Because the value of all crypto tokens is low compared to the global money supply, monetary policy does not need to worry about their effectiveness at the moment. The President of the Bundesbank was sceptical about the issue of digital central bank money. Interest rates on digital money or the possibility of negative interest rates would expand the scope of monetary policy if private individuals were unable to switch to cash. But there is a “serious catch”: Digital central bank money could enter into direct competition with bank deposits. However, if commercial banks had to offer interest premiums to prevent bank deposits from being converted into digital central bank money, their margins in the deposit lending business would continue to fall, which could be problematic for financial stability.
Warning of digital banking storm
Weidmann sees an even greater risk in digital bank runs. If savings can be transferred to one’s own account at the central bank at the click of a mouse in order to flee the private financial system, the threshold for an onslaught on the banks would presumably be much lower than in the analogue world. Weidmann also cited an example of this: if not only Northern Rock’s customers but also those of other British banks had brought their flocks to the central bank in the UK in the crisis year 2007, they would have completely destabilized the entire banking system.
The President of the Bundesbank also referred to critics who have identified the possibility of money creation by commercial banks as a weak point of the current monetary system, because these are a major cause of harmful credit cycles. Historical experiences with a single-stage banking system and with central lending by the central bank were “sobering”, central administrative economies had shown that the state or the central bank were not the better bankers.
No competition for cash
Weidmann was convinced that the need for crypto tokens and digital central bank money would not arise if central banks were to keep payment transactions up to date with the latest technology. He was keen on the Eurosystem’s efforts to enable banks to make central bank money payments in real time by the end of the year. This would enable transfers between private individuals in a matter of seconds around the clock, every day of the year, regardless of which bank they have their account with.
Referring to Agustín Carstens, managing director of the Bank for International Settlements, who had described Bitcoin as a mixture of financial bubble, snowball system and environmental disaster, Weidmann said he did not think crypto currencies were at least a convincing alternative to state money:
“For a stable monetary and financial system we do not need crypto tokens, but central banks committed to price stability and effective bank regulation.
Gregor HallmannGregor Hallmann has been a business journalist for 20 years. As editor of a news agency, the studied political scientist closely followed the Internet boom and the subsequent bursting of the dotcom bubble around the turn of the millennium. Since then, as a freelance journalist, he has been writing critically about economics, finance and investment – and also has crypto currencies and block chains in mind.