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Crypto

Why are central banks suddenly interested in cryptocurrencies?

After ditching bitcoins and cryptocurrencies in general, since their inception just over a decade ago, central banks have decided to change their minds and have begun seriously thinking about creating their own digital currency, called the “digital central bank currency” or MNBC.

According to the Bank for International Settlements (BIS), 86% of central banks are exploring this possibility. Some are more advanced than others. It is clear that states are feeling more and more threatened by the impressive achievements associated with the alliance of finance and technology, and, above all, they do not want to “miss” the train of digital currencies. They intend to solidify their sovereignty – a staggering one since the advent of cryptocurrencies – by creating their own digital currencies.

The threat to central banks

It is in this sense that in 2020 China decided to experiment with its digital currency in four major provinces. Its first goal is to test a life-size digital yuan during the Winter Olympics next year. But the rate is completely different. It’s more strategic. China wants to fulfill a dream that has plagued it for a long time, namely to impose its currency as an international currency against the dollar. European countries, including Lithuania, have also made good progress in creating their digital currency. It was the first European country to launch its digital currency in July 2020. In Sweden, the central bank has also started tests.

Threats to central banks are no longer limited to well-known cryptocurrencies like bitcoin or ether, but much more serious ones, so-called “stablecoins”. These are digital currencies issued by private companies, the main characteristic of which is that they are backed by equivalent funds in classic currencies such as the dollar or euro, which indicates their stability, unlike conventional cryptocurrencies. Diem, formerly Libra, the currency offered by Facebook, is the most successful project.

“Most of the money supply is already in digital form. ”

Imagine for a second that Facebook is using the full potential of its social network, as well as the WhatsApp application it owns, to launch its currency, it will be a real nightmare for central banks, which will do anything to kill in the egg. this is a titanic project. In addition, it is worth remembering that the digitization of currencies is a long history. Indeed, most of the money supply is already in digital form. Most of the money in circulation consists of deposits from private banks and reserve money deposited with the central bank. The share of coins and banknotes remains insignificant.

Libertarian Approach and Legal Vacuum

Central banks blame bitcoin and cryptocurrencies in general for their decentralized nature due to the lack of unified governance. This is precisely the main counter-argument used by cryptocurrency advocates who rely on a philosophical and social libertarian approach to justify their use. The enthusiasm for cryptocurrencies shouldn’t make us forget the uncertainty and the very real legal vacuum that surrounds them. Cryptocurrencies are part of what are called “goods of trust”: assets whose attributes cannot be assessed in advance by their buyers. Any faults are difficult to identify as they require extensive technical knowledge.

“In reality, cryptocurrencies are nothing. ”

Financial regulation, good as it is, can be ineffective when it comes to resolving conflicts around cryptocurrencies. Faced with the proliferation of “scams” due to the rise in cryptocurrency prices in recent days, buyers are often faced with a legal vacuum. In fact, cryptocurrencies do not represent anything. Cryptographic technologies allow them to be created, stored and transmitted. In case of problems, such as theft of your cryptocurrency, the same technology should allow you to check the validity of the process. Therefore, it is difficult for an ordinary person to understand the intricacies of this market even for standard operations: buying, storing or selling.

A real revolution?

The interest in creating MNBC will be to correct this particular legal vacuum and to appease the participants in this particular market. In addition, MNBC could allow companies and individuals to hold deposits at the central bank, which is encouraging, especially in a crisis. However, until now, these transactions have only been reserved for commercial banks and certain financial institutions.

This is the real revolution for MNBC. Therefore, it would be wiser to talk about new means of payment than about a real new currency. The main goal of MNBC is to make money transactions more flexible without having to endure the negative side effects of cryptocurrencies, such as excessive volatility or their use in fraudulent transactions. However, this opportunity for companies and individuals presents a number of challenges.

Increasing the power of central banks

In normal times, central banks lend money to commercial banks, which must inject it into the economy through loans to businesses and individuals. In reality, the process is more complex, and sometimes, especially in times of crisis and heightened uncertainty, banks are reluctant to lend to avoid reckless risks. Central bank pressure tactics are limited and far from effective.

“Strengthening central bank power will increase citizen distrust in an institution that already suffers from a significant democratic deficit. ”

The emergence of digital currencies of central banks will allow these banks to more effectively influence real economic activity by establishing a direct link with all economic players. This would simplify monetary policy while increasing their influence. But at the same time, it would upset the already delicate balance between central and commercial banks. The latter will see that their power is shaken (reduction of bank intermediation); which is not without prejudice to their profitability. Financial technology can also be affected by this situation for the same reasons as commercial banks.

However, the consolidation of central bank power will increase citizens’ distrust of the institution, which already suffers from a significant democratic deficit as it is not controlled by any elected body. Another problem, and not least, may arise from a conflict of interest, as the central bank will judge – by becoming its own regulator – and a party – by being a bank intermediary.

Relentless efficiency in times of crisis

Bitcoin will be less of a problem the day it becomes a store of value like gold, that is, when it becomes less volatile. I must say that with the Covid-19 crisis, money “flows freely.” Central banks have not hesitated to flood the markets with immeasurable amounts of money. This has given impetus to the bitcoin turifarians, who rightly accuse central banks of manipulating currencies. It must be said that more and more people in the United States and Europe have taken less advantage of the stimulus plans of Presidents Trump and Biden, as well as the European stimulus plan, which is slowly taking effect, to invest in cryptocurrencies. They don’t fully trust fiat currencies.

Remittances from governments to households during the Covid-19 crisis would be relentlessly effective if that money were directly deposited into digital wallets. MNBCs can also facilitate migrants’ remittances to their families given the low costs, especially during a pandemic and containment, as it poses a lower risk of infection.

The question is whether MNBC will step on cryptocurrency platforms. In other words, if their appearance would be harmful to cryptocurrencies in general and bitcoins in particular. The answer to this question can only be ambiguous. In our opinion, it is unlikely that all MNBCs will use blockchain technology, as central bank officials are vague about the emergence of a system that is not very transparent to them, especially without a gendarme to enforce the rules.

Will Cryptocurrencies Survive MNBC?

However, blockchain allows the storage and transmission of publicly available and secure information without a supervisory authority. Unless central banks use so-called “valid” or “semi-open” blockchains, which operate on an authorization basis. That is, where the blocks will be visible to everyone (reading is allowed), but cannot be changed in the sense of checking them (writing is disabled). Only authorized nodes, in this case central banks, can change them.

“The new generation of speculators does not need to worry about the invasion of states in the magical world of cryptocurrencies. ”

Technically, cryptocurrencies can survive in MNBC because they don’t play the same role. Cryptocurrencies can be a store of value, especially when they become less volatile. They can also continue to play, but in reasonable proportions, their role as a speculative asset. It is difficult to imagine that they can be viewed, at least in the short and medium term, as currencies. On the other hand, MNBC may well play this very role. This distribution of tasks remains hypothetical and depends on the development of legislation related to cryptocurrencies.

In addition, MNBC projects can act as a catalyst for the cryptocurrency sector, as they “democratize” them to some extent. They will allow the uninitiated to understand the intricacies of digital wallets. The new generation of speculators shouldn’t worry about the invasion of states into the wizarding world of cryptocurrencies. She has a bright future ahead of her. Everything is as usual.

READ: Cryptocurrencies: Bitcoin Fever Gains Regulatory Attention

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