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  • Author: Diego Zuluaga
  • Publication Date: 06-2021
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: When the Libra Association first announced its plan to launch a private digital currency for domestic and cross‐​border payments — then consisting of a single token backed by a mix of stable fiat currencies — financial inclusion was a big part of its business case. With 1.7 billion people globally lacking a bank or mobile money account, Libra thought it was imperative for some of the world’s largest companies, including the leading social media platform, to join forces and bring cheap payments to the world’s “unbanked.” And while this project has faced a rocky reception from central bankers and regulators — for reasons good and bad — even they often frame the case for their own, public digital currencies (CBDCs) in terms of bringing cheap and fast electronic payments to the greatest possible number of people, as cash use and cash acceptance decline.
  • Topic: Finance, Banks, Inclusion , Digital Currency
  • Political Geography: Global Focus
  • Author: Charles W. Calomiris
  • Publication Date: 06-2021
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: What we use as our medium of exchange is subject to dramatic change over time, and sometimes bank regulation has accelerated such changes. The national banking system, founded in 1863, envisioned the creation of a uniform medium of exchange in the form of national bank notes, which replaced the preexisting system of state bank note issuance. But the creation of the national banking system soon resulted in the diminished importance of bank notes as a medium of exchange. Under the new system, state banks faced a prohibitive tax of 10 percent per year on any notes they issued, and national banks had to maintain collateral at the Treasury for their outstanding national bank notes equal to 111 percent of their outstanding notes, and also had to maintain an additional 5 percent in required government‐​currency (“greenback”) cash reserves on hand. That meant that if a bank wanted to make loans, it had to find an alternative to bank notes as a funding source for those loans. Deposits had been growing in importance leading up to the National Banking Act of 1863, but the act accelerated the growth of deposits markedly, and they became the primary funding vehicle for loans. As Comptroller Eckels remarked in 1896: “And thus it has come about that deposit taking is now the feature, and the issuing of circulating notes but the incident, in national banking, instead of, as in the early history of the system, the note‐​issuing function being the feature and deposit banking but the incident” (Eckels 1896: 565; emphasis added).
  • Topic: Science and Technology, Finance, Banks, Loans
  • Political Geography: Global Focus
  • Author: George Selgin
  • Publication Date: 06-2021
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: Various proposals for a central bank digital currency (CBDC) involve different technical solutions to as many distinct problems. My concern is with the monetary policy implications of those (e.g., Bordo and Levin 2019; Ricks 2020) that would allow anyone to place deposits in a Fed Master Account, directly or using ordinary banks as brokers.
  • Topic: Monetary Policy, Banks, Central Bank, Financial Stability, Digital Currency
  • Political Geography: Global Focus
  • Author: Caitlin Long
  • Publication Date: 06-2021
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: Stablecoins are financial obligations issued on a blockchain. They are generally fully collateralized with either fiat currency deposits at a bank, or with short‐​term government bonds held at a custodian. They’re issued only by nonbanks, although FINMA in Switzerland does allow Swiss banks to issue Swiss franc–denominated stablecoins. Usually stablecoins do not pay interest, and they are designed to trade at par with the fiat currency. Because they are issued on a blockchain, they usually settle in minutes, with irreversibility, and — critically — they are “programmable,” which means users can build their own software applications to interact with them.
  • Topic: Monetary Policy, Banks, Digital Currency
  • Political Geography: Global Focus, United States of America
  • Author: Lawrence H. White
  • Publication Date: 06-2021
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: Private commercial banks have been providing trusted money to the public for hundreds of years, in the form of banknotes (where allowed) and transferable deposit balances, as an integral part of their business model. Economically, money balances are a private good: they are rival in consumption (you and I can’t both simultaneously spend a given banknote or deposit balance) and excludable in supply (you and your bank can stop me from spending the funds in your wallet or account) (White 1999: 89). Accordingly, the market does not inherently fail to provide money efficiently.
  • Topic: Markets, Monetary Policy, Economy, State, Banks, Digital Currency
  • Political Geography: Global Focus
  • Author: Tobias Adrian, Tommaso Mancini-Griffoli
  • Publication Date: 06-2021
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: a card, waving a phone, or clicking a mouse. Or we might hand over notes and coins, though in many countries increasingly less often. Today’s world is characterized by a dual monetary system, involving privately issued money — by banks of all types, telecom companies, or specialized payment providers — built upon a foundation of publicly issued money — by central banks. While not perfect, this system offers significant advantages, including innovation and product diversity, mostly provided by the private sector, and stability and efficiency, ensured by the public sector. These objectives — innovation and diversity on the one hand, and stability and efficiency on the other — are related. More of one usually means less of the other. A tradeoff exists that countries — central banks especially — have to navigate. How much of the private sector to rely upon, versus how much to innovate themselves? Much depends on preferences, available technology, and the efficiency of regulation. So it is natural, when a new technology emerges, to ask how today’s dual monetary system will evolve. If digitalized cash — called central bank digital currency — does emerge, will it displace privately issued money or allow it to flourish? The first is always possible, by way of more stringent regulation. We argue that the second remains possible, by extending the logic of today’s dual monetary system. Importantly, central banks should not face a choice between either offering central bank digital currency, or encouraging the private sector to provide its own digital variant. The two can coincide and complement each other — to the extent central banks make certain design choices and refresh their regulatory frameworks.
  • Topic: Monetary Policy, Banks, Money, Digital Policy, Digital Currency
  • Political Geography: Global Focus
  • Author: Charles I. Plosser
  • Publication Date: 06-2018
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: It is a pleasure to be back here at Cato and to be invited to speak once again at this annual conference. This is one of the premier ongoing monetary policy conferences, and the participants, both at the podium and in the audience, attest to its prominence. This is a session on international monetary arrangements, and there has already been an interesting discussion. I find myself in substantial agreement with the comments of John Taylor, so I do not wish to repeat his points. What I will try to do is put the rules-based approach to international monetary policy coordination in a context that I hope will help us understand some of the past failures so we might avoid them in the future. In many ways, I will simply be reminding us of some principles we all have known for some time, yet which we seem to forget all too frequently.
  • Topic: International Cooperation, Monetary Policy, Banks
  • Political Geography: Global Focus