Financial authorities in many countries around the world are studying and experimenting with so-called CBDCs, digital currencies of central banks. However, according to economists Peter Bofinger and Thomas Hass, this type of cryptocurrency is in danger of failing in its main objective. One argument is the subsequent and inevitable competition with decentralized digital currencies and private bank services.
Central banks around the world seek to create their own centralized and state-owned cryptocurrencies with the aim of implementing them as bargaining chips. However, the new study argues that CBDCs will most likely fail in this role, but possibly succeed as a store of value for large institutional investors.
Researchers Peter Bofinger and Thomas Hass, from the Economics department at the University of Wuerzburg in Germany, published a study on VoxEU, a financial research and analysis platform. They believe that the effort of central banks to create digital currencies focused on exchanges may be in vain. According to experts, there is no “obvious justification” for the creation of CBDCs as they are being formulated.
What are CBDCs?
Central bank digital currencies are essentially centralized cryptocurrencies and may have different purposes and functions. According to the researchers, a CBDC can be seen as “a deposit with a central bank that is used within the framework of existing real-time gross settlement payment systems (RTGS)”.
Another possible use of them would be “as an independent payment system that operates in parallel to the traditional one already existing, using deposits held at the central bank.”
In a simplified way, this type of cryptocurrency can be used for some purposes. They can serve as a deposit for reserving value, as a form of general digital payment or as a currency of exchange between digital products within the framework regulated by the central bank in question.
Private structures generate competition
Central banks are looking for a more stable alternative to the current speculative nature of decentralized cryptocurrencies. That is why state digital currencies could, in theory, solve this problem and create a stable digital payment system, but only at the national level. “They have to show that the objectives they are pursuing with CBDCs are not satisfactorily achieved by private providers,” write Bofinger and Hass.
However, for researchers, even if these objectives are achieved to generate financial stability and a concrete system of digital payments, CBDCs would still not be the best option or solution for what they propose.
For them, there is no reason for anyone to want to switch from a private bank or payment system (as there are already many) to a national one. They conclude that a central bank simply cannot offer the same variety of functions and products as the private financial market.
In addition, a system exclusively intended for the domestic market cannot compete with major global financial services providers and with cryptocurrencies that can be traded internationally. Finally, the objective of achieving digital exchange currencies linked to the state would be the wrong direction.
CBDCs could function as a store of value
For the authors of the research, the best way to use state digital currencies as they are proposed today would be to store money in a stable manner. “The demand for a value reserve CBDC would come from companies and large investors with bank deposits of more than € 100,000, which would be redeemed in the event of a bank restructuring,” points out the research.
However, even with a change in direction, CBDCs would have little influence on the current international economy. Global payment systems, such as PayPal, which now includes even cryptocurrencies, would remain dominant. Meanwhile, for the purpose of reserving money, there are still many alternative assets, investments and digital currencies.
With information: Decrypt