A coming crypto storm for central banks? Focus on digital money intensifies

business-standard.com:

By Howard Schneider

NEW YORK (Reuters) - Digital money, a curiosity just a few years ago, is emerging as an intense concern among central banks with the potential to erode the power of monetary policy, and even in the best of worlds likely to make control of interest rates more difficult, according to new Federal Reserve and other research.

A New York Fed symposium this week laid out the puzzle central bankers face in dealing with emerging digital technologies that range from new ways to process payments to new asset categories like cryptocurrencies and stablecoins.

There are benefits seen in the underlying technology, including better transaction speed, lower cost, and easier accessibility to banking services, and even with recent crashes and volatility it is assumed it will keep advancing. Ignore it, in other words, and systems developed by upstart private companies could capture larger shares of finance and make "central bank cash" less relevant - diminishing central bank control over interest rates.

Create a substitute in the form of a central bank digital currency, and new instabilities could emerge - including the potential for a digital dollar or euro to replace conventional bank deposits and compete with money market funds and other key financial instruments. In a crisis, the process could mimic a bank run, leave the system starved for liquidity, and force the Fed, for example, to either ramp up lending to commercial banks or beef up its own holdings of Treasury bonds and similar securities to keep the system stable.

Banks losing deposits would have to compete for fresh ones and "depending on the intensity...the general level of short-term interest rates...could rise" as a result, concluded a Fed paper this