Monetary Reform Light 

Sovereign digital currency coexisting with bankmoney 


Since around 2013/14 a number of scholars have been calling for 'digital cash', that is, the use of electronic or digital central-bank money in public circulation, not solely in interbank circulation as is the case today. Over time, the high-powered central-bank money – either as sovereign currency on account or sovereign cryptocurrency – might take over the now predominant role of bankmoney on bank giro accounts.[1] If a full 'big bang' transition from bankmoney to sovereign money cannot be achieved in the immediate future, something less radical might be attainable, some kind of monetary reform light. Such reasoning is also encouraged by a growing number of central banks, who are now looking into the matter by conducting research and even enacting pilot projects.

The common feature of the various approaches put forth is the introduction of non-cash central-bank money into general public use, but without directly challenging the present bankmoney privilege, that is, the banking sector's ability to create the very bankmoney on which the banks operate in their dealings with the non-bank public. The idea relates to giving the non-bank public the option to choose between bankmoney and central-bank money, with the two coexisting side by side. Some supporters idealise the approach as 'combining the best of both worlds'[2], while others hope for the approach to be a half-way house towards full monetary reform, gradually reversing the wrong-headed development of the last hundred years through which bankmoney has driven out central-bank money by about 90–97 per cent. As a result of that development we have a bankmoney regime today, pro-actively led by the banks' primary credit and deposit creation (= bankmoney creation), while central banks have given up control over the stock of money, deliberately accommodating the banks' residual demand for solid cash and reserves (= electronic central-bank money in a bank's central-bank  account). Rather than being in control of the money, central banks have become anytime refinancers of the banks, no longer caring about the stock of money and restricting themselves to short-term base rate policy which is supposed to influence consumer price inflation.

Before discussing what electronic or digital central-bank money exactly is, and whether it is predominantly about sovereign cryptocurrency  or sovereign currency on account, a number of developments which make monetary reform measures rather urgent are outlined in the following section.

It should be noted that two other approaches often mentioned in the present context are helicopter money (also known as Quantitative Easing for people), and safe deposits by way of a voluntary 100% reserve on individual deposits. However, helicopter money and 100% reserve-backed deposits do not actually belong here, as will be discussed in two brief appendices at the end of the paper.

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Developments which challenge the sovereign monetary prerogatives and put central banks under pressure to take action

Over the last century, driven by the trend toward cashless payment, the rise of the present bankmoney regime based on fractional reserve banking has marginalised central-bank money to a large extent, thereby challenging the role of central banks, and capturing the sovereign monetary prerogatives to a considerable degree.[3] Current developments which appear to bring matters to a head are: 
-    the final disappearance of traditional cash, and its potential abandonment by decree
-    strong market concentration in the banking sector
-    the rise of additional money surrogates, particularly money market fund       shares (MMFs) 
-    the emergence of private cryptocurrencies
-    the paradigmatic predominance of the efficient-market-hypothesis, also       applied to money creation and credit expansion.

Traditional cash is bound to dwindle or be abolished sooner or later. Around the year 1900, the ratio between bankmoney and cash (coins and notes) was about 30–40% bankmoney (sight or demand deposits) to 60–70% cash (= central-bank currency = sovereign money). Today, the ratio stands at 80:20 in the eurozone, though it is closer to 90:10 in reality, as a portion of the cash is hoarded as a safety buffer or circulates abroad as a parallel currency.[4]

Related to the spread of cashless payments, as both a result and further condition of it, there has been growing market concentration in the banking sector, and subsequent concentration of bankmoney creation. The bigger a bank, the smaller is its relative need to refinance. Smaller banks lose out in cost competition related to refinancing, and thus dwindle in number. The large banks and international megabanks which remain have millions of customers undertaking many times that number of cashless transactions, further enhanced through IT-accelerated cashless money transfer.[5]

Cashless payment practices represent welcome progress in terms of comfort, safety, speed, and cost-efficiency. At the same time, however, the dependency of the banking sector on refinancing through central-bank cash and reserves has decreased substantially. The fractionality of the reserve base which banks need is now very small and, as central banks always accommodate the banks' demand for reserves and cash, have become a mere re-active sub-set of the pro-active extension of primary bank credit, and thus the creation of bankmoney. To create and maintain 100 euros in bankmoney, banks today need a central-bank money reserve of only 2.5–3 euros, of which 1.4 euros are coins and notes for ATMs, the rest being non-cash excess reserves (interbank payment reserves) and a 1% minimum reserve requirement.[6] In England, Canada, and other countries, minimum reserves have already been abolished (thus providing recognition of how fictitious the assumed control function of a minimum reserve requirement is). In the USA, the minimum requirement is 10% minus cash in vault and other deductible items.  

To become comprehensively independent of central banks, and fully complete the reign of the bankmoney regime, commercial banks would have to dispense with the 1.1–1.6% non-cash reserve and the remainder of the 1.4% cash reserve. Most banks would like to see cash disappear anyway, as they are not allowed to create coins and cash by themselves and thus have to finance the cash at a rate of 100% (not just a small fraction of it). Aside from this, handling cash is more expensive than the computerised handling of money-on-account.

Moreover, ever more state agencies, especially the revenue office, demand to be paid in bankmoney and refuse to accept cash. This is not without irony considering that the major financial state authority rejects what is left of the state's sovereign currency. Politicians, too, are keen on abolishing cash, fostering the illusion that this would drain the swamp of underground money foregone to the revenue office.

Further, it is monetary policy makers who would like to eliminate cash, since the latter is still a hurdle to imposing negative interest rates on the deposits of bank customers (= bankmoney).[7] People can instead circumvent negative interest by holding their money in cash. If too many people try to do so at once, this would be a bank run – a disaster in-built in fractional reserve banking that policy makers will not want to wilfully provoke.

