National Government Digital Currencies Versus Globally Distributed Cryptocurrencies: in Depth

As society starts to move away from cash, central banks’ potential to reap profits off issuing that cash could be threatened.

Many governments are worried about the mass adoption of cryptocurrencies and hence are considering the merits of creating a central bank digital currency (CBDC).

Central banks have woken up to the risks cryptocurrencies can pose to policy makers’ bread-and-butter business: the economy.

Hence the debate about the pros and cons of government digital currency closed private blockchains versus public blockchain cryptocurrency are increasingly on the agenda of policy makers and investors alike.

The mainstream media often wrongly refer to government backed digital currencies as cryptocurrencies without defining the new concept of central bank digital currency.

Cryptocurrency is a blockchain asset and not the liability of anyone. Central bank issued digital currency is based on a fractional reserve banking system based on debt and the liability of increasingly highly indebted nation state central banks.

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 Image Source: The BIS (Bank for International Settlements) report

Cryptocurrencies were created with the intention to make central banks, the traditional bastions of monetary policy, redundant in the face of a peer-to-peer electronic cash.

10  years after the publication of the Satoshi Nakamoto’s Bitcoin whitepaper, cryptocurrencies are considered to be utilized by the very institutions they were meant to subvert. Blockchain, the distributed ledger technology underpinning Bitcoin, is the tool that can be extended to a central bank digital currency.

Most of the current amount of money is digitized already, whether in bank reserves with the central bank, or in checking accounts at the local bank. Only a fraction of money supply is in paper money bills in circulation. But digital money, locked up in private ledgers and exchanged through dozens of heterogeneous databases en route from creditor to debtor, lacks the speed, stability, scalability, and security of a good cryptocurrency.

‘If you can’t beat them, join them’

Many countries are increasingly thinking about a strategy of how to deal with the global rise and mass adoption of cryptocurrencies. If Bitcoin is the money of the people, fiat currency is the money of the state.

Governments and central banks from India, Japan, Canada, Russia, Switzerland to Singapore and the Marshal Islands are having projects as to how best create a government backed digital currency. Several other governments, including China, Estonia, and Iran, have discussed plans for their own digital currency.

Singapore has project UBIN and the Bank of Canada has Project Jasper and the United States is toying with the idea of a FedCoin, whereas Sweden’s Riksbank is contemplating the ‘e-Krona.’

In Sweden, the demand for cash has dropped considerably over the past decade. Already, many retail stores do not accept cash and some Swedish bank branches no longer disburse or collect cash. In response, the Riksbank has embarked on a project to determine the viability of an e-Krona for retail payments. No decision has yet been taken in terms of technology.

The Marshall Islands will issue its own cryptocurrency that will be circulated as legal tender along with the U.S. dollar.

The Head of the Swiss Stock Exchange has appealed to the Swiss National Bank to (SNB)  to launch the e-Swiss Franc.

In response to these comments, the SNB repeated its message to the media that it did not consider any need for such a move. Mounting calls for Switzerland to introduce a blockchain-based national cryptocurrency therefore continue to fall on deaf ears at the Swiss National Bank.

Switzerland is a rich country with a thriving Crypto Valley and only small wealth disparity compared to Indonesia and other emerging markets but it seems that developments in fast growing countries like Indonesia could have been on the mind of the Head of the Swiss Stock Exchange.

While Bank Indonesia hasn’t banned exchanges from offering cryptocurrencies, it has asked investors to refrain from owning, selling or trading crypto token despite the growing number of Bitcoin investors. The Indonesian central bank doesn’t deem digital currencies as legal tender…

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