In a new financial system research report, economists say the environment is ripe for central banks to issue digital currencies. However, they cautioned against cryptocurrencies, given the high volatility in their prices, which would not be conducive to a national financial system.
Kiel Report
Economists at the premier Dutch institute have just released their report “Monetary Dialogue” at the European Parliament’s ECON Committee meeting. This report is expected to be the framework or the guidelines by which central banks can operate in the financial system of the future.
According to the report, “Currently, cryptocurrencies such as Bitcoin could not supplant traditional currencies to any significant degree. The available technology faces severe limitations regarding scalability. In particular, it would be prohibitively expensive to conduct even a moderate share of the transactions now handled via traditional currencies through cryptocurrencies.”
Bitcoin and digital currencies are different
The researchers state that a digital currency issued by a central bank will act in a different manner in the financial system than the current methods in which cryptocurrencies are used. The experts claim that technically currency has to be a medium of exchange. Unfortunately, in the case of cryptocurrencies they have are majorly used for purposes of financial speculation.
The inherent issue with bitcoin and other alternate coins is that they do not have a fixed value. Thus, there is no rational method to value these coins. The result of this non-value fixing currency is that it will lead to strong price fluctuations, which in turn will attract more investors, who are essentially speculators.
The further complication with digital currency is that there is no regulation that will control or regulate the speculation heights, which may impact the overall economy of a country, in the case of their use as an economic denomination.
The report states that, to “recurrent instability of the banking system, commercial banks would need to come up with more reliable funding sources than deposits. As the fractional reserve character of the current banking system can be a major source of instability, such a disruptive change is not necessarily a bad development, but could finally pave the way for a more stable financial system.”
National Digital Currencies in the offing
The timing of the report is very appropriate because worldwide national governments are pondering the use and adaption of digital currencies. The report clearly distinguishes digital currencies from that of cryptocurrencies and thereby gives these national financial decision-makers the right perspective in concluding upon the idea of introducing the national digital currency.
The most talked-about and one of the first to introduce such digital currency are the Governments of Thailand and the Bahamas. The Bank of Thailand which is the central bank in Thailand has at several venues hinted upon the idea of introducing the country’s own digital currency.
Similarly, the Central Bank of Bahamas has proposed to set up the digital currency system in the country.
However, the biggest driver of a move towards digital currencies worldwide could begin with the Bank of England, the central bank for Great Britain proactive on the new digitized money use.
