Banking in a Digital Fiat Currency Regime

Abstract

This chapter explores the future of banking in a digital fiat currency (‘DFC’) regime, defined as a monetary regime in which retail and wholesale consumers have direct access to public digital checking and payments services, independent of the existing bank-centric depository system. I argue that in such a regime, existing banks will continue to perform the valuable social function of underwriting loans and evaluating collateral, even as their checking and payments processing functions will be rendered obsolete. Such a system would improve payments system resiliency, while addressing the safe asset shortage issues associated with insurance caps on bank deposit accounts. At the same time, a DFC regime would necessarily clarify the public nature of the existing credit system, wherein commercial banks are (inherently) entrusted to underwrite loans and subjectively evaluate collateral. Thus, digital fiat currency technology represents more than a mere improvement in payment system efficiency—it has the potential to transform the banking industry, simplify financial regulation, and recast our collective understanding of how money and banking work in the modern economy.