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Bitcoin, Central Bank Digital Currencies And Cryptos: The Battle Begins

The financial world is in a state of flux. For once, the Pandemic is neither an effect and only arguably a cause. Digital currencies – cryptos – are on the march again. The simple fact remains that with the resurgence of Bitcoin – now approaching its highs of December 2107 –  traditional monetary systems are being challenged once more. The challenge is fundamental – it extends to what we understand by the concept of money.

We report on cryptos regularly in our news section. Here’s an extract from a report here a couple of weeks ago: Central banks around the world are set to launch their own digital currencies. In 2018, the preparation was done for a “Britcoin” launched by the Bank of England. The product is wrapped up in metaphorical cling film, and ready to go.

Some might argue that central bank digital currency (CBDC) is an inevitable by-product of declining cash usage. The main element that will find resistance is, in our opinion, the cnetralised (still) nature of the financial structure if CBDCs. Central banks, while officially distanced from the shared-ledger (blockchain) accounting systems behind CBDCs, are still closely associated. Here’s an entertaining report from Finextra, which reports startlingly low levels of cash usage in Norway.

And here is the latest, from our friends at Finextra. We tend to agree with the anonymous central bank official – although we disagree with the contention in the body of the report – that central banks are behind the digital-token curve (see Bank of England Britcoin reference, above).

As news leaks out about a possible 2021 launch for Facebook’s digital currency Libra, a senior European Central Bank official warns: “What is at stake is nothing short of the future of money”.

Facebook’s Libra cryptocurrency is readying to launch as early as January, the Financial Times reported on Friday, citing three unidentified people involved in the project.

The Geneva-based Libra Association that will issue and govern Libra plans to launch a single digital coin backed by the dollar, a significant scaling back from its recently revised plans to to issue a series of stablecoins backed by individual traditional currencies, as well as a token based on the currency-pegged stablecoins.

The news has alarmed central banks, which are currently at a minimum of two years out from creating their own digital alternatives.

ECB board member Fabio Panetta, speaking today at a Bundesbank-convened future of payments conference, argues that the impending revolution in payments “requires us to stand ready to reinvent sovereign money”.

Speaking directly to Facebook’s stablecoin strategy, Panetta warns: “Stablecoin users are likely to bear higher credit, market and liquidity risks, and the stablecoins themselves are vulnerable to runs, with potentially systemic implications.”

He says the risks could be mitigated if the stablecoin issuer were able to invest its reserve assets in the form of risk-free deposits at the central bank, as this would eliminate the investment risks that ultimately fall on the shoulders of stablecoin holders.

“This would not be acceptable, however, as it would be tantamount to outsourcing the provision of central bank money,” Panetta states. “It could endanger monetary sovereignty if, as a result, private money – the stablecoin – were to largely displace sovereign money as a means of payment. Money would then be reduced to a ‘club good’ offered in return for the payment of a fee or membership of a platform.”

The ECB is mustering support for the creation of a a digital euro, with multiple experiments underway across EU markets and around the world.

In Europe, the ECB and the national central banks have started preliminary experimentation through four work streams.

  • Our view is that central banks and state governments will remain fiercely opposed to large-scale crypto usage – be it Bitcoin or Libra – as this will inevitably lead to a parallel financial or value-exchange system – one that is largely untaxable and certainly opaque (at best) in audit terms. The battle for control between cryptos and mainstream is just being joined. This one, as they say, will run and run over the next few years.


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