Economists Peter Bofinger and Thomas Huss argue that government-owned cryptocurrencies may fail as a medium of exchange due to competition from private banks.
According to an article on European economic policy analysis published by economists Peter Bofinger and Thomas Hass, cryptocurrencies issued by governments may be a failure because the concept lacks “understandable motivation.”
Bofinger and Hass, of the economics department of the University of Würzburg in Germany, argue that central banks have been too focused on issuing state-owned cryptocurrencies as a medium of exchange. There, for the time being, private banks already offer such opportunities as deposit insurance and a wide range of products.
According to the researchers, instead of trying to position state-owned cryptocurrencies as a means of payment, governments need to think about the concept of supranational digital currencies that can act as a store of value in the international system.
Government-owned cryptocurrency can be viewed as “a deposit at the central bank that is used within existing real-time gross settlement systems.” However, it can also be understood as an independent payment system that operates in parallel with the existing system using deposits held at the central bank.
The authors of the publication studied the existing models of developed state cryptocurrencies and came to the conclusion that it would be difficult for central banks to issue such a digital currency without interfering with the market. The article notes:
“They have to prove that the goals they are pursuing are currently not being satisfactorily met by private service providers. And even if public goods, such as financial stability or the stability of a payment system, are not optimally achieved, it is not clear that government cryptocurrency is an adequate solution. ”
Researchers are also wondering why a user should switch from a private bank or payment system to a national one if he already has deposit insurance. From the point of view of the authors, perhaps the best type of government cryptocurrency is one that hardly any central bank thinks about for fear of abandoning intermediation. It will be a government-owned cryptocurrency designed not to facilitate payments, but to preserve value.
“The demand for such a state-owned cryptocurrency will come from firms and large investors with bank deposits of more than 100,000 euros. From the user’s point of view, this demand will depend on the interest rate for such deposits. Central banks could auction savings deposits, which would give them full control over their amount, ”the researchers write.
In conclusion, the authors of the article note that state-owned cryptocurrencies are too small on the scale of the international economy:
“The bar is set by PayPal. The experience of this company shows that instead of national schemes that can work only with the national currency and carry out transactions only with system accounts, the solution should be supranational, multicurrency and open to payment entities that do not depend on the system. If central banks stick to their current approach, there is a high risk that state-owned cryptocurrencies will become a giant failure. ”
According to a recent study by the Bank for International Settlements (BIS), central banks are actively researching government-owned cryptocurrencies, and developing countries are initiating their mass release. At the same time, in January, the IMF said that only 23% of central banks can legally issue government cryptocurrencies.
