking countries, such as Switzerland. Zimmermann and Enz, who both met Gesell, drew on Gesell’s philosophy when sketching out the WIR system. As entrepreneurs, they were desperate to sell as much of their wares as possible during the depression, but not be dependent on traditional bank credit to do so. They considered the WIR as a tool to foster trade between companies while creating an alternative community. What mattered to them were the ties between trade and social values. The name adopted for the cooperative reveals its functions; it is a currency that binds a community together by means of growing trade and shared social values. Alternatively, the WIR can be seen as a cooperative that defends each of its users. According to Zimmerman and Enz, the WIR Bank makes the system work. It can get rid of monetary exploitation by creating WIRs based on the needs of participants and the whole system (Zimmermann 1949). By regulating the use of WIRs, the WIR Bank supervises the amount of WIRs in the system, and is empowered to compel an enterprise to spend its excess WIRs. Membership of the community requires compliance with its rules (Vallet 2018). Although the WIR Bank supervises and regulates traded WIRs, its regulations have changed over time to suit the needs of business. It initially taxed unspent WIRs by requiring those corporations failing to use up their allotted WIR capital to purchase WIR fiscal stamps which effectively served as collateral against hoarded WIRs. This fiscal stamp was kept on the firm’s ledger. As the overseeing body, the WIR Bank would deliberate as to whether this tax should be levied or not on companies hoarding currency. Since the bank’s primary aim was to make the WIR circulate as fast as possible within the system, the tax was perceived as the best tool to encourage users to spend WIRs instead of paying fees. Specifically, the tax served as a tool to depreciate the value of hoarded WIRs over time: companies were compelled to pay a tax adjusted to the value of their holding which would act similarly to a negative interest rate (Vallet 2018). This tax proved difficult to impose owing to pressure from entrepreneurs who felt they were being penalized twice in the form of inflation

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aggravated by tax. During the annual meeting of WIR users in Zurich on 2 May 1948, a large number of users criticized the system. On the one hand, they claimed that converting Swiss francs into WIRs became increasingly  less  and profitable over time owing to the real depreciation  of the Swiss franc. On the other, they held the tax on unspent  WIRs  as  responsible for undermining their flexibility in the market and reducing  their  profitability.  According to users, the problem was that they were pushed to spend all their WIRs each year when holding them for trade in the following year would have been more profitable. Furthermore, the tax was a restraint preventing new companies from entering the system (Vallet 2018). For this reason, the tax was repealed  in 1948. The WIR Bank and users agreed on two changes that are still  in effect today. First, the principle of non-positive interest rates on ­WIR-denominated assets superseded the tax. Second, the WIR Bank remained the unique institution in charge of supervising hoarded WIRs, with greater flexibility: the WIR Bank would assess each case on a pluriannual basis, instead of a yearly basis (Vallet 2018). Notwithstanding these recent developments, the WIR Bank simultaneously started exerting renewed control on WIR transactions by requiring companies to make WIR account for no less 30 percent of the total amount of any transactions involving WIR. Nonetheless, these mishaps have not stopped the WIR from flourishing. The WIR system remains dynamic both in terms of membership numbers and trade creation. Acceptance of the WIR among Swiss small businesses has been increasing over time (see section 4). When WIR users experience growth, new users find themselves incentivized to enter the system. These trends can be explained in relation to the three types of confidence delineated by French institutionalists.

4. THE FRENCH INSTITUTIONALIST FRAMEWORK APPLIED TO THE WIR The history of the WIR illustrates its dynamic evolution. In 1945 there were only 900 participants using the WIR and the WIR was used for purchasing the equivalent of 700 000 Swiss francs (CHF). The network has since broadened, rising from 12 000 participants and the equivalent of 53 million CHF in trade in 1958, to 18 000 users with trade estimated at 180 million CHF in 1970 (approximately 0.5 percent of Switzerland’s monetary base). Currently, approximately 60 000 Swiss companies trade in WIR, of which around 50  000 are small businesses with fewer than

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50  employees, with trade reaching 1.5 billion CHF3 (approximately 1 percent of Switzerland’s monetary base4). The WIR system involves one-tenth of Swiss small businesses  – the largest network for small businesses in Switzerland (Wiggli 2016). It acts not unlike a ‘club’, whose participants profit from membership, while outsiders profit from abiding by its rules in the form of enhanced access to trading networks. Therefore, the network continues to expand. The WIR system relies on the social model of ‘the strength of weak ties’ (Granovetter 1973). Network membership builds confidence, which in turn fosters trade. Companies accept payment in WIR in the full knowledge that they will be in a position to use it. The system facilitates trade between companies that would not otherwise have established contact. There are both direct and indirect network effects (Evans and Schmalensee 2010). The more that money is used, the more methodical confidence builds up within the network. Using the WIR is both an incentive to use it again and protects its users since the size of the network lowers the risk of using it. This enables the system to become more cohesive. This club effect is estimated to account for an average of 5 percent of total gross sales in WIR for each company (WIR Bank 2016). However, it is worth noting that the WIR club is not totally impenetrable to outsiders; it is also bound up with the Swiss monetary network. Trade in WIRs will multiply the volume of their transactions in Swiss francs, since it reinforces mutual trust between companies involved in the system over time. Such a link is likely to bolster mutual trade in the national currency, namely, the Swiss franc, which remains the most important. Germann Wiggli, the former chair of the WIR Bank, claims that the total amount of WIR circulating in the Swiss economy amounts to transactions amounting to approximately 50 billion CHF (Wiggli 2016). New trading activities represent new opportunities for the private sector, through potentially new clients and sales. Growing trade, in turn, fosters the diversification of partners and economic activities. For instance, WIR-using firms in the construction industry have spawned WIR-reliant real-estate companies. This trend is partly owing to a new rule, in effect since 1973, whose aim is to encourage users to spend their WIRs. Specifically, there has been a fixed but asymmetric convertibility between the Swiss franc and the WIR since 1973: companies can convert their Swiss francs into WIRs, but the reverse is not possible. Hitherto, the exchange rate WIR/CHF has been permanently set – at the rate of 1 WIR = 1 CHF. This has had the effect of improving the efficiency of the WIR system by increasing the number of WIR transactions and discouraging WIR frugality. The principle of asymmetric convertibility is accepted by users as they expect more trade

