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Central banks, the digital dollar and resistance from banks

Updated: Apr 24, 2023

Fumbling and stumbling through the crypto jungle, central banks and policy makers are facing resistance to the idea of a digital dollar from banks and other sections of the private sector, reports Bloomberg (see link below) in an interesting article on the subject.

For those new to blockchain, we explained key concepts n in this article here (available only for our clients, solicitors and barristers).

The political appeal is that this the adoption of a national e-currency would reduce the cost of banking for many. Citizens would wire money directly to each other via their e-wallets. With China racing a head in its Fintech capabilities, policy makers consider this an important arena to compete in. Minnows like the Bahamas are already experimenting with digital currencies and some countries like El Salvador have made Bitcoin legal tender.

Laptop, with a US flag and cash

Image courtesy Gerd Altmann (geralt)

Objections from banks include the suggestion that this mechanism makes it easier for depositors to create a run on the banks. It’s not clear that’s right, as the biggest disincentives to do that are (a) the deposit guarantee and (b) the fact that having bundles of cash at home isn’t secure.

There is a financial disincentive for banks too. Term deposits are a low cost liability. A bank’s key roles are credit transformation (lending out money and taking credit risk) and maturity transformation (borrowing short term and lending long term).

It is unclear how digital currencies will tie in with traditional banking. Perhaps bank’s e-wallets will count at the central bank as a deposit? The Bahamas currently allows banks to offer e-wallets.

There is some concern amongst banks that under some versions of its implementation, digital currencies could mean that they are effectively competing with central banks for deposits. In our opinion that is unlikely as it goes against neo-liberal principles.

The greatest appeal of the digital dollar is the disintermediation of banks in transacting money. Though those crypto enthusiasts concerned by the excessive printing of Fiat money won’t be placated by this solution.

Whilst not discussed in the article, it also has socialist or progressive economists salivating at the prospect of targetable money. For example social security security funds that can be limited to food, rent or education. By contrast for those deeply suspicious of the government, the prospect of the government having total control over money is likely the stuff of nightmares.

The Federal Reserve Bank of Boston has been collaborating with MIT on prototypes for a digital dollar. We will watch this space as it will certainly be interesting.

Bloomberg article here (limited free articles then need to subscribe)

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