Currency overhaul incoming?
By Liam Sheasby, News Editor
14 Jun 2021
With the growing popularity of cryptocurrencies, and concerns over the dilution of fiat currency through quantitative easing programmes since 2008, many governments and central banks are weighing up the switch from physical to digital currencies.
El Salvador became the first nation in the world to class Bitcoin as legal tender, and it's expected other countries may follow suit as the popularity of such currencies grows year-on-year.
Politico are reporting that the US Federal Reserve are mooting a 'digital dollar'; to be used alongside the physical but likely to replace it entirely in the future. The problem governments have are the rise of so many of these private digital currencies. The lack of control versus fiat currency risks leaving nation states behind and potentially at a trading disadvantage. The Financial Times also reported over the weekend how the Basel Committee on Banking Supervision believes that cryptocurrencies are extremely risky and require stricter rules to be implemented.
The American Bankers Association is reportedly unhappy with the prospect, with a press statement stating that the upsides of a digital dollar “are theoretical, difficult to measure, and may be elusive”. Others argue however that banks would be almost entirely bypassed (hence their unhappiness) and thus unable to use the cash being held for loans and other credit purposes.
The solution will likely be to both regulate and provide state competition; a digital dollar that can be easily jumped into and a raft of new legislation to curb the worst behaviours of cryptocurrency creators and traders and persuade them to come more mainstream with the central bank's own digital asset. The fundamentals of digital currencies, using the same technology as cryptocurrencies, mean that you could make global payments both faster and cheaper, as well as open up banking and financing to more people than ever before.
The problem though is the state monitoring of said data. Discussions in the US Senate have touched upon issues such as transparency and privacy, as well as whether this is just a desire to match China's aspirations for a digital Yuan. Rivalry aside, we're already incredibly monitored in our behaviours in real life with CCTV cameras, GPS, and satellites. These new blockchain transactions, if rushed in and not properly challenged by politicians in the formation process, could mean every transaction onwards is noted and known and remove any trace of privacy. This is a huge risk to governments and central banks because people would turn to bartering and trading of non-tracked items, such as physical bullion, jewellery, rare metals, and more.
It is expected that the Federal Reserve Bank of Boston, working in tandem with the Massachusetts Institute of Technology (MIT), will publish a draft proposal of their Digital Currency Initiative in July as an initial approach to the challenge of going digital.