The Finance Brown Bag Seminar is held by the Institute for Finance, Banking and Insurance (WU Vienna) and the Vienna Graduate School of Finance (VGSF). It serves as a presentation platform for PhD students, faculty members, and visitors. An overview of BBS on the website of the Institute for Finance, Banking and Insurance.
David Skeie, University of Warwick
Digital Currency Runs
Digital currency created by the private sector, such as bitcoin, is designed to have a determined supply and enable payments with the premise of competing with and supplanting central bank fiat money and the banking system. Central banks are developing fiat central bank digital currency (CBDC) and banks are innovating in response. This paper shows that central bank monetary policy interest rates paid on bank reserves must be set dynamically and relative to interest rates (even if zero rates) paid on CBDC to prevent the disintermediation of banks, support optimal firm investment and risk sharing for consumers, and prevent digital currency runs into CBDC. Private digital currency may be preferred over fiat money in countries with high inflation, but using it outside of the banking system reduces investment and risk sharing. Banks can re-emerge by taking deposits and lending in private digital currency to increase investment and risk-sharing while avoiding fiat inflation, but these banks risk having runs into the private digital currency. Private digital currency is superior to traditional hard currencies, such as based on a gold standard, for investment, risk-sharing and financial stability.