by Cindy Huynh
On March 13, 2018, European Bank Officials discussed the potential of a Central Bank-backed cryptocurrency and how it would challenge the current banking system. Although they believe that existing digital currencies like bitcoin are not the future, they see do seem the financial advancement as ‘an early sign of change.’
Changing Transaction Mediums, but Probably not Bitcoin
Benoit Coeure, Member of the Executive Board of the European Central Bank (ECB) and Jacqueline Loh, Chair of the Bank for International Settlements (BIS) Market Committee commented that while “cash will not be king forever,” the future of money will not revolve around existing cryptocurrencies since they are “poor imitations of money.”
“Almost nobody prices goods in Bitcoin, few use them for payments, and, as a store of value, they are no better than gambling in a casino. Policymakers are rightly worried about consumer and investor abuses, as well as illicit use.”
Despite ECB’s pessimistic stance, Coeure and Loh believe today’s cryptocurrencies could pave the way for the future, just like “Palm Pilots paved the way for today’s smartphones.”
As such, the duo went on to explore the idea of Central Bank Digital Currencies (CBDC) and how this could potentially work under the current financial system.
ECB published the opinion piece a month after Italy’s economy Minister Pier Carlo Padoan revealed that Central Banks were considering issuing their cryptocurrencies. Although the ECB did not openly embrace cryptocurrencies, they readily acknowledged that existing cryptocurrencies highlighted severe flaws in the existing financial system.
Central Banks Are Still Uncertain
Under the existing financial system, “only financial institutions have direct access to digital Central Bank money via accounts at their national Central Bank.” A consumer-focused CBDC could, however, theoretically extend that access to everyone, removing the need for intermediary financial institutions.
A such an institution would have significant ramifications concerning the role and movement of money in the economy. It would also challenge and disrupt the existing banking business models.
Further, the ECB raised the necessity of implementing a CBDC as existing payment arrangements are moving towards digital, convenient, instant, and round-the-clock availability alternatives.
While the ECB recognizes that non-cash payments play a significant role in the future of finance, society is, however, not yet ready to embrace a cashless system. Demand for still banknotes remains high in many of countries.
If a CBDC were to exist, the currency would need to retain the convenience, ease, and availability that currently exists. On the technical backend, it also needs to be safe from any hack attempts, something that has plagued the crypto community since its inception.
Bitcoin is the most secure financial network on the planet. But its centralized peripheral companies are among the most insecure. pic.twitter.com/0rxLtXscNJ
— Nick Szabo⚡️ (@NickSzabo4) June 18, 2017
The recent Coincheck hack, one of the largest heists in cryptocurrency history, saw over $500 million of NEM coins lost. Despite many bag holders being refunded, it comes as no surprise that security and safety are one of the top concerns regarding a CBDC.
The ECB also stated that a CBDC “should not grant the same anonymity of cash to users,” and that “there is no one-size-fits-all solution.”
Acknowledging Traditional Problems
Despite the existing obstacles with cryptocurrencies like bitcoin, the ECB openly acknowledged the problems with the existing financial system, especially regarding cross-border retail payments.
“Such payments not only permit shoppers to easily buy goods online from overseas, but also allow foreign workers to send money, supporting financial inclusion and development. However, there payment channels are generally much slower, less transparent and way more expensive than domestic ones.”
The ECB ends their report stating that “improvements here are the best way of rising to the Bitcoin challenge.”
While it is unclear whether they see cryptocurrencies as a direct threat to the banking system like the Bank of America, the ECB will address and improve on existing international payment channels.