Are centralised digital coins the future?

As regulators begin to clamp down on crypto, Central Banks around the world are fighting for control of their monetary flexibility.

Cryptocurrencies reduce the options that central banks may have in controlling the economy, and therefore, are a major threat to fiat currencies. So-called ‘stablecoins’, a nongovernmental digital coin that is pegged at a fixed exchange rate to a currency, are gaining momentum in both domestic and cross-border transactions, especially in the developed world.

Governments are concerned that they will lose their control over the economy as fiat currencies are replaced by these cryptos. Central banks around the world manage the money supply of their economy by buying or selling securities such as bonds that expand, or contract, the monetary base. The issue is, if people aren’t using your currency, these efforts are rendered useless.

To fight these growing concerns, more than 85% of central banks have looked into, or are piloting, digital coins of their own. Unlike decentralised crypto, these coins would be centralised and regulated by a Central Bank or the country’s monetary authority. At the forefront of this experimentation is China who has $300 million of digital renminbi in its economy so far. Furthermore, the Bank of England issued a statement that there may be a future “Britcoin”, as well as the European Central Bank stating they are prepared to issue a digital euro if the need were to arise.

According to Markus Brunnermeier, an economist at Princeton University, the only way for Central banks to maintain their monetary sovereignty is through the creation of these digital currencies.

With the creation of these Central Bank Digital Currencies (CBDCs), come some advantages. The first is that they allow for faster, less costly transactions and higher security on payments. Additionally, since these digital currencies would not be held in a bank account, it enhances financial inclusion providing everyone with the chance to hold some form of currency, instead of dividing the world into those who bank and those who don’t.

Researchers at the Bank of England suggest that if a digital dollar went into widespread circulation, it could permanently increase U.S. output by up to 3% a year.

One drawback to these CBDCs, however, is that the Central Bank would have a greater understanding of how consumers spend their money. The irony here is that a major feature of cryptocurrencies is that they provide financial privacy, yet the introduction of these CBDCs would destroy this.

With the market cap of the crypto market passing $2 trillion for the first time and growing at an exceptional rate, Central Banks will need to act fast if they are to maintain their monetary independence. Whether CBDCs are accepted as the future of the financial system, only pilot studies will show.