Whether Bitcoin or its imitators eventually achieve some global ubiquity, they have already achieved success in one fundamental way, and that is by forcing humans to rethink their relationship with money, as well as banks.

Cryptocurrencies were not on the ballot during the “sovereign money” referendum of Switzerland from last weekend, in which Swiss citizens rejected by the ratio of three to one a proposal to end fractional reserve banking, as well as give sole money-creation authority to the Swiss National Bank. But, they were actually the elephant in the room.

We think that the presence of the crypto alternative is eventually going to force economies around the world to disintermediate banks from money still the direct authors of that change will not be activist voters wielding ill-conceived referenda or crypto enthusiasts that are voting with their wallets.

The central bank itself is going to implement the first phase of a transition toward the actual “money of the people,” striving, as well as competing to remain relevant in a post-crisis, post-trust, digitally connected global economy.

That can disappoint adherents of the cypherpunk dream that birthed Bitcoin. But, the global news for those that want governments out of money altogether is that when currencies become digital, as well as enjoy all the bells and whistles of programmable funds, they are going to foster more intense global competition among themselves.

For instance, when smart contracts have the ability to manage exchange rate volatility, people, as well as businesses involved in international trade are not going to need to rely only on the dollar as the cross-border currency of choice. This more competitive environment is ultimately going to open the door to non-government digital alternatives like Bitcoin.

Backlash against CBDCs

To be entirely sure, official enthusiasm for central bank-issued digital currency, or also known as CBDC, has reduced somewhat like the old guard of central banking, had dug in its heels.

The Bank of England spearheaded research into the idea about three years ago. Governor Mark Carney, lately warned of financial instability if his institution was to directly provide some digital wallets to ordinary citizens, a change which is going to give everyone the same opportunity to have reserves at the central bank as regulated commercial banks.

The Bank of International Settlements, which is some kind of international club for central banks, echoed the concerns of Carney, as have other officials too.

This backlash, which pointed that the bank supervisory teams within central bank bureaucracies have regained ascendancy over technologists, as well as innovators in their internal debates over CBDC, appears to form a well-founded expectation: bank runs would be a real possibility.

Banks are the real problem

One unique reason for promoting digital fiat currencies is precisely to bypass the banks. No matter if the currency is fiat or decentralized, banks are the real problem. The technical, as well as social and regulatory infrastructure upon which they operate,  is decades old and fraught with non-necessary compliance costs.

The banks remain centralized, non-interoperable databases on outdated, clunky COBOL mainframes. They actually rely on multiple intermediaries to process the payments, each meaning their own, siloed ledgers which have to be reconciled against each other through time-consuming fraud-prevention mechanisms.

Each of these inefficient systems, instituted to address the problem of trust, merely add to the cost of confidence in the system.

There is also the massive political risk which comes with the involvement of banks in our payments system.

One of the reasons why it was deemed necessary for governments to ball out the banks in the world to the tune of trillions of dollars in 2008 was that not doing so would have thrust our highly complex payments systems into chaos. The global economy is going to have a cardiac arrest. It is that threat of bringing us all down with them which actually gives “too-big-to-fail” banks hold over policymaking.

A lot of central bankers, still smarting from the fallout from that crisis, know that this is the problem.  A lot of them see real benefits in removing banks from payments, as well as recognize that digital currencies can help. The question is – how to get there without fomenting chaos.

Gradual solutions suggested

One of the solutions is a phased approach over time. You do not provide CBDC to everyone at first, but you start with large non-bank financial institutions, follow it up with a particular class of large corporations and then move to smaller businesses.

The second solution is to introduce an unprecedented, as well as central bank-determined CBDC interest rate, which is going to be an addition to the central bank toolkit for managing the money supply.  At this moment, it hinges on a combination of a policy rate imposed on the reserves of the banks, as well as on the interventions in the two-way market for buying and selling government securities with banks.

The ex-Chair of the Federal Deposit Insurance Corp.,  Shelia Bair argued, the new interest rate tool could increase monetary policy, as central banks could utilize it to either stimulate or cool the economy.

Still, we cannot see developed-world central banks rushing to do this. Their relationships to commercial banks are actually too entrenched.

But, the thing is different for developing-world central banks. For a long time, those countries’ monetary policy has been driven by policies of the biggest central bank in the world, the Federal Reserve. Whether the Fed cuts rate, the foreign, as well as inflationary money will flood into their bank-centric financial systems; otherwise, if it hikes rates, they are going to face deflationary risks. In theory, a fiat digital currency could permit them to offset those forces.

Of course, now everything could go wrong. A new tool for profligate governments in order to debase the money of their citizens does not look desirable.

Still, that may also be what ultimately gives Bitcoin, or other viable Altcoin, a possibility to shine, especially as Layer 2 solutions start to help with scalability, as well as liquidity. The central banks cannot put the cryptocurrency genie back in the bottle. Their potential embrace of digital fiat currencies is going to occur in an era when their citizens will have an opportunity to shift to these new decentralized solutions, with increasing ease.

No matter if they take over the world or not, the power of the market in a more open system of currency choice is going to mean that cryptocurrencies are hopefully going to play a huge role in forcing these politicized centralized institutions to manage the money of their people better.


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