Could central banks issue digital currencies, so bank crises only cost investors?

Posted by in Economics, Politics

Since the global financial crisis of 2007-08, most central banks have been evaluating the possibility of a government-issued digital currency. If this happened, say as a crisis response, the public could have bank accounts and be able to withdraw cash, avoiding the current risk of bank insolvency.

“A survey commissioned by the bank of central banks, the Bank of International Settlements, has disclosed that even though Central Bank Digital Currencies (CBDC) are being researched by a big number of reserve banks, the work is mostly conceptual. Consequently, only a handful of them have any intentions of issuing a CBDC in the near future.

Looking across all respondents for both types of CBDC, payments safety and domestic efficiency are the most important motivating factors to central banks”.  source:

“In part because cash is rapidly disappearing in their jurisdiction, some central banks are analysing a CBDC that could be made widely available to the general public and serve as an alternative safe, robust and convenient payment instrument. In circumstances where the traditional approach to the provision of central bank money – in physical form to the general public and in digital form to banks – was altered by the disappearance of cash, the provision of CBDC could bring substantial benefits”.  source:

Benefits and impacts (Wikipedia)

Digital fiat currency is currently being studied and tested by governments and central banks in order to realize the many positive implications it contributes to financial inclusion, economic growth, technology innovation and increased transaction efficiencies. Here is a list of potential advantages:

Safety of payments systems: A secure and standard interoperable digital payment instrument issued and governed by a Central Bank and used as the national digital payment instruments boosts confidence in privately controlled money systems and increases trust in the entire national payment system while also boosting competition in payment systems.

Protection of money as a public utility: digital currencies issued by central banks would provide a modern alternative to physical cash – whose abolition is currently being envisaged.

Preservation of seignioriage income: public digital currency issuance would avoid a predictable reduction of seignioriage income for governments in the event of a disparition of physical cash.

Financial inclusion: safe money accounts at the central banks could constitute a strong instrument of financial inclusion, allowing any legal resident or citizen to be provided with a free or low-cost basic bank account;

Technological efficiency: instead of relying on intermediaries such as banks and clearing houses, money transfers and payments could be made in real time, directly from the payer to the payee.

Banking competition: the provision of free bank accounts at the central bank offering complete safety of money deposits could strengthen competition between banks to attract bank deposits, for example by offering once again remunerated sight deposits.

Monetary policy transmission: the issuance of central bank base money through transfers to the public could constitute a new channel for monetary policy transmission (ie. “helicopter money”), which would allow more direct control of the money supply than indirect tools such as quantitative easing and interest rates, and possibly lead the way towards a full reserve banking system.

Financial safety: CBDC would limit the practice of fractional reserve banking and potentially render deposit guarantee schemes less needed.


A general concern is that the introduction of a CBDC would precipitate potential bank runs[30][31] and thus make banks’ funding position weaker. However, the Central Bank of England found that if the introduction of CBDC follows a set of core principles the risk of a system-wide run from bank deposits to CBDC is addressed”. source:

International Monetary Fund’s staff discussion notes

“Digitalization is reshaping economic activity, shrinking the role of cash, and spurring new digital forms of money. Central banks have been pondering wheter and how to adapt. One possibility is central bank digital currency (CBDC)– a widely accessible digital form of fiat money that could be legal tender. This discussion note proposes a conceptual framework to assess the case for CBDC adoption from the perspective of users and central banks. It discusses possible CBDC designs, and explores potential benefits and costs, with a focus on the impact on monetary policy, financial stability, and integrity. This note also surveys research and pilot studies on CBDC by central banks around the world”. full paper available here:

Bank of England’s discussion papers:

A surprisingly balance overview on the American Express website:

No protection in New Zealand

“In most countries around the world (and all advanced countries except New Zealand), small depositors are protected when a bank fails. That is because most countries have what is called deposit insurance – a scheme under which depositors are fully insulated from loss and guaranteed prompt access to their funds up to a specified amount if their bank fails.

New Zealand is the only advanced OECD country without deposit insurance. If a bank fails in New Zealand, there is no protection available for small depositors.  Even worse, if the Reserve Bank got its way, it would impose losses on depositors through a ‘haircut’ to your deposits to absorb losses that the bank has sustained.  Under the Reserve Bank’s approach, depositors are deliberately forced to absorb losses (after shareholders have first lost everything). In every other advanced country, small depositors are protected from losses through deposit insurance.”  source:

Why does financial stability matter?

The answer is that bank crises are frequent and bank crises hurt. Since the mid-1970s there have been over 140 banking crises2around the world. And they have had large costs for the affected economies and societies.

On average a bank crisis costs a country 23% of its GDP, while public debt increases by around 12 percent.3 The amounts are higher for advanced economies. And as a rule, the deeper the banking system, the larger the disruption and the higher the costs. Recessions associated with financial crises are deeper than recessions that are not.

The consequences in terms of employment are also severe. In addition there can be broad welfare consequences in terms of declining physical and mental health, regardless of whether an individual is directly affected by job, income or housing loss. The impact of a crisis on the wider economy is also long lasting. Recovery can take a decade or more and is halting in nature.”  source:

NZ Reserve Bank: The pros and cons of issuing a digial currency

“We find the pros and cons of a central bank issuing a digital currency are mixed across each of the central bank functions, revealing the complexity in evaluating such a currency. In particular, we find the implications for monetary policy and financial stability could be significant, both positively and negatively”.  source:

The paper above is saying a digital currency could undermine the banking sector – but then, bank crises are tough on us, so if we live through another one its time for banks to risk only the money of their investors and governments to manage cash deposits.