Since the 1980s, the marginalisation of central-bank money has also been furthered by the rise of money market funds (MMF) as a new money surrogate. For the most part, MMF shares purchased with bankmoney. Especially on financial markets MMFs are used as deposit-like, easy-to-transfer means of payment in lieu of bankmoney or reserves (depending on whether the payer is a nonbank or a bank). The volumes of MMFs are important, amounting to 2.5 times the active money supply M1 in the USA. In Europe, the use of MMFs is not as widespread but is still at about a third of M1.[8]  

Currently, the emergence of private cryptocurrencies based on blockchain technology might turn into yet another challenge to the sovereign monetary prerogatives, and thus the role of central banks. Should a number of these currencies develop into generally used means of payment, they would challenge central banks and bankmoney alike. At present there are more than 1,450 such commercial cryptocurrencies, including Bitcoin, Ethereum, Ripple, and Madcoin, at a total market capitalization of $ 616 billions.[9] Most crypto-'coins' are launched by fintech start-ups, but large technology companies are preparing to join the race.

It is impossible to say how many of those cryptocurrencies will survive, and what will come of the survivors. Equally unclear is whether this is all about additional gambling in the global casino, or whether a few cryptocurrencies might literally gain currency as a general means of payment. This, however, remains unlikely if neither governments nor central banks support private crypto monies, and as long as most large banks or big financial intermediaries remain reluctant to enter the crypto race. But that may change. For example, over 100 banks worldwide are already said to use the technology of Ripple for international transactions.[10] Should this precedent be followed, private cryptocurrencies might even challenge the principle of having nation-state currencies such as the dollar or pound, or the euro in a community of nation states.

But even in the absence of a future for cryptocurrencies as a general means of payment, the combined effect of the aforementioned developments looks ultimately bound to dispense with the need for central banks and the monetary sovereignty of states altogether. Monetary control of central banks over bankmoney creation has already much decreased because of a decline in the effectiveness of conventional monetary policy instruments. This has allowed for essentially unlimited and pro-cyclically overshooting bank credit and deposit creation (= bankmoney creation), resulting in inflation (of up to two thirds of nominal growth) and nowadays primarily asset Inflation and financial-market bubbles, which in turn results in increased instability and crisis-proneness of banking and finance.[11]

The aforementioned developments would be inconceivable without a foundation in suitable paradigms according to which the continued privatisation of money does not appear as what it is, or is considered to be irrelevant or even desirable, which applies not only to the supporters of Neoaustrian free banking and is another triumph of Banking School doctrine superceding the ordoliberal heritage of the Currency School.

'Neoliberalism' – which is a misleading byword for financial and industrial corporatism of global scope, oligopolistic markets, and cross-border supply-chain dominance – has played a part in this. The heirs of Keynes too, however, while criticising financial capitalism primarily in terms of distribution, unreflectingly support Banking School reasoning. They do so by postulating the alleged identity of money and credit combined with an overdrawn theory of endogeneity of money, which comes down to identifying money with bank credit as if that were the most natural thing in the world. Some – such as for example the so-called 'modern money theory' – even misrepresent the present bankmoney regime as a sovereign currency system under government control, while in actual fact it has long since been a privatised money system backed by the central bank and warranted by the government. Money, however, especially if denominated in a national currency, is no private affair, but a public matter of constitutional importance, comparable to the prerogatives of legislation, jurisdiction, territorial administration and the monopolies of taxation and the use of force. 

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Central bank issued digital currency (CBDC, digital cash)

Having taken a wait-and-see stance for some time, central bankers have started to think about confronting the present challenges by creating a digital currency of their own. They thus intend to continue the traditional sovereign monopoly on solid cash in a modern way, by implementing sovereign digital currency or, as they prefer to say, central bank issued digital currency (CBDC). In 2017 alone, about two dozen central banks announced their interest in CBDC.

Staff members of the Bank of England were among the first to publicly reflect on CBDC.[12] Leading members of regional U.S. Federal Reserve Banks have proposed the introduction of 'Fedcoins' into public circulation, or 'Fedwire for all', respectively.[13] The Basel Bank for International Settlements as well as the Swedish Riksbank have published papers in the same vein. Singapore and Canada are reported to have already tested a blockchain-based currency for internet business. Uruguay has launched a pilot project using 'peso tickets'. [14] Presumably there are several other such projects under way.

However, authors and central-bank papers examining the matter often remain ambivalent about what exactly they understand by CBDC or digital cash. The current wave of announcements was apparently triggered by the hype around the likes of Bitcoin. Therefore one would expect CBDC to be about central bank issued cryptocurrency based on some variety of the cryptographic technology of blockchain-generating distributed ledgers (DL[15]). The expression 'Fedcoin' clearly relates to such a cryptocurrency approach.

CBDC, however – while indeed presented as a new type of money designed to counter the challenge of private cryptocurrencies and to compete with bankmoney – is not necessarily meant to be cryptocurrency itself. Quite often, CBDC actually relates to non-cash central-bank money for public use, that is, sovereign currency on account. Expressions like 'Fedwire for all' or 'reserves for everyone' clearly refer to such an understanding.     

Banking and finance have for a long time been going through a process of computerisation, IT networking, and the online handling of transactions. Contracts, booking entries and payments are no longer written by hand or typewriter, but all such things are by now 'digitally' coded and 'electronically' processed. Clearly this is no longer about traditional solid coins and paper notes. It can, however, refer to any other form of informational-token fiat money, whether central-bank reserves, active bankmoney, currently deactivated bankmoney (time and savings accounts), 'e-cash' (bankmoney accessed via cards and apps), and now also any variety of cryptocurrency.

'Electronic' or 'digital' money are rather unspecific and generic terms. To avoid confusion, then, the most important distinction under such umbrellas is the one between cryptocurrency and money-on-account (central-bank account, or bank account, or another type of transaction account, in the conventional sense). If that money comes from a state's central bank, or other monetary authority, the money then represents sovereign currency on account, or sovereign cryptocurrency, respectively.

