Deutsche Bank: "Fedcoin: how banks can survive"

[Denker]

https://twitter.com/deutschebank/status/657165834079612928

https://dbresearch.com/PROD/DBR_INTERNET_EN-PROD/PROD0000000000368569.pdf

This was so predictable what they might do!
I can't believe they really think that this is the solution to prevent their downfall.


Here are the highlights of the pdf(copy & pasted from reddit)

    Would you extend an unsecured loan to a firm with 20 times leverage that pays no interest and charges an administration fee for the privilege? No? Well, if you are anything like the average Briton, for example, you have happily deposited £3,000 with your bank on those conditions.

    Why would anyone do that? For one, it is hard to go about life in developed countries legally without a current account. Officially, 97 per cent of British households have at least one current account and the rest are probably a statistical error. Those accounts function as safe stores of liquidity for savers, guaranteed by the Bank of England. But if that is the simple answer surely it would be easier for everyone to have a current account with their central bank.

    The reason the Bank of England does not accept deposits is that administering 80m personal current accounts, settling 100m daily direct debit payments and maintaining 70,000 cash machines is cumbersome. Far easier to leave that to commercial banks and provide them with a central clearing and settlement platform. Banks are happy to step in, and not just to charge fees for deposits and payments.

    Their main incentive is creating electronic money in vast multiples of the central bank base money. Therefore, in the UK so-called M4 money exceeds that issued by the Bank of England by 30 times. As economics students learn early on, the resulting excess of deposits over reserves is the essence of fractional reserve banking. The combination of deposit-taking and credit- creation functions means even a simple bank, therefore, is operating two fundamentally different businesses. While those functions are interlinked today, it is what James Tobin termed, “essentially an accident of history.”

    Yet that accident ensures banks have long enjoyed great liberties in determining the broad money supply. Even today, central banks can expand reserves by purchasing financial assets through quantitative easing, but unless commercial banks create assets by making new loans the broad money supply does not expand even as the monetary base grows.

    As a result, this arrangement is being questioned in the post-crisis world. Central banks have despaired with deleveraging banks’ struggle to meet what little credit demand there has been. Yet central banks’ hands are tied by the “accident of history” described above. They cannot, for instance, raise broad money supply at will by crediting the reserve accounts of those who would immediately contribute to aggregate demand, a potentially useful tool against high unemployment and low inflation.

    Enter digital blockchain technology, which has the potential to remedy many of the limitations of the present system. Blockchains promise payment systems that no longer rely on a handful of agents keeping track of who owes what and who owes whom. Before the blockchain, payment systems were regulated by trusted third parties, like a bank, that time-stamped transactions. By contrast, digital currencies such as Bitcoin are based on decentralised ‘ledgers’ that record transactions in a particular order without the use of any trusted third party. The ledger is constructed and jointly administered by all members of the network. The legitimacy of the transaction is verified by network members devoting their computer processing power to check that the currency unit in question can be traced from the sender’s account all the way down its chain to the first creation of the unit.

    This makes it possible for central banks to issue digital money without relying on commercial banks within a fractional reserve banking system. By maintaining accounts directly with the public, central banks can effectively separate the deposit-taking function from the credit-creation function currently embedded in commercial banks. In doing so they may, by other means, achieve what the ‘Chicago Plan’ for full reserve banking attempted in 1934.

    Ironically, this will be anathema to Bitcoin users, the biggest proponents of blockchain technology, who envision it as an alternative to state-sponsored money. However, that radical monetary philosophy has unnecessarily marred the implementation of a revolutionary technology. For without the backing of the state, Bitcoin remains unanchored. Since citizens ultimately need to pay taxes in their home currency, receiving salaries in Bitcoin is a huge risk given the Bitcoin exchange rates fluctuate wildly.

    For digital money to hold its value, central banks need to guarantee convertibility. This is the idea behind the so-called Fedcoin [1] where a central bank issues and controls the blockchain and renders Fedcoin legal tender at parity with, say, conventional dollars. If the Fedcoin’s value drops below the dollar, arbitrageurs would swap it for dollars at the discount window, whereupon digital units would be deleted from the ledger until parity was effectively restored. The central bank is uniquely capable of doing this; any other private actor would be vulnerable to a run if they offered convertibility between conventional dollars and a digital currency.

