ONENYONE WHO I bought bitcoin a year ago it must seem justified – and rich. The price of the cryptocurrency exceeded $ 50,000 for the first time on February 16, an increase of five times over the previous year. Large Wall Street companies, including BlackRock, Bank of New York Mellon and Morgan Stanley, are considering keeping some for customers. Last week, Tesla, the maker of electric cars, said it bought $ 1.5 billion in bitcoin and would accept it as payment for its cars.
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Investor interest in bitcoin as an asset may be increasing, but the inefficiencies and transaction costs associated with its use make it unlikely to be a viable currency. Here, the action was within central banks. As consumers stopped using physical money and private companies – like Facebook – expressed an interest in launching their own tokens, many central banks began planning to issue their own digital currencies. Bank for International Settlements, a club of central banks, said last month that it expects that a fifth of the world’s population will have access to a central bank digital currency (CBDC) in 2024.
China is clearly the vanguard. On February 17, it completed the third major test of its digital currency, distributing 10 million yuan ($ 1.5 million) to 50,000 buyers in Beijing. He announced a joint venture with FAST, an interbank messaging system used for cross-border payments. Sweden, another champion, extended its pilot project.
The last major central bank to take seriously a CBDC is the European Central Bank (ECB) Your public consultation, seeking opinions on the desirable characteristics of the CBDCs, completed in January, getting more than 8,000 responses. Speaking for The Economist on February 10, Christine Lagarde, its president, said that she planned to seek approval from her colleagues to start preparing for a digital euro. The decision is expected in April. Lagarde expects the currency to enter the market in 2025.
As well as other central banks, the ECB wants to offer consumers a digital offering as secure as physical money. Unlike bank deposits, a right to central bank reserves does not carry a credit risk. Digital currency transactions could be settled instantly on the central bank’s ledger, instead of using card and bank network channels. This could provide a backup system in the event that interruptions or cyber attacks cause private payment channels to fail.
The bank also sees the digital currency as a potential tool to strengthen the international role of the euro, which represents only 20% of the central bank’s reserves globally, against 60% of the dollar. This could allow foreigners to settle international transactions directly with money from the central bank, which would be faster, cheaper and more secure than directing them through a network of “correspondent” banks. This could make the digital euro attractive to companies and investors.
Its main attraction may be to offer a level of privacy that neither the United States nor China can promise, says Dave Birch, a fintech expert. The former uses its financial system to enforce sanctions; the latter seeks control. But getting the project right will be tricky: the European Union still wants to be able to track money being laundered or hidden to avoid taxes. One solution could be to allow users to open e-wallets only after being examined by banks, but that the use of digital currency itself is not monitored.
An extremely successful digital euro could divert bank deposits and threaten the availability of credit. The solutions being considered include limiting the amount of currency that users can retain or – like Fabio Panetta, a member of ECBthe company’s executive board, suggested on February 10 – charging fines for use above a certain limit. A digital euro can also involve “a major legal reform”, says Huw van Steenis of UBS, a bank. The “finality of settlement” – which governs when a payment is completed and cannot be reversed – varies across the 19 eurozone countries and would need to be harmonized. Launching a CBDC it will require more than symbolic efforts. ■
For the full interview with Christine Lagarde, visit economist.com/CLpod
This article appeared in the Finance and Economics section of the print edition under the title “Token gestures”