The European Central Bank this week published a discussion paper on the pros, cons and economics of implementing a central bank digital currency (CBDC). It suggests that a CBDC could help avoid BigTech firms’ dominance in the payments market due to “network externalities” surrounding the use of mediums of exchange.
Ultimately, the paper argues that a CBDC may be “the only solution to guarantee the smooth continuation of the current monetary system.”
Threats of digital platforms
The discussion paper first pointed to the growing interest in CBDCs and now Central banks around the world are exploring. So far they have been launched in two countries: Bahamas (Sand Dollar) and Nigeria (eNaira).
This report places their growth and adoption potential in the larger picture of a rapidly digitizing world and economy. This has led to digital platforms becoming the dominant business model, with data and software playing an increasing role. However, it has also contributed to an anti-competitive environment that concentrates digital market power in the hands of a few tech giants.
This centralization trend is caused by “network externalities” – meaning that users are attracted to these platforms precisely because Others are using them.
“In extreme cases, this could lead to winner-take-all in a particular market segment Achieve results with a single dominant platform,” the report explained.
Regarding cryptocurrencies, the ECB is concerned about major platforms that issue digital currencies (eg Diem) Can leverage network externalities to become the primary issuer of private money. Hypothetically this could challenge the domestic economy’s monetary sovereignty – its supremacy over the economy’s currency as a store of value, medium of exchange and unit of account.
What CBDC can offer
As a remedy, the report recommends that the CBDC as a tool to ensure the continued practical use of public funds in the economy. It could reduce payment costs, resolve friction with financial intermediation, and improve the ability of central banks to act as lenders of last resort.
By protecting monetary sovereignty, a CBDC would help maintain central bank control over monetary policy. If prices in the economy were denominated in different currencies, any expansionist policy would only create a bout of inflation without increasing economic output.
“Theoretically, monetary authorities could ‘print’ an unlimited amount of their own currency to support financial Institutions are in trouble,” the report explained. “However, if the liability is denominated in a foreign currency, this liquidity support is no longer provided, which increases the risk of a bank run (even for solvent institutions).”
Facebook Launches Diem’s Project – A Global Dollarized Cryptocurrency Project – Final Failed After multiple regulatory and political pushback. Countries such as France and Germany confirmed early on that they would block the project because of its potential to disrupt traditional financial institutions.
Since it crashed, Diem’s former project lead David Marcus has turned to Bitcoin. Those loyal to major cryptocurrencies like Jack Dorsey believe that it alone can challenge the global dominance of the US dollar.
However, central bankers don’t care that much about this particular asset. Former Federal Reserve Chairman Ben Bernanke claimed in May that Bitcoin has failed as an alternative currency. Later that month, the Riksbank clarified its view that Bitcoin and Ethereum are not currencies, mainly because of their volatility.
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