It is clear that new technologies are increasingly revolutionizing, well,Â everything. New methods of payment are ubiquitous and the use of cash in many countries is decreasing, in favor of the use of digital payment methods such as cards or mobile payments.
Therefore, central banks in charge of the currencies and notes of a country are considering adapting to the new demands of their citizens , and are beginning to remit their own forms of digital currency. This decision has its own pros and cons.
What will be the effects of central banks launching their own cryptocurrencies?
There are defenders and detractors in the issuance of public digital currency by central banks such asÂ The Bank of England, the People’s Bank of China or the Bank of Sweden.
Some argue that this could improve the functioning of the payment system as the management of monetary policy, while others argue a more cautious approach as the technological risks inherent in crypto could upset financial stability.
The Bank of Spain, for example, has pronounced that the advantages and disadvantages will depend, to a large extent, on the modalities chosen for the issuance of the public digital currency, that is, if its anonymity character is respected or not.
Some of the advantages of issuing digital currency for central banks include:
- Decrease in cash demand: card or mobile payments are the order of the day, and the demand for cash is decreasing more and more.
- A possible improvement of some aspects of the functioning of payment systems: productivity benefits can be produced that are associated with the introduction of digital currencies, although it is not clear whether these improvements would come from the introduction of public digital currencies rather than from the extension and improvement of current private digital currencies.
- Possible improvements in the management of monetary policy: if the public digital currency is remunerated, its interest rate will become a key instrument for the implementation of monetary policy, since it will affect savings and investment decisions of families and businesses, both directly (through the payment of funds deposited in the central bank) and indirectly (by setting a lower limit to the payment of bank deposits).
- In the fight against tax fraud, money laundering and improving financial inclusion: digital currencies could potentially play a major role. If one’s currency holding is not anonymous, that is, when the central bank have an active record of all the transactions of an individual, you could easily trace and stamp out any money laundering. That said, if crypto transactions are not anonymous, it would imply a serious loss of individual privacy, and the central banks would need to make massive infrastructure investments to verify each transaction at all times.
This would require that the use of cash be completely eliminated to prevent it from being used for illegal activities. However, replacing coins and notes with non-anonymous digital coins will not mean the end of these criminal activities, which would still have assets for their purposes, such as foreign currencies, gold etc…
Will the digital currencies of central banks unseat Bitcoin?
Another of the many reasons for the issuance of digital money by public entities is that cryptocurrencies such as bitcoin, ethereum or litecoin are gaining broader acceptance.
It is feared that public digital currencies may end up gaining acceptance and displacing the legal currency of a country, so the thinking goes that central banks should preemptively take action on the issue by launching digital currencies of their own so as not to lose control over the national currency.
However, nothing could be further from the truth. This theory is currently not given much weight given that the market value of cryptocurrencies is relatively small and its medium of exchange is still limited. Not to mention the extreme volatility of crypto.
What possible problems would banksÂ have?
The problems are many but the central issues is the profitability of the banking sector. Even if they were to somehow curb volatility, these markets would be less mature and episodes of panic could be created, leading to massive withdrawals of funds by depositors.
In this case, banks would be forced to increase the remuneration of deposits above the interest rate, which would reduce their margins of intermediation, could lead to a decrease in the supply of credit and its increase in value, and surely , to a contraction in the capacity of the country’s banking system.