Several central banks, including the Bank of England, the People’s Bank of China, the Bank of Canada and the Federal Reserve, are exploring the concept of issuing their own digital currencies, using the blockchain technology developed for Bitcoin. Skeptical commentators suspect that their primary goal is to eliminate cash, setting us up for negative interest rates (we pay the bank to hold our deposits rather than the reverse).
But Ben Broadbent, Deputy Governor of the Bank of England, puts a more positive spin on it. He says Central Bank Digital Currencies could supplant the money now created by private banks through “fractional reserve†lending – and that means 97% of the circulating money supply. Rather than outlawing bank-created money, as money reformers have long urged, fractional reserve banking could be made obsolete simply by attrition, preempted by a better mousetrap. The need for negative interest rates could also be eliminated, by giving the central bank more direct tools for stimulating the economy.
The Blockchain Revolution
How blockchain works was explained by Martin Hiesboeck in an April 2016 article titled “Blockchain Is the Most Disruptive Invention Since the Internet Itself“:
The blockchain is a simple yet ingenious way of passing information from A to B in a fully automated and safe manner. One party to a transaction initiates the process by creating a block. This block is verified by thousands, perhaps millions of computers distributed around the net. The verified block is added to a chain, which is stored across the net, creating not just a unique record, but a unique record with a unique history. Falsifying a single record would mean falsifying the entire chain in millions of instances. That is virtually impossible.
In a speech at the London School of Economics in March 2016, Bank of England Deputy Governor Ben Broadbent pointed out that a Central Bank Digital Currency (CBDC) would not eliminate physical cash. Only the legislature could do that, and blockchain technology would not be needed to pull it off, since most money is already digital. What is unique and potentially revolutionary about a national blockchain currency is that it would eliminate the need for banks in the payments system.According to a July 2016 article in The Wall Street Journal
 on the CBDC proposal:
[M]oney would exist electronically outside of bank accounts in digital wallets, much as physical bank notes do. This means households and businesses would be able to bypass banks altogether when making payments to one another.
Not only the payments system but the actual creation of money is orchestrated by private banks today. Nearly 97% of the money supply is created by banks when they make loans, as the Bank of England acknowledged in a bombshell report in 2014. The digital money we transfer by check, credit card or debit card represents simply the IOU or promise to pay of a bank. A CBDC could replace these private bank liabilities with central bank liabilities. CBDCs are the digital equivalent of cash.
