Crypto Tipping Point: Is Digital Currency Too Big To Fail?

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-Analysis-

PARIS – The Germans are very attached to the good old banknotes, but their Finance Minister Olaf Scholz looks to the future: “A sovereign Europe needs innovative and competitive payment solutions.” As such, it must “be at the forefront of issuing digital central bank currencies and actively promote them,” he said on April 16.

Two days earlier, the European Central Bank (ECB) had carried out an extensive survey of Europeans, most of whom were in favor of a digital euro. The ECB is expected to decide this summer whether or not to launch such a project.

Meanwhile, the US Federal Reserve is cautious, but is considering the possibility (along with the Massachusetts Institute of Technology). On April 19, the Bank of England (BOE) and the UK Treasury Department set up a working group on the subject.

The trend was accelerated by the COVID-19 pandemic.

Then there is China, which has taken it to a completely different level: The country has been experimenting with an “e-yuan” in four major cities for a year!

In recent months, most central banks have intensified their work on digital currencies, drawing inspiration from blockchain, the technology that encrypts, records and secures transactions and that is behind the cryptocurrency Bitcoin, which was introduced in 2008.

That interest is spurred by the decline in cash payments, a trend accelerated by the COVID-19 pandemic. This shift is in line with the rise of Bitcoin and its little brothers (Ether, Ripple, Litecoin …) and the proliferation of private e-currency projects like Facebook’s Diem, which are still in the works.

At first glance, these central bank digital currencies – known as “MNBCs” – are not going to change much in the daily lives of individuals and businesses, as the majority of payments are already dematerialized. And yet the difference is fundamental: most of the euros we hold in our accounts and savings books today are created by commercial banks through loans. MNBCs, on the other hand, would be the equivalent of banknotes printed directly by financial institutions. In addition, they could be held directly by them without going through the banks. And that would make a huge difference.

The European Central Bank in Frankfurt am Main – Photo: Boris Roessler

In emerging economies where part of the population does not have a bank account, these MNBCs could foster financial inclusion by allowing cell phone payments and transfers. You could also make cross-border transfers easier and cheaper. This would be particularly beneficial for immigrants who would send money to their families in their countries of origin. They are easier to find than banknotes and could also help fight fraud and money laundering.

But that’s the whole point: the question of anonymity and respect for private data. Bitcoin works thanks to thousands of computers networked together to validate transactions. It is not controlled by a centralized body like the ECB or the Fed. By introducing their own e-money, monetary institutions would potentially have access to information about the financial flows and purchases of individuals, depending on the conditions. This worries the more libertarian advocates of decentralized cryptocurrencies.

On the contrary, an “e-euro” would “strengthen the confidentiality of digital payments”, ECB board member Fabio Panetta assured the European Parliament on April 14 with Apple Pay and Google Pay. In fact, the ECB would be more careful with our privacy than the American tech giants.

It could strengthen China’s surveillance of citizens who know who pays what, where, and when.

However, the same cannot be said of the Central Bank of China (PBOC), which dreams of generalizing its digital yuan in 2022. The system will allow users to pay through a mobile application that the communist regime hopes to regain control of Alipay and WeChat Pay, the two private giants of Chinese mobile payment.

But that in turn also strengthens China’s surveillance of citizens, as the PBOC knows who pays what, where, and where. This is especially true when this system is coupled with technologies such as video surveillance and face recognition used in parallel in Chinese cities. Additionally, over time, the digital yuan could also compete with the dollar in the domination of international payment systems, providing a way to bypass sanctions Washington has imposed on foreign companies trading with countries like Iran.

There is still a long way to go, and the PBOC insists that this is not their aim. But the dizzying speed at which it advances leaves all scenarios open.

The difficulty for western central banks is that MNBCs can also undermine financial stability. For example, what would happen if individuals gave up their bank accounts in the event of a crisis? en masse and just keep their euros or dollars at the central bank? This could weaken the banking system, which is essential to finance the economy.

To avoid this, monetary institutions could limit the amount of MNBC that any individual can hold. Or they could reserve its use solely for interbank exchanges. In any case, Europe must not lose the innovation race in this area because of cold feet or a lack of ambition. Currencies have always been instruments of international power. Recast in digital form, they will be even more so.


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