In some cases, banks or central banks intend to use the blockchain or DL technology as an alternative to conventional clearing and payment systems, while the transactions continue to be in bankmoney and central-bank reserves.[16] In such cases, no new type of money comes into play, just a new method of transfer, while the interplay between pro-actively created bankmoney and re-actively provided central bank reserves remains the same – leaving the bankmoney regime on a fractional base of reserves such as it is. 

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Sovereign cryptocurrency

At present there is no generally referred-to project for sovereign cryptocurrency. In any event, it will be an application of the blockchain and DL technology whereby – in contrast to Bitcoin and most other cryptocurrencies – the currency units are injected by the central bank, through a process separate from the continual DL and blockchain-documented transactions. The crypto-'coins' involved, of course, cannot be touched and kept in a purse. Technically, it is about another kind of account which in the blockchain/DL context is called 'digital wallet'. Solid cash circulates directly 'from hand to hand' or, say, from purse to purse. In an analogous way, cryptocurrency circulates directly 'from wallet to wallet', without intermediate bank transfer of reserves as is the case with indirect bankmoney transfer.[17] In this sense cryptocurrency is a cash-like means of payment indeed. It can be exchanged for cash, bankmoney, reserves or sovereign money-on-account.

Bitcoins, the first and still biggest private cryptocurrency, is being 'mined' by an opaque stand-alone algorithm. The 'miners' obtain Bitcoins as a reward for computing complicated confirmation processes of Bitcoin transactions. Energy-hungry computer farms have been built to support this process, particularly in northern China and regions close to the polar circle. The Bitcoin algorithm approaches an upper limit that cannot be exceeded. Each new Bitcoin takes more computing and energy than the previous one. The creation of Bitcoins is thus finite and with no reference to economic dynamics in the real world, similar to the former scarcity of gold.

By now, Bitcoin is no longer seen as the future model of cryptocurrency because it is too energy-intensive and expensive, and much too slow to be useful as a modern means of payment. Bitcoin can carry out 7 transactions per second, while a payment service such as PayPal can carry out over 100 in the same timeframe. Visa and Mastercard can manage from 2,000 to 7.000.[18]     

In addition there are unsettled technical questions, such as for example data or money safety, and unsettled legal questions such as warranty and liability. Bitcoin devotees imagine being in a space without codified law and 'government meddling'; which, of course, is a chimera. If need be, transactions must be retraceable and usable by courts and other authorised institutions (which in fact is the case even with Bitcoin, as any digital or electronic data processing leaves a trace).

The Bank of England (BoE) at first seemed to pursue an approach based on cryptocurrency. One concept developed on behalf of the BoE is RSCoin.[19] The letters in the acronym were not explained, but its explicit purpose was to create a cryptographic payment system for central-bank money in a crypto wallet, thus sovereign cryptocurrency denominated in the national currency unit. The sovereign currency units are fed into the system and managed as a stock of money by the central bank (or another state body acting as the state's monetary authority), complying with all legal requirements. Since 2016, however, nothing more on this matter was officially published. 

A subsequent publication by the BoE is the CBDC model of Barrdear/Kumhof.[20] With regard to the difference between cryptocurrency (in digital wallet) and currency on account, however, the research report is not consistent. The concept would grant 'universal, electronic, 24x7, national-currency-denominated and interest-bearing access to the balance sheet' of the central bank. The authors see their version of CBDC as a modern variant of Tobin’s incidental proposal for deposited currency accounts in 1987 (which points to currency on account rather than cryptocurrency). CBDC would be 'implemented via distributed ledgers and competes with bank deposits as a medium of exchange' (the DL technology pointing to cryptocurrency rather than currency on account). Most importantly, CBDC is not 'reserved' for banks only, but is for general use in public circulation, as an alternative option to bankmoney, and also to traditional cash and private cryptocurrencies (as far as some of these might develop into a general means of payment).

The authors consider a pre-crisis situation 'in which an initial stock of CBDC equal to 30% of GDP is issued against an equal amount of government debt, and is then, subject to countercyclical variations over the business cycle, maintained at that level. We choose 30% because this is an amount loosely similar to the magnitudes of Quantitative Easing conducted by various central banks over the last decade'.[21] According to the authors' DSGE model, this 'could permanently raise GDP by as much as 3%, due to reductions in real interest rates, distortionary taxes, and monetary transaction costs. Countercyclical CBDC price or quantity rules, as a second monetary policy instrument, could substantially improve the central bank's ability to stabilize the business cycle.'[22]

Being interest-bearing for the holder is said to underpin the cash-like nature of CBDC.[23] The digital currency would be issued exclusively in exchange for sovereign bonds purchased by a central bank on the open market. The quantity of CBDC in circulation can thus be dispensed in a measured way and kept under control, so that a hypothetical landslide migration from bankmoney (the money surrogate) to CBDC (the high-powered 'real thing') can be prevented. The government would redeem the bonds upon maturity, but the CBDC-units would continue to exist until used in a payment to the central bank (upon which act the central bank liability would be deleted).

The method of issuance and deletion of CBDC in Barrdear/Kumhof follows the conventional principle of creating central-bank money by way of credit extension and a related accountancy procedure (where CBDC represents a central-bank liability). A central bank-acknowledged consortium of banks would continue to underwrite originally offered sovereign bonds, selling on a bigger or smaller part of the bonds to non-monetary financial institutions (e.g. funds) and private persons. Thereafter, the central bank would buy the bonds from the banks, institutional investors, and private individuals, against CBDC. As a result, the central bank would hold the sovereign bonds, while banks and non-banks would be using CBDC in lieu of reserves (banks) and bankmoney (non-banks). 

