VoxEU Column Financial Regulation and Banking Monetary Policy

Central bank digital currencies, community currencies, and the reinvention of money

Some countries have issued their own central bank digital currencies, and many European economists favour such a currency too. This column shows that when properly designed, central bank digital currencies can help stabilise the financial and monetary system. Furthermore, a complementary currency backed by a central bank digital currency can not only compensate for the demise of commercial bank money, but it can also democratise money creation. The authors also show that complementary currencies can have higher multiplier effects on local expenditure, allow central banks to control circulation velocity, and help countries in currency crises.

China has banned private cryptocurrencies (Olcott 2021) and launched its own central bank digital currency (CBDC). We now have a race between countries to issue their own CBDC. 

In the UK, the House of Lords committee has concluded there is no convincing case for the creation of a CBDC (Mozée 2022) and that it could cause bank runs. According to the Centre for Macroeconomics, however, 84% of the European economists surveyed favour a CBDC (Crumpton and Ilzetki 2021), and so do we.   We are economists specialising in the management and study of electronic community or ‘complementary’ currencies on a regional scale in Spain, Switzerland, and Germany. Our experience shows that CBDCs, properly designed, can help stabilise our financial and monetary system.

But first, what is likely from the introduction of CBDCs? It could just mean that central bank accounts would be available to everyone, not just to banks. Most people would probably opt to move their money from their checking account to a central bank deposit, since the latter is safer. This could cause bank runs, which worries the House of Lords. But runs can be avoided if there is a gradual transition to the amount of CBDC each citizen is permitted. Establishing such limits is only possible if the CBDC is not a private cryptocurrency but rather a central bank deposit.

Making central bank deposits available to all citizens is a simple change that can eventually transform the monetary system as we know it. Given that banks create new money (deposits) out of thin air whenever they make loans, any public preference for central bank deposits over commercial banks could make this old money creation mechanism non-viable. Banks would have to generate new credit products, transforming themselves into more ‘normal’ businesses in the process.

If most people hold CBDCs instead of checking accounts, banks would no longer be ‘too big to fail’. In the event of bankruptcy, the system of electronic payments would continue, hosted by the central bank, eliminating the need for a public bailout. This point is stressed by Miguel Angel Fernández Ordóñez, the Bank of Spain’s former governor, in his book, Adiós a los bancos. Because they are insured against their outsized risks, banks regularly earn outsized profits. With a CBDC, the long-term trend of nonfinancial corporations earning an ever-smaller share of corporate profits would be curbed, resulting in a more balanced distribution of income, as seen in the following US series (Figure 1).

Figure 1 Nonfinancial corporate business: Profits after tax



The implementation of CBDC and less money creation by banks would mean greater systemic stability for another reason: bank money is highly ‘pro-cyclical’. Central banks could issue CBDCs counter-cyclically, moderating economic cycles rather than magnifying them. As Yale economist Irving Fisher wrote in 1935, ending private banks’ ability to create money would both nationalise money and fully privatise banking. More recently, former Bank of England Governor Mervyn King (2010) argued that “[o]f all the many ways of organising banking, the worst is the one we have today”.

Nonetheless, many fear that a CBDC will give the government a window on every transaction, ending the anonymity of cash. But with almost three-quarters of the value of US consumer purchases now electronic (Federal Reserve Bank of San Francisco 2019), this window is already open to a valid search warrant. Legitimate purchases with a CBDC can be similarly shielded. On the other hand, there is a real security gain in combating laundered money. Current efforts to track the assets of Russian oligarchs have brought this to the fore. Novokmet (2018) and his colleagues conclude that Russian secretion of private wealth abroad is unparalleled in modern history and now totals as much as 100% of their country’s annual GDP.   

There is much more hidden wealth to be taxed. The 2020 UN High-Level Panel on International Financial Accountability, Transparency and Integrity (FACTI) estimates show a 2019 tax loss of about $600 billion. Using World Bank figures on global tax/GDP ratios and global GDP,1 one can estimate this loss at 4.61% of global tax revenues. This global tax to GDP ratio is an average, so the progressivity of statutory tax rates, both within and between countries, means this estimate of tax loss is highly conservative.  

What’s more, there are few real alternatives to creating a CBDC since, without it, private stablecoins threaten a central bank’s capacity to control monetary policy. One can imagine everybody using just Facebook’s currency and it decides how much to put in circulation. Understandably, central banks don’t want this, and the US has now forced Facebook to give up its dream of controlling global currency (Murphy and Stacey 2022).

But what is to stop a non-US company or state actor from realising that dream? Keynes called for a transition to a truly international currency rather than a global hegemon like the US dollar. Similarly, former Bank of England governor Mark Carney (2019) calls for a synthetic hegemonic currency, and economists like Persaud (2021) have noted that the IMF’s Special Drawing Rights (SDR) instrument is available for the purpose. Fatás and Weder di Mauro (2021) note that if the IMF does not build a new international CBDC, then a company like Facebook is likely to reap the huge transaction cost savings to be gained from doing so.  

