The European Parliament Committee on Economic and Monetary Affairs (ECON) released a study that was commissioned to investigate competition in fintech last week. One of the subjects that jumped out of the report was their stance on Central Bank Digital Currencies (CBDCs).
Unlike some other entities in the established financial community, the ECON report suggested that CBDCs would act as a counterbalance to the formation of “cartels” in the crypto market.
Despite the fact that there are more than 1,000 different cryptocurrencies, the ECON study warns against the possibility of shadowy figures who may rig the crypto markets to their own advantage. There are, of course, “whales” that have control over an outsized amount some cryptos. There have also been allegations of potential conflicts-of-interest.
Central Bank Digital Currencies Have Little Hope of Independence
The established central bank-led financial system has dealt with numerous instances of corruption and price fixing, with the LIBOR scandal popping out as one of the most dangerous. A group of London-based banks were convicted of gaming the LIBOR rate, which is the basis for the rate of interest on numerous debt instruments.
Nonetheless, the study that ECON released had this to say on why CBDCs would be a positive influence in the crypto market, “The arrival of permissioned cryptocurrencies promoted by banks, even by central banks, will reshape the current competition level in the cryptocurrency market, broadening the number of competitors.”
One of the biggest benefits that cryptos offer to their users is their apolitical nature. Central banks have long claimed to be independent, but in most cases, this is simply false. The ongoing battle between Russia and the Western Banking system is evidence enough of this lack of central bank autonomy. The bottom line is, any central bank product will probably be subject to the political whims of the nation that regulates the banks.
Central Banks Are Out of Their League
Central Bank Digital Currencies are also something of a misnomer. Fiat currency is basically digital already, as the debt that currency represents is a creation of central bank computers. It is true that Central Bank Digital Currencies would be totally unhinged from anything in the “real” economy, which may or may not be what crypto users are looking for in a means of settlement and savings.
The ECON funded study did concede that cryptos are making an impact on how people everywhere look at money. The study described popular cryptos like Bitcoin and Ethereum as, “technological and operational paradigms that are a source of disruption for the entire sector, including monetary policy and financial stability.”
During the same week, the US Congress held a hearing that took a much different view on topic of Central Bank Digital Currencies at times. Alex Pollock, who is a senior fellow at the R Street Institute, posited that
“to have a central bank digital currency is one of the worst financial ideas of recent times, but still it’s quite conceivable,” and went on to say that, “I think we can we can safely predict that its credit allocation would unavoidably be highly politicized and the taxpayers would be on the hook for its credit losses. The risk would be directly in the central bank.”
Could Crypto go Centralized?
Mr Pollock’s statements bring up an interesting point. Until now, central banks have never had direct relationships with the general public. Depending on how it was implemented, a Central Bank Digital Currency would change that. Creating a direct relationship between a central bank and the general population may not be a good idea, as the central banking model was never designed to deal with people on a one-to-one basis.
It is interesting that decentralized currency is being investigated by the highest levels of government around the world. Cryptos evolved without the involvement of any official parties, and it could be argued that Central Bank Digital Currencies are the exact opposite of what decentralized currencies are. Instead of removing a third party, CBDCs would make central banks even more powerful that before.