Andreas Dombret was a member of the Board of Directors of Deutsche Bundesbank from 2010 to 2018 and represented the German central bank at the International Monetary Fund, on the Board of Directors of the Bank for International Settlements in Basel and on the Supervisory Board of the ECB. Today, he advises various financial institutions and the international management consulting firm Oliver Wyman.
Roy Amara of the famous American University of Stanford is credited with having realized that the effects of new technologies are overestimated in the short term, while innovations are underestimated in the long term. In my opinion, the crypto winter we are currently experiencing and the dramatic collapse of the crypto exchange FTX clearly illustrates that the high valuations of so-called cryptocurrencies have been greatly exaggerated in the short term.
Despite its immense popularity among Millennials and Gen Z – a recent survey found that 43% of American men aged 18-29 have traded or invested in crypto at least once – the crypto market crash did little significant damage to the wider financial system. .
However, I strongly believe that crypto regulation has now become inescapable, even though regulators’ main financial stability concerns currently are more money laundering, fraud and consumer protection than possible economic impact. of cryptography. FTX has shown the need for uniform global regulation.
Currencies serve as a medium of exchange
The burning question now, in the spirit of Roy Amara’s thesis, is whether so-called cryptocurrencies have the long-term, transformative impact that their ardent proponents are so clamoring for. In my opinion, this is anything but certain. A decisive factor for the future development of digital currencies will be the upcoming introduction of central bank digital currencies, or CBDCs for short. This makes stablecoins – a large part of the crypto market – largely redundant. To understand my point, it is necessary to recall what distinguishes currencies.
They perform multiple functions, but two are particularly important: Currencies serve as a means of exchange accepted by citizens – whether shells, “fiat” currencies or digital currencies. The second function is to serve as a store of value. Both functions require trust from users. With cryptos, however, both requirements for a currency are not fulfilled or only to a very limited extent.
Despite claims from crypto enthusiasts that cryptos, like bitcoin, offer an almost gold-like store of value, the reality is that bitcoin excels as a haven of speculative high volatility rather than a reserve. valuable. We remember: last year, the value of bitcoins, calculated in US dollars, fell by almost two-thirds, while the price of gold remained practically unchanged.
The need for innovation
Another important form of cryptos are stablecoins, which peg their value to “fiat” currencies or a commodity like gold. Unlike bitcoins, stablecoins offer a privately issued coin, called a token, with a well-defined value, and are increasingly used as a means of payment or as an investment in the challenge world and beyond.
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In fact, it was the success of stablecoins that made central banks aware of the need to innovate to stay at the forefront of technological developments. Central banks provide their own CBDCs or let private players develop the stablecoin ecosystem.
In my opinion, CBDCs will positively change the financial economy. Money is now not only a competitive activity, but also a public good, and CBDCs have significant advantages as they could eventually replace physical money effectively. CBDCs are central bank money, a trusted store of value, and they address user privacy concerns.
Attractions for illegal activities
For CBDCs to gain momentum, they must be sufficiently attractive compared to other means of payment. And once central banks establish a CBDC ecosystem, privately-issued stablecoins pegged to “fiat” currencies should lose much of their appeal as a legitimate medium of exchange. After all, who wouldn’t rather have the central bank as a counterparty than private issuers?
In such a scenario, stablecoins no longer play a major role in payments, especially in retail. You can keep some wholesale applications (like clearing and settlement), especially cross-border. And they will inevitably be magnets for those involved in illicit activities and for true challengers and speculators. Beyond that, however, stablecoins are unlikely to see widespread use once CBDCs become available.
Stable enough for individuals?
The crypto winter of the past few months has already weighed on user confidence and raised questions about whether the retail crypto world is stable enough. One result is likely to be that stablecoins will be more or even fully guaranteed in the future. But once CBDCs become available, why would anyone – except perhaps a small minority – prefer tokens issued by a private third party, which expose them to significant liquidity and market risk, when they can instead hold digital currencies issued by central banks issued and secured?
The big question for the future, still largely unanswered, is what impact CBDCs will have on the banking industry. For example, payments, especially cross-border, are a lucrative business for commercial banks. Much of this revenue could disappear if businesses and individuals maintain digital currency accounts with the central bank. This would undoubtedly be good news for customers, but bad news for banks. I have the impression that central banks want to avoid this development.
More concept than reality
At the moment, CBDCs are in the experimental phase and are more of a concept than a reality. But in my opinion, it is only a matter of time before the introduction of digital central bank money. China and the European Union are among the pioneers in experimenting with digital central bank money. The UK is also working on sterling proposals. One thing is very clear: once CBDCs become a reality, it will be hard to underestimate their long-term impact. A reason, therefore, to take care of them.
This article first appeared in a similar form in Financial News.