background

“Govcoins” part two: the consequences

Central Bank Digital Currencies are a reality in many countries and they are likely to change the way we use and see money, and the international role of banks in world’s economy, bringing complex economic and politic implications. In the first article on the topic we analysed the classic role of central banks that has also been changed from digitalization, prospecting a challenging future. How desirable this future is? In this second chapter about “govcoins” we’ll analyse both pros and cons of this massive innovation.

Advantages

As we discussed in the previous article, a digital value would be a fast and secure payment method, using advantages of cryptocurrencies together with the state currency, permitting the creation of a convenient and efficient financial system. Process and transactions would be reduced and simplified and costs would be reduced too because a CBDC doesn’t need intermediaries which are usually paid for their services (earning around 350 euros per year for each person on the planet).

This would lead to a major financial inclusion, because the disintermediation and the direct link with the central bank would make finance accessible for 1,7 billions of people not owning a bank account. Moreover, introducing CBDC central banks role would be implemented with major pros.

The monetary policy would be more and more efficient and focused, and central banks would control quantity and remuneration of circulating cryptocurrencies.

This would allow them to directly act on investments and consumptions modifying the interest rate on digital deposits and helping citizens accrediting on their virtual wallets , and supporting the aggregate demand with ad hoc measures.

If digital currency takes the place of the physic one, central banks could adopt negative interest rates on the circulating currency, drastically increasing their stabilizing action towards crisis, recessions and deflation. Lastly, the possibility to control and track CBDC transactions would reduce the risk of money laundering, tax evasion and other financial crimes.

The reason why this payment system is so attracting is now clear. But this attraction hides several dangers.

The risks

Govcoins could become dominant in international finance thanks also to the network effect (the benefits coming from a network membership increase, as the members of the network increase). But this CBDC hegemony would affect privacy and the new role of commercial banks. If central banks are afraid to lose the economy control, a massive use of cryptocurrencies would put too much power in one’s institution hand, which would access to a massive mole of citizens sensitive data, taking active control of their economic behaviour. If cash is sort of an anonymous payment method, its digital substitute could be easily programmed and monitored: just think about instant sanctions or bank account freezing due to inappropriate behaviour or to a currency programmed to avoid or oblige certain kinds of expenditures (for example prevent the purchase of certain importation gods or services such as abortion).

Social control wouldn’t be the only privacy problem: to put this massive mole of information in one place and link it to the use of a digital currency would make this data more and more vulnerable. If a cyberattack could cause huge problems, such an attack compromising the use and safety of a digital currency would be devastating for a state economy.

The other CBDC problem is related to the disappearance of commercial bank. The actual financial system has got many flaws, but its alternative has got more: if the majority of people would directly put their founds in central banks, commercial banks would find themselves without founds for loans, causing negative effects on consumptions and investments, obliging central banks to take care of this aspect (with the anything but rosy perspective to allow bureaucrats to decide for the credit allocation).

This capital flight from banks would increase concurrently with financial crisis, because savers could see in digital currencies a more secure alternative to bank deposits, exacerbating the recession.

Moreover, often central banks don’t want to take care about credit allocation: it’s easy to be guarantors of a financial stability if you can leave to others the daily relationship with privates, only intervening to correct system deficiencies. However, a massive use of CBDC would expose central bank to major risks due to large fluctuations of their balance.

The international context

We mustn’t underestimate the geopolitical consequences of a world dominated by cryptocurrencies. CBDC could become a valid alternative to the dollar hegemony to a global level: today dollar is the first reserve currency on our planet, thanks to the free circulating of capitals which the Chinese colossus cannot rival, and this contributes to the USA global influence. This domain is based on traditional system, which would not exist anymore once the digital currencies have replaced them as an international payment method. Some reporters think of this cryptocurrency as a way to challenge the USA hegemony, bringing positive effects on Europe and euro international role.

However, minor and fragile countries are afraid of the possible geopolitical upheaval caused from CBDC, figuring people using a digital coin instead of the traditional, causing chaos in the local financial and economic system.

In conclusion, such a range of opportunity and danger requires caution and rationality, and its revelatory that Chinese bureaucrats considering control more important than anything, are limiting the expansion of e-yuan. Governments and financial institution have to prepare to an epochal change in the currency role and to a resizing of the bank role. To strengthen privacy laws and to reform the financial system and the central banks functioning, are some of the countermeasures that have to be taken to fight the risks of a digital transition.

Translated by Dr. Oshun Samintra De feo


Share the post

  • L'Autore

    Davide Bertot

    IT

    Davide Bertot, torinese classe 2000, è un ragazzo fortemente interessato alle relazioni internazionali, alla politica e all'attualità. Attualmente studente di laurea triennale in International Relations and Diplomatic Affairs presso l'Università di Bologna, collabora con Mondo Internazionale come autore nell'area tematica Legge e Società, in particolare in ambito economico, contribuisce come autore e revisore per altre associazioni ed è volontario presso Volt Torino. Ragazzo intraprendente, pragmatico, curioso e sempre pronto ad imparare, spera un giorno di poter lavorare nelle istituzioni europee e dare il suo contributo per il miglioramento della società. Studia e lavora con la politica e l'attualità perché crede nella capacità delle persone di avere un impatto e nella necessità di parlare dei problemi e lavorare insieme per risolverli.


    EN

    Davide Bertot, born in Turin in 2000, is a boy strongly interested in the field of international relations, politics and current affairs. Currently an undergraduate student of International Relations and Diplomatic Affairs at the University of Bologna, he works with Mondo Internazionale as writer of the section Law and Society, in particular of economic matters, gives his contribution as writer and editor for other associations and volunteers at Volt Torino. Resourceful, pragmatic, curious, and fast-learning, he hopes one day to work in the European institutions and do his part to improve our society. He studies and works with politics and current affairs because he believes in the people's capacity to have an impact and in the need to acknowledge problems and work together to fix them.

Categories

Sections Society Law Economy


Tag

criptovalute Euro Dollaro yuan Digitale banca banca centrale Banca Centrale Europea govcoins Economia macroeconomia valuta moneta denaro prestito digitalizzazione finanza Big Tech controllo Crisi economica fallimento politica monetaria credito riserve pagamento Online Privacy Geopolitica programmazione inclusione network evasione fiscale

You might be interested in

Image

Framing the World, first edition.

Redazione
Image

Digital Euro: why create it?

Valentina De Consoli
Image

Framing the World, number III

Redazione
Log in to your Mondo Internazionale account
Forgot Password? Get it back here