If CBDCs emulate the anonymity of cash, it will not be possible to limit their use to residents of a particular country. The main difference between CBDCs and Bitcoin would be that decentralization would not be desirable in the former.
Bitcoin allows transferring digital value on a global scale without needing intermediaries, requesting permits, or censorship, among other features. The world’s Central Banks, some to a greater extent than others, underestimated the attempts to replicate this essential idea, imposing low limits and obstacles.
As a result of the possibility that Facebook would give its users access to currency without national restrictions, Central Banks became aware of the need to revive the debate on central bank digital currencies (CBDCs). Santiago Fernández de Lis, Head of Regulation at BBVA, considers that the practical implications of implementing CBDCs are profound, for both users and the entire financial structure.
Calibrating the costs and benefits of adopting a CBDC-based model involves projecting scenarios and potential consequences for the financial system as a whole. The delays by some Central Banks represent advantages for others, considering that the cross-border nature of these crypto-currencies could change the current scenario, in terms of international reserve currencies and foreign trade.
Digital and Physical Money
The main functions of a Central Bank are to preserve the value of the national currency and to maintain the stability of prices and the financial system as a whole. It is the institution in charge of safeguarding and managing gold and fiat currency reserves, issuing legal tender money, serving as a treasurer and financial agent of the public debt, and being auditors and lenders of private banks, among others.
A Central Bank is also a bank for other financial intermediaries and private credit institutions. The only real public money issued by a Central Bank is cash. Other means of payment represent private money, that is, money lent to commercial banks, telephone companies, and FinTech companies, among others.
The main argument for the growing interest in eliminating cash is that its anonymity and fungibility facilitate using it for criminal purposes. There is also the high cost of producing new units, especially in hyperinflation or devaluation scenarios and frequent changes in monetary cones.
Cash also limits the scope of monetary policies based on negative interest rates since it provides a zero-rate option in its storage. Lately, following the declaration of a pandemic due to COVID-19, the potential of cash as a disease propagator has become another argument.
Central Bank Digital Currencies
Central Bank Digital Currencies could maintain the anonymity of cash and eliminate the need for financial intermediaries. Likewise, they could increase the monetary supervision and surveillance of individuals, maintaining the presence of private banks. Of course, this would also involve digital cash subject to interest rates, the Central Bank’s greater monopoly of financial activity, and more scope for its monetary policies.
The main difference between the technical architecture of CBDCs and Bitcoin is that decentralization would not be desirable. Network security and transaction verification would rather be the sole responsibility of the Central Bank and, in any case, of trusted institutions of the bank.
If CBDCs are designed to emulate cash, whilst maintaining anonymity, it will not be possible to limit their use to the residents of a particular country. This would raise competition for global seignorage. Currently, the portability of physical money limits it, but these logistical difficulties would disappear by going digital.
By Alexander Salazar