GovCoin

Bitcoin and Dogecoin command the lion's share of attention in cryptocurrency-land these days, with purchasers citing their decentralized potential to one day replace standard currencies—or just throwing some speculative fun money their way for kicks. But now there's also an unlikely group of players getting involved in digital currencies, who have a very different set of responsibilities and motivations: central banks.

A digital version of a country's national currency could replace paper notes or coins, checks, and other traditional forms of money. It could enable the same direct cash transfers from individuals to their peers or to businesses that Bitcoin enables, cutting out banks and payment processors and eliminating transaction fees. But a central bank would oversee the network, rather than a totally decentralized cryptocurrency like Bitcoin.

According to PwC, more than 60 central banks are looking into or actively working on central bank digital currencies, or CBDCs, today. China is in the lead so far, with a trial of its digital yuan under way in several cities. But other major central banks are also moving in: The European Central Bank has held public consultations on a digital euro, and President Christine Lagarde said last month that the ECB would decide whether to continue the project later this year. A digital euro could become operational within a few years.

The Federal Reserve Bank of Boston, meanwhile, is studying a digital dollar in collaboration alongside the Massachusetts Institute of Technology, with results expected this fall.  

Barron's Daren Fonda wrote about the potential benefits and pitfalls of CBDCs today. He noted that the relentless rise of cryptocurrencies—to a combined market cap of some $2.2 trillion—is forcing central banks to consider their impacts whether they want to or not.

Here's Daren:

The rise of cryptos poses challenges to central banks and financial authorities. Transactions in alternative currencies aren’t as easy to track as those that run through banks and other traditional intermediaries. Central banks worry about losing control over monetary systems, keeping tabs on cash in circulation, and implementing monetary policies like negative interest rates, which could be far less effective if more of people hold and transact in cryptos, rather than standard money.

Cryptos may also undermine countries’ capital controls, such as blocking outflows of their currency or suspending access to bank deposits during a financial crisis, since cryptos operate in an alternative financial system. Turkey, for instance, recently saw the value of its lira plunge 12% and had to calm the markets on fears that it would impose new restrictions on foreign exchanges of its currency. The country’s central bank recently banned the use of crypto-currencies for transactions in goods or services.

A digital dollar would be pegged to the value of the paper dollar, unlike Bitcoin which has no fundamental peg. The Fed would be able to control its supply just as it does the traditional dollar today—again, unlike Bitcoin, which is capped at 21 million.

And likely of concern for many, CBDCs would allow central banks to better track money in circulation. That's highly unlike the anonymity of Bitcoin and other cryptocurrencies out there today.

Daren has much more on CBDCs and what to consider in his report. Read the rest here.