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for their own business through the increased amounts of WIRs circulating in the network. In addition, the choice given to users to call on the WIR Bank for loans in WIRs increases the strength of this spending-based system, in keeping with Zimmermann and Enz’s philosophy at its inception. As the WIR Bank was authorized to lend in Swiss francs, as well as in WIRs from 1936, the WIR Bank capitalizes on this right to issue credits in WIRs with a very low interest rate (usually 1 percent or less). Users can borrow at a permanent and stable low interest rate. Therefore, the WIR can be thought of as a process or hub of interdependency, ensuring the dynamic nature of the network and generating social and economic dynamics within a community. While dynamic,  this  process has proven stable over the years, with the WIR Bank ensuring  stability by taking responsibility for the WIR payments system. Stability also depends on a connection between the WIR and the Swiss monetary system taken as a whole, termed ‘hierarchical confidence’. Hierarchical confidence is associated with methodical confidence: money needs to be entrenched in a system in order to be accepted by a community (Aglietta 2014). In order to deal with the way in which hierarchical confidence takes place in the WIR system, I use the three main features of the settlements and payments system mentioned in the previous section, namely, the issues of the choice of a unit of account, mintage and the rules for the settlement of transactions. Building on these three features, my aim is twofold: first, I shed light on the characteristics of hierarchical confidence in the WIR system. Second, I seek to demonstrate that hierarchical confidence in WIR depends above all on hierarchical confidence in the Swiss monetary system: even though the WIR has its own monetary autonomy,  the WIR exists because the strength of the Swiss system allows it. 4.1 The Unit of Account With respect to the legitimacy of the unit of account, I emphasize, in addition to the developments in the section dealing with methodical confidence, that hierarchical confidence in WIR mainly rests on the rule for WIR users to settle at least 30  percent of the total amount of their transaction in WIRs (first obligation) as well as on the obligation to spend their WIRs (second obligation). Although the WIR Bank does not set a unique rule that regulates the amount of WIRs a firm can hoard after having settled its transactions

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in WIRs  – since the bank wants to handles each case separately (Vallet 2018) – the WIR Bank exerts a control on the balance in WIRs for all the firms. Whenever the WIR Bank views the level of hoarding as unreasonably high, it may pressure the firm into spending the WIRs it holds in excess (Vallet 2018). While pragmatic, the WIR Bank obliges firms using the WIR to respect these two important obligations associated with the use of WIR if they want to have the right to belong to the WIR monetary system. This rule is key regarding the legitimacy of the WIR, according to the principles underpinning its circulation. Users have accepted this supervision over time since the WIR Bank has succeeded in legitimizing the usefulness of the WIR as a unit of account for valuation of production, payments and debts. The challenge of the WIR Bank has been to convince users that they would gain from using the WIR for some transactions  – in particular to benefit from network externalities – and then they would gain from turning to the WIR Bank to contract loans in WIRs. To that end, the WIR Bank found itself having to stabilize the relationship between the Swiss franc and the WIR. The WIR Bank, together with the Swiss monetary authorities, settled this problem in 1973 by setting up the principle of asymmetric convertibility, mentioned previously (Vallet 2018). In earlier times, it was possible for users to speculate on exchange rate changes between the WIR and the Swiss franc, and the right to lend in WIRs between users. Even though this did not impact the overarching dynamic of the WIR system, it created instability that was not favorable for the legitimacy of the WIR. In summary, hierarchical confidence in the WIR system is embedded in hierarchical confidence in the whole Swiss monetary system. The WIR does not threaten the Swiss franc as the former remains subordinated to the latter. They complement each other, demonstrating that monetary plurality does not imply a lack of monetary unity. At stake here is the ability to proceed with the aforementioned payment of taxes and wages, for which the Swiss franc has still had the monopoly since the revision of the Swiss Constitution in 1891. The Constitution gave the state the right to issue official bank notes. It put an end to the legitimacy of local currencies circulating within the country hitherto (Weber 1988). Through the process described previously, the Swiss franc became the most widely used currency in 1903, namely, when the national debt was denominated in Swiss franc for the first time in Swiss history (Church and Head 2013). This was a turning point in Swiss monetary history, as the Swiss franc became the currency Swiss people place the most confidence in (Walter 1982), especially since they had to use it exclusively for tax payments from that date.

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4.2 The Mintage As regards mintage in WIRs, hierarchical confidence rests mainly on the nature of the WIR Bank’s credit policy. The WIR Bank seeks to foster entrepreneurship as much as it can through advantageous loans to small businesses – 97 percent of all companies in Switzerland. The WIR Bank explicitly lists maximal support for small businesses as one of its foundational commitments (WIR Bank 2016). This choice, which was officially made in 1958, enhanced the confidence small businesses placed in the WIR Bank. The stance and the goals of the WIR Bank became clearer, in that the bank was committed to the support of small businesses in its core of métier. The WIR Bank did not – and still does not – want to support other types of firms. This has created a niche for the bank, but also a peculiar monetary space in Switzerland only dedicated to the support of small businesses. This is key for small businesses, in sharp contrast to the pressure larger firms and big banks are likely to exert on them. Specifically, this support from the bank helped small businesses to develop specific ties among themselves, especially the development of cooperative structures on a regional basis (Vallet 2015a). With this aim in mind, the policy to facilitate access to banking credit at a very low and stable interest rate was drafted. For example, in construction, where 60 percent of Swiss companies belong to the WIR community (Vallet 2015b), borrowing interest rates are currently 0.5 percent, among the most attractive rates in the nation (WIR Bank 2015). Even though this rule is not specific in the current period of very low – even negative – interest rates in Switzerland, it has proven advantageous over a long time span. Since the WIR Bank does not need to rely on the SNB for refunding operations in WIRs, it can lend at very low rates. For example, during the early 1980s, when mortgage rates were 7–8 percent on average, mortgages in WIR were at 0.75 percent. Moreover, if a user needs WIR, since its balance is in deficit, it can contract a loan in WIRs at the WIR Bank at 0 percent (Vallet 2018). In addition, the WIR Bank seeks to give advice to borrowers to help them to develop their business and connect with other WIR users (Vallet 2015b). If we add to this policy the possibility that small businesses in the WIR monetary system can borrow either in Swiss francs or in WIRs (since the WIR Bank belongs to the Swiss monetary system), or in a blend of both currencies (Table 11.1), there are strong incentives for WIR users to turn to the WIR Bank. On the whole, the WIR is associated with the Swiss franc: they complement each other in the Swiss monetary economy. The Swiss monetary system has been characterized for more than one century by stability,

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Table 11.1  Simplified balance sheet of the WIR Bank (2014–2018) In thousands

2014

2016

2018

Assets Claims towards clients in WIR Claims towards clients in CHF Mortgage claims in WIR Mortgage claims in CHF Non-financial trading operations in CHF Financial investments Other types of assets

4 623 779 190 110 658 330 655 206 2 572 039 173 059 145 151 229 884

5 308 132 173 128 770 071 653 522 2 914 520 222 717 170 778 403 396

5 267 032 115 472 604 062 586 421 3 279 377 165 839 129 792 386 069

Liabilities Deposits in WIR Deposits in CHF Borrowings in CHF Equity Other types of liabilities

4 623 779 768 394 2 590 292 527 900 373 283 363 910

5 308 132 770 563 3 105 335 607 400 408 639 416 195

5 267 032 676 925 3 079 933 694 200 457 574 358 400

Source:  The author, from WIR Bank (2015, 2017, 2019).

which enables internal monetary mechanisms, such as the WIR, to exist within the country. This stability, which relies on the conjunction of several key factors, has taken time to emerge and to be anchored in the economy. The political stability of the country favors monetary stability (Fior 2002). The first (1934) law on banking secrecy exemplifies this: it rested on a strict selection of banking institutions authorized to deal with banking secrecy while securing anonymity for their clients. The philosophy underpinning the SNB’s monetary policy since its creation in 1907 has become increasingly focused on generating confidence in the stable value of the CHF to attract foreign capital. These factors helped stabilize the monetary system in Switzerland. This stability increased the supply of bank capital and enabled the development of bank activities, and by extension those of the industrial sector. Within this stable framework, banks such as the WIR Bank have been able to grow. It is easier to develop a niche in a stable rather than an unstable system: WIRs are secured by the hierarchical confidence associated with mintage in CHFs. The Swiss franc offers unparalleled malleability, network externalities and institutional trust related to the SNB. This gives it a decisive edge over competing currencies, such as the WIR. Yet the WIR is useful for firms for purchasing some goods, enabling them to retain Swiss francs for other