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Sovereign currency on account

Currency accounts as an alternative option to bank giro accounts

At a number of points the Barrdear/Kumhof CBDC model gives the impression of being about money-on-account rather than cryptocurrency-in-wallet; and indeed, it is such that the desirable effects of a CBDC can in fact also be achieved by introducing a new type of current account – sovereign money accounts or, say, currency accounts – as an alternative to the present bank giro accounts containing bankmoney. Currency accounts would offer non-banks (firms, households, government bodies without a central bank account, and non-monetary financial institutions) the option of 'reserves on account'. At present, only banks and government bodies with a central-bank transaction account have that option. Such currency accounts would also be an answer to the question of safe deposits, which is a topic that regularly resurfaces in a banking crisis.

In 2013/14, the idea of introducing safe currency accounts in parallel to bank giro accounts was at first discussed in connection with the then-debated approach to helicopter money or Quantitative Easing for people, arguing that monetary financing of government expenditure would make much more sense in terms of monetary reform if accompanied by the introduction of currency accounts – which of course also applies to other forms of CBDC. Without such currency accounts, which allow for public circulation of central-bank money-on-account, helicopter money is not really a step towards monetary reform because customers would still not have access to sovereign money-on-account, while the banks would obtain large amounts of additional reserves, in this case entirely for free.

A number of academics and policy makers have also proposed the introduction of central bank issued digital currency that would coexist alongside with bankmoney.[24] The most developed approach in this direction so far is the e-krona concept published by the Swedish Riksbank in September 2017.[25] In Sweden, the disappearance of cash is well under way, and the Riksbank is obliged to provide legal-tender central-bank money for general use. If this is no longer in cash, then it could materialise in the form of e-krona, that is, electronic crowns as currency on account. A higher degree of effectiveness of conventional monetary policy instruments would certainly also be welcome. Basically, it can be assumed that the bigger the share of sovereign currency on account in proportion to bankmoney, the bigger is the policy leverage of central banks.  

In addition to currency on account, provision is also made to supply e-krona via cards and apps as a 'value-based solution'. Once again, it is not entirely clear if this would be cryptocurrency or, as is the case today with 'e-cash', an account-based method where the money on account (bankmoney today) is deposited by the bank in a special omnibus account for customer 'e-cash' transactions. In any case, the authors of the concept prefer currency on account over cryptocurrency for the simple reason that conventional accounts and related processes are a tried and tested technology, whereas cryptocurrencies are still in their infancy, posing a number of unsettled questions, as mentioned in the previous section. 

E-krona is supposed to come into circulation analogous to cash, that is, on demand of the money users who obtain e-krona in exchange for bankmoney or cash. E-krona thus presupposes the existence of the present bankmoney structure, at least at the beginning. E-krona balances would be managed within a special account and payment infrastructure. In a way this means rebuilding something like the former postal giro offices. The additional infrastructure is apparently meant to exist apart from the present split-circuit structure of interbank circulation of reserves and public circulation of bankmoney.

Rather than building a new infrastructure from scratch, e-krona – generally speaking, sovereign currency on account – could also be managed by banks or other payment service providers. For example, the money might be kept in a customer transaction omnibus account of a bank or other payment service provider, adjoining that institution's reserve account but separate from its own reserves and off the bank's balance sheet. This would be similar to a securities account managed by banks for respective customers without the bank itself being entangled with the customers' assets and liabilities.

An individual share or sub-account in such a customer transaction omnibus account would have its own address in the respective real-time gross-settlement payment system. Present account numbers could basically be retained, as these are composed of a bank's sort code and an individual account number. What would make a big difference, however, is the fact that the money would be transferred directly amongst currency accounts without monetary intermediation by the banks, so that the money is the unequivocal property of the customer and is neither an asset nor a liability on a bank's or other payment provider's balance sheet.

The central bank, as payment system provider or contractor of a system operator, would, in a sense, still be the trusted third party; not, however, as monetary intermediary between bankmoney and central-bank money, as is the case today with banks as payment intermediaries. Instead, central banks would be operators and warrantors of the payment systems in which all transactions are made in sovereign currency on account. The important thing is to have customer currency accounts separate from customer giro accounts and the banks' central-bank accounts.

Introducing currency accounts means the separation of a bank's own money from the money of the bank's customers. Non-segregation of a bank's own money and customer money is a core feature of the present bankmoney regime premised on fractional reserves. The split-circuit reserve system (split between the interbank reserve circuit and the public bankmoney circuit) would still exist, but customers would have the choice between bankmoney and central-bank money (= reserves = sovereign money = currency on account). Everyone could in fact maintain both types of account.

Offering currency accounts to customers could be optional, or made compulsory for the providers. As soon as such an offer exists, many customers will not hesitate to make use of it. Firms and people would decide which kind of account they prefer. Indirect transfers between currency accounts and bank giro accounts would be possible, in the same way as it is possible today to transfer an amount of money from a government central bank account to any bank giro account (by way of the recipient bank crediting the respective customer account), as it is possible, in the opposite direction, to transfer an amount of money from a bank giro account to a government central bank account (by way of the remitting bank deleting the bankmoney and transferring an equal amount of reserves to the government account).

Operating the two types of accounts in parallel and in mutual exchange would not pose a problem. For a bank, no disadvantage or advantage would arise (in contrast to helicopter money without having currency accounts available, as discussed below, whereby the banks are free riders of the arrangement). The reason for this is that payments within and between customer omnibus accounts are neutral for the banks, meaning that a bank will not have to use its own money, nor will that bank receive additional reserves.

In a payment from a currency account to a giro account, the recipient customer's bank will obtain the reserves, whereas the customer will receive a demand deposit (bankmoney) in the giro account. The reserves obtained in this way, however, are in fact not discretionary for the banks, but will largely be committed to payments in the reverse direction, when the giro customers of that bank make payments into currency accounts. On balance of all payments in and out, larger surpluses or deficits are unlikely; should they occur, they can be offset on the interbank money market.

