Can central bank digital currency lead to cryptocurrency collapse

The idea of ​​central bank digital currencies is not new, as central bankers around the world are discussing this topic, and even the International Monetary Fund, as Managing Director Christine Lagarde, discusses the downsides and pros of the idea.

The need to have this conversation has now become commonplace. In countries like Sweden and China, the use of cash is declining and has almost disappeared. Meanwhile, digital payment systems like Venmo, PayPal and others in the east like M-Pesa in Kenya, WeChat and Alipay in China and Paytm in India offer alternatives to our normal banking system.

There are still many fintech innovations related to traditional banking, and none are based on blockchain or cryptocurrency. Likewise, if CBDCs are issued, there will still be no connection to these promoted blockchain technologies. Yet crypto-freaks have taken advantage of policymakers’ scrutiny of CBDCs as evidence that even central banks need crypto or blockchain to participate in digital currencies.

Such remarks are absurd. All private digital payment systems, whether connected to cryptocurrencies or traditional bank accounts, are likely to be replaced by CBDCs. Currently, central bank balance sheets are only accessible to commercial banks, and reserves are already held as digital currencies. It is for this reason that central banks are so effective in facilitating lending operations and interbank payments. Apart from that, the importance of trading with the right tools on a leading platform – including Bitcoin Revolution – cannot be ignored.

Since individuals, non-bank financial institutions and businesses do not have the same access, their transactions must be processed by licensed commercial banks. Therefore, bank deposits are a form of private money used only for non-bank transactions. Therefore, even fully digital systems such as Venmo or Alipay cannot operate independently from the banking system.

If individuals are allowed to transact through the central bank, it would overturn current arrangements, eliminating the use of cash, normal bank accounts, and even digital payment methods.

Better yet, CBDCs would not depend on public ledgers distributed without trust or authorization like those used by cryptocurrencies. Additionally, central banks have already granted access to an undistributed private ledger that facilitates transactions and payments in a transparent and secure manner.

If a CBDC is issued, it will immediately move cryptocurrencies, which are insecure, cheap, or easily scalable. Cryptocurrencies remain attractive to those who wish to remain anonymous, say enthusiasts. Although, like private bank deposits today, CBDC transactions can also be anonymous transactions, with account holder information only available to regulators or law enforcement when necessary, such as this is already the case with private banks.

The use of crypto-wallets by individuals and organizations does not make cryptocurrencies anonymous, as a digital footprint is always left behind. And authorities seeking to hunt down terrorists and criminals will soon crack down on completely private cryptocurrencies.

Generally speaking, CBDCs should be welcome as they would remove worthless crypto coins. In addition, a CBDC-based system would improve financial inclusion by shifting payments from private banks to central banks. Thanks to their mobile phones, millions of people without a bank account could access an efficient and virtually free payment system.

The main disadvantage of using CBDCs is that CBDCs would disrupt the existing fractional reserve system, from which banks lend more than they have in cash deposits to create more money. To lend and invest, banks require deposits. Therefore, by moving deposits from private banks to CBDCs, banks would become intermediaries of loanable funds, borrowing money to repay long-term loans, such as mortgages.

In other words, the Central Bank would use a narrow banking system to replace the fractional reserve banking system. The result would be a financial revolution which can bring many benefits.

Conclusion

So far, no country has chosen this path, perhaps because it would mean a radical collapse of private banking. One possible alternative would be for central banks to lend deposits that they have collected from CBDCs to private banks. The risk of state interference in bank lending decisions would be evident if the government were the sole provider and depositor of funds.

About Alexander Estrada

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