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purposes (in particular for tax settlements or for payments in cash everywhere in Switzerland). There is, therefore, no real competition between currencies in Switzerland, in accordance with the wishes of the Swiss economic actors. Although WIR users can make a trade-off between the use of both currencies according to their needs, entailing a competition between the WIR Bank and credit card companies trading exclusively in Swiss franc, the competition remains low. As mentioned previously, the total amount of traded WIRs in the Swiss economy is low (approximately 1 percent of Switzerland’s monetary base) and is dedicated to specific purposes. 4.3 Rules for the Settlement of Transactions In the WIR, the efficient and secure settlement system depends on supervision of the WIR Bank by the Swiss authorities, and on the choices of the WIR Bank through its credit policy. Concerning supervision of the WIR Bank, the WIR Bank has been respecting the Swiss banking law since 1936. The right given to the WIR Bank to issue its own currency in 1936 in Switzerland was conditional on  the integration of the WIR Bank’s activities with the Swiss banking law: The WIR pioneers did not ask for it, it was a ‘gift’ from the authorities. This does not happen by friendship or sympathy but by distrust. In fact, federal authorities have submitted the WIR organization to the banking law and thus the control of authorities. This was very beneficial for the system. (Vallet 2014, p. 5)

The banking license granted to the WIR Bank in 1936 was a fundamental step in creating confidence in the WIR system (Vallet 2014). Users trusted the WIR Bank since they knew the Swiss banking law aimed to protect their business. In particular, each loan has been subjected to a bank guarantee or required subscription to a mandatory credit insurance. From the beginning, users also knew they could rely on the SNB and on the state in case of turmoil (Vallet 2018, p. 3). In summary, WIR users have trusted the WIR Bank since 1936 because it belongs to the Swiss franc system which is perceived to be stable, through law and through the reputation of institutions in charge of it: ‘the WIR system is efficient on the condition the whole system is efficient’ (Vallet 2015b, p. 2). Having this framework in mind is necessary for understanding hierarchical confidence in the WIR Bank. To comply with the banking rules devised by Swiss authorities, which is required for a government banking license as

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well as its insurance in case of turmoil, the WIR Bank is cautious about its investments and lending. As the WIR Bank is ultimately accountable for the currency it issues, it strives to stay clear of risky schemes and avoids ‘toxic’ assets. The objective is to protect WIR users, while protecting the WIR itself. This is perceptible through the structure of the balance sheet of the WIR Bank. As regards the liabilities of the WIR Bank, Table 11.1 reveals a dominant share of stable obligations to clients in WIR and CHF, most of which are deposits. It is worth noting here that the bank’s cooperative status is advantageous in securing liabilities: as the bank does not have to distribute dividends to stockholders, it can retain a share of its profit as reserves, turning its liabilities into strengths. Concerning the assets it holds, the main aim of the WIR Bank is to lower their riskiness through long-term and low-risk operations. The WIR Bank develops its priorities so that safety and security are more important than profit. With that aim, it selects from among potential clients to protect the community at large from harmful banking attitudes: only small businesses sharing the bank’s values and aiming to promote entrepreneurial projects are considered seriously. The bank uses specific transparent and social guidelines, associated with strict criteria of exclusion for loans. For instance, the WIR Bank assesses the expected impact the loan will exert on the whole WIR community, through the possible additional trade created among WIR users (Vallet 2018). Specifically, among the assets of the WIR Bank are: ●

●

Bank credits in CHFs and WIRs constitute the main activity of the bank. Credits to the real-estate sector are limited, in spite of attractive perspectives of short-term profit owing to the current potential bubble in Switzerland (WIR Bank 2014, p. 23). Financial investments remain low in respect of the total balance sheet; the WIR Bank refrains from investing in financial markets for its own betterment, and drastically regulates these investments as far as its clients are concerned.

Moreover, the WIR Bank strictly respects the Swiss banking law as far as its weighted-risk assets compare with its capital ratio is concerned, which is now highly supervised by the Swiss authorities. The Swiss banking system was greatly affected by the 2008 crisis owing to overly risky behavior on the American subprime market taken by Crédit Suisse and UBS. These two banks rank as Switzerland’s global systemically important banks (GSIBs) since they jointly serve approximately 50 percent of the Swiss banking

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market. Since UBS was particularly shaken, the Swiss government, the SNB and the Banking Federal Commission bailed it out by granting it a USD6 billion subsidy in the form of special government bonds. Furthermore, the SNB provided financial support to a special fund (referred to as the StabFund, created in October 2008) with a USD54 billion grant dedicated to rid UBS of its toxic assets. By contrast, in the meantime, smaller banks experienced a significant rise in their market share (Table 11.2). The time was ripe to redesign the banking law (Kugler and Junge 2017). As a consequence, in order to avoid moral hazard and to secure banking activities in Switzerland, the Swiss government implemented in 2012 a new banking law5 regulating bank equity and the distribution of the risks they can take. Banks in Switzerland must take limited risks and must hold enough equities related to criteria defined by the government, which assesses the ‘quality of their balance sheet’ (FINMA 2018). Specifically, since 2014, this law has rested on the precautionary measure introduced by the Basel Committee to prevent banking crises from arising, through the common equity tier 1 (CET 1) as a key capital measure. In accordance with the rules of Basel III, the CET 1 is an indicator corresponding to a bank’s secure equity to risk-weighted assets ratio: common equity tier 1 ratio = common equity tier 1 capital / risk-weighted assets. It can therefore be of use to determine a bank’s ability to face crises. Common equity tier 1 is a measure of bank solvency gauging a bank’s capital strength, since it defines the secure capital requirements for banks (the core capital) and then excludes other types of capital. Similarly, CET Table 11.2 Share of banks in Swiss banks total balance sheets, percentage (1985–2020) Types of banks

1985 1995 2005 2014 2017 2020

All banks 100.0 100.0 100.0 100.0 100.0 100.0 Cantonal banks 18.5 19.8 11.5 17.2 17.7 20.1 Major banks 50.7 55.2 67.1 48 48.2 45.2 Regional banks 8.3 5.5 2.9 3.6 3.6 3.2 Raiffeisen banks 2.7 3.8 2.9 3.6 6.9 7.5 Other banks and other institutions, 14.7 14.1 13.4 22.9 20.4 20.5 including the WIR Bank and the BAS 0.1 0.1 0.1 6.5 6.4 6.4 Financial companies (have not existed 2.5 – – – – – under Swiss banking laws since 1995) Subsidiaries of foreign banks 2.1 1.2 0.6 1.9 2.9 3.3 Private banks 0.5 0.5 0.6 0.2 0.2 0.2 Source:  The author from Swiss National Bank, Banks in Switzerland (2020).