In this way, e-krona or other concepts of sovereign currency on account could be the meaningful start of a gradual transition from the present bankmoney regime to a full-blown sovereign money system, depending on the market decision of money users regarding which type of account they would prefer to use. The more the use of currency accounts propagates, the bigger the shift in payment volumes from giro to currency accounts would be. As a result, the extremely low fraction to which banks refinance today would increase.

This would induce higher, though distributed, refinancing costs for the banking sector. The actual refinancing costs of banks can be expected to be about the same as if people made more payments in cash again, rather than using cashless transfer of bankmoney via giro accounts. Around the year 1900, banks in Europe had no problem with a cash-to-bankmoney ratio of about 60:40. Why should the banking industry have problems with a digital currency-to-bankmoney ratio coming closer again to 50:50? 

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Central bank accounts for everyone?         

An even simpler proposal than separate currency accounts is to call for an immediate individual central bank account for everyone, as put forth, for example, by Schemmann as well as Andresen.[26] Gocht, a former member of the Bundesbank board of governors, suggested something similar in 1975. He wanted to assign all regular payment functions to the postal giro office, to separate the payment functions from the credit and investment business of banks.[27]

The proposal sounds plausible, but most national giro offices no longer exist. They have been incorporated into the commercial banking industry, been successfully contained by the improved giro and payment systems of the banks, or suffered from an image problem, being seen as 'poor people's banking' because a considerable proportion of their customers were welfare clients. As a result, the crux of the matter today is that a central bank would have to make a huge effort to build up the respective infrastructure almost from scratch[28], while the banks would have to bear huge sunk costs and lay off employees.

Independently, one may ask whether mass management of accounts is a reasonable task for the national monetary authority. Some companies, concerned about the safety of their bankmoney at the height of the 2007/08 financial crisis, wanted to open a central bank account but were turned away, in a few cases even through court decisions. Central banks today act primarily as a 'bank of the banks', residually acting as a manager of government transaction accounts, while no longer conducting business with the public.

The role of 'bank of the banks' – particularly the function as anytime provider of liquidity, 'whatever it takes' – can be criticised from the angle of a central bank's mission as 'guardian of the currency'. As such, they should care about the money rather than take care of the banks. In the present system, however, money creation and bank credit are firmly wedded together and, in actual fact, it is the banks that take the lead in the creation of credit-borne money, so that central banks primarily take care of the banks and their bankmoney. 

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Mobile use of currency accounts

Sovereign money, in whichever form, can be equipped with today's transfer tools, for example credit cards, prepaid cards, e-cash cards, online banking, as well as payment functions implemented via mobile phones.

Activation of a money transfer, by making use of such a card or mobile-phone function, results in the transfer of money-on-account. Normally, today, this is from a bank giro account into another such account. The term 'cash' or 'e-cash' is thus misleading, because there is no money on the magnetic strip or chip of such cards or phones. Instead, the strip or chip stores the information about a respective amount (the account balance). The information has been downloaded from a bank giro account onto the device; thereafter, that individual giro account is debited and the amount transferred (credited) to a bank's e-cash omnibus account, from which the bankmoney is then transferred to a recipient when a customer 'pays' – or, more precisely, triggers a payment from a bank's e-cash omnibus account to an individual bank giro account – with a cash card or phone.

With sovereign currency accounts, in whichever form, the procedure would be analogous. The cards themselves would not carry 'digital cash' but represent a balance of currency on account, and using such cards would trigger a transfer from a currency account to some other account. 

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Sovereign digital currency and bankmoney coexisting side by side – not the last word on the subject

Many a supporter of CBDC imagines its introduction in parallel with bank­money as a smooth gradual process, as a more cautious and politically feasible approach in comparison with a full overnight transition to sovereign money, the latter often being seen as 'too radical'. In fact, however, 'monetary reform light' entails entails still unanswered questions and risks absent in a full overnight transition.   

Consider, for example, the expectation of better central-bank control over the stock of money, particularly more influence on the banks' bankmoney creation. Whether this will really come true depends on how the money is issued. The most prominent approaches by now – the CBDC model by Barrdear/Kumhof of the Bank of England and the e-krona project by the Swedish Riksbank – both provide sovereign money on account to the banks in the first instance, similar to solid cash.

The Swedish plan provides digital e-krona on customer demand in exchange for bankmoney, that is, when customers demand bankmoney to be transferred into a sovereign currency account. However, it is still the banks who in the first instance decide on the stock of money by preceding bankmoney creation through primary credit extension.

The CBDC plan provides digital currency by purchasing sovereign bonds. These are not purchased directly from the treasury. That would be straight monetary financing. Instead, the bonds are bought from banks, non-bank financial institutions and other financial investors – as is the case with purchases of bonds and other securities in connection with quantitative easing programmes. Here too, the process starts with the banks financing sovereign bonds, and thereafter, if need be, being re-financed by the central bank.

The CBDC plan is different from the e-krona plan, in that newly emitted sovereign bonds are paid for by the banks with bank reserves into a governments' central-bank transaction account. Those reserves, however, immediately flow back to the banks through government expenditure into bank giro accounts of the recipients. To the extent to which recipients of government expenditure would already have digital currency accounts, the money, though, would flow into these accounts. Nevertheless, control of the preceding primary money creation, or say, the gatekeeper function, still rests with the banks.

In any case, the banks would not fail to react to a shift from bankmoney to sovereign money. Expect banks to offer more than they do today, so as to avoid mass migration to high-powered safe currency accounts, or sovereign cryptocurrency, respectively. High enough deposit interest is likely to be the measure of choice, perhaps in combination with low, or even no, account fees. Already in the time of private banknotes these had to be interest-bearing in order to make them competitive with non-interest-bearing but safe silver coin. Today, similarly, sovereign digital currency would be the safe but non-interest-bearing alternative. Traditional cash, by contrast, is by now an alternative to only a small extent, for reasons of unwieldy handling, safekeeping, and incomplete acceptance despite its being legal tender.  

