#cbdcdigital

Governments all over the world are rushing to introduce their Central Bank Digital Currencies, or CBDC’s, before their physical fiat currencies collapse as trust in the current financial system continues to decline.

Euro CBDC is Coming:

The European Central Bank (ECB), which has been leading the charge in this area, recently published a working paper about the forthcoming digital euro that describes how CBDC’s would function.

In this article, I will discuss about why CBDC’s will be both bullish and bearish for cryptocurrencies.

Digital Payments:

The first part of the paper provides a bit of background about digital payments.

The authors of the paper immediately identify the three things central banks are afraid of which are:

Fintech Companies

Big Tech Companies 

Cryptocurrencies.

Central banks are afraid of these entities because they’re quite literally disrupting the existing financial system.

As far as the central banks are concerned the only solution is a central bank digital currency which the authors note would result in quote abrupt and potentially irreversible changes to the financial system. 

The Economics of CBDC’s

The implications CBDCs would have on the financial system

The challenges associated with a CBDC rollout

The author reiterates that the paper does not concern a wholesale CBDC because it would quote entail a less significant change to the status quo of the financial system. The status quo of the financial system includes central banks printing money into the accounts of big banks and asset managers many of which have been caught laundering billions of dollars while regulators crack down on regular people with strict KYC.

The authors also note that quote our paper largely steers clear of the topics of cryptocurrencies and decentralized finance probably because an educated reader would look at this technology and think this is so much better than the CBDC.

Digitization Of Business :

The second part of the paper explores the quote- digitization in business and payments and it covers all the factors that have given rise to CBDC’s.

The first factor is the gradual shift of economic productivity from the physical to the digital meaning that more and more money is being made by goods and services that are available partially if not wholly online.

The authors note Google, Amazon, and Facebook as easy examples here. The authors point out that this rapidly growing digital economy creates serious centralization issues wherein the first adopters of the technology are required to compete in this economy become larger and more monopolistic eventually making it impossible for new companies to enter the ring.

The authors highlight data as a core component of this first mover advantage, companies that have been around for longer have a lot more data about the user and consumer behavior and this gives them an edge that new companies will take years to get.

This is the rationale behind the digital markets act that was recently passed by the European Union as it focuses on data sharing and transparency by big tech including with new competitors in the industries they currently dominate. 

Why Central Banks Want CBDCs:

Why central banks want to roll out their digital currencies?

The first reason is one that all central banks love to throw around and that’s that central bank money is the safest form of money.

The authors then claim that quote- as the use of cash is declining the promise of convertibility at par becomes less and less meaningful.

The second reason why central banks want CBDC’s is monetary sovereignty.

A CBDC would make it possible for governments to prevent foreign currencies from competing with their national currencies. If you’re wondering why governments and central banks don’t like this currency competition it’s because it would fundamentally force them to act more responsibly with their spending and printing which most governments and central banks don’t want to do because it benefits them and their friends.

As such just about every country would quickly see its national currency replaced by some foreign currency likely the US dollar in the form of stable coins like USDT and USDC, given that this is slowly but surely starting to happen in countries that are experiencing the most inflation.

CBDC And Monetary Policy:

The fourth part of the paper pertains to how CBDC’s would impact monetary policy which some of you will know is everything the central bank does namely raising and lowering interest rates, and creating money out of thin air for the government, the commercial banks, and their buddies.

The authors of the paper start by going over some research that suggests commercial banks could get squeezed by a CBDC. This is partially because there wouldn’t really be a need for them and partially because most people would opt to keep their CBDC holdings directly at the central bank for safety reasons. 

The authors seem to suggest that a solution would be to just have commercial banks compete by raising interest rates offered on CBDC deposits.

The authors assess the actual use of CBDC’s to modify monetary policy which the authors claim is quote not the main focus of central banks looking to roll out CBDCs. That’s because most central banks want CBDC’s to act like digital cash. However, the ECB does want to use its digital Euro to modify monetary policy and also wants it to replace physical cash.