The BiS warns that digital currencies can generate an earthquake in the monetary system

If the central bank does not act, private money could interfere with monetary policy

The rapid digitization of payment methods (card, bizum, mobile …) and the economy is also allowing a revolution to take place in money itself. Cryptocurrencies are increasingly popular and are beginning to enjoy some acceptance among some companies (form of payment) and institutional investors (such as investment). In turn, central banks in various jurisdictions, in an attempt not to lose ground, have announced projects to launch their own digital currencies , which are intended to be a digital alternative to cash. Nobody wants to be left behind in this digital revolution.

The Bank for International Settlements (BiS) has published a new work on the digitization of money in which it predicts important changes in the monetary system that could, for example, put the independence or monetary sovereignty of some countries at risk. , alter the properties (or part of them) of what until today we have called money or exchanges. But they could also reduce costs and time in transactions.

Markus K Brunnermeier, Harold James and Jean-Pierre Landau are the BiS researchers who have carried out this work that analyzes both private digital currencies or cryptocurrencies (bitcoin, ether or cardano), as well as public ones or CBDC(digital currencies issued by central banks). These experts argue that “digitization has revolutionized payment systems and money in general. While digital money itself is not new to modern economies, digital currencies now facilitate instant peer-to-peer transfers in a way that was previously impossible. These new currencies (both public and private) will become the central hubs of large social and economic platforms of systemic importance that transcend national borders and will redefine the ways in which payments and user data interact. “

This type of digital money is not something entirely new. In China it has already been used through different applications such as Alipay, which allows sending digital money through the tokens of the application itself, simply using an electronic signature. On the other hand, Facebook has led the development of digital currencies for social networks, in addition to plans to issue its own stablecoin or stablecoin, renamed Diem , which will be backed by dollars ensuring a stable exchange rate with respect to the ‘greenback ‘. Finally, in recent years, thousands of fiat cryptocurrencies have been launched using blockchain technology.

“The first important economic idea is that digital currencies present innovations that will separate the functions that today are fully met in money (store of value, medium of exchange and unit of account), which will make the competition between currencies much more fierce. Digital currencies can specialize in certain roles and compete exclusively as a medium of exchange or, for example, exclusively as a store of value “, explain the BiS experts. Some digital currencies may have certain advantages for savers to use to conserve their purchasing power, while others may have characteristics conducive to making quick purchases. Today it is the money issued by the central bank that brings together all these properties.

Digital currency areas

“The second prediction is that digital money issuers will try to differentiate their product by adding features to their currencies that have not traditionally been tied to money, such as data collection or social media services. Convertibility may be required so much. between digital currencies (exchanging one digital currency for another), such as interoperability of platforms to take full advantage of the benefits of this type of competition. The importance of digital connectivity, which often supersedes the importance of macroeconomic linkages, will lead to establishment of digital currency areas “( digital currency areas or DCA) that link the currency more with the user of a digital network than with the place or a specific country “, these experts maintain.

If today the euro is the currency of all Europeans, perhaps tomorrow there will be a digital currency that brings together a community or union that work in the same sector and that see certain advantages in that digital currency regardless of where they live. That digital currency area could bring together people from all over the world who have something in common that leads them to use the same platforms, networks, and digital currencies. This is something that has already been observed in the world of video games, but that in the future could gain more relevance.

A kind of digital dollarization

“The international character of these digital currencies will make emerging and advanced economies vulnerable to what could be termed as digital dollarization, in which the national currency is supplanted by the currency of a digital platform (which does not have to be a digital dollar, “says the BiS report.

Beyond cryptocurrencies, public digital currencies or CBDC can also have a disruptive impact on the monetary system: ” CBDC digital currencies can also cause disruptions to the international monetary system: countries that are socially or digitally integrated with their neighbors may clash to digital dollarization, while the dominance of systemically important platforms could lead to the emergence of digital currency areas that transcend national borders. ” Fabio Panetta, member of the Executive Board of the ECB, warned this week that “in the absence of a European solution for digital payments, our monetary and financial sovereignty would ultimately be at stake.”

This occurs today in small countries that have been ‘colonized’ by foreign currencies, such as Ecuador with the dollar or Montenegro with the euro. A safe and stable public digital currency (CBDC) could lead millions of people in other countries to decide to transform their most liquid savings into this currency, putting in danger the monetary sovereignty of that country and region, which would be subject to the decisions of the central bank of the issuing country of the CBDC. “As a result, governments may be forced to offer a public digital currency (CBDC) to maintain monetary independence,” the report’s authors argue.

BiS experts believe that this may generate a kind of race among central banks to issue their own public digital currency in an attempt to prevent their citizens from abandoning legal tender in their country to convert it to another, more stable currency. offer a higher interest rate, for example. This risk is most acute in those countries whose currencies suffer constant episodes of depreciation or devaluation. Citizens will be tempted to quickly, cheaply, safely and easily transform their pesos or lira into a supposed dollar or digital euro that they can keep in their digital wallet on their mobile phone.

Cash and monetary policy

“Third, digital currency and its integration with ubiquitous platforms and services raises important questions about competition between public and private money . In a digital economy, cash could de facto disappear , while payments could focus on platforms. rather than in the provision of bank credit, weakening the traditional transmission channels of monetary policy, “these experts argue.

These private currencies can raise concerns for monetary policy. Monetary policy is generally seen as a public function that private money issuers would carry out inefficiently. If large private issuers of digital currency are allowed to freely conduct monetary policy, they could use it to benefit their companies rather than the public, according to BiS analysts.

“Similarly, the provision of emergency liquidity has generally been considered an essential function of the central bank. In such a banking system, it would probably be necessary for some entity to be able to provide emergency liquidity directly in the network, and it is not in the business. all clear that the owner of the network is going to provide the optimal amount of emergency funding “, ensure the BiS researchers.

The document lists some examples that occurred in the last centuries that did not end very well. Although central banking and its monopoly on money receives much criticism and is probably an imperfect system, it seems to have given some stability to the monetary system, at least in developed countries that have an independent central bank. “Historically, one of the reasons governments have tried to regulate private money has been to curb financial instability,” the authors argue.

In fact, the history of unregulated private money in Western society is often seen as problematic. Free banking (the bank controlled finances and the issuance of banknotes) lasted less than 30 years in the US and Switzerland, according to the BiS report. The only case in which some stability was achieved was in Scotland, where free banking was maintained for just over a century.

However, there are some episodes where unregulated private currencies have been successful and even more accepted than the official government currency. One of the most interesting examples is that of the ‘Swiss’ dinar in Iraq, which continued to circulate in the Kurdish part of the country even after the government disavowed it. In recent years, fiat cryptocurrencies like bitcoin or ether have once again raised the question of whether privately issued and unsupported money can be successful. Although fiat cryptocurrencies have not yet stabilized as a store of value and are often inefficient means of exchange, they have found their place as use currencies in international transactions (especially for the evasion of capital controls).

The report concludes that the ongoing digital revolution may lead to a radical transformation of the traditional money exchange model. In addition, digital currencies can create some turbulence in the monetary system. So “the rise of digital currencies will have implications for the treatment of private money, the regulation of data ownership and the independence of the central bank,” the report warns.

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