Public digital currencies, a currency for the future?
In the space of a few years, the world of currencies has undergone considerable upheavals. The development of new means of payment, the rise of crypto assets, we have also witnessed the emergence of digital currencies issued by private banks and even by central banks. At the end of 2019, according to the Bank for International Settlements, 80% of monetary institutes were already thinking about a digital currency project, but only 10% were at the pilot stage. The European Central Bank (ECB) has already taken a position on the subject and states:
“In this new era, a digital euro would ensure that people in the euro area can benefit from a free, simple, universally accepted means of payment.”
Wouldn’t an unfavored economic policy objective be to abolish cash payments in order to achieve an ultimate goal that would otherwise be almost unattainable: to trace all transfers and curb most irregularities, undeclared “black” transactions, “small” tax fraud or illegal payments (drug trafficking, financing of terrorist activities, etc.)?
In our view, these public digital currencies would have a double advantage: they would allow a monetary policy with more direct and immediate effects, but also protect against the excesses of private assets. Because these new offers raise many questions and have macro-economic, political and ecological impacts of a fundamental magnitude, first and foremost the question of the sovereignty of States.
Traditional currency reserves? No longer a matter of course
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Close to home, the Nordic countries seem to be ahead of the curve in the adoption of decentralized financial transfer technologies. Outside European borders, China has largely taken the lead. It aims to be the first major country to issue a sovereign digital currency, the e-yuan. Tests have begun on a large scale in this country where mobile payment is already popular. Last December, in 10,000 shops in the city of Suzhou, customers were able to pay with this currency.
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At the same time, the shares of the dollar and the euro in world foreign exchange reserves are tending to decline. The dollar’s decline fell to its lowest level in 25 years in the fourth quarter of 2020. The euro is also experiencing difficulties in the face of the emergence of the Chinese yuan and the return to favor of gold, perceived as a hedge in the current reflationary context. Gold and Bitcoin seem increasingly complementary, both providing the desired hedge against inflation.
https://datawrapper.dwcdn.net/W0zBA/1/ According to the IMF, private digital currencies of the “stable coin” type, i.e. with more stable fluctuations, could emerge as international reserve currencies. The report of this international organization examines the factors that could influence the dollar’s dominance in this area, and it is no longer clear that the traditional currencies of the main financial powers can maintain their predominant status without entering the race of digital currencies.
Helicopter Cryptocurrency
Central bankers can also see public digital currency as a solution to the traditional pitfalls of monetary policy. The enormous advantage of these digital assets would be to allow economic agents to have an account directly with the central bank, with the advantages generally attributed to “helicopter money”: circumventing possible blockages in bank credit channels, putting new money directly into the hands of individuals while taking into account inequalities…
In sum, this could greatly facilitate the transmission of monetary policy, without the adverse effects of asset purchases. The induced situation of excess liquidity as currently experienced is typically a delicate situation in which the central bank may be in difficulty to achieve its objectives. Central banks could thus regain a form of control and a much more direct modulation of the money supply because the credit of private banks would no longer intervene in the chain of money creation.
The temptation to develop state-owned digital currencies such as the euro or the digital yuan also stems from the inherent weaknesses and dangers of private digital currencies. China, which is very advanced in the development of its public digital currency, as we have said, declared last May the illegality of transactions related to cryptocurrencies.
A question of trust
More than 13000 private cryptocurrencies coexist today, which inevitably generates market inefficiencies. Yawning arbitrage opportunities allow some specialized funds to exploit price differentials to achieve 100% returns.
Moreover, bitcoin is not really a currency as such. Confidence in a currency is based on the institution that issues it and, on an asset, liability present on its balance sheet. The independence of the issuer (traditionally a central bank) theoretically increases this confidence in the currency issued. Bitcoin does not benefit from this and moreover, in France, no one is obliged to accept a payment in bitcoin according to the Monetary and Financial Code.
The ultimate question therefore remains that of the assertiveness of States vis-à-vis private companies. This is an unavoidable question before private currencies reach a dominant position depriving States of a sovereign function of general interest.
Especially since environmental considerations are mixed in. The mining of these currencies generates significant energy drifts related to the computing power of computer servers.
- China
- European Central Bank (ECB)
- Euro (currency)
- Bitcoin
- sovereignty
- Data Visualization
- monetary policy
- Cryptocurrency
- Central Banks
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