Should Central Banks Issue Digital Currencies?

Let’s talk about our most fundamental product and its producers; “cash, and central banks.”
In a digital world, some central banks have already developed digital currencies, and changed their operations. What’s next?

Central bank’s “Operation Model” and Its Social Cost

Issuing currencies is central banks’ most traditional and fundamental business. For more than 300 years, they have been manufacturing banknotes, managing inventories, and developing new technologies. They began to conduct macroeconomic policy only in modern times (Yes, TOM > BGIE, as always.)

However, issuing currencies is costly, both for a central bank and for all of us. For example, Bank of Japan (BOJ) printed 3 billion sheets of new banknotes in FY2015, which costed US $500 million[1].

Also, central banks manage “supply chain” to distribute currencies. BOJ operates a huge automated warehouse (560,000 square feet in total floor space) in a suburb of Tokyo, where it processes banks’ orders, issue clean banknotes, verifies the authenticity of returned banknotes, and stores suitable banknotes for recirculation. It also has 32 branches all over the country, where those processes are conducted almost manually. In total, BOJ’s annual cost of manufacturing and distributing banknotes was US $800 million in FY2015, 43% of its total budget[2].

Moreover, it costs all of us a to use paper currencies. We need to safely store and carry banknotes to settle transactions by cash, and there is a risk of cash being stolen. In 2012, European Central Bank estimated that the social cost of cash payment was 0.49% of total GDP in European countries[3]. A similar research in Singapore estimated the cost was 0.52% of its GDP[4]. Essentially, we are losing money by using money!

Central Bank’s Actions in Digital World

Now, let’s talk about Fintech. As you might have heard, technological innovations, such as “block chain” and “distributed ledger technology (DLT),” have enabled the development of “bitcoin.” However, as an executive central banker recently said, “for any asset to be used and accepted as currency, it must have sufficient “trust” among a wide range of users. In this respect, “bitcoin” attempts to create a “chain of trust” from scratch, but this requires substantial costs.”[5]

Given the social cost of cash payment, and privately issued bitcoins’ challenge for “trust,” the argument for central bank’s digital currency seems natural. In fact, several central banks have already changed their operations, or started developing digital currencies in coordination with the private sector.

Operational change

Central bank of Denmark stopped internal printing of banknotes and minting of coins in 2016, and started outsourcing these functions to external service providers, given the decreasing demand for new banknotes and coins. By this operational change, it expects to yield total savings of US $12 million (kr. 100 million) until 2020.[6]


Development of digital currencies

In March 2016, National Bank of Nederland (DNB) published it would develop a prototype of digital currency, called “DNBcoin,” by applying blockchain and DLT.[7]

In October 2016, Central Bank of Russia published it had successfully developed a prototype block chain for transactions confirmation, called “Masterchain,” with leading financial market players.[8]

In June 2016, Bank of Canada published it was partnering Canadian banks, fintech entrepreneurs and other companies to test DLT.[9]

United Kingdom:
In June 2016, the Governor of Bank of England(BOE) stated  it would explore the use of DLT in BOE’s core activities, including the operation of real-time settlement system [10]. Also, in February 2016, after repeated discussion with BOE staffs, a London University economist published a paper, which suggested the introduction of BOE’s digital currency “RSCoin.”[11]

In January 2016, People’s Bank of China published it had a “mid-term” strategy of issuing its own digital currency, and would try to launch it as early as possible.[12]


Next Step and Political Implications

So far, most central banks have developed digital currencies only for internal test, and don’t have specific plans for putting them into circulation. For example, Bank of Canada explained that the only goal of its partnership with the private sector was to understand the mechanics, limits and possibilities of the technology.

Going forward, I propose more and more central banks should start specific experimentation of issuing digital currencies, rather than internal research, to figure out operational issues. I think this is a good direction because central banks’ digital currencies have a huge potential to reduce operational costs of the whole society.

At the same time, central banks, academics, and financial institutions should also discuss political implications of central banks’ digital currencies.

Potential questions include,

“Who should track all the transaction data to transfer digital currencies; central banks, commercial banks, or the third party?”

“Any impact on financial intermediary function of commercial banks if people have direct access to central banks’ digital currencies?”

“Any implication for monetary policy? For example, is it possible for a central bank to decrease the face amount of the digital currency and literally implement “negative interest rate”?”


Yes, it’s obviously a big challenge, but we should keep going.

(797 words)


[1] Bank of Japan,” Banknotes Orders in FY2015″ (only in Japanese), February 2016.

[2]Bank of Japan,”Financial Statements for the 131st Fiscal Year/Fiscal 2015″, May 2016.

