While the discussion on the need to regulate cryptocurrencies or leave them unregulated is still live and ongoing, central banks might surprise us by adopting a proactive approach.
In the Global Financial Stability Report issued in April 2018, the International Monetary Fund explained that a number of central banks such as the Bank of Canada, the People’s Bank of China, the Monetary Authority of Singapore, and the Swedish Riksbank have started to explore the possibility of issuing new central bank money in the form of a cryptocurrency, the so called central bank digital currency (CBDC).
Central banks would be able to issue CBDCs to commercial banks, other payment service providers or individuals as a token representation of, or an addition to, cash in physical form and/or electronic deposits. CBDCs would be exchanged at par with the central bank’s other monetary liabilities.
In an article published last week, the IMF managing director Christine Lagarde, while remaining aware of the risks brought by digital currencies, suggested that “policymakers should keep an open mind and work toward an even-handed regulatory framework that minimises risks while allowing the creative process to bear fruit”.
She recognises the potential of cryptocurrencies for offering a fast and inexpensive means of making payments and international money transfers and she believes that this new way of transacting will benefit consumers.
One of the objectives behind the CBDCs is indeed to counter the inability of private networks to ensure full stability and safety of privately issued cryptocurrencies.
CBDCs would still maintain the benefits of the current cryptocoins, such as allowing the instant clearance and settlements of transactions without the involvement of an intermediary, and anonymity. As opposed to cash, transacting parties would not need to be in the same place.
Central banks may also tailor the level of anonymity on the basis of the amount transacted, similarly to cash transactions for ‘small amounts’ while reducing the anonymity for higher amounts.
From a central bank perspective, the adoption of CBDCs would reduce the costs of maintaining and replacing notes and coins.
For the small corporate and retail public with limited or costly access to banking services CBDCs could also reduce transaction costs in some countries or regions, therefore facilitating financial inclusion.
Nonetheless, the CBDC would not come without risks. For instance, since it would be a potential competitor to traditional bank deposits, it could lead to volatility in fund flows between commercial banks and the central bank, potentially resulting in bank runs toward CBDCs and thereby jeopardising financial stability.
Disclaimer:
This article was issued by Elisabetta Gaudiano, research analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as a personal recommendation/ investment advice including tax and legal advice.