    For consumers, holding and exchanging money via Fedcoin would incur lower transaction costs than, say, through bank accounts or credit cards. Equally important, the value of Fedcoin would be even more explicitly guaranteed by the central bank than commercial bank deposits. Soon enough, digital cash underwritten by the central bank would replace electronic money generated by the banking system.

    Meanwhile, for policymakers, such a payment mechanism eliminates the potential systemic risk posed by commercial bank failures. Moving from a daily clearing and settlement system to one in which each transaction is settled immediately reduces counterparty risk. Broad money supply could then be controlled absolutely without technical impediments. And digital cash would finally make the zero lower bound on policy rates redundant for inflation- targeting central banks, as the blockchain’s underlying algorithm could be adjusted to reduce the value of Fedcoin over time.

   If the Fedcoin took off, it would appear to be the death knell for credit card providers and deposit-taking institutions. Banks would have two options to avoid economic obsolescence. The first would be to transition toward a pure investment banking strategy, financed entirely via equity and long-term debt raised from savers aware of the risk they were taking. Indeed, this is the model favoured by neo-classical economists harking back to the ideas of Irving Fisher.

    A second option would be to attract Fedcoin deposits by providing services such as verification for know-your-customer and anti-money-laundering rules or secure digital wallets or even just the most user-friendly apps. Banks could compete for Fedcoin deposits by issuing their own blockchains, at par with Fedcoin. Deutsche Bank, for example, could issue dbCoin, which customers use to settle transactions with any counterparty, much like a digital chequebook. Banks would guarantee convertibility of their digital currencies into Fedcoin, and central banks offer clearing and settlement facilities.

    This brings us full circle back to today’s system, but with a couple of important exceptions. For starters, the difference between the monetary base and bank-created, branded money would be considerably clearer. More important, perhaps, the technological obsolescence of deposit-taking institutions engenders greater economic competitiveness. The banking sector would no longer be rewarded for processing payments or managing current accounts. It would have to compete for deposits by offering better services and ultimately greater responsibility for the money it creates.

    Fedcoin remains a thought experiment. The humbling conclusion for banks is that neither customers nor central banks necessarily have to depend on their oldest services much longer. Although hard to imagine in the current low-interest rate environment, technological change may structurally raise banks’ funding costs. If banks are to compete with the emerging fintech and shadow-banking industries for household savings, they will need to offer far more than in the past.

    [1] The idea of a government cryptocurrency has been discussed by others including David Andolfatto, a researcher at the Federal Reserve of St Louis.

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[LiteCoinGuy]

[RustyNomad]

This will solve the problems brought about by fractional reserve banking but it will not solve all the problem we have today.

The value of the FedCoin will still be in the hands of the central bank and they can push this down as and when they want which will still have a direct impact on your wealth. Most of the problems we have today are as a direct result of central banks determining the value of currencies instead of the free market. Yes the value is determined to some extend on a free market basis but the manipulations by central banks have a great influence on this 'free market' value.

The solution will be a currency where the value of such cannot be influenced and or determined by just a single nation. Like bitcoin. No one central bank can set the value for bitcoin, yes they can influence it but at a cost directly to them so not as easy as it currently is to influence their own currency. A currency whose value is determined by the true free market is what will resolve most of the problems we have today.

The only way to be able to compete economically with other nations will be through the implementation of sound economic policies and not through economic manipulation as it is currently being done by almost all central banks.

[ebliever]

And why should people given a choice between bitcoin and fedcoin choose the latter? (Besides simple coercion in one form or another.)

[mezzomix]

If they are not idiots, they choose the coin that give them maximum control. 