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1 takes into account the risks associated with some assets the banks hold (the risk-weighted assets, or RWA). Evidently, assets held by banks are weighted based on the market risk and credit risk: the RWAs would be assigned an increasing weight according to their credit risk. Specifically, cash would have a weight of 0 percent, while loans of increasing risk would carry weights of 20 percent, 50 ­percent or 100 percent. The higher the ratio, either the stronger the core capital or the lower the risk taken by the bank. Each bank in Switzerland must conform to a minimal rate of basic equity ratio using the CET 1 ratio. Table 11.3 compares the WIR Bank and the standard minimum rules for banks in Switzerland in respect of asset risks. Even though the cautious management of the WIR Bank should require fewer levels of equity, the figures show that the bank has exceeded its legal requirement, thereby demonstrating its strong commitment to preserving the WIR’s special status. This is very reassuring for the Swiss government which does not perceive the WIR to be a threat to the whole system. By contrast, the two previously mentioned GSIBs have ratios below the standard minimum rules relating to their status: although Crédit Suisse and UBS should have an optimum ratio of 17.0 percent (T1) and CET 1 (12.5 percent), their effective ratio is close to 14.3 percent (T1) and CET 1 (10.0) (Kugler and Junge 2017). In summary, confidence in the WIR and in the Swiss franc are intertwined, and rely on common stable institutions. Such a structural framework raises the issue of its acceptability and the legitimacy of the WIR: money users accept it because they have faith in the WIR, and Table 11.3  Equity ratios and credit security, percentage Basic equity ratio (T1 = CET 1 + additional tier 1 capital (AT1*)) 2014 Standard minimum rules for banks in Switzerland WIR

6

12.89

2015 6

12.02

Hard equity ratio (CET 1)

Global ratio (T1 + T2)

2014

2015

2014

4.5 (minimum safety cushion: 7)

4.5 (minimum safety cushion: 7)

8 (minimum safety cushion: 10.5)

12.89

12.02

15.60

Source:  The author, from Swiss National Bank, Banks in Switzerland (2017).

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greater use of the WIR helps generate culture, norms and values in respect of the WIR. Finally, as regards the WIR, ethical confidence is obvious if we look at the reasons underlying the choice of the WIR. From a solely economic viewpoint, it is undeniable that Swiss francs are more convenient for small businesses. Use of the WIR demonstrates membership of a community that believes in different forms of exchange. It is a form of business that consolidates marketing development and social purpose for the community. Specifically, the social value of the WIR system is to promote a ‘social business’, a trading network functioning on the basis where profit maximization is not the most important goal. Instead, values of entrepreneurship, solidarity, reciprocity and locality in Switzerland come to the fore. The WIR Bank’s choice to set up very low interest rates to help new ties through trade creation exemplifies that. For the effective functioning of the system, each WIR user must trust these values and respect the social norms associated with them (Vallet 2018). In particular, if credits, debts and prices are durably denominated in WIR, each participant of the community is able to make decisions in relation to other members in a reliable way, since they share the same norms and values associated with money. This is an auto-referential process. Three examples demonstrate this point. First, the reference to social values shared by the community is illustrated by the existence of regional groups of enterprises using the WIR. Four times a year, fairs are organized for and by WIR users, where they display their wares and broaden the community (Vallet 2015b). This community creates economic but also social interaction, which is fundamental to confidence as a whole, as it unites territorial actors on issues where their interests converge (Vallet 2015a). Second, ethical confidence is visible in times of crisis, when WIR users turn to the community before turning to other companies using only Swiss francs. In times of crisis, the flight to safety can lead to an increased demand for Swiss francs to be hoarded, as this currency plays the role of a safe haven. However, recent history has revealed that people turn to the WIR to offset their loss in Swiss francs since they want to preserve trade in WIRs within the WIR community (Vallet 2018). For example, as Descartes (2015) – the largest entrepreneur trading in WIR within the French-speaking part of Switzerland – avers, when enterprises belonging to the community are indebted to others, the WIR enterprises will be paid first on condition that they accept part of the payment in WIR. With the support of the WIR Bank, they can arrange easy and flexible solutions to settle payments while maintaining the circulation of the WIR within the

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community (Vallet 2018). The previously mentioned possibility of borrowing WIRs at a 0 percent interest rate exemplifies that. The third example is that the WIR Bank adheres to the principle of ‘renunciation of profit maximization’ (Vallet 2015a, p. 3), which is related to its cooperative status. Similar to other central banks, the WIR Bank focuses on WIR community instead of profit-seeking. Consequently, the strength of the WIR Bank is that it is not motivated by speculation or profit, but by the development of entrepreneurial projects for small businesses. Through its credit policy, the WIR Bank seeks to foster long-term stability and confidence (WIR Bank 2015, p.  16): the social norms and values related to this community come first, and this creates a competitive advantage and even a niche in the Swiss banking market.6 As with hierarchical confidence, ethical confidence in WIR is also related to the Swiss economic and social system. The WIR system also embodies the Swiss commitment to fostering entrepreneurship and self-help in a spirit of cooperation. The WIR monetary system typifies Swiss-ness: ‘Solidity, smallness compared to large traditional banks, simple structures, modesty and lack of discussion regarding bonuses and banking scandals’ (Vallet 2014, p. 7). In summary, the monetary space of the WIR system resolves the inherent monetary tension that frequently occurs between centralization and fragmentation (Aglietta and Orléan 1984). Relying on specific social values and norms, the WIR system personifies a form of local anchorage that is decisive for both the Swiss economy and Swiss democracy.

5. CONCLUDING REMARKS This chapter examines confidence in money in the example of the WIR through the prism of the three keystones of confidence theorized by Aglietta, Orléan and Théret: methodical, hierarchical and ethical. I argue that the WIR’s success must be linked to its ability to bolster confidence, which transformed an economic network into a monetary community, and in turn contributed to redefining locality and creating social values. Moreover, the WIR is a living proof that money as an institution, is consistent with process. The WIR system should be viewed as a framework that generates stability while being constantly refashioned as a consequence of users’ decisions and policies enforced by its regulatory bodies. The concept of process also requires a primary role for social interactions, which influence both the institutions and the social rules and values associated with money. In this framework, confidence plays the essential role of sustaining the process.

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Considering money as a process, with confidence at its core, challenges our understanding of money for two reasons: 1. The framework of confidence in money presented in this chapter begs the question as to its own suitability for other local currency systems. My view is that it may be transposed to other local currencies, although meeting all three criteria seems difficult to achieve. Blanc (2018) noted that some local currencies rest on alternative projects aiming to create specific networks with tighter or looser ties to the national monetary system. In these instances, ethical confidence takes on a more prominent role as specific social values and norms are prioritized. In France, among the most striking examples are the Gonette (Lyon), the Gentiane (Annecy) and the Eusko (Basque territory) which might be seen as a genuine expression of local identity.   At the other end of the spectrum, other local currencies appear to complement the established monetary order, as they attach more importance to methodical confidence (business activities) and hierarchical confidence (where local currency banks are part of the global banking system). The Sardinian SARDEX typifies the prominence of methodical and hierarchical confidence in money. Similarly, the Geneva-based WIR challenges the tenets of hierarchical confidence: it is used by both French and Swiss citizens, companies and consumers united around a common project (ethical and methodical confidence coming first). Hierarchical confidence appears of lesser relevance in this instance.   Generally, prevalence of one facet of confidence is connected with a fundamental dialectical feature of money, the inevitable result of a trade-off of the marginal advantages of network extension (generally economic gains) with its marginal costs (mostly the dilution of social values initially supporting the project). That is, since there are both economic and social forces underpinning the perpetuation of money, the numerical scope of any local currency will be determined by whichever type of confidence prevails. 2. As far as the WIR is concerned, we should not underestimate the connections between the various manifestations of confidence in the currency and specific features of the Swiss political system (federalism, direct democracy and neutrality). The combined forces of federalism and direct democracy, both deeply rooted in Swiss society (Schweizer 1991), always hindered centralization, and restrained the expansion of the federal state (Obinger 1998). Federalism and direct democracy also led to power and responsibilities trickling down to local levels, including cities, cantons and private actors. This system empowered