[3]European Central Bank,”The social and private costs of retail payment instruments, a European perspective”, September 2016.

[4]KPMG, “Singapore Payments Roadmap: Enabling the future of payments,” August 2016.

[5]Hiroshi Nakaso, “FinTech – Its Impacts on Finance, Economies and Central Banking,” November 2016.

[6]Danmarks Nationalbank, “Danmarks Nationalbank adapts to falling demand for new banknotes and coins,” Press release, October 20, 2014.

[7]Berndsen, Ron, “If Blockchain is the answer, what is the question?” Speech at the Dutch Blockchain Conference, June 20, 2016.

[8] Bank of Russia, “Bank of Russia and market participants have developed Masterchain prototype and successfully made first test transactions,” Press release, October 5, 2016.

[9] Wilkins, Carolyn, “Fintech and the Financial Ecosystem: Evolution or Revolution?” Speech at Payments Canada, June 17, 2016.

[10] Carney, Mark, “Enabling the FinTech transformation: Revolution, Restoration, or Reformation?” Speech at the Lord Mayor’s Banquet for Bankers and Merchants of the City of London at the Mansion House, June 16, 2016.

[11] Danezis, George and Sarah Meiklejohn, “Centrally Banked Cryptocurrencies,” Proceedings of Network and Distributed System Security Symposium 2016, Internet Society.

[12] Fan, Yifei,”On Digital Currencies, Central Banks Should Lead,” Bloomberg View, September 1, 2016.



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Student comments on Should Central Banks Issue Digital Currencies?

  1. An issue that never crossed my mind, but a very important one. This is a topic that I have least confidence in predicting how it would change. Already now, it has been few months since I actually used paper notes or cash for any financial transactions – it has been all done via credit cards or online payment. With current technological advancement, I am much more in worry as to what it would be like in ten years on how people make payments – we might even not use credit cards and linked to our fingerprints. Putting imaginations aside very curious as to how central banks plan out future strategies to mitigate challenges related to currencies in the future.

  2. Thanks, Sotaro. Great post! Are there any other reasons central banks are making the push to back digital currencies? I’m sure there are benefits aside from the operational complexity of printing notes and managing circulation. On another notes, what I’m most curious and concerned about is the patchwork global regulatory environment – Canadian and Japanese may have different standards, which complicates both development efforts and cross-border transactions. Any insight here?

  3. This is fascinating. I agree with the statement above though, the fundamental issue is one of trust. The public has already had a scare in recent times with the financial crisis and the US narrowly avoiding default on its liabilities. Moreover, the US is conspicuously absent from the list of countries developing digital currencies. Is that a coincidence? I would suggest that the US is in no rush to cede their position of leading global currency – US dollars are used around the world and the infrastructure (let alone trust) doesn’t exist for a digital currency to reach as extensively. Could physical and digital currencies be in circulation at the same time?

  4. Sotaro, thanks for the post! How worried are you about privacy concerns here? I see all of the benefits of digital currency–but think that there are major benefits (as long as major downsides) to the ability to perform untracked and untraceable transactions. Do we feel comfortable with allowing the government to see all of our purchases?

    I’m also very very curious about the role of culture in these transformations. For example, I know Scandinavia has been extremely fast to adopt digital payments–but Germany, right next door and similar in many respects, is still a heavily cash-based economy. What causes these differences? And how will this impact the roll-out of digital currencies going forward?


    1. Great post and comments – thanks all! I find this topic incredibly interesting and have firsthand benefited from Sweden’s progressiveness towards building a cashless economy – I didn’t handle any Swedish Krona during my year living there. I agree that culture plays a huge role, especially regarding a country’s perception and stance on tax evasion. To your question, Shezaad, I think reduction in tax evasion is a huge benefit of going cashless and it also provides banks with a vast amount of spending data – I see both pros and cons to this. Personally, I’m a huge advocate for digital but I think there is a long way to go in both willingness and regulation.

  5. Great post Sotaro. After reading this, a few questions come to mind, “To what extent do municipalities present a channel for cybercrime to exist, and do they risk becoming pointless once they begin exploring the use of DLT?” I ask because networks such as Bitcoin are popular because they provide an alternative non-regulated market. If central governments aren’t able to regulate DLT networks then they will have trouble instituting their monetary policy. Also, networks like Bitcoin are notorious for having difficulties tracking criminal activity, if this issue is not resolved than the implementation of these networks will be a challenge for central banks. I’ve included an article below that reviews these issues.