[Amph]

always the same thing, the true strength of bitcoin is only one, decentralization, as long as their system is centralized, it will be just another "fiat coin"

i can't believe they can't grasp this aspect, or they actually can but they can't do nothing to really pose a threat to bitcoin

but i still like deutesche bank, because they offer zero fees on everything

[Kprawn]

The only advantage they have is that they have bought the governments and they have the power to decide what will be allowed... Fedcoin or Bitcoin. The arrogance in that

statement, leaves a nasty taste in my mouth. It's not enough that they effectively are stealing the technology... they are also saying.. We will stay in control of your money, and

you have no control over the governments, but we do. 

[Mickeyb]

If they are not idiots, they choose the coin that give them maximum control. 

And of course this will be their Fedcoin. At least until all of their financial nonsense that they have created doesn't fall apart in the future. And this will happen!

But you can't blame control freaks for not wanting to cease their control.

[Denker]

If they are not idiots, they choose the coin that give them maximum control. 

And of course this will be their Fedcoin. At least until all of their financial nonsense that they have created doesn't fall apart in the future. And this will happen!

But you can't blame control freaks for not wanting to cease their control.

Of course not. I mean who is willing to freely hand over power and control?!

[mezzomix]

If they are not idiots, they choose the coin that give them maximum control. 

And of course this will be their Fedcoin. At least until all of their financial nonsense that they have created doesn't fall apart in the future. And this will happen!

For them the right choice will be fedcoin. For me and most of the other people the right choice is bitcoin.

[Mickeyb]

If they are not idiots, they choose the coin that give them maximum control. 

And of course this will be their Fedcoin. At least until all of their financial nonsense that they have created doesn't fall apart in the future. And this will happen!

For them the right choice will be fedcoin. For me and most of the other people the right choice is bitcoin.

I don't expect that we will have majority of people on board with us. Believe it or not, there a still many blind followers out there that believe the banks and governments. They will change their mind though just when they get burned, like the people got burned during the last crisis in 2008/2009, like people of Cyprus got burned and also Greek people, etc.

[maokoto]

They do understand, but want to get advantage on people who do not truly understand. At least thats what it seems to me.

[eyeknock]

If they are not idiots, they choose the coin that give them maximum control.  

And of course this will be their Fedcoin. At least until all of their financial nonsense that they have created doesn't fall apart in the future. And this will happen!

For them the right choice will be fedcoin. For me and most of the other people the right choice is bitcoin.

well you know, they will do everything needed to try to take the control, thats why they are thinking on fedcoin, the good part about it is that people will not forget that there is another one solution called bitcoin, they simply  cant do that.

in the end people will notice that bitcoin > everything, so, let them continue with his stupid dream...

[designerusa]

Control fetish of authorities never ends. If you can control virtual money it would lose real meaning of this cryptocurrency system. I know Blockchain technology is great but what is really great is this system has no real controller over it.

[mezzomix]

If they are not idiots, they choose the coin that give them maximum control. 

And of course this will be their Fedcoin. At least until all of their financial nonsense that they have created doesn't fall apart in the future. And this will happen!

For them the right choice will be fedcoin. For me and most of the other people the right choice is bitcoin.

I don't expect that we will have majority of people on board with us. Believe it or not, there a still many blind followers out there that believe the banks and governments. They will change their mind though just when they get burned, like the people got burned during the last crisis in 2008/2009, like people of Cyprus got burned and also Greek people, etc.

Most people get burned every day a little bit - it's called inflation. Following people that work against your personal interests is not a sign of sanity!

[Meuh6879]

If they are not idiots, they choose the coin that give them maximum control.  

OK ... what the different between the actual supply of money ... and ... a private blockchain with proprietary miners and unlimited supply ?

nothing.

they cut the jobs, it's all.
computer centralisation to increase marge and profit without any new service to the customer.

[Pab]

Looks like Fed and banking industry is in panic

[Meuh6879]

true, true ...

https://www.youtube.com/watch?v=lEQU-SluquQ

[johnyj]

The fundamental problem with those fiat coin or fed coin: It does not cost anything to create those coins, just numbers typed in a computer, so they should worth nothing when used in exchange

A common misconception is that fiat money is backed by state, it is not, it is only backed by domestic users' acceptance, similar to bitcoin: Bring your domestic currency to another country then immediately only exchange can back its value, without exchange it will worth nothing