Finder makes money from featured partners, but editorial opinions are our own.

Opinion: With USA and Canada now floating digital currencies, focus should shift to bank overhauls

shutterstock data servers crypto 450x250

Picture not described

Central banks need to get ready for digital currencies, but commercial banks may get in the way.

In an op-ed for the Wall Street Journal, former CFTC chairman Christopher Giancarlo, and former director of CFTC's experimental LabCFTC initiative Daniel Gorfine, have suggested a blockchain-based digital currency to help maintain the US dollar's dominance in an era of emerging digital currencies.

"Recent developments in digital currencies... threaten the dollar's dominance, and Washington policymakers are taking notice," they write. "Significant actors, including central banks and social media platforms, may launch new currencies in the next few years. As their networks grow, they could eventually erode the dollar's status as the most popular currency for international exchange."

Up north, Canadian central bank authorities have been entertaining similar thoughts, The Logic reports.

At an internal central bank presentation in September 2018, Stephen Murchison, an adviser leading the Bank of Canada's digital currency research, enumerated a range of benefits of digital currency, including the ability to gather more information on consumer spending.

He also pointed out that cryptocurrencies pose a threat to central bank operations, physical banknotes are expensive, and national digital currency may be necessary for reaching people and enacting monetary policies going forward.

"The incentive to produce a ubiquitous international currency is huge," Murchinson said. "Cryptocurrencies may become a direct threat to our ability to implement monetary policy and lender of last resort (LOLR) role."

National digital currencies are inevitable

More internationally, the Bank of England's Mark Carney has suggested a new "synthetic hegemonic currency" as a new international digital currency. And more locally, the Bank of England regards a national digital currency as near-inevitable, as does the Bank of Israel.

Elsewhere, Germany and France have issued a joint statement to "reaffirm their willingness to tackle the challenges raised by cryptocurrency", after European Central Bank board member Benoit Coeure described Facebook's Libra cryptocurrency as "a wake up call".

"We also need to step up our thinking on a central bank digital currency," he said.

Meanwhile, China's national digital currency may be hitting the market as soon as 11 November, 2019, Uruguay and Sweden have already live tested national digital currencies, and India has confirmed its forays into digital currency, motivated largely by the fact that it's sick of spending almost US$100 million a year to manage physical paper money.

The Bahamian "sand dollar" national digital currency is well underway for similar reasons, plus a desire to bank the unbanked across the islands.

Live testing is more active elsewhere. Russian officials have been quite explicit in their view that cryptocurrency can serve as an economic weapon, and it's believed that Russia prodded Venezuela into being a guinea pig for testing this economic weapon, via the Venezuelan Petro cryptocurrency.

Officials in Iran and Turkey have also expressed varying degrees of favour for the idea of a digital currency for escaping international sanctions, while North Korea has been neck-deep in digital currency for a long time now.

South Korea is naturally in the process of exploring national (and more local) digital currencies too, while Japan's interbank clearinghouse has already trialled its own yen-backed stablecoin.

The Marshall Islands national cryptocurrency is also moving forward, despite concerns from the International Monetary Fund (IMF), which itself has urged the world's central banks to start taking digital currency seriously.

And that's just a snapshot. Pick almost any country in the world, and you'll find that it's actively engaged in digital currency somehow.

And of course, Facebook – an enormous digital nation with a population of 2.5 billion (a quarter of the world's population) – has its own "national" digital currency designs with Libra.

Ready or not, here comes the age of digital currency.

Opinion: Commercial banks overhauls are the next step

As the thinking goes, if you're not careful (you being an entire country in this case), your residents will start using other brands of purely digital currency instead of the locally-made home-grown currency.

This comes with a slew of big problems, primarily stemming from the fact that people are bypassing the country's existing banking arrangements.

For a real world example of these problems, look at how Nepal banned Alipay and WeChat Pay. It did this to prevent tourists from China from completely bypassing the local economy. Basically, the actual money in someone's Alipay or WeChat Pay account is held in China, so any transactions made through it don't touch the local economy at all. There's no need to use the local currency, and it's difficult for local monetary authorities to tax and track those transactions.

At the same time, it could weaken a country's ability to enact monetary policies. When a central bank cuts interest rates, for example, those cuts only have an effect insofar as it affects the commercial banks, who are then meant to pass on the cuts to consumers, who are then expected to change their behaviour accordingly. As more people switch to outside digital currencies, monetary policies start losing their effectiveness.

Taken to extremes, the uncontrolled rise of digital currencies could lead to a devastating libertarian utopia. No one wants that, and anyone who says they do is mistaken.

This leads to the next problem: most existing financial systems are not designed for digital currency. Most central banks are not ready to take on the full liability of all their currency in circulation. Commercial banks are an important buffer in this regard, in that they help distribute risks.

For example, about 95% of the value of Australian dollars in circulation is encapsulated in banknotes. The Reserve Bank of Australia (RBA) is responsible for ensuring the value of these banknotes. However, the RBA is only directly liable for about 3.5% of AUD in circulation. The other 96.5% is the direct responsibility of commercial banks, who purchase banknotes from the RBA to back up the value of customer deposits and similar.

Now if one bank fails, the impact on the national economy will be limited. If everyone loses faith in the Australian dollar, they can mostly only make it as far as the commercial banks. The commercial banks are distributing the risks, and insulating the RBA from the masses. It's an important job, but it also incurs necessary overhead costs, such as physical security for those banknotes, insurance for customer funds and massive executive bonuses.

This is problematic, because in a multi digital currency world, these expenses will appear baked into the cost of a currency itself, and people will theoretically gravitate to whichever digital currency is the best product. It needs to be something that adequately holds monetary value, and which is widely accepted as local currency. But brand loyalty is nonexistent, as seen whenever a local currency fails and the greenback swiftly takes its place.

Therein lies the dilemma. It's too risky to give up sovereign monetary control, but:

  • It's too risky for central banks to directly issue national digital currencies to end users, so you have to go through commercial banks.
  • Commercial bank costs undermine the competitiveness of a currency itself, causing people to seek other alternatives which erodes central bank monetary control anyway.

This problem is the reason many countries have so far resisted or delayed a national digital currency. Alternative currencies like Bitcoin have always been too small to worry about, but now you have beasts like Libra and the Chinese national digital currency stomping around, countries like Russia actively looking to erode the US dollar's dominance, and just about every bank on the planet looking at digital currency.

The cat's out of the bag, the clock is ticking and market forces are coming for currency itself. As it does, the pressure will start falling on commercial banks to adapt, even at the cost of their own profit margins.

Also watch

Disclosure: The author holds BNB, BTC at the time of writing.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

Latest cryptocurrency news

Picture: Shutterstock

Ask a Question

You are about to post a question on

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked

Finder only provides general advice and factual information, so consider your own circumstances, or seek advice before you decide to act on our content. By submitting a question, you're accepting our 1. Terms Of Service and 6. Finder Group Privacy & Cookies Policy.

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
Go to site