For the same reason (to avoid landslide account migration) and also to maintain parity of bankmoney and central-bank money, central banks and governments will find themselves constrained to continue with their backing and warranting of bankmoney. Monetary reformers call for putting an end to state guarantees for private bankmoney, so as to advance the transition to central-bank money in a side-by-side constellation.[29] Ending state guarantees for private bankmoney certainly has great importance, especially in terms of constitutional or governance aspects. Why, after all, must governments and central banks be so oblivious of their monetary prerogatives that they actively subsidise and guarantee private money, rather than ensuring said sovereign monetary prerogatives?

However, when there is no state guarantee for private bankmoney, a new Gresham situation might arise. Gresham's law, dating back at least to the 16th century, states that 'bad coins drive out good coins'; with bad coins  being those of reduced or dubious silver content. People wanted to spend the bad coins as soon as possible, while trying to keep for themselves the coins of good silver or gold content. Today, by analogy, people would preferably use second-order 'bad' bankmoney for making current payments, while high-powered 'good' sovereign central-bank money would be used for storing, or even hoarding, money.

Thus, if banks pay high-enough deposit interest, and if central banks continue to act as the anytime refinancers of the banks, and if governments continue to be the bankmoney warrantor of the highest instance, it remains unclear whether under normal conditions of business-as-usual a transition from bankmoney to sovereign digital currency would happen at all.

The safety of money is an issue of great concern in times of crisis, whereas under normal conditions it is the cost factor that tends to carry more weight. As a consequence, conventional instruments of monetary policy remain of little use, and the financial instability inherent to the bankmoney regime would continue to exist. As soon, however, as a sense of crisis and uncertainty comes up, one has yet to reckon with a flight from giro accounts to currency accounts, that is, a general bankrun, destabilising banking and finance. As banks in such a situation are for the most part not able to provide sufficient high-grade collateral, central banks – much as today – would again have to resort to various forms of Quantitative Easing and hands-free credit operations with the banking sector – once more saving the banks, rather than making sure that there is a safe stock of reliable sovereign money which needs not be saved in a crisis.   

The CBDC concept developed by Barrdear/Kumhof of the Bank of England sets an upper limit to CBDC of 30% of GDP. The bankrun issue might have been one reason for this. Another such measure would be to restrict the use of sovereign money-on-account to a specified maximum amount of a single transaction, as is the case today in many countries with regard to the use of cash. Without being explicit on this question, the Swedish Riksbank has stated that e-kronas are meant to be used in everyday transactions of rather limited amount.

Any such quota fixing, however, as soon as respective limits are being approached, threatens the 1:1 parity of bankmoney with central-bank money, and thus the emergence of a new Gresham situation. Bankmoney and central-bank digital currency would start circulating at variable rates (surcharge or discount, respectively), with central-bank digital currency circulating at a higher rate than bankmoney. The situation would not be entirely dissimilar from pre-modern coin economies, when coins of the same face value were circulating at different and varying purchasing power parity, which includes a level of transaction costs much higher than in a system of maintained parities.            

Against this background, the allegedly easier, less radical and politically more appealing approach to 'sovereign money reform light' turns out to be the more complicated option, associated with a number of problems and risks that would be excluded from the outset in a full overnight transition to sovereign money. The not-so-'light' option thus promises to be the easier and more stable one.  

Nevertheless, should a full transition from bankmoney to sovereign money not be in reach anytime soon, for whatever confounded reasons, the side-by-side introduction of sovereign digital currency is a meaningful option, in spite of the problems it entails. The problems and risks inherent to the present bankmoney regime clearly remain of a far greater scale.  

Sovereign digital currency – be it in the form of currency on account or cryptocurrency, with both in public circulation as a competitive alternative to bankmoney and private cryptocurrencies – would contribute to the modernisation of the money and banking system, and might even be a facilitator for significantly re-expanding the supply of central-bank money. This would then reduce the share of bankmoney, help preventing the expansion of some private cryptocurrencies as a general means of payment, and reinvigorate up to a point the effectiveness of conventional instruments of monetary quantity and base-rate policies. Such an outcome, however, is far from self-evident.

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Appendix I  –  Helicopter money / Quantitative Easing for people
Helicopter money is also known as Quantitative Easing for people (QE4P) and as monetary financing of government expenditure.[30] By and large, the different terms have the same meaning: direct central-bank funding of government expenditure. Helicopter money is often seen as a first step towards sovereign money reform. However, it does not serve this function, because helicopter money is not about introducing central-bank currency on account or cryptocurrency into public circulation. Instead, it might contribute to a permanent mix-up of monetary and fiscal responsibilities.

Technically, today's money system is no longer based on cash nor dominated by it, as was the case with Greenbacks – the U.S. Treasury notes – in the 19th century, when strongboxes were shipped across the country. At the time, helicopter money was a systemic alternative; today, no more. In today's basically cashless monetary and banking system, when the government spends reserves from its central-bank account, firms and people get a deposit entry (bankmoney), while the banking sector obtains and retains the reserves for free. The banks are thus free riders of the arrangement. The more extensive monetary financing is, the less the banks still have to refinance at a cost. If traditional solid coins and notes, which banks still have to refinance to 100%, are then replaced with still more bankmoney and 'e-cash' created by the banks themselves, all of the conventional monetary policy instruments will be ultimately pointless.

Helicopter money can be helpful to a degree as an economic stimulus when there is a pronounced lack of effective demand. But a first step towards monetary reform it is not, for it does not create a cashless public circuit based on central bank issued digital currency. Apart from this, the legal admissibility of helicopter money under EU law – Art. 123 (1) TFEU, specifically – is questionable, which represents an additional hurdle.

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Appendix II  –  Safe deposits by way of a voluntary 100% reserve

In the aftermath of the banking crises in 2008–12, a number of scholars, as well as bankers managing the accounts of companies or wealthy individuals who were scared about the safety of their deposits, produced the idea of backing up the deposits in bank giro accounts by way of a voluntary 100% reserve on such deposits.[31] This would certainly create safe deposits, but the idea is very unlikely to succeed and create a public circuit based on those reserves.

