Blockchain can improve central bank helicopter money policies

A large number of investment banks have shown interest in blockchain, the technology underlying cryptocurrencies such as Bitcoin.

Blockchain is also a ledger that can track transactions without relying on intermediaries such as banks, which is why the financial industry is excited.

But in HSBC's view, interest in blockchain may not only involve investment banks, but may even extend to central banks responsible for national currencies.

In the UK and the US, for example, the Federal Reserve and the Bank of England have focused on maintaining economic growth and controlling inflation at a relatively low and stable level.

According to a report released by HSBC, central banks could use blockchain technology for a policy that is even more unconventional than quantitative easing. It could apparently make it easier for central banks to deliver “helicopter money” to households.

This might sound like bad news to some cryptocurrency fans, who believe that blockchain is great because it can facilitate currencies and transactions without relying on central banks.

HSBC's basic view is that so far, central banks have tried to ease economic problems by raising interest rates, which gives banks and borrowers control over policy. Central banks encourage the creation of private credit, or inside money, backed by debt.

There are a few problems with this. First, you can't guarantee how much money will be available to the real economy. That's ultimately determined by the banks. Second, the creation of debt is a problem, too much of it will slow growth, especially if it's created for risky projects that don't pay off.

But helicopter money would be outside money: money injected directly from the central bank, rather than representing debt elsewhere in the private sector. Nobel Prize-winning economist Milton Friedman proposed the idea of ​​helicopter money decades ago, meaning that the central bank could stimulate directly, without having to go through the personal credit system at all.

HSBC pointed out the trust problem of the "helicopter money" model: In short, people will undoubtedly doubt the ability of the central bank and how much it can help the economy with its actual needs. If it is too much, "helicopter money" may cause crazy inflation.

Here’s how HSBC sees blockchain helping with this problem:

If we move towards an economy where all transactions are recorded in real time on the blockchain, it won’t be too different from the ecosystems that some of the world’s business giants currently have. Online e-stores can lend money to merchants without collateral because they already know everything about the merchant’s considerations: from how many people are spending money to the conversion rate of page views to purchases. In the same way, a modern money transmission system enabled by real-time big data analysis through blockchain can allow governments to balance the entire economy more efficiently and systematically.

In short, blockchain can give governments a better understanding of what is actually happening in the economy. The report also has two pictures, the first of which shows the current methods used by central banks to influence interest rates:

You can see that the central bank doesn’t actually send money directly into the economy, but uses banks as intermediaries.

In the figure below, the combination of blockchain and "helicopter money" is very direct.

Original article: http://www.businessinsider.com/hsbc-says-the-blockchain-could-be-used-for-radical-central-bank-helicopter-money-policies-2015-11
By Mike Bird
Compilation: Overnight porridge
Source (translation): Babbitt Information