Should Central Banks Issue Digital Currencies?

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Izabella Kaminska argued in the Financial Times that Central Banks should not go about issuing digital currencies. Kaminska lists off the reasons that banks should avoid issuing digital currencies, and why CBDCs are a bad idea. It’s safe to say that FT editor has not shied away from voicing her opinion.

The Rise of Central Bank Digital Currencies

Part of her argument goes that because the Central Banks would essentially be “moving into retail,” they would face legitimate competition from existing stablecoins and ultimately from each other. Digital versions of existing fiat currencies will be able to move much faster around the globe. The difference will be notable, but the effects on the economy are currently unknown.

From my perspective, it’s wrong to council central bankers against issuing digital currencies. People, by and large, will benefit from the issuance of new types of currency. A greater degree of choice will help everyone.

Some central banks, like the People’s Bank of China, are bound to issue digital currencies anyway. There’s no sense fighting it. It’s going to happen. As such, the better move is to look for ways that existing stablecoins still might serve the economy in a world where regular currencies are already digital.

Central banks should issue digital currencies. It will help them compete in a world of increasing choice, where cryptocurrencies can be considered alongside traditional means of moving money.

The growing movement against CBDCs comes from a fear that stablecoins and cryptos won’t be able to compete in a world where central banks issue something as convenient as crypto, but with a sense of legitimacy that crypto just can’t lend.

This is the wrong attitude to adopt, of course. Just because banks will be able to transact in something quite like crypto – a digital version of fiat currency – doesn’t mean that banks will suddenly be able to do what crypto can.

The Appeal of Crypto

Major financial institutions are still going to consider things like Ripple for the movement of money across borders, and things along those lines.

Crypto is attractive for precisely the reasons that a central bank-issued digital currency won’t be attractive to some people. Some people won’t like it precisely because it’s issued by a central bank. They’d prefer to use something like Bitcoin, which takes its value from the market.

In a previous generation, many of these users would have preferred gold. Bitcoin is considered by many to be digital gold. The point is that central banks can’t issue gold. They can’t issue what a certain portion of the market is looking for. Therefore, let them issue digital currencies. It may slow the proliferation of stablecoins, but it won’t slow the progress of Bitcoin any.

People will be able to hold fiat currencies in wallets on their phones just like they can cryptos today. Perhaps the most impacted sector will be exchanges, who will likely interface with the new issuance of digital currencies.

The question of whether or not central banks should issue digital currencies is not really worth asking anyhow. The better question is whether they will or not. Representatives of many major banks have spoke on the subject, and the Chinese central bank is actively pursuing a project in the direction of issuing a digital currency.

What will a world with central bank digital currencies look like? How will it change finance? That much remains to be seen. But for now, from my corner, I’m encouraging all developments.