There are a number of reasons for this, starting with the fact that implementing a 100% reserve on deposits, in lieu of the existing 1% minimum reserve requirement, is costly for a single bank. A bank pioneering the idea would suffer a significant disadvantage in cost competition. Ultimately it would be the respective customers who would have to bear the additional costs. Most customers would not be prepared, or in the position, to accept that – which makes the idea appear to be another kind of safe haven for the rich only. Furthermore, in a mixed setting of 100%-reserve banks and fractional-reserve banks side by side, it would be nearly impossible to make sure that the reserves accompanying customer payments stay attached to the deposits, even more so under the present condition of non-segregation of customer money from a bank's own money.[32] In comparison with 100%-banking, the approach of CBDC as sovereign currency on account – eventually perhaps also sovereign cryptocurrency – is clearly preferable. 

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Ali, Robleh/Barrdear, John/Clews, Roger/Southgate, James. 2014a. Innovations in payment technologies and the emergence of digital currencies, Bank of England Quarterly Bulletin, 2014 Q3, 262–275.

Ali, Robleh/Barrdear, John/Clews, Roger/Southgate, James. 2014b. The economics of digital currencies, Bank of England Quarterly Bulletin, 2014 Q3, 276–286.

Andolfatto, David. 2015. Fedcoin: On the Desirability of a Government Cryptocurrency, Macromania, 3 Feb 2015.

Andresen, Trond. 2014.  The Central Bank with an expanded role in a purely electronic monetary system, Real World Economic Review, no. 68, 2014, 66–73. 

Baba, Naohiko/McCauley, Robert N./Ramaswamy, Srichander. 2009. US Dollar Money Market Funds and Non-US Banks, BIS Quarterly Review, March 2009 65–81.  

Barrdear, John/Kumhof, Michael. 2016. The macroeconomics of central bank issued digital currencies, Staff Working Paper No. 605, July 2016.

Bech, Morten / Garratt, Rodney. 2017. Central bank cryptocurrencies, Basel Bank for International Settlements, Quarterly Review, September 2017, 55–70.

BIS (Bank for International Settlements). 2015. CPMI report on digital currencies, Basel, 23 Nov 2015.

Broadbent, Ben. 2016. Central Banks and Digital Currencies, Bank of England, 2 March 2016.

Buiter, Willem H. 2009. Negative Nominal Interest Rates. Three ways to overcome the zero lower bound, NBER Working Papers, June 2009.

Danezis, George / Meiklejohn, Sarah. 2016. Centrally Banked Crypto­currencies, http:// ndss16currencies.pdf.

Deutsche Bank Research. 2017. Long-Term Asset Return Study, 18 Jul 2017.

Dyson, Ben/Hodgson, Graham. 2016. Digital Cash. Why Central Banks should start Issuing Electronic Money, London: Positive Money.

Eichengreen, Barry. 2017. Central bank-issued digital currency is the future, not cryptocurrency, CNBC The Fintech Effect, 30 Oct 2017.

Gocht, Rolf 1975: Kritische Betrachtungen zur nationalen und internationalen Geldordnung, Berlin: Duncker & Humblot.

Gudehus, Timm. 2015. Sicherheitskonten und Geldsicherungsbanken. Gleitender Übergang zu einer neuen Geldordnung, 

Higgins, Stan. 2015. Bank of England Economist Proposes National Digital Currency,, 18 Sep 2015.

Hilton, Adrian. 2004. Sterling money market funds, Bank of England, Quarterly Bulletin, Summer 2004, 176–182. 

Huber, Joseph. 2014. Monetary reform as incremental innovation, www.sovereign­, #ecash and #offbalance.

Huber, Joseph. 2017. Sovereign Money, London: Palgrave Macmillan.

Huber, Joseph. 2017b. Split-circuit reserve banking – functioning, dysfunctions and future perspectives, Real-World Economics Review, No. 80, June 2017, 63–84. 

Kumar, Aaron / Smith, Christie. 2017. Crypto-currencies – An introduction to not-so-funny moneys, Analytical Note Series AN2017/07, Nov 2017, Reserve Bank of New Zealand, Wellington.

Laeven, Luc / Valencia, Fabian. 2008. Systemic Banking Crises. A New Database, IMF Working Paper WP 08/224.

Mai, Heike. 2015. Money market funds, an economic perspective, db research, EU Monitor Global Financial Markets, February 26, 2015.

Mayer, Thomas. 2013a. Banish fractional reserve banking for real reform, Financial Times, 24 June 2013.

Mayer, Thomas. 2013b. A Copernican Turn in Banking Union Urgently Needed, CEPS Policy Brief, No. 297, July 2013.

Niepelt, Dirk. 2015. Reserves for everyone – towards a new monetary regime?, VOX Policy Portal, 21 Jan 2015,

Niepelt, Dirk. 2016. Elektronisches Notenbankgeld ja, Vollgeld nein, Neue Zürcher Zeitung, 16.6.16.

Reinhart, Carmen M. / Rogoff, Kenneth S. 2009. This Time is Different. Eight Centuries of Financial Folly, Princeton University Press.

Rogoff, Kenneth. 2014. Costs and benefits to phasing out paper currency, NBER working papers, May 2014.

Schemmann, Michael. 2012. Liquid Money – the Final Thing. Federal Reserve and Central Bank Accounts for Everyone, IICPA Publications.

Simonite, Tom. 2016. A Bitcoin-Style Currency for Central Banks, MIT Technology Review, 10 March 2016,

Striner, Richard. 2015. How America can spend its way back to greatness. A guide to monetary reform, Santa Barbara, CA: Praeger.  

Sveriges Riksbank. 20173. The Riksbank's e-krona project, Report 1, Stockholm, Sep 2017.

