In a bid to retain their control over money, several governments have launched central bank-backed digital currencies, CBDCs, as an alternative to cryptocurrencies. India, for instance, recently proposed a ban on all private cryptocurrencies whilst including a framework to develop a digital asset that would be issued by the Reserve Bank of India.
According to a pair of European economists, this approach is ultimately bound to fail. Peter Bofinger and Thomas Hass in a paper released today argued that there is no “obvious justification” for launching digital cash substitutes. For this reason, digital cash is at risk of failing.
The duo believes that central banks have been too engrossed with launching CBDCs when private banks already offer a wider array of products. Instead of trying to launch a new medium of exchange, central banks should focus on rolling out supranational digital assets that function as an international store of value. Bofinger and Hass wrote:
If central banks stick to their current approach, the risk is high that CBDCs will become a gigantic flop.
Bofinger and Hass made some very salient points. Considering the global financial landscape, would the U.S. accept China’s CBDC as a recognizable medium of exchange in its country? The same goes for every other CBDC.
The benchmark is set by PayPal which is the ‘elephant in the room’ of global payments. It shows that instead of national schemes that can only operate with the national currency and can only make transactions with system-specific accounts, the solution must be supranational with multi-currency operability and an openness to payment objects that are not system-specific.
China and the Bahamas have already rolled-out pilot stages for the central bank digital currencies. While the European Central Bank is still garnering public opinion about a digital Euro, several other countries are actively researching and testing digital versions of their national currencies for payments.