Economists Peter Bofinger and Thomas Hass argue that public cryptocurrencies may fail as a medium of exchange due to competition with private banks.
According to an article on the analysis of European economic policy and published by economists Peter Bofinger (Peter Bofinger) and Thomas Hass( Thomas Hass), state-issued cryptocurrencies can be a failed idea, as this concept lacks “clear motivation”.
Bofinger and Hass, from the Faculty of Economics at the University of Würzburg in Germany, argue that central banks have been too focused on issuing state-owned cryptocurrencies as a medium of exchange. Meanwhile, private banks already offer options such 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, which can act as a means of saving in the international system.
The state cryptocurrency can be considered as “a deposit in the central bank, which is used within the existing real-time gross settlement systems”. However, it can also be understood as an independent payment system that works in parallel with the existing system using deposits held at the central bank.
The authors of the publication studied the existing models of state-owned cryptocurrencies being developed and concluded that it would be difficult for central banks to issue such a digital currency without interfering with the market. The article notes:
“They must prove that the goals they are pursuing are currently being unsatisfactorily achieved by private service providers. And even if public goods, such as financial stability or the stability of the payment system, are not achieved in an optimal way, it is not obvious that a state-owned cryptocurrency is an adequate solution.”
The researchers also wonder why a user would switch from a private bank or payment system to a national one if they already have deposit insurance. From the authors ‘ point of view, perhaps the best type of state – owned cryptocurrency is one that hardly any central bank is thinking about for fear of abandoning mediation. It will be a state-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 on such deposits. Central banks could sell savings deposits at auction, 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 only work with the national currency and conduct operations only with system accounts, the solution should be supranational, multi-currency and open to payment objects 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 exploring state-owned cryptocurrencies, and their mass release is initiated by developing countries. At the same time, in January, the IMF stated that only 23% of central banks can legally issue state-owned cryptocurrencies.