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a number of actors with decision-making weight endowed with veto rights, which modified their preferences and strategic options (Obinger 1998).   With this political framework in place, the WIR had the necessary leeway to expand. Local businesses were entrusted with the production of public goods, instead of being created centrally (Obinger 1998). As a whole, the state operated as a regulator actor devolving some of its powers to local actors, both public and private, which favored the emergence of a system of rules, which in turn favored the emergence of inclusive institutions (Acemoglu and Robinson 2012), which encouraged all key Swiss political and economic actors to pull in one direction, that of the country’s development.   Hence, in view of the political organization of Switzerland, the three facets of confidence in the WIR appear more consistent with Desan’s ‘constitutional approach to money’ (Desan 2015) than with the Chartalist vision of the state occupying a position as a monetary regulator (Bell 2001, p.  154). Through a close examination of the WIR, ‘we can see how money’s innovation would bring the public and private worlds together’ (Desan 2015, p. 8).   As a currency circulating at a local scale, handled by numerous private actors while complying with national banking norms and regulations, the WIR challenges ‘the apparently homogenous money made by the state, creating conventions of use that compartmentalize money in myriad ways’ (Desan 2015, p. 2).   Further, ethical confidence in the WIR is illustrative of the currency’s historical trajectory, as shaped by its community of users. On this aspect, my approach is reminiscent of Desan’s, which emphasizes the collective process (political, social and conceptual practices) underpinning money (Desan 2015): ‘The process of making money involves people both as individuals and as a collective. It serves both private and public purposes’ (Desan 2016, p. 21).   Similarly, the constitutional approach is key in that it underlines that the quality of money also refers to its function as a medium of exchange between actors (Desan 2015). In the WIR system, trade increasingly broadens the monetary network, private actors furnishing a public good through the system of IOUs and of debtor/creditor relations (Vallet 2016). The WIR thus gains acceptance, as actors willing to become indebted in WIR may find other actors equally willing to hold liabilities (Bell 2001, p. 151).   This acceptance relates not only to hierarchical confidence in Swiss banking but also to political institutions: the latter created social rules, norms and specific organizations between economic actors enabling

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the emergence of a WIR market. The WIR exemplifies that money embodies ‘a set of concepts – credit, debt, commodity, payment, sale, contract, and even (or especially) property – that are legal categories’ (Desan 2016, p. 21).   As Durkheim (1893 [1973]) argued, markets requires trade between people of various types, traders who do not know each other sometimes and who do not have the same preferences but trade nevertheless. The law is thus key, being ‘the process that puts the relationships making money into practice’ (Desan 2016, p.  29). Law shapes the contribution and the duties of each individual toward the community of users.   The combination between public and private actions has been a key component of the WIR’s expansion: while public actors have designed rules and laws, private actors on the market have set ‘the pace and purposes of money creation’ (Desan 2015, p. 22). Public authorities, first of which is the central bank, must recognize ex ante private liabilities related to credit to legitimize the use of money (Hockett and Omarova 2017, p. 1156). In turn, private transactions legitimize such public authorities.   With the WIR, confidence was the outcome of the combined action of public and private actors) crystallized into Swiss institutions. These institutions unite people with varying preferences through coercive forces and reproduce WIR-denominated trade. This is why the WIR example exemplifies that the institutional rules existing in a given territory  – with its domination and power relationship  – should not be neglected when studying the ability of money to transform other binding ties (Cartelier 2007).   On a final note, not only does the WIR help bolster confidence in the Swiss monetary system as a whole, but the reverse is also true. It is my assumption that the WIR owes its popularity to the confidence placed in the Swiss franc system.

NOTES 1. This work has been partially supported by the ANR project ANR-15-IDEX-02. 2. The phrase ‘three keystones of confidence’ is a literal translation from the original French phraseology. 3. In 2016, the WIR Bank ruled to accept only ‘active’ WIR users into the system, namely, users willing to share data concerning their WIR activities. As a consequence, the network was downsized to 30 000 users at the end of 2018. 4. The distribution of users of WIR is as follows: retail sales (27.9 percent), services (6.3 percent), hotel industry (12.3 percent), construction (37 percent), industry (19 percent) and wholesale sales (19 percent). In addition, it should be noted that the WIR, while

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circulating across the whole country, remains used principally in the German-speaking cantons: trade in WIR in French- and Italian-speaking parts only accounts for 0.4 percent of the total amount of transactions in WIR (Vallet 2015c). 5. The ‘Ordonnance sur les fonds propres’. 6. According to Dubois (Vallet 2014) and the WIR Bank (2014), this factor limits the extension of the WIR network. Although we could assume that the WIR system could reach 100 percent of small businesses, the risk of losing its specificity and marketing tools would increase, and ultimately harm, its expansion. The WIR is an ‘island of rescue and trust’ (Vallet 2014, p. 3).

