Why Can't Central Banks Create Their Own Digital Currencies?

PBOC officials announced they were 'close' to launching a digital currency
Two US Lawmakers wrote an open letter to the Fed asking to 'consider developing a national digital currency'
Primary benefits is it connects users through a decentralized, immutable system
Crytpo and Bitcoin Market Cap Story of Day

Crytpo and Bitcoin Market Cap Story of Day

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Over the last few weeks, there has been a growing chorus for sovereign Central Banks to launch their respective 'digital currencies' - We believe this is another bogus, nonsensical narrative perpetuated by those who don't fully understand crypto's value proposition or are threatened by its rise.

While the talk of sovereign nations creating some kind of digital currencies of their own has existed for some time, the discussion has reached new heights in the past weeks. In early September, officials from the PBOC announced they were 'close' to launching a digital currency designed to, 'protect China's monetary sovereignty.' Details were sparse on the nature and operations of the project. Several other Central Bankers have since made comments on the matter and then last week two US Lawmakers wrote an open letter to the Fed asking them to, 'consider developing a national digital currency.' The letter is extremely vague and simply points to others investigating this potential and implying the US should as well.

 

Crypto Takeaway: Since crypto's liquidity explosion in 2017, every year there has been a nonsensical narrative perpetuated by mainstream media designed to dismiss bitcoin as currency but give some credit to the technological development. The first was, 'blockchain over crypto' where bankers, etc... said exactly that there were some interesting technological developments brought on by bitcoin but that considering the protocol as a potential competitor to sovereign currency was a farce.

The following year, the narratives surrounded the importance of stablecoins which suggested that investors would never adopt an asset as volatile as bitcoin but digital transfers pegged to traditional assets had its merits. The former argument is aggressively losing steam as operators realize that distributed ledgers have limited valuable use cases. The latter has taken a huge hit on the back of the many failed stable coin launches in 2019.

This year, the narrative emerging to dismiss bitcoin as a widely adopted currency asks, 'why can't Central Banks create their own digital currencies?' To that, we ask, 'what could possibly be imagined that would make a Central Bank digital currency, different from the status quo?' By most findings, cash transactions only represent 30% of total transactions in the US with that number on the decline. Credit, debit and other electronic together are the growing leaders with transactions essentially being fully tracked online. 

The value of bitcoin and cryptocurrency is not simply fast online transactions. One of its primary benefits is that it directly connects users with their monetary resources through a decentralized, immutable system. When you hold sovereign currency a government and a bank stand in between the user and their funds and have full authority to freeze wires or in some cases repossess them. While this may only be a nascent demand source in developed markets, on a global scale it continues to grow (chart).

 

About the Author

FRNT Financial is an Institutional Brokerage which offers clients a variety of products along with research & analytics in the crypto-space.