The early history of “Central Bank Digital Currency”

In the world outside Facebook, the lasting legacy of Libra will probably be a central bank digital currency (CBDC) — electronic cash, issued directly by the central bank — finally being pushed out into the world.

A central bank’s job is to keep their economy stable and working. So they do a lot of blue-sky thinking, so they aren’t caught on the hop.

Bank research departments routinely come up with wild schemes to rebuild the financial system, but upside-down and inside-out — just in case the plans are needed. And that means lots of speculative papers!

Central banks had talked about the idea of CBDCs for years — but with the Libra announcement, the economic astronauts went “this is our moment!” and dusted off their suddenly-popular old musings.

But where did the idea of central bank digital currencies come from?

2013: Fedcoin

As is usual with quite a few ideas connecting crypto to the real world, the idea of a blockchain-based central bank currency seems to have come from JP Koning.

Koning’s 14 April 2013 post “Why the Fed is more likely to adopt bitcoin technology than kill it off” suggests the US Federal Reserve Bank could take Fedwire, the Fed’s real-time gross settlement system, and put it on a blockchain for resilience: [Blog post, 2013]

An alternative (and perhaps cheaper) way to build a resilient payments system would be for the Federal Reserve to adopt a bitcoin-style distributed ledger. The Fed’s ledger would no longer be stored at EROC. Rather, all member banks would hold a copy.

… What would be accomplished is a decentralization of the information contained in the Fed’s ledger. The ledger would be everywhere rather than at one spot. Transfers of ledger space would no longer be patched through the central processor at EROC but would be handled by a distributed network of cooperating nodes. Whereas the current hub and spoke system has two levels of redundancy, Richmond and Dallas, a distributed system has no central hub and therefore much more layers of redundancy. It would be very difficult to destroy it.

This is the earliest outline I can find of a blockchain-based central bank digital currency. (If you know of an earlier one, please comment!)

In his 21 July 2014 post “Will Bitcoins Ever Become Money? A Path to Decentralized Central Banking”, economics blogger Sina Motamedi proposed a reserve-backed stablecoin issued by a central bank — independently, I think, of Koning’s 2013 idea. [blog post, 2014]

Inspired by Motamedi, Koning fleshed out the concept in his 19 October 2014 post “Fedcoin”: [blog post, 2014]

Setting up the apparatus would be very simple. The Fed would create a new blockchain called Fedcoin. Or it might create a Ripple style ledger by the same name. It doesn’t matter which. There would be an important difference between Fedcoin and more traditional cryptoledgers. One user—the Fed—would get special authority to create and destroy ledger entries, or Fedcoin.

Koning doesn’t propose narrow money, as a lot of later CBDC proponents have hoped for:

As for the supply of Fedcoin, it would effectively be left free to vary endogenously, much like how the Fed currently let’s the market determine the supply of Fed paper money.

… Symmetrically, unwanted Fedcoin would reflux to the central bank in return for either newly-created cash (in the case of the public) or reserves (in the case of banks), upon which the Fed would erase those coins from the ledger. The upshot is that the Fed would have no control over the quantity of Fedcoin—it would only passively create new coin according to the demands of the public.

This would also be a consumer payment system — right there on your phone:

The public would enjoy all the benefits of bitcoin including fast transaction speeds, cheap transaction costs, and the ability to transact almost anywhere and with almost anyone as long as all parties to a transaction had a smartphone and the right software.

Koning proposes one feature that bankers were very interested by in 2014:

So by implementing something like Fedcoin, the Fed could safely implement a negative interest rate monetary policy.

Koning notes an obvious side-effect of CBDCs — the destruction of private bank deposits, and a massive shift of power in the banking system. He suggests letting the commercial banks do their own competing dollarcoins.

“Central bank digital currency”

So we have the concept of a CBDC by 2013, and fully detailed by 2014. Bankers started talking about the idea — a bit fumblingly, as they didn’t really understand Bitcoin, but tried to make sense of a central bank crypto-token using Bitcoin as their model.

David Andolfatto of the St Louis Fed gave a talk about Koning’s Fedcoin at the 2015 International Workshop on P2P Financial Systems (29 January 2015), and blogged about it on 3 February 2015: “Fedcoin: On the Desirability of a Government Cryptocurrency.” [Ecurex, PDF, archive; blog post, 2015]

Andolfatto just called this “Fedcoin” — though one of his commenters used the phrase “central bank e money”.

Andolfatto’s post got some attention. Richard Gendal Brown of distributed ledger company R3 blogged about Fedcoin and similar ideas on 5 March 2015: “A Central Bank ‘cryptocurrency’? An interesting idea, but maybe not for the reason we think”. [blog post]

Brown’s post is actually about the possibilities of Fedcoins with smart contracts. But it caught my eye for these two sentences:

But there’s a small issue: this intellectual exercise is fascinating but is a central bank digital currency actually needed?

… And this is where I think a central bank digital currency could make sense on a distributed ledger. It would clear away all that complexity.

These are the first usages I can find of the precise phrase “central bank digital currency”.

From late March 2015, I find papers from central banks talking at length about the concept — and using the phrase “central bank digital currency” or “currencies” for it. Even if a lot of them still weren’t quite sure what a bitcoin was. This usage was only after Brown’s post.

I could be wrong — and if anyone knows an earlier coinage of the phrase, please do comment. But as it stands, Richard Gendal Brown looks like the winner. Even as it seems to have surprised him: [Twitter]



Update: The term “central bank digital currency” was being used by banks through 2015, after Brown’s post — but Tim Swanson points out the first use of the acronym “CBDC”: the 2 March 2016 speech “Central banks and digital currencies” by Ben Broadbent, deputy governor of the Bank of England. [Bank of England, 2016, PDF]

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