Tobin, James. 1987. The Case for Preserving Regulatory Distinctions, in: Restructuring the Financial System, Federal Reserve Bank of Kansas City, 1987, 167–183.

Turner, Adair. 2016. Between Debt and the Devil, Princeton University Press.

Wortmann, Edgar. 2017a. The virtual euro, Ons Geld Working Paper, Utrecht, https://

Wortmann, Edgar. 2017b. Deleveraging without a crunch, Ons Geld Working Paper, Utrecht, pdf.

Yamaguchi, Kaoru/Yamaguchi, Yokei. 2016. Peer-to-Peer Public Money System, Japan Futures Research Center, Working Paper No. 02-2016, Nov 2016.

Zitter, Leah. 2016. The Bank of England's RSCoin – an experiment for central banks or a Bitcoin alternative? Bitcoin Magazine, 28 March 2016, 

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[1] Wortmann 2017a+b, Dyson/Hodgson 2016, Yamaguchi/Yamaguchi 2016, Huber 2017 188–190, Huber 2014 #ecash.

[2] Striner 2015 47.

[3] A sovereign state's monetary prerogatives comprise the rights to (a) determine the currency of the realm (the official monetary unit of account), (b) issue the money denominated in that currency, and (c) benefit from the seigniorage thereof, that is, the gain from creating new money. (b) and (c) have by now largely been captured by the banking industry. 

[4] Proportions drawn from time series by Bank von England, Deutsche  Bundesbank, UK National Office of Statistics, U.S. Treasury, U.S. Federal Reserve und Swiss National Bank.

[5] ECB Press Release 21 Jan 2014, Decline in the  number of MFI continued.– The Economist, Special Report on Banking, 6 July 2017, 8. – ILSR Banking Blog vanishing-community- banks-national-crisis.

[6] These numbers are based on central bank statistics until 2007/08. Since then, the numbers have become inconclusive because they have been bloated by the crisis policies of Quantitative Easing.

[7] Buiter 2009, Rogoff 2014. Larry Summers at the IMF Economic Forum of 8 Nov 2013. Speech available in full at­

[8] Hilton 2004 176–182, Baba/McCauley/Ramaswamy 2009 65–81, Mai 2015.

[9] 20 Jan 2018. Continously updated figures, including market capitalization, available at https://

[10] Abigail Morris, CEO reveals why Ripple will take over from leading cryptocurrencies, Express, 6 Jan 2018. Available from 

[11] Deutsche Bank Research 2017 3, Laeven/Valencia 2008, Reinhart/Rogoff 2009.

[12] See Ali/Barrdear/Clews/Southgate 2014a+b, Higgins 2015, Danezis/Meiklejohn 2016, equally Broadbent 2016, Barrdear/Kumhof 2016.

[13] Fedwire is the interbank payment system of the U.S. Federal Reserve in which transactions are made in reserves. Andolfatto 2015.

[14] BIS 2015, Bech/Garratt 2017, Sveriges Riksbank 2017. Also cf. Kumar/Smith 2017. Peter Levring at Bloomberg, 11 Dec 2016, Uruguay launches digital currency pilot, Central Banking Newsdesk, 6 Nov 2017, https://www.

[15] A DL is often said to be a decentralised accountancy journal. 'Decentralised', however, is not quite right. Rather, a DL is about a continuously synchronised collective journal, of which every participant in the system has an identical copy, and where a number of confirmed entries are unalterably stored in a 'block', with successive blocks resulting in a chain of blocks.                           

[16] A case in point is Japan, possibly also India. Individual statements by members of the ECB-council hint in the same direction.

[17] A widespread misunderstanding of fractional reserve banking suggests there is a fractional transfer of reserves. This does not apply. The interbank transfer of reserves, or the interbank clearing of reserves, is of the same amount as the bankmoney transferred. The fractionality of reserves exists nevertheless. It results from the fact, that customers never obtain reserves (high-powered central bank money-on-account), but only a 'deposit' entry on account, while the banks keep the reserves for themselves so that the reserves can repeatedly be reused in subsequent transactions, incessantly going out to other banks and coming in from other banks, offsetting each other. Put differently, the interbank circulation of reserves is many times faster (much more frequent) than is the use of bankmoney by each customer (Cf. Huber 2017 57–88).

[18] Danezis/Meiklejohn 2016. Some airlines and railway companies, as well as today's telecom and tech giants, have comparable, or even bigger and faster, processing capacities.

[19] Simonite 2016, Zitter 2016, Danezis/Meiklejohn 2016.

[20] Barrdear/Kumhof 2016.

[21] Quantitative Easing = Monetisation of debt by purchases of sovereign bonds, partially also other securities, so as to provide fresh money to the previous bond holders. Monetisation = creating new money against purchase or deposit of securities, i.e. debt incurred by the originators of such securities. 

[22] Barrdear and Kumhof 2016 3–18.                       

[23] Early banknotes of the late 17th through to the early 19th century were interest-bearing. Those banknotes, however, were for the most part issued by private bankers who had to make sure their notes were accepted in lieu of silver coin, and circulated at par with the silver coin. Why, by contrast, 'high-powered' central bank money would need to be interest-bearing to stand the competition with crisis-prone bankmoney is difficult to ascertain.

[24] For example see Niepelt 2015, 2016, Dyson/Hodgson 2016, Eichengreen 2017.

[25] Sveriges Riksbank 2017.                                                                                                

[26] Schemmann 2012, Andresen 2014. 

[27] Gocht 1975 81.

[28] There are special cases, such as for example in New Zealand (NZ), where the central bank could use the still existing post office branches, as NZ Kiwibank does with NZ Post.

[29] Wortmann 2017a+b.

[30] See; Turner 2016 218.  

[31] Mayer 2013a+b, Gudehus 2015.

[32] On the shortcomings and cost disadvantage of 100% banking, cf. 100-per-cent-reserve-chicago-plan.  

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