CBDCs and international currency competition
In this paper, Cong and Mayer develop a dynamic model of global currency competition entailing national fiat currencies, cryptocurrencies (stablecoins included), and Central Bank Digital Currencies (CBDCs). The strength of a country’s economic fundamentals and the strength of its currency are mutually reinforcing, leading to global currency dominance by the strongest countries. According to their model:
- Countries with strong but non-dominant currencies (e.g., China) tend to have the strongest incentives to launch CBDC first so as to attain a technological and cumulative first-mover advantage;
- Countries with dominant currencies (e.g., the U.S.) are motivated to launch CBDC early on both to nip cryptocurrency growth in the bud and later to counteract a competitor’s CBDC;
- Countries with the weakest or without a sovereign currency may opt for cryptocurrencies or stablecoins pegged to a basket of currencies or a consumption index to avoid digital dollarization;
- Regulatory reserve requirements on stablecoins pegged to a fiat currency can mitigate the adverse effects of cryptocurrencies on that currency.
The Coming Battle of Digital Currencies
Authors: Lin William Cong, Simon Mayer
From: Cornell University, University of Chicago
First findings from Project Hamilton
In August 2020, the Boston Fed and MIT launched a collaboration project by the name Project Hamilton in order to examine a hypothetical CBDC. They have just completed phase 1 of the project which has revealed several key learnings on the potential design of a CBDC:
- They developed two complete sets of computing source code, or “codebases,” for the software systems. One codebase was capable of handling 1.7 million transactions per second, with 99 percent of those transactions finishing in less than a second — well above the basic benchmark of 100,000 transactions per second they sought to achieve.
- CBDC design choices are more granular than commonly assumed. Currently, CBDC designs are categorized as direct, two-tier, or hybrid models, with “token” or “account” access models. They found these limited categorizations lacking and insufficient to surface the complexity of choices in access, intermediation, institutional roles, and data retention in CBDC design.
- The distributed ledger, a feature of blockchain technology, creates performance bottlenecks, and requires the central transaction processor to maintain transaction history, which one of their designs does not, resulting in significantly improved transaction throughput scalability properties.
Project Hamilton Phase 1 Executive Summary
By: Federal Reserve Bank of Boston and Massachusetts Institute of Technology Digital Currency Initiative
The latest on the digital euro
The study identifies the fundamental rationale for a possible issuance of a digital euro: to preserve the role of public money in a digital economy. It outlines the policy options, trade-offs as well as design issues that its creation would raise.
The digital euro: policy implications and perspectives
Authors: Markus Brunnermeier, Jean-Pierre Landau
From: Princeton University, Sciences Po
