As central banks race to pilot national digital currencies in the war against cryptocurrencies, the transition has the potential to “unleash a wave of destabilisation” according to Luke Bartholomew, senior monetary economist at Aberdeen Standard Investments.
Following the meteoric rise of cryptocurrencies in recent years, almost all of the world’s largest central banks are currently researching or even piloting central bank issued digital currency as a way to keep control of the money supply and preserve financial stability.
The US Federal Reserve and European Central Bank are currently carrying out research into creating national digital currencies, while in April the Bank of England announced the creation of a taskforce with the Treasury, which is expected to announce a UK digital currency pilot scheme soon.
Meanwhile, The People’s Bank of China is one step ahead with the creation of a national crypto currency that runs through a phone app.
The benefits of a new digital form of money are clear, says Bartholomew, helping to offset the threat from private digital currencies such as Bitcoin and ensuring central banks retain control of the money supply and interest rates to support economic aims. Central banks could also gain better data on where people are spending their digital currency.
However, Bartholomew warned that there are risks to this brave new digital currency, some of which could be “potentially frightening.” He raises questions over the future of high street bank accounts if people choose to hold a central bank digital account. In times of crisis, people might be more likely to move money out of their bank account into a central bank account, accelerating bank runs. Furthermore, if digital currencies pay interest, they’ll set a floor below which commercial banks won’t be able to drop.
Other downsides include a loss of anonymity which could lead to tax confiscations and much greater state control of individuals’ money.
Bartholomew says: “The transition to Central Bank Digital Currencies (CBDCs) has the potential to be volatile. To avoid unleashing a wave of destabilisation, almost all central banks want to limit the attractiveness of their cryptocurrency and its availability so they are most likely to make the currency available via commercial bank accounts.
“But not acting over the rapid growth of private cryptocurrencies would also be destabilising as central banks risk the world’s population moving over to the cryptocurrencies that are entirely in private hands and beyond government control.”
Bartholomew expects that in the short-to-medium term, private cryptocurrencies will continue to expand and there will be an “uneasy co-existence” between them and CBDCs. Over the longer-term, central bank-driven cryptocurrencies may supersede, squeezing private cryptocurrencies and commercial banks out.
He adds: “The alternative, and potentially more destabilising situation is that CBDCs are not attractive enough to stop the march of unregulated cryptos, as people quickly adopt new private platforms and currencies.
“Policymakers face losing control of the financial and payment system, and currencies such as private ‘stablecoins’, which are supposed to convert at a fixed rate with existing national currencies, may become dominant. This scenario is less likely, as it involves regulators not acting and not pursuing own interests, but it is possible. So it’s hardly surprising that all the best economic and banking firepower is working on robust solutions to these very pressing problems.”
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