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FINMA (2018), ‘Appréciation et Approbation de la Prise en Compte d’Instruments de Capital’ (‘Assessment and approval of the recognition of capital instruments’), FINMA, Berne, accessed 15 May 2021 at https://www.finma.ch/fr/autorisation/ banques-et-maisons-de-titres/modification-des-conditions-d-autorisation/a​u​t​o​r​ isations-et-approbations/instruments-de-capital/. Fior, M. (2002), Les Banques Suisses, le Franc et l’Allemagne, Geneva: Librairie Droz. Gesell, S. (1948 [1916]), L’Ordre Economique Naturel (The Natural Economic Order), Berne: Coopérative d’Editions Franchistes. Girard, R. (1972), La Violence et le Sacré, Paris: Grasset. Granovetter, M. (1973), ‘The strength of weak ties’, American Journal of Sociology, 78 (6), 1360–80. Hockett, R.C. and S.T.  Omarova (2017), ‘The finance franchise’, Cornell Law Review, 102 (1143), 1143–218. Ilgmann, C. (2015), ‘Silvio Gesell: “A strange, unduly neglected” monetary theorist’, Journal of Post-Keynesian Economics, 38 (4), 532–64. Kugler, P. and G. Junge (2017), ‘Les exigences de fonds propres sont trop basses pour les grandes banques suisses’ (‘Capital requirements are too low for the major Swiss banks’), La Vie Economique, 12, 48–50. Marx, K. (1887), Capital, repr. 1990, London: Penguin Classics. Obinger, H. (1998), ‘Federalism, direct democracy, and welfare state development in Switzerland’, Journal of Public Policy, 18 (3), 241–62. Orléan, A. (2019), ‘Interview with André Orléan’ (conducted by the author), 10 February. Ponsot, J.F. and G. Vallet (2013), ‘Small is beautiful? La souveraineté monétaire de la Suisse en question’ (‘Small is beautiful? Switzerland’s monetary sovereignty in question’), Revue Française de Socio-économie, 12, 27–50. Schweizer, P. (1991), ‘Federalism in Switzerland’, India International Centre Quarterly, 18 (4), 161–9. Simmel, G. (1907), The Philosophy of Money, repr. 1978, London: Routledge. Théret, B. (2007), La Monnaie Dévoilée Par Ses Crises. Crises Monétaires d’Hier et d’Aujourd’hui. Volume I (Money Unveiled Through Its Crises. Monetary Crises of Yesterday and Today. Volume I), Paris: Éditions de l’École des Hautes Études en Sciences Sociales. Théret, B. (2008), ‘Les trois états de la monnaie. Approche institutionnaliste du fait monétaire’ (‘The three states of money. Institutionalist approach of the monetary fact’), Revue économique, 59 (4), 813–41. Théret, B. (2016), ‘Qu’est-ce que la monnaie?’ (‘What is money?’), paper presented at the Institutionnalismes Monétaires Francophones Conference, Lyon, 1 June. Vallet, G. (2014), ‘Interview with Hervé Dubois’ (conducted by the author), 3 November. Vallet, G. (2015a), ‘Interview with Hervé Dubois’ (conducted by the author), 29 July. Vallet, G. (2015b), ‘Interview with Antoine Berger’ (conducted by the author), 17 August. Vallet, G. (2015c), ‘Le WIR en Suisse: la révolte du puissant?’ (‘The WIR in Switzerland: the uprising of the powerful?’), Revue de la Régulation, 18 (2),  accessed 15 March 2022 at https://journals.openedition.org/regulation/1 1463.

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Vallet, G. (2016), ‘A local money to stabilize capitalism: the underestimated case of the WIR’, Economy and Society, 45 (3–4), 479–504. Vallet, G. (2018), ‘Interview with Hervé Dubois’ (conducted by the author), 13 April. Walter, F. (1982), ‘Finance et politique à la belle époque. La France et les emprunts de la Confédération Helvétique (1890–1914)’ (‘Public finance and politics at the Belle Epoque. France and the Helvetic Confederation’s debt (1890–1914’), Revue Suisse d’Histoire, 32, 421–50. Weber, M. (1922), Economy and Society, repr. 1978, Oakland, CA: University of California Press. Weber, E.J. (1988), ‘Currency competition in Switzerland’, Kyklos, 41 (3), 459–78. Wiggli, G. (2016), ‘Interview: Germann Wiggli, CEO de la Banque WIR’, Le Monde Économique, 27, 27–30. WIR Bank (2014), ‘Report 2013’, WIR Bank, Geneva, accessed 24 April 2020 at https://www.wir.ch/fr/la-banque-wir/a-propos-de-nous/investor-relations/ra​p​p​o​r​ ts-financiers. WIR Bank (2015), ‘Report 2014’, WIR Bank, Geneva, accessed 24 April 2020 at https://www.wir.ch/fr/la-banque-wir/a-propos-de-nous/investor-relations/r​a​p​p​o​r​ ts-financiers. WIR Bank (2016), ‘Report 2015’, accessed 24 April 2020 at https://www.wir.ch/fr/ la-banque-wir/a-propos-de-nous/investor-relations/rapports-financiers. WIR Bank (2017), ‘Report 2016’, WIR Bank, Geneva, accessed 24 April 2020 at https://www.wir.ch/fr/la-banque-wir/a-propos-de-nous/investor-relations/rappor​ ts-financiers. WIR Bank (2019), ‘Report 2018’, WIR Bank, Geneva, accessed 24 April 2020 at https://www.wir.ch/fr/la-banque-wir/a-propos-de-nous/investor-relations/r​appor​ ts-financiers. Zimmermann, W. (1949), Weltvagant. Erlebnisse und Gedanken (Wanderer of the World. Experiences and Thoughts), Hammelburg: Drei Eichen.

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Index ‘100 percent money’ scheme 88 accessibility, e-krona 198–9, 202 agent-based model (ABM), money creation and liquid funding needs 155, 168–72 Aglietta, M. 275–6, 277–8, 280, 281 anchoring 120–21 anonymity 28, 35, 36–7, 68, 79, 196–7, 199–200 Argentina, complementary currency system (CCS) (Redes de Trueque, RTs) 221–2, 237–8, 254 and economy 229–34 evolution and characteristics of 226–9, 230–34, 235–7 generative conditions of complementary currency systems (CCSs) 222–6 stratification of currency circuits 234–7 asset price channel 110–11 Auer, R. 143 balance sheets aggregation of 51–3 central bank, with and without digital currency 106–7 central bank digital currencies (CBDCs) 36, 37, 38, 85–7 custodial stable coins (CSCs) 42, 43–4 digital trade coins (DTCs) 45, 46–7 disintermediation, and central bank digital currencies (CBDCs) as store of value 123–6 fiat-backed stable coins (FBSCs) 39–40 institution issuing stable coins 82, 83 over-collateralized stable coins (OSCs) 48, 49

pure-asset coins 24, 28, 29–31 stock and flow mechanics under bank and nonbank lending 161–7 bank equity 166–7 bank lending channel 109–10 bank runs 104, 108–9, 122, 125, 159, 173, 174 banking fractional reserve view of 154, 156 intermediation view of 154–5, 156, 157, 158 money creation view of 154, 155, 156, 157–9 shadow 161, 217 stability of system 108–9 system, Switzerland 291–3 banks and Big Techs 81–2, 83–4 and different types of central bank digital currencies (CBDCs) 85–7 and early electronic payments 78 linkages with state 278–80 market power 122–3 narrow 39–40, 42, 44, 45, 47 post-crisis periods 88 Bátiz-Lazo, B. 78 Big Techs 81–4, 96–7, 98 Bindseil, U. 7, 128, 129, 142 Bitcoin 25–32, 34, 76, 79–80, 88–9 central bank digital currencies (CBDCs) as response to 84–5 ledger 67–8 as legal tender 84 system and features 66–8 Bitcoin cash 72 Bitcoin design, and theory of money 57–9, 73–4 Bitcoin system and features 66–8 Bitcoin units (BTC) and Keynesian perspective 68–71 302

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Index ­303

classical view of money 62–4 design changes, forks and other units 71–3 modern Keynesian perspective on money 64–6 money concepts, names and notations 59–62 Blackburn, D. 223, 235 blockchain 67–8, 72, 76, 79, 90, 210, 214 bonds 123–4, 164–5 Brazil, Banco Palmas 255–6 capital flight 212, 213, 214, 215 cash 35, 111, 130–34, 135–6, 137, 138 in balance sheets 162 declining use of 96, 120–21 disadvantages of 189 properties of 196–7 use in Sweden 187, 191–5, 199 cashless/checkless society 78 central bank credit, as substitute for deposits with banks 123–4 central bank digital currencies (CBDCs) 34–7, 38, 77, 83–4, 89–90, 147–50 and comparative advantages of central banks 121–2 convertibility 36, 37, 103, 126, 137, 214–15 efficient distribution of 137–40 end-user demand by consumers 141–2 international dimension of 142–7 introduction in payment segments 131–3 as means of payment, factors determining usage 129–42 merchant acceptance, widespread 135–7 mitigants to an excessive stock of 126–9, 203–4, 215 money creation and liquid funding needs 172–5 need for 189–90 possible designs for 85–7 programmable, for monetary circuits of production 209–17 as re-emergence of older projects 87–8

