Home Technology Opinion: The Fed and other central banks claim digital currency is more efficient, but what really scares them is crypto.

Opinion: The Fed and other central banks claim digital currency is more efficient, but what really scares them is crypto.

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Opinion: The Fed and other central banks claim digital currency is more efficient, but what really scares them is crypto.

Abandoning traditional caution, the US Federal Reserve and other nations’ central banks are likely to introduce CBDC (central bank digital currencies) in the near future. Supported by the Bank for International Settlements, 105 countries representing over 95% of global GDPincluding the WEthe European Union and Chinaare actively testing or considering digital currencies.

Although details remain unclear, CBDCs will likely be based on technology similar to bitcoin
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and other cryptocurrencies, but with important differences, such as:

  • CBDCs would be a central bank liability, in effect, fully state-backed digital money.

  • Its value would be pegged to the national currency, unlike real cryptocurrencies whose price is determined solely by demand and supply.

  • It would function in the same way as existing fiat currency and would allow normal payments to be made and financial or commercial obligations to be met.

The only difference from cash would be the absence of bills and physical transferability, as transactions would be electronic, similar to existing funds transfers through banks. Although initially voluntary, it could easily be made mandatory.

Arguments for CBDCs, as for banning cash itself, are always framed in terms of improving efficiency. However, since most advanced economies have efficient remittance systems and most payments are now electronic in any case, it is unclear what additional benefits would accrue. To the extent that payment systems, especially cross-border ones, are expensive or slow, improved interoperability and compensation systems would provide effective solutions.

Other benefits cited include deterrence of crime or terrorism, increase in the legal economy by reducing the scope of the underground economy, elimination of tax evasion, reduction in the cost of printing coins and even preventing contact with bacteria and virus-carrying banknotes. There are little supporting evidence for each of these complaints.

CBDCs create new problems. If savers abandon bank deposits, funding for the banking system could be reduced, disrupting the flow of credit. This could increase the risk of bank runs (investors switching deposits to CBDCs) during times of financial uncertainty. These risks would require complex workarounds; for example, setting permanent or temporary limits on transfers to central bank accounts and deposit withdrawals. This would divert from the essential idea and fragment the payment system.

Central banks also risk losing seigniorage income (income from issuing currencies at a cost below their face value or income from holdings of securities financed by monetary creation). Annual seigniorage receipts in the United Statesfor example, is estimated at around $20-25 billion (0.1% of GDP).

power in the state

In fact, like all restrictions on the use of cash, CBDCs are designed to increase the power of the state:

  • CBDCs would reduce confidentiality and anonymity allowing surveillance spending habits and indirectly the behavior of citizens, because CBDCs are fully traceable.

  • Negative rates (which have been widely used in Europe and Japan over the past decade) can be avoided by holding cash. Replacing cash with CBDCs allows central banks to trace holdings and charge a negative interest rate for their digital currencies.

  • Central banks could promote consumption by placing a time limit on digital currencies in which they must be spent or lost forever. It can channel spending to specific areas through incentives or penalties.

As with electronic transactions in general, there are familiar problems of cyber security and disruptions to operations due to technology or power failures.

There are fears that cryptocurrencies could threaten the dominance of the US dollar.

The real motivations of CBDCs are complex. Governments fear losing the state monopoly on currency creation, monetary control and falling behind the demands of changing markets, de facto ceding control to private interests. Central bankers are also aware that they are not seen as an obstacle to ‘innovation’.

For the Federal Reserve, there is also concern that in the long run cryptocurrencies could threaten the american dollar
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dominant status as a reserve currency. But the introduction of CBDCs by large economies risks creating instability as it would erode the monetary sovereignty of smaller countries and facilitate capital flight in times of instability. For international adoption, collaboration on technical standards and legal frameworks would be necessary.

CBDCs make little sense. Currency remains an important medium of exchange and provides a payment option for legitimate transactions. Despite the growing use of electronic payments, cash is still widely used especially for small value transactions. The use of cash around the world remains high among the poor and elderly as well as in large parts of the world where fast internet coverage is not ubiquitous. The elimination of money would aggravate, not improve, social and financial exclusion.

Instead of pandering to the fintech fad, central banks would do better to focus on their core objectives – ensuring sound currency and improving cheap access to essential financial services for their country’s citizens, especially the poor. disadvantaged.

Russian novelist Fyodor Dostoyevsky considered money, which in his day was just cash, “invented freedom.” It would be ironic if crypto-technology, conceived by its inventors as a mechanism to increase freedom, became the basis for increased state control over individual lives and decisions.

Satyajit Das is a former banker and author of A Banquet of Consequences – Reloaded ( 2021) and Fortunes Fools: Australia’s Picks (2022).

After: Listen to Ray Dalio on the Best New Ideas in Money Festival September 21 and 22 in New York. The hedge fund pioneer has a strong opinion on the direction the economy is taking.

More: The easy money bill is coming due: prepare for weak and volatile market returns – and perhaps long-delayed financial accounts.

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