The dramatic collapse of the Bitcoin bubble (and of other cryptocurrencies) is a clear indication that in its current format this new digital payment system is not going to make it.
I don’t believe this is just a dip and that the system will suddenly revive itself again.
While there are certain benefits of a transaction system that bypasses the banks, the downside – no oversight and no regulations – doesn’t make it a trustworthy alternative to the current banking system. Furthermore, the enormously powerful banking system is not just going to sit by and allow their lunch to be eaten.
All major banks have in the last few years invested heavily in fintech, of which cryptocurrencies is an important element as well as the underlying blockchain technology. In general fintech is here to stay and will play an increasingly important role in the future of banking.
The need to bypass costly and cumbersome middleman banking systems is certainly there and the underlying principles of what Bitcoin and the others tried to do remains sound. But I believe that it is more likely that the current banking system will undergo massive changes itself rather than allow an outside system to replace it, or even to make a dent in the old system.
So what could be a more likely outcome?
It will come not as any surprise that the Central Banks and the IMF have been looking at these developments and are determined to play a key role in the transformation of the banking system with the use of fintech. Their investigations are along the lines of central bank digital currencies (CBDCs) – unlike cryptocurrencies CBDCs are established as money by government, regulation or law.
The reason this would lead to a massive transformation is that CBDCs are public digital currencies and they could directly compete with commercial bank deposits and challenge the status quo of the current fractional reserve banking system. If such a system had been in operation during the Great Financial Crisis it would also have alleviated some of the problems the world faced, as private bank deposits would then move into CBDCs.
It is obvious that the commercial banks would be worried by such moves and most certainly there will need to be an in-depth discussion about the future of this sector before anything will happen on any large scale. Nevertheless some countries are already exploring CBDCs such as Sweden, UK, Spain, Uruguay and China. The IMF has suggested looking at PPPs between central banks and commercial banks and perhaps this might be a first step in that direction.
Digital currency is already in use in transactions between commercial banks and the central banks. And it is a highly efficient system. The aim of CBCDs would be to open up access to others (individuals, businesses, other financial institutions). This would allow for even less cash, no traditional bank accounts and other digital payment systems, and as all of this will be government-based there is in principle no issue with safety, trust, protection, etc. – an area where cryptocurrencies faced nearly insurmountable problems. Furthermore, transactions will be in real time and it will be incredibly cheap to operate.
As the Central Banks already have an efficient centralised system in place there is no need for a new central system. This could even question the need for blockchain technology in this situation, and certainly not in the short term.
As there is no need for bank accounts in this situation, millions of people in developing countries who don’t have access to banks can use this system on their smartphones. Of course, anybody living in the developed economies – where already a majority are using their mobile phones