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reasons for introduction of 120–21 as store of value, and bank balance sheet disintermediation 122–6 width versus depth (usage objective) 133–4 see also Sweden, e-krona (central bank digital currency, CBDC) central bank digital currencies (CBDCs), and monetary transmission mechanism 94–5, 113–14 asset price channel 110–11 bank lending channel 109–10 changing attitudes/acceptance and legitimacy of currency 99–113 current challenges for central banks 96–7 fiscal and monetary policy mix 111–12 interest rate channel 103–9 lender of last resort 109 monetary policy 103–13 open economy and exchange rate transmission 112–13 threat of digital dollarization 98–9 trust 95–6 central bank independence 4, 9, 279–80 central bank reserves, and interest rate channel 105–8 central banking new model of 4–10 old model of 3–4, 7–9 post-Keynesian approach 4–5, 10–11 central banks, current challenges for 96–7 centralization 77 check kiting 26 checkless/cashless society 78 Chicago plan 157 Chiu, J. 122, 123 circuits, currency 225, 234–7 circuits of production, see programmable central bank digital currencies (CBDCs), for monetary circuits of production classical view of money 62–4 Cœuré, Benoît 99–100 Coinbase transactions 26, 27 Colacelli, M. 223, 235 Collins, R. 225–6

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304

Central banking, monetary policy and the future of money

community and/or complementary currencies (CCs) 245–6, 266–7 Argentinian Trueque and local Kenyan Pesa 254–5 categories of 247–9 convertible local currencies, regulatory responses to 255–6 LETS and time banks 252–4 origins and development of community and participationbased currencies 246–50 relationships with regulatory authorities 250–56 stimulation of exchanges/ transactions 258–60 as structuring tools for territorial development 262–6 subsidiarity-based monetary arrangements 265–6 territorial and participatory currencies as tools for communities and local governments 256–62 territorial innovation 262–4 territorialization of activities/ territorial development 257–8 transformation of practices, lifestyles and social representations 260–62 complementary currency systems (CCSs) 222–6; see also Argentina, complementary currency system (CCS) (Redes de Trueque, RTs); confidence in money confidence in money 272–4, 295–8 ethical confidence 280–81, 294–5 French institutionalist framework applied to WIR system, Switzerland 284–95 hierarchical confidence 276–80, 286–91 history and evolution of WIR system, Switzerland 282–6 methodical 274–6 trust 95–6, 261 convertibility central bank digital currencies (CBDCs) 36, 37, 103, 126, 137, 214–15

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local currencies 247, 248, 249, 253, 255–6, 260, 261, 264 stable coins 37, 39, 41, 42 WIR system, Switzerland 284, 285–6, 287 core ledger, platform model for central bank digital currencies (CBDCs) 36 COVID-19 crisis 2, 97, 100, 190–91, 221–2 crypto-assets 102, 189–90 cryptocurrencies 23–4, 53–5, 76–7 definition of 61 emergence of 79–81 pure-asset coins 24–34, 35 stable coins 37, 39–50, 82–3, 102, 121 towards macroeconomic model with (stock-flow consistent modeling) 51–3 without collateral 96 see also Bitcoin; Bitcoin design, and theory of money; central bank digital currencies (CBDCs); central bank digital currencies (CBDCs), and monetary transmission mechanism; Sweden, e-krona (central bank digital currency, CBDC) cryptographic instruments 61 currency acceptance and legitimacy of 100–102 definition of 61 currency circuits 225, 234–7; see also programmable central bank digital currencies (CBDCs), for monetary circuits of production custodial stable coins (CSCs) 41–2, 43–4 cyber risk 97 Dai 48, 49–50 decoupling principle 105 demurrage 259 deposit insurance 87, 109, 173, 215 ‘deposited currency’ proposal (Tobin) 87–8 Desan, C. 277, 297–8 Diem (Libra) 82, 83, 96–7, 100, 102

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Index ­305

digital currencies, see Bitcoin; Bitcoin design, and theory of money; central bank digital currencies (CBDCs); central bank digital currencies (CBDCs), and monetary transmission mechanism; cryptocurrencies; Sweden, e-krona (central bank digital currency, CBDC) digital dollarization 98–9 digital euro 120, 137, 143–4 digital instruments 61, 67 digital ledger technology (DLT) 79 digital trade coins (DTCs) 42, 45, 46–7, 48 digitalization 76–7, 83, 96–7, 188–9 distributed ledger technology (DLT) 23, 127 DSGE models 158 e-identity 141 e-krona, Sweden, see Sweden, e-krona (central bank digital currency, CBDC) economic crises 1–2, 5–6, 157, 221–3, 229–36, 246–7, 272, 282, 291–2 elasticities of production and substitution, money 65–6, 70 electronic payments, early 78 Enz, Paul 282, 283 ether 80–81 Ethereum 32–3, 34, 48, 80–81 Ethereum Virtual Machine (EVM) 33 Eurosystem 120, 121, 137, 143 exchange rate transmission 112–13 Ferrari, M. 142 fiat-backed stable coins (FBSCs) 37, 39–40 financial exclusion 225 fiscal policy 111–12 fractional reserve view of banking 154, 156 fractionation 77 France, community and/or complementary currencies (CCs) 253, 256

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French institutionalist framework, and confidence in money ethical confidence 280–81, 294–5 hierarchical confidence 276–80, 286–91 methodical confidence 274–6 WIR system, Switzerland 284–95 Friedman, Milton 3, 4, 10, 157 fungibility of money 213–14, 215–16 FX conversion, and central bank digital currencies (CBDCs) 145–6 Germany, Regio paper currencies 256 Gesell, Silvio 259, 282–3 Gómez, G.M. 236 Great Depression 157, 223, 282 Great Recession 272 hoarding money/payment instruments 69, 213, 215, 282, 283–4, 286–7 hyperinflation, Argentina 229 Ihrig, J. 7 Ilgmann, C. 283 independence, central banks 4, 9, 279–80 India 225 inflation expectations 7 hyperinflation, Argentina 229 link with money 4, 9 targeting 2, 4–5, 6, 9 institutionalist framework, confidence in money, see French institutionalist framework, and confidence in money institutions, and trust in money 95–6 interest rate channel 103–9 interest rates central bank digital currencies (CBDCs) 128–9, 173, 174, 202–3 and investment 1–2 low, benefits of 282 negative interest rate policy (NIRP) 126 and new consensus model (NCM) 9 post-Keynesian approach 4–5, 10–11 Taylor rule 5, 8 WIR system, Switzerland 286, 288 intermediation view of banking 154–5, 156, 157, 158

