In this paper, I will dissect the prospective impact of retail central bank digital currencies with reference to the hierarchy of credit in modern monetary economies. If central banks decide to issue digital currencies in a similar manner to their issuance of cash, public money will become more widely accessible and potentially threaten the business model of commercial banking. Thus, considerations about financial stability need to be critically assessed to ensure that central bank digital currencies can become a positive addition to monetary environments.
Being a literature review, this paper will thoroughly revise existing accounts on a variety of challenges and chances regarding a transformation of current structures before discussing these findings. This approach will demonstrate that central bank digital currencies provide a benefit to society and strengthen the monetary sovereignty of the central bank without jeopardizing financial stability.
Table of Contents
I. Introduction
II. Research Design
III. Money and banking in modern economies
A. Key actors
B. What is money?
1) Credit theory of money
2) Commodity theory of money
3) State theory of money and further considerations
C. Money creation
D. Hierarchy of credit
E. Digital Money
F. Central Bank Digital Currencies
IV. Literature Review
A. CBDC interest structure
B. Commercial banking in a retail CBDC world
1) Disintermediation of commercial banks
2) CBDC runs
C. Desired impact
1) General observations
2) Swedish e-Krona
3) Uruguayan e-Peso
4) ECB’s digital euro
V. Discussion
A. Benefit to society
B. Financial Stability
1) Commercial Banking
2) Financialization of the economy
3) Other Private Sector Solutions
VI. Final Remarks
A. Limitations of this paper
B. Conclusion
VII. References
Objectives and Themes
This bachelor thesis examines the transformative impact of retail Central Bank Digital Currencies (CBDC) on the established credit hierarchy within modern monetary systems. The central research question investigates how the introduction of public digital money challenges the business models of commercial banks and influences financial stability, specifically analyzing whether such a system could enhance monetary sovereignty without destabilizing existing two-tier financial structures.
- The theoretical evolution of money from commodity-based standards to credit-based fiat systems.
- The mechanics of money creation and the role of commercial banks as intermediaries of credit.
- The comparative analysis of various CBDC design choices, including direct, indirect, and hybrid models.
- The implications of retail CBDC for financial stability, including risks like bank disintermediation and CBDC runs.
- Case studies on the Swedish e-Krona, Uruguayan e-Peso, and the European Central Bank’s digital euro project.
Excerpt from the Book
D. Hierarchy of credit
The most critical component to shed light on money and the banking system in modern economies is the allocation of power within the monetary sphere, and thus, the implications of all said above for economic actors. As modern fiat money is credit rather than a commodity, banks create new money by granting loans to borrowers, who then operate within the financial system. Thus, the terms 'credit' and 'money' will be used interchangeably from here on. Taking together the respective functions within this process of the central bank, commercial banks and private economic actors such as firms or households, it becomes clear that money is assembled in a hierarchy of credit. Via credit and loans, commercial banks create fiat money. Let alone this pronouncement neglects the Metallist tradition of the commodity theory of money. Instead, the concept of fiat money, which has no intrinsic value and is created 'out of thin air', supports that money is a shared belief between debtor and creditor as stated in the credit theory. However, there needs to be a guarantee for the conviction that fiat money represents value in the form of purchasing power. Otherwise, the system of trust between debtor and borrower would collapse back to the issue of asymmetric information as in the past of commodity money.
The ultimate warrantor for the value of fiat money is the central bank in its function as a “lender of last resort” (Mehrling, 2012, p. 13) as it cannot be disregarded that commercial bank lending is a riskful business. Hyman P. Minsky (1992) outlines extensively in his hypothesis of financial instability that the system of credit in modern financial systems is inherently unstable. His argument refers to the insights of Chartalism and acknowledges that credit is mainly driven by the demand from private businesses who want to invest given an expected profit (Minsky, 1992, p.6). As private actors engage primarily with commercial banks to acquire funding, Minsky’s insight implies two important aspects to understand the place of commercial banks in the overall financial system.
Summary of Chapters
I. Introduction: Outlines the rise of CBDCs in the context of modern monetary evolution and defines the twofold research scope, focusing on money theory and the potential impact on the credit hierarchy.
II. Research Design: Explains the methodology based on a literature review of central bank reports and academic research to interpret CBDC for an unknowledgeable audience.
III. Money and banking in modern economies: Reviews foundational concepts including the credit and commodity theories of money, the mechanics of money creation, and the inherent hierarchy of credit.
IV. Literature Review: Synthesizes current academic discourse on CBDC interest structures, the role of commercial banks in a retail CBDC world, and country-specific motivations for implementation.
V. Discussion: Analyzes the societal benefits of retail CBDC, specifically regarding financial stability and the potential (partial) disintermediation of commercial banks.
VI. Final Remarks: Acknowledges the limitations of the thesis regarding the scope of design scenarios and summarizes the key finding that retail CBDC could strengthen monetary sovereignty.
Keywords
Central Bank Digital Currency, CBDC, Credit Hierarchy, Money Creation, Commercial Banking, Financial Stability, Fiat Money, Monetary Sovereignty, Retail CBDC, Disintermediation, Chartalism, Digital Euro, e-Krona, Monetary Policy, Financialization.
Frequently Asked Questions
What is the primary focus of this thesis?
The thesis explores the prospective impact of retail Central Bank Digital Currencies (CBDC) on the credit hierarchy of modern monetary economies and its potential to alter the existing banking structure.
What are the central themes covered?
The core themes include the definition of money, the hierarchy of credit, the mechanics of money creation, the role of central banks versus commercial banks, and the risks of financial disintermediation.
What is the main research objective?
The objective is to demonstrate how CBDC may disrupt the traditional distinction between public and private money and to assess whether this transition can occur without jeopardizing overall financial stability.
Which methodology is employed?
The research is based on a systematic review of existing literature, including central bank working papers, reports from economic research institutions, and academic discourse on monetary economics.
What does the main body discuss?
The main body moves from theoretical frameworks (credit vs. commodity theory) to practical CBDC design options, literature reviews on current implementations, and a critical discussion of societal and stability implications.
Which key terms describe this research?
Key terms include CBDC, Credit Hierarchy, Monetary Sovereignty, Financial Stability, Commercial Banking, Fiat Money, and Disintermediation.
How does the author define the "hierarchy of credit"?
The author defines it as the allocation of power within the monetary sphere, where central bank money stands at the top as the ultimate means of settlement, followed by commercial bank credit, and finally private credit.
Why might a retail CBDC be considered "disintermediating"?
It is viewed as disintermediating because it allows the public to hold claims directly against the central bank, potentially reducing the volume of deposits held at commercial banks and undermining their traditional business model.
What role does the "Chartalist" perspective play in the work?
The Chartalist perspective, or state theory of money, is used as a theoretical foundation to explain how legal and political affirmation—rather than intrinsic commodity value—underpins the authority of modern fiat money.
What conclusion does the author reach regarding financial stability?
The author concludes that while CBDC alters the credit hierarchy, it does not necessarily cause instability; rather, it could enhance financial stability by reinforcing the central bank's role as the anchor of the monetary system.
- Citar trabajo
- Anonym (Autor), 2021, Commodity, Credit, CBDC? How the growing significance of Central Bank Digital Currencies may alter the credit hierarchy of modern banking systems, Múnich, GRIN Verlag, https://www.grin.com/document/1165456