Our empirical studies have shown the potential positive economic impact of community or complementary currencies (CCs) and how a CBDC can augment its financial power when used to back these. The successful CCs we have worked on complement conventional currencies: the WIR with the Swiss franc; the Bavarian chiemgauer and Barcelona REC with the euro.

A CC limited to the local exchange and backed by a CBDC would have three main advantages. First, as our studies have shown, these have higher multiplier effects on local expenditure – higher additional rounds of re-spending.

Second, such CCs would allow central banks to control the velocity of circulation (how many times a dollar changes hand every year), which they currently do not. In the last three US recessions, the counter-cyclical expansion of monetary aggregate M2 was mirrored by an even greater pro-cyclical collapse of its velocity – meaning that GDP, equal to M2 times its velocity, had to fall. The percentage changes of each can be seen in Figure 2.

Figure 2 Percentage changes of velocity of M2, GDP and M2



By contrast, our work shows that CCs are counter-cyclical (their volume and/or velocity increase in times of crisis). This is ‘common knowledge’ for those working with CCs, but our empirical work has confirmed it. Some CCs have their velocity further accelerated via incentives that are implemented in the currency design itself. We show that this has been successfully practised by the chiemgauer currency in Bavaria.

Third, the introduction of CCs backed with CBDC could help countries in currency crises escape IMF ‘conditionality’ that means that when hard-currency loans are needed to support a nation’s currency, they must be tied to reduced government expenditures, higher taxes, and higher interest rates. Otherwise, a reviving economy could just spend more on imports, further weakening its currency. By creating a currency with both ‘ends’ of a transaction geo-located, such expansionary outflows can be limited. 

This problem is part of the ‘original sin’ of international finance – developing countries’ inability to borrow in their own currency. As Persaud (2021) notes, poor countries are not only the most at risk from (and least responsible for) climate change. They are also more exposed to debt crises in their attempts to respond. Any energy transition or climate change mitigation requiring expansionary policies is likely to cause devaluations that worsen their existing hard-currency debt. 

‘Insulating’ trade, debt, and capital flight from such an expansion are possible to the extent it can be paid for with national CCs – and without explicit protectionism or capital controls. With these three outcomes – a higher multiplier, counter-cyclical velocity, and insulation – the use of a CBDC to back regional CCs would enable sorely needed reforms.  

In closing, we would argue that a CC backed by a CBDC can not only compensate for the demise of commercial bank money but can also democratise money creation. 120 European scholars have signed an open letter to the European Central Bank and European Parliament (Couppey-Soubeyran et al. 2022) calling for a broader public discussion of both the opportunities and the risks to democracy posed by CBDCs. 

More democratic forms of CBDCs cannot be guaranteed by CCs, but they can be supported. Communities can decide where to allocate liquidity and how to build ‘smart contracts’ into our currencies, incentives to “nudge” us toward green services and other pro-social expenditures. As with traditional gift currencies like Native American wampum, a community-issued currency can be a token of longer-term reciprocity.

Authors’ note: Susana Martín Belmonte is a monetary innovator and consultant who designed the Barcelona REC currency in 2018. Christian Gelleri and Jim Stodder have worked on the Southeast Bavarian chiemgauer and the Swiss WIR currencies.


Carney, M (2019), “The Growing Challenges for Monetary Policy in the current International Monetary and Financial System”, speech at Jackson Hole conference, Bank of England, 23 August.

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Crumpton, L and E Ilzetzki (2021), “Central bank digital currency for the UK”,, 26 July.

Fatás, A and B Weder di Mauro (2019), “The benefits of a global digital currency”,, 30 August.

Federal Reserve Bank of San Francisco (2019), “Fednotes: 2019 Findings from the Diary of Consumer Payment Choice”.

Fernández Ordóñez, M A (2018), “The Future of Banking: Secure Money and Deregulation of the Financial System”, Areces Foundation Seminar, 6 February.

Fernández Ordóñez, M A  (2020),  Adiós a los bancos: Una visión distinta del dinero y la banca, Taurus Publishers, Madrid.

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Fisher, I (1935), 100% Money,  Adelphi Publishing, New York.

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King, M (2010), “Banking: From Bagehot to Basel and Back Again”, speech at the Second Bagehot Lecture, Buttonwood Gathering, New York, 25 October.

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Mozée, C (2022), “A ‘Britcoin’ would carry financial stability and security challenges and there’s ‘no convincing case’ for one, says House of Lords report”, Markets Insider. 

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Stodder, J and B Lietaer (2016), “The macro-stability of Swiss WIR-bank spending: balance, velocity, and leverage”, Comparative Economic Studies 58(4): 570-605.


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