Central banks will “never” issue a national cryptocurrency
There has been a lot of talk on and off about central banks working on, considering, analyzing and planning a digital version of it’s national currency. It’s fine to talk about it, analyzing the merits of a digital national currency based on blockchain technology perhaps combined with efficient value transport technology, which in the end might improve the efficiency of the current digital networks between banks and the central banks, depending on how advanced the existing systems are.
As far as launching a digital national currency though, things become quite complicated very quickly.
Government credit risk
A digital national currency available to everyone is pretty much the same as everybody being able to place excess liquidity in the central bank. This would also allow the best possible credit risk in any country, though special cases arise when governments are close to bankruptcy and/or hyperinflation is present.
In many countries, individuals don’t really care about this, as government guarantees apply to individual bank deposits up to a certain amount. In the US, the FDIC (Federal Deposit Insurance Corporation) guarantees all private deposits, which de facto has resulted in not a single person having lost money in connection to a US bank defaulting. Corporate bank deposits are however not guaranteed by the governments.
The first thing that will happen if a national digital currency is launched is that corporations will place most of their excess short-term liquidity in the national currency — bypassing bank deposits, which will totally undermine the way banking traditionally works. Many corporations remember the fallout of banks in the wake of the global financial industry crises of 2007 and 2008; many companies lost money on banks defaulting.
Local, regional or global banking crises will happen again. When they happen, corporations will not hesitate to withdraw their liquidity from commercial banks in pursuit of security in the national digital currency. These withdrawals could trigger a crisis — provided that the central banks won’t act as lenders of last resort, and relend the funds from the national digital currency back to all the national commercial banks. This is not likely to happen.
It is not the role of the central banks to guarantee commercial banks — never was and never will be, even if “too big to fail” probably will exist forever. The role of central banks is to ensure monetary stability over time.
The impact of launching a national digital currency will vary from country to county, depending on the proportion of the banking industry profit, which in turn is derived from traditional banking business and the overall efficiency of the national banking systems.
Financial products backed by government risk
With access to the best possible credit risk and instant liquidity, there is nothing that prevents large corporations with significant liquidity — with or without the appropriate financial services licenses — to start developing and selling financial derivatives, based on implied underlying government risk through digital IOU structures.
This is certainly possible today if excess liquidity is used to purchase government bonds and bills, but they are not as liquid and easy to structure through as cash. But it might not even have to go that far!
Simple peer-to-peer lending with explicit government risk behind IOU structures is vastly more secure than most corporations using bank deposit as collateral.
And what will be next?
Central banks issuing debit cards or even credit cards, perhaps lending money directly to the public and corporations ? Don’t think so, it will never happen.
Article by Morten Nielsen, CFO of ARYZE
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of ARYZE.
Morten has many years of experience in finance, fundraising, and the cryptocurrency space — previously at JP Morgan for six years, where he was involved with one of the most competitive hedge funds at the time. He has also held a senior VP position at UBS, and was global head of hedge fund derivative marketing. He is now CFO at ARYZE and is responsible for financial risk assessment and management, as well as a range of revenue management activities.
