Government digital currencies aren't efficient enough for prime time

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Central banks worldwide are seriously studying the possibilities of digital cryptotokens representing central-bank assets. Several central banks around the world are studying whether and where to issue tokens that represent national currencies.

Central-bank digital currencies (CBDCs) fall into two categories: wholesale, or tokens issued for use between banks that settle accounts with one another through the central banks, such as interbank settlements; and retail, or tokens issued for general-purpose use by consumers or businesses in place of electronic or paper currency.

For central banks, wholesale tokens are of interest for improving interbank settlements, though early experiments have not shown sufficient efficiencies.
The Central Bank of Canada did an initial experiment using cryptotokens for interbank payments in 2016. That work is continuing in an experiment with the Monetary Authority of Singapore (MAS) focused on cross-border settlements, an area that MAS sees as the most promising use of blockchain and tokens by central banks.

MAS also is testing blockchain technology, including wholesale tokens, to make interbank payments more efficient. The recently completed Phase 2 of Project Ubin concluded that interbank settlement functions could be decentralized without compromising privacy and run without a central MAS infrastructure.

When it comes to retail tokens, however, MAS is not impressed. “We don’t see an urgent need, and there’s a lot more we can do to make traditional payments much faster, cheaper, and virtually free,” said Ravi Menon, MAS managing director, in his Money20/20 Asia closing keynote.

In any case, today’s cryptocurrencies—bitcoin for all practical purposes—just isn’t money form a central bank perspective.

“At this time, the general judgment is that their volatile valuations and inadequate investor and consumer protection make them unsafe to rely on as a common means of payment, a stable store of value, or a unit of account,” concluded researchers at the BIS in its latest report on CBDCs, issued recently.

Mark Carney, governor of the Bank of England, agrees. In a March 2, 2018 speech at the Scottish Economics Conference, Edinburgh University, Carney also called for increased supervision of crypto-assets and noted that ICOs can no longer avoid securities regulations by the U.S. Securities and Exchange Commission and the U.K. Financial Conduct Authority.

According to Xen Baynham-Herd, head of strategy and lead economist at Blockchain, central banks could achieve benefits, but still take on take on risks:

First, central banks could have greater interest rate control. In an era in which interest rates are close to zero and have been negative, central banks lose control. If interest rates are negative, people hoard cash and arbitrage on the rate. Without cash, rates can be negative.

Central banks could also directly set different rates for different people. Central bank rates are expressed through intermediaries in the real economy, and it does not always work out according to policy.

The granularity of transactions can be increased beyond what today’s electronic transactions make possible today. Assets that move off the ledger can be paired with those on the ledger, enabling the bank to account for assets more accurately.

Lastly, CBDCs could make it possible for central banks to implement momentary policy immediately. Rates could be tweaked in real time through a dashboard, rather than setting the rate and waiting a month to set it again.

The Bank of Canada examined similar use cases for CBDCs in a recent paper and reached conclusions that amounted to, “interesting and possible but not yet compelling enough.” Until the technologies provide significant savings, cryptotokens threaten financial stability, and the risks of open access to central bank balance sheets are worked out, retail CBDCs are a long way off.

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