The Biden administration is nominating law professor Saule Omarova to head the Office of the Comptroller of the Currency (OCC). Omarova recently wrote a paper that outlines a series of structural reforms that would radically redefine the role of a central bank as the ultimate public platform for generating, modulating, and allocating financial resources in the economy. Beginning with the liability side of the central bank balance sheet (the “People’s Ledger”) she advocates the issuance of retail central bank digital currency (CBDC) and concurrent migration of all transaction deposit accounts from private banks to the central bank. On the asset side, she advocates a comprehensive qualitative restructuring of the central bank’s investment portfolio, which would maximize its capacity to channel credit to productive uses in the nation’s economy. She shows how the proposed reforms would make the financial system less complex, more stable, and more efficient. [Read more]
Here is a great series of tweets by the World Economic Forum’s Ashley Lannquist reminding us that blockchains and crypto-assets entail higher total costs of transaction validation than centralized systems. Decentralization has costs. The actual tweets are unrolled below, but make sure to go to the source for the comments.
- Second-layer solutions (e.g., the lightning network) reduce transaction validation costs but at the expense of technical resilience (certain nodes need to remain online), locked-up capital, and decentralization. Certain trade-offs are unavoidable. See page 20 of “beyond the doomsday economics of “proof-of-work” in cryptocurrencies“.
- Permissioned blockchains similarly greatly improve scalability and transaction costs, but at the expense of requiring greater trust and technical resilience among a much smaller set of nodes (again, the solution becomes higher centralization).
- Of course, in some cases greater decentralization can be worthwhile (e.g. situations with risk of corruption or hardware failure). This can be where blockchain shines! But the trade-offs involved must be clearly understood and evaluated.
- In brief, in blockchain, the ability to assume low trustworthiness among validators leads to higher security costs. For proof-of-work (PoW) this is computation, for proof-of-stake (PoS) it’s locked-up capital. Federated consensus algorithms enable lower costs and higher throughput by depending on some trustworthy nodes.
- Reducing the cost of locked-up capital in proof-of-stake (e.g., through services where your stake generates yield) is nice for validators, but it reduces the cost for them of behaving dishonestly, weakening security incentives.
Ashley also provided the following essential readings:
- “The Economic Limits of Bitcoin and the Blockchain“
- “Some Simple Economics of the Blockchain“
- “More (or Less) Economic Limits of the Blockchain“
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Tomorrow (October 4) I’ll be setting the stage for the three-day CBDC Conference, providing my views on what is and isn’t retail CBDC. On the 6th I’ll be leading a panel that will discuss some of the “live’ retail CBDC projects. You can register for this and the full three-day (October 4-6) event here: email@example.com