Do the central banks have a digital master plan in place that will see them derail bitcoin and other cryptocurrencies before they have truly been established as a viable, decentralised alternative to fiat?
The supply of Bitcoin is limited, say its advocates, but new cryptocurrencies are springing up everywhere.
Cryptocurrencies are crypto assets, not currencies, plus they are awkward to use and not safe (as some vaults have been hacked into), says Marshall Glitter.
Questioning digital currencies
In my view, this development raises an existential problem for cryptocurrencies such as bitcoin: what will be the raison d’etre for cryptocurrencies once CBDCs become ubiquitous? Why would someone prefer to let Facebook’s Mark Zuckerberg look after their money rather than Fed Chair Jerome Powell or ECB President Christine Lagarde? And who would prefer to hold their money in an unsecured exchange like Mt. Gox, an entity that was hacked in 2014 while losing $460m in the process? Other crypto exchanges have collapsed due to outright fraud – Turkey’s Thodex exchange was taken offline after its founder absconded with $2bn in bitcoin-denominated client funds.
Indeed, why do bitcoin or other cryptocurrencies have any value to begin with? The key to that is their generic name: cryptocurrencies. Bitcoin and others have been promoted as a superior upgrade to managing a financial system, as opposed to ‘fiat’ US dollars and euros that are susceptible to debasing and devaluation by reckless monetary authorities. Early adopters and buyers are expecting greater demand in the future, but why exactly should demand increase?
One assumes it is because they expect people to use them for two of the three uses of currencies: a medium of exchange and a store of value.
The adoption of CBDCs is likely to dispel the illusion that cryptocurrencies are ‘currencies’ in the true meaning of the term and scuttle their aspired goal of becoming cash equivalents (see Fig 1). As many policymakers have pointed out, including former Bank of England Governor Mark Carney and Swiss National Bank President Thomas Jordan, cryptocurrencies are crypto-assets, not currencies. People are buying them simply in the hope of selling them at a higher price in the future. But if CBDCs occupy the niche in the financial sector that cryptocurrencies are expected to occupy, why should demand increase?
World Finance
1 comment:
Marshall Gittler asks why anyone would want to hold crypto currency once CBDC is up and running. It’s possible people would find cryptos more attrictive than CBDC if cryptos are not properly regulated. In particular, cryptos would be attractive if they manage to play the trick which fractional reserve banks have played since banks first appeared, which is to suggest to depositors that their money is safe when it is quite clearly not because the banks’ assets consist to a significant extent to loans (which enables those banks to pay interest to depositors) and every bank makes silly loans at some point, at which point it cannot repay depositors their money.
I.e. Cryptos should be forced to make it very clear whether they are 100% backed by reserves (i.e. base money) or not and they should be constantly audited to make sure that where they do claim to be 100% backed by reserves, that the reserves are actually there.
And what do you know? The latter is very much the basic rule of full reserve banking. I.e. the basic rule of full reserve is (shock horror) . . . . honesty!
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