In Europe-Central Asia, central banks are exploring the possibility of issuing cryptocurrencies for several reasons.

First, the use of traditional cash is steadily declining.

Second, cryptocurrencies provide a viable alternative to digital copying of the original features of cash in digital format. Like cash, cryptocurrencies allow anonymous P2P transactions without intermediary involvement.

Third, the demand for tokens linked to the legal currency is increasing. These tokens can be used like cryptocurrencies, but their value does not have the disadvantage of high volatility. Converting actual coins and banknotes into digital tokens with the same legal protection and the same stable prices as all currencies issued by the central bank seems to be a natural development trend. The transparency of the central bank’s digital currency transactions can facilitate the systematic execution of monetary policy.

People are seriously concerned about central banks issuing cryptocurrencies. The crypto tokens issued by the Central Bank can not only replace cash, but also replace the electronic payment system operated by commercial banks. Commercial banks can already provide electronic accounts, mobile money and value cards. These systems can be uploaded and used offline.

The Swedish Central Bank is exploring the possibility of providing electronic accounts and value cards directly to the public. The idea is to manage these cryptocurrencies in the central bank’s central register. This proposal to replicate existing tools in the private sector stems from the perception that the government has a legal obligation to provide public means of payment. However, this may weaken the traditional financial intermediary role of commercial banks, which converts liquidity liabilities into long-term assets. Central banks cannot afford to pool their liquidity liabilities to finance their investments.

If the central bank chooses blockchain technology to manage decentralized digital transactions, it will compete more directly with cryptocurrencies. Its advantage is to provide a more stable token. However, the system will be fundamentally different from earlier cryptocurrency protocols. The central bank’s money supply will be endogenous — so as to link its value with the legal currency — and the seigniorage tax will accumulate in the central bank. There is no doubt that such a system will become a blockchain requiring permissions, only preselected servers can participate.

Marko Vidrih