  6. My main concern about a shift to digital currency is privacy. Consumers already share a lot of personal information with financial institutions through their use of credit cards and online banking transactions. I’d be interested to know how much more information would be collected with the introduction of a digital currency. This WSJ article indicates that in the US cash is still the most common method of payment: What do you think that governments would have to do to convince citizens that digital currency is reliable and secure?

  7. This is exceptionally interesting, Sotaro—could potentially change how we understand money for the rest of their lives.

    One question I have for you: how much money is de facto digital already? I assume a notable amount, and if so, what is to stop countries from ‘going digital’ rather than introducing a new, alternative digital currency?

    I suppose that the optimal way to address this question would be to look at the value of all notes and coins in circulation vs. the amount of total currency-related instruments (e.g., bonds and stocks). Given limited data availability without Bloomberg/Reuters access, I decided to take back-of-the-envelope data for the UK market.

    Total value of GBP notes and coins outstanding as of end-of-2015 was ~£74 billion (i). Of this amount, notes accounted for ~£64 billion (ii), so coins account for a mere ~£10 billion. Turn to the bond market—as of end-2015, the gilt market (UK Government bond market) was worth £1,427 billion (iii). This does not even consider the private-label bond market of the stock market. Could we not argue that by this measure, the sterling market is de facto digital already? Given this context, do you think that a more viable option may be to simply scale down physical currency usage over time?

    Thanks again, very interesting post!


    (i) Statista, “Banknotes in circulation in the United Kingdom 2014-2016, by denominations,”, accessed November 20, 2016.

    (ii) Statista, “Amounts outstanding of notes and coin in circulation in the UK 2015-2016,”, accessed November 20, 2016.

    (ii) UK Debt Management Office, “”, accessed November 20, 2016.

  8. Great post! I agree with you that digital currency will have a bright future to replace paper cash. The challenge as you mentioned in the post is the trust. Due to lack of regulation, Bitcoin attracts all kinds of fraud, ponzi schemes, and more. The central banks essentially need to work with start-ups to establish certain rules to develop the new technology and market.

  9. Extremely interesting article! I would be curious to see the extent to which digital currencies would compete with the main form of money in the economy. Some admirers of bitcoin see it as a means of bypassing central banks altogether. Conversely, others see the distributed ledger as an opportunity for the central bank to expand its role, via a “central bank digital currency” available to a much wider group of counterparties. Here is an interesting article I came across:

  10. The topic totally cought my attention. Very interesting insights! Thank you. Althouh I see financial benefits of not printing money, I am slightly scared by the perspective of full digitalization of central bank issued money. If central bank and government relations are not fully transparent and those institutions are not fully independent, that might couse a threat of government trying to influence the bank to cover for short term deficits.
    If you are interested in central banking problems, let me recommend you a very interesting book, showing a different perspective on the topic. Especially shocking to me was the fact that FED is a private institution:

  11. Bitcoin and other applications of the block chain are very interesting indeed. However, the technology is also very wasteful in terms CPU resources. As the chain itself gets longer and more transactions are added the computational power needed to add subsequent chains disproportionately increases. Also, the cost is essentially pushed from the government and to the distributed nodes of the block chain system – so there’s essentially a shift in cost from the government to private entities to pay for the currency system. If the core of the argument to use block chain tech is to save money I question whether or not that would be accomplished (at least with current technology). I do still think it’s worth investigating on the part of central banks though, because tech is constantly evolving. How do you think of the costs of powering servers to power this? Additionally how do you view the shift in paying for currency from the government to private entities?

  12. Sotaro, I really like the research that you’re citing on Norway and BOE’s forays into the space. There is a lot of new economic modeling this year (esp the 2016 BOE report) that suggests its just as costly not to explore DC issuance than it is to assume the risks. Curious on your take on these opportunity costs?

  13. Sotaro, excellent post! I’m wondering what implications might have the different technologies that the different central banks may use to develop digital currencies. So far the physyical element of currencies allows an easy exchange, in the case of digital currencies different techonologies might impose barriers for trading with the consequence of less developed and inefficient markets.

  14. Really interesting post, Sotaro, thanks!! Another interesting driver to interrupt cash currency: reduce organised crime. Peter Sands has done some fascinating research into this.

  15. One of the main implications of cashless economies is that tracking transactions is easy, making harder to operate in the grey economy. However, it is not clear for me whether digital currencies are feasible everywhere given that most countries still have high informality rates. Does digital currency, issued by central banks, reduce informality rates? Or low informality rates make the use of digital currency possible? If governments do not reduce informality rates, we will end up using printed money, cards, and digital currencies and creating a more complex system that do not tackle one of the main issues for developing countries, the informal sector.

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