Central Bank Digital Currencies, Cryptocurrencies and Collateral

April 2018

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Central banks face new competition in their issuance of currency: cryptocurrencies have captured the popular imagination, if not yet the actual spending behavior of most consumers. Even so, central banks and regulators are developing strategies for how to respond to cryptocurrencies including potential bans, treating them as commodities or requiring government supervision. One possible response is to adopt the technology and strategies of cryptocurrencies by issuing a central bank digital currency.

Central bank digital currencies could take the place of cash in an economy, with users accessing a bank account linked to the central platform. Of course, electronic access to cash already exists in various forms, from central bank reserve accounts to consumer bank accounts. A new entrant could replace or supplement cash, and could be used by either commercial banks or consumers as a form of payment. It could be based on blockchain or on a new technology thought to be more secure against hackers. As central banks explore their options, it is clear that a widespread introduction of central bank digital currency would have far-reaching implications for setting monetary policy and the regulation of cryptocurrencies themselves. Central bank digital currencies could also have potentially destabilizing impacts on commercial banks, which occupy a critical role in the transmission of monetary policy and funding of the real economy. In turn, central bank digital currencies could fundamentally impact expectations and product development in capital markets, including derivatives and collateral management.

This Finadium research report investigates current developments in central bank digital currencies, from trial balloons to actual projects underway. We look at the monetary policy opportunities and challenges posed and how financial market participants may want to consider their responses. This report should be read by financial markets professionals interested in the future of money, cryptocurrency, central bank digital currencies and product development in capital market activities.

Table of Contents

  • Executive Summary
  • The Cryptocurrency Challenge to Central Bank Currency Issuance
  • How Central Bank Digital Currencies Could Work
    • – Is Central Bank Competition with Commercial Banks a Good Idea?
    • – The Cybersecurity Problem
  • Case Studies, Fits and Starts
    • – Trial Balloons
    • – The Likely Contender
  • New Monetary Policy for a Digital Age
  • Capital Market Impacts from Central Bank Digital Currencies
    • – Interest Rate Policy, Derivatives Pricing and Services Businesses
    • – Digital Currencies as Collateral
  • About the Author
  • About Finadium LLC

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