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306

Central banking, monetary policy and the future of money

international capital flows/payments and central bank digital currencies (CBDCs) 125–6, 141, 142–7 illicit 212–13 monetary circuits/hierarchy 211–12, 214 and money supply 158 international credit card schemes (ICSs) 144–5 international monetary system 113 interoperability, central bank digital currencies (CBDCs) 144–5 investment, and interest rates 1–2 IOUs 64–5, 66, 70, 71 Jakab, Z. 6 Kent, Christopher 7 Kenya, local Pesa 254–5 Keynes, J.M. 2, 10, 65 Keynesian perspective on money 59 Bitcoin units (BTC) and design implications 68–71 modern 64–6 see also post-Keynesian approach König, P.J. 7 Kregel, Jan A. 109, 113 Kumhof, M. 6, 126 Kydland, F.E. 158 Lavoie, M. 8, 11 law, and confidence in money 277–8, 279, 290–91, 298 ledger 23, 36, 67–8, 79, 127, 210–11, 214, 215–16 legal tender status 130–31, 135–7 lender of last resort 109 Libra (Diem) 82, 83, 96–7, 100, 102 liquid funding needs, see money creation and liquid funding needs, compatibility of loanable funds theory 1–2 local currencies, see Argentina, complementary currency system (CCS) (Redes de Trueque, RTs); community and/or complementary currencies (CCs); confidence in money Lucassen, J. 225

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MakerDAO 48, 49–50 market capitalization Bitcoin 32, 79 Dai 50 Ethereum 32, 33, 34 Ripple (XRP) 35 Tether (USDT) 41, 42 market power banks 122–3 and central bank digital currencies (CBDCs) 132–3 digital payment service providers 136 McLeay, M. 6 merchant service charge (MSC) 136 microcredit 259–60 Mill, John Stuart 63 mining 24, 26–8, 29, 32, 33, 67, 68, 69, 72, 84 Minsky, Hyman 64, 65, 88, 89 mintage 277–8, 288–90 mobile app, central bank digital currencies (CBDCs) 140 modern money theory (MMT) 64, 102 monetarism 3–4 monetary circuits of production, see programmable central bank digital currencies (CBDCs), for monetary circuits of production monetary plurality 224, 225, 226, 245, 246, 265, 275 monetary policy dominance of 1–2 and ‘hybrid’ model of central banking 8–10 and new model of central banking 4–7 post-Keynesian approach 10–11 transmission mechanism, and central bank digital currencies (CBDCs) 103–13 monetary sovereignty 81, 84, 98–9, 102, 137, 140, 224, 245 monetary system, international 113 monetary systems, structural features of 154 monetary transmission mechanism, see central bank digital currencies (CBDCs), and monetary transmission mechanism

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Index ­307

money 159–60 classical view of 62–4 concepts, names and notations 59–62 fungibility of 213–14, 215–16 Gesell on 282–3 instruments 60–61, 64–5, 70, 78 link with inflation 4, 9 long-run neutrality of 9–10 modern Keynesian perspective on 64–6 quantity theory of 3–4 as social institution 102 sovereign money 81 taxes on 282, 283–4 temporary means of payment 223 transferability, money instruments 60 trust in 95–6, 261 units 60, 62–3 see also confidence in money money creation 6–7, 65, 77, 80, 94, 101 money creation and liquid funding needs, compatibility of 154–6, 176–7 agent-based model (ABM) simulation 168–72 balance sheet stock and flow mechanics under bank and nonbank lending 161–7 central bank digital currencies (CBDCs) 172–5 definitions 159–61 literature review 156–9 money supply 3–4; see also money creation and liquid funding needs, compatibility of Nakamoto, Satoshi 25, 67, 70, 79 narrow banks 39–40, 42, 44, 45, 47 negative interest rate policy (NIRP) 126 new consensus model (NCM) 6, 8, 9, 10 New Keynesian model, bank lending channel 110 Noone, C. 126

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onboarding and funding services (central bank digital currencies, CBDCs) 138 open economy and exchange rate transmission 112–13 Orléan, A. 277–8 over-collateralized stable coins (OSCs) 48, 49–50 Panetta, F. 127, 128, 129 payment instruments 132, 187–8 payment interface providers 36, 37 payment services, central bank digital currencies (CBDCs) 139–40 payments, technology for 197–8, 199 per capita limits, holdings of central bank digital currencies (CBDCs) 127 platform model for central bank digital currencies (CBDCs) 36 post-Keynesian approach arguments against private digital currencies 101–2 asset price channel 110–11 central banking 4–5, 10–11 interest rate channel 105–6, 108–9 monetary and fiscal policy 111, 112 and new consensus model (NCM) 9 see also money creation and liquid funding needs, compatibility of Prescott, E.C. 158 prices Bitcoin 28, 32, 57–8, 71 Dai 48, 50 digital trade coins (DTCs) 45 Ethereum 33, 34 Ripple (XRP) 34, 35 Tether (USDT) 41 private digital currencies, arguments for and against 101–2 programmable central bank digital currencies (CBDCs), for monetary circuits of production 209–10, 217 monetary circuit theory/design objectives 210–14 programmable variables 214–16 risks 216–17 proof-of-work (PoW) 25, 26, 27–8, 33, 68

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308

Central banking, monetary policy and the future of money

prosumers 254 pure-asset coins 24–34, 35 quantity theory of money 3–4 Redes de Trueque (RTs), see Argentina, complementary currency system (CCS) (Redes de Trueque, RTs) Ricardo, David 63 Ripple 33–4, 35 Robinson, Joan 10–11 Rudd, J.B. 7 safety of deposits/savings 104, 196, 198 securitization 166, 167 settlement of transactions 278, 279, 290–95 shadow banking 161, 217 smart contracts 209 Smith, Adam 63 social norms and values, and confidence in money 280–81, 294, 295 socioeconomic status, and means of payment 224–6, 238 sociology of money 275–6 sovereign money 81 sovereignty, monetary 81, 84, 98–9, 102, 137, 140, 224, 245 stability of banking system 108–9 stable coins 37, 39–50, 82–3, 102, 121 Stansbury, A. 6 state and confidence in money 276–7, 278 linkages with banks 278–80 role of 193–5 stock-flow consistent (SFC) modeling 51–3 strategic autonomy, monetary 121, 132 Summers, L.H. 6 Sweden, e-krona (central bank digital currency, CBDC) 187–9, 204–5 attainment of objectives 201–2 design of/properties required 195–200

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monetary policy and financial stability 202–4 need for 189–90 reasons for introduction 190–95 Swiss franc 287, 288–90, 294 Switzerland, WIR system 273, 295–8 balance sheet of WIR Bank 289, 291 French institutionalist framework applied to 284–95 history and evolution of 282–6 mintage 288–90 rules for settlement of transactions 290–95 unit of account 286–7 taxes on money 282, 283–4 payment of 278 Taylor rule 5, 8 technology for payments 197–8, 199 Tether (USDT) 41, 42 Théret, B. 280, 281 Tobin, J. 87–8 Torre, A. 262–3 transferability, money instruments 60 transformative monetary plurality 246, 265 transmission mechanism of monetary policy 103–13 trust in money 95–6, 261 unit of account choice of 277, 278 WIR system, Switzerland 286–7 Utility Settlement Coin (USC) 39 Vallet, G. 287, 288, 290, 294–5 value chains 216 virtual instruments 61 WIR system, see Switzerland, WIR system XRP coins 33–4, 35 Zimmermann, Werner 282, 283

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