A cryptocurrency of the central bank? Not in 2018

Central banks may be the 800-pound gorillas of the financial universe, but they have kept their hands off Bitcoin and other cryptocurrencies, preferring to monitor developments at a distance.

Will that change in 2018?

Some have speculated that 2018 will be the year that central banks begin adding bitcoins to their balance sheets. Probably not because the average bitcoin buyer has radically different goals from those of a central banker.

Bitcoin buyers want to get 10,000% returns and participate in near-anonymous transactions. Central bankers do not need high returns, nor do they require anonymity. They have an obligation to their citizens to guarantee the stability of the currency. The firmness of the assets that central banks hold in their portfolios is a key part of achieving this mandate.

If the purchasing power of money begins to fall too quickly in relation to its objective, the central bankers will try to undo this by buying sufficient amounts of money. This requires selling assets from your portfolio or sales in the open market.

Assets that do not fluctuate much in value, such as a government bond, can be counted as constant material for open market sales. But the price of Bitcoin fluctuates regularly by 20-30% per week. Given this volatility, a central banker can not expect to depend on Bitcoin to provide a boost in future repurchase efforts.

This means that bitcoins will not help central bankers to fulfill their price stability mandate, and I would not expect any of them to start including Bitcoin and other cryptocurrencies in their portfolios.

Now, there may be some central banks that add traces of cryptocurrencies to their balance sheets, but only as a political trick. For example, I can imagine that the Central Bank of Iran or the Central Bank of Russia publicly announce that they will reduce their reserves of US dollars by a small amount and replace it with bitcoins.

But this would only be a way to land a public relations coup against an enemy, and not as a way to promote a solid central bank.

Digital currency of the central bank

Many central bankers have been exploring the idea of ​​issuing digital coins from the central bank or digital accounts for the use of natural persons. These tokens can be issued in a chain of blocks, in a normal account or on a smart card. Unlike Bitcoin, this form of money would have a fixed value, that is, a unit of digital currency would be linked to a 1 dollar bill.

I think it is unlikely that central bank currencies or digital accounts will be introduced in 2018. There are many possibilities for many central banks to even backtrack on their efforts as they learn more about the challenges of introducing a digital payment product.

Here is the crux of the problem: it makes sense for a central bank to issue a digital currency or publicly available accounts if there is sufficient demand. But it is not the same where this demand will come from, given that private bank accounts already provide the public with the same set of services that a product of the central bank would hypothetically offer.

For example, a declared advantage of a digital currency of the central bank is that citizens would obtain the ability to maintain digital money without risk. But since bank deposits are guaranteed by state insurance deposit schemes up to very high amounts, they are already 100% safe. Then there is no apparent reason for someone to change.

Central banks will also have no difficulty in competing with existing private sector payment alternatives.

Would the People's Bank of China (PBOC) make better use of a retail payment network than Alibaba or Tencent? Would the Bank of Canada offer a superior payment product to commercial banks in Canada, say TD or CIBC, which group all kinds of other financial services together with their payment offer? Probably not.

Therefore, it is not obvious to me why the public would want to use the product of the central bank, and therefore there is no reason for central bankers to devote much time to these projects.

A digital currency of the central bank could only obtain public acceptance by providing a unique service that private alternatives do not offer: anonymity.

We already know that people use physical cash because, among other reasons, it improves privacy. In the same way, anonymity would encourage the adoption of a digital version of cash. But this would force central bankers out of their comfort zone and into what would be a contentious public debate about financial anonymity and censorship.

The result is that the only digital currency projects that have the potential to survive against private competition must include anonymity, but only determined central bankers who understand the value of anonymity as a public service will be able to drive these anonymous digital currency projects in the face of criticism.

Unfortunately, it is likely that there are not too many central bankers willing to take that risk.

Regulation

Even so, with central banks hesitating to buy cryptocurrencies or adopt CBDC, the only front on which they will be active in 2018 is regulation. As cryptocurrencies become more and more integrated into the conventional financial sector - say through futures, ETFs, hedge funds or credit to buy Bitcoin - the perceived risks of instability that expand from the cryptocurrency markets to the conventional markets.

Central bankers have remained on the sidelines during most of the increase in cryptocurrencies. But given that they have a watchdog role to play, we hope that each time it is seen as a responsibility to intervene and regulate the sector.

It remains to be seen what form this regulation takes.

Source: CoinDesk