Safe sovereign money accounts (digital currency accounts)
Monetary reformers have long been looking for a step-by-step approach to sovereign money, more precisely, an individual and bottom-up approach rather than introducing sovereign digital currency top-down. Of course, whether top-down or bottom-up, matters of money tend to involve some central law-making and regulation, and often things also depend on a central bank's goodwill.
First ideas about safe bank accounts in 2010–12 drew on the approaches of 100%-reserve banking of the 1930s. This involves a requirement for banks to hold a 100%-reserve in cash and central-bank excess balances on a respective customer deposit. However, banks willing to do that would put themselves at a considerable cost disadvantage. The reserves for making bankmoney safe would need to be 100% financed and available at any time, whereas all other banks need only a very small fractional reserve of 1.5–3% of their liabilities to customers. As a result, banks that offer safe accounts are likely to lose out to the competition, or else customer account fees would have to bear the higher costs. In consequence, 100% reserve-secured accounts were pondered, but not put into practice.
Another obvious idea was, and still is, to make central-bank accounts available to everyone. However, central banks are nowadays fixated on the idea of the two-tier money and banking system, putting themselves in the role of 'bank of the banks', while reducing their historical role as 'bank of the state' to running transaction accounts for the treasury and some other state bodies. Such transactions accounts no longer include credit and refinancing functions, since introduction of the euro not even minor ways and means advances. One is prompted to wonder who might have written the Lisbon Treaty Articles on money, banking and central banking.
For the rest, central banks are unwilling to act as 'bank of the nation', at least in the way they are still 'bank of the state', that is, offering simple transaction accounts and acting as a public payment service provider for anyone who would be interested in making use of such a service. In most countries today, even large corporations and very rich people are denied a central-bank account. In several cases this was even confirmed by court rulings. Of course, this need not be the last word in the mater…
When Positive Money and other NGOs and political parties launched the campaign for QE4P in 2015 (Quantitative Easing for the people, i.e. for the real economy, rather than just QE for finance) the idea of introducing sovereign money accounts attracted interest again (accounts with central-bank digital currency in them, i.e. the 'reserves' that are presently reserved for the privileged use by banks). Under present conditions, the banks would be free riders of QE4P like any scheme of monetary financing, because only banks can receive non-cash central-bank money (= reserves = digital currency). The banks would thus get the central-bank money for free, while firms and people would still have to put up with the bankmoney surrogate. Things can only change if and to the degree to which firms and people are given the option of running digital currency accounts (= sovereign money accounts).
Meanwhile, a growing number of central banks are investigating the possibilities of introducing central-bank digital currency (CBDC) into public use, most notably various CBDC models from Bank of England staff, the e-krona concept of the Swedish Riksbank, the Icelandic Rafkrona report and the e-peso experiment run in Uruguay [see menu Digital Currency on this website]. Among the motives behind them is to compensate for the dwindling cash base, the possibility to impose negative interest, with both aspects aiming to regain greater effectiveness of conventional monetary policy.
CBDC in fact offers individual access to safe & secure sovereign money for everyone, be it in the form of central-bank money-on-account or crypto tokens. This is certainly a step in the right direction, even though the question of money creation and control of the stock of money is not tackled. In other respects, too, the models discussed so far face a number of problems, partly real ones and partly just imagined, due to the co-existence of digital currency with still-existing bankmoney the creation of which would still precede and determine the entire stock of money.
In this situation, the question arises why individual banks and non-bank payment service providers (PSP) with a central-bank account and access to the central-bank payment system should not be given the possibility to offer safe accounts to their customers, for example in the form of fiduciary omnibus transaction accounts, as an additional or sub-account of those banks and other PSP with the central bank. The objection that central-bank payment systems would not have enough capacity for this appears to be questionable considering that offering such transaction accounts to the public would not include a higher number of payments to be carried out but just a somewhat higher number of central-bank accounts or sub-accounts.
Another question is whether EU laws on payment services and e-money allow for offering safe digital currency accounts to the non-bank public. As was to be expected, this is currently a highly controversial question. In Lithuania, however, the national parliament has decided Yes. According to Art. 25 of its law on e-money, customer money held in trust by e-money institutions can be safeguarded - among other, less convincing options - by holding it in an account with the Bank of Lithuania or another central bank within the Eurosystem.
In the Netherlands, the monetary reform NGO Ons Geld, following a recommendation by The Netherlands Scientific Council for Government Policy, has now developed an additional bottom-up option of public depositories. The concept includes public transaction accounts containing central-bank digital currency. The accounts can be managed by private payment service providers on behalf of firms and individuals. The concept is tailor-made to the legal conditions within the EU and the euro area but can certainly be readapted to other currency areas.
Want to know more? Read the Ons Geld position paper written by Edgar Wortmann:
Public depository: safe-haven and level playing field for book money.
As a supplement:
Questions & Answers on money and debt
Many new monies – wealth of options or transactional chaos?
Recent years have seen the emergence of a bewildering variety of concepts and offerings of new ways of making payments, often including new types of digital money, or digital currencies, respectively, such as narrow banks, safe accounts, public, depositories, money market fund shares, e-money of various types, virtual currencies, cryptocurrencies, including stablecoins; some of them fully or fractionally backed by reserves (central bank money), some by bank deposit money, some by sovereign bonds or other securities, some with no backing at all. New projects are now so frequent that it has become difficult to keep track of what is going on and what it might entail for the systemic structure of money and banking.
Here is a paper including a taxonomy of these new developments, prepared by
Simon Hess, board member of NGO Monetative:
100% E-Money and its Implications for Central Bank Digital Currency >
Central-Bank Accounts for Everyone
• In accordance with the concept of sovereign money accounts, Ben Dyson and Graham Hodgson (Positive Money, London) have detailed a plan for Digital Cash. Why Central Banks Should Start Issuing Electronic Money >
• In an article in the real-world economics review, no.68, 2014, Trond Andresen explained a concept of Electronic Sovereign Money Accounts (ESMA), a system of purely electronic payments that might help to make the transition from bankmoney to sovereign money >
• Dirk Niepelt, Study Center Gerzensee of the Swiss National Bank, has repeatedly argued in favour of sovereign money-on-account side by side with bankmoney > Reserves for everyone. Keep cash, let the public hold central bank reserves, VOX Policy Portal, 21 Jan 2015.
• The Economist also makes the case for offering central bank accounts to everyone, 26 May 2018, 70.
FED refuses cooperation for setting up digital currency accounts
The Narrow Bank with secure accounts denied by FED
James McAndrews, a former US Federal Reserve (FED) employee, has founded TNB Bank (TheNarrowBank). The idea behind it: All customer funds are deposited as a reserve directly with the FED. They are thus secured against bankruptcy and secondly, the interest on FED bank reserves (1,95%) is currently higher than market rates. This would give TNB bank and its customers comparatively high deposit rates despite the risk-free depositing of their money. The concept would indirectly allow for safe depositing of money in a style similar to "digital cash". Unfortunately, the banks business model is focusing on big financial institutions (making the playground even more uneven). However, the FED refuses to grant the TNB bank access to its payment system.
Some articles on the matter:
Bloomberg: "Fed Rejects Bank for Being Too Safe"
Cobden Centre: "Why the Fed Denied the Narrow Bank"
Safe deposits on the basis of a conventional
• Among those who have made the case for individual bank deposits backed-up by a 100% voluntary central-bank reserve is Thomas Mayer, Senior Fellow at the Center for Financial Studies, Frankfurt, and former chief economist of Deutsche Bank
> A Copernican Turn in Banking Union Urgently Needed, CEPS Policy Brief, No. 297, July 2013.
Also cf. > Banish fractional reserve banking for real reform, Financial Times, 24 June 2013,
re-published at Thomas Attwood Blog, 24 June 2013
> Banish fractional reserve banking for real reform.