Why central bank digital currencies will destroy bitcoin
Central banks should issue their own digital currencies to replace a crisis-prone banking system and shut out cryptocurrencies
By
The world’s central bankers have begun to discuss the idea of central bank digital currencies (CBDCs), and now even the International Monetary Fund and its managing director, Christine Lagarde, are talking openly about the pros and cons of the idea.
This conversation is past due. Cash is being used less and less, and
has nearly disappeared in countries such as Sweden and China. At the
same time, digital payment systems – PayPal, Venmo, and others in the
west; Alipay and WeChat in China; M-Pesa in Kenya; Paytm in India –
offer attractive alternatives to services once provided by traditional
commercial banks.
Most of these fintech innovations are still connected to traditional banks, and none of them rely on cryptocurrencies or blockchain. Likewise, if CBDCs are ever issued, they will have nothing to do with these over-hyped blockchain technologies.
Nonetheless, starry eyed crypto-fanatics have seized on
policymakers’ consideration of CBDCs as proof that even central banks
need blockchain or crypto to enter the digital-currency game. This is
nonsense. If anything, CBDCs would likely replace all private digital
payment systems, regardless of whether they are connected to traditional
bank accounts or cryptocurrencies.
As
matters stand, only commercial banks have access to central banks’
balance sheets; and central banks’ reserves are already held as digital
currencies. That is why central banks are so efficient and
cost-effective at mediating interbank payments and lending transactions.
Because individuals, corporations, and non-bank financial institutions
do not enjoy the same access, they must rely on licensed commercial
banks to process their transactions. Bank deposits, then, are a form of
private money that is used for transactions among non-bank private
agents. As a result, not even fully digital systems such as Alipay or
Venmo can operate apart from the banking system.
By allowing any individual to make transactions through the central
bank, CBDCs would upend this arrangement, alleviating the need for cash,
traditional bank accounts, and even digital payment services. Better
yet, CBDCs would not have to rely on public “permission-less”,
“trustless” distributed ledgers like those underpinning
cryptocurrencies. After all, central banks already have a centralised
permissioned private non-distributed ledger that allows for payments and
transactions to be facilitated safely and seamlessly. No central banker
in his or her right mind would ever swap out that sound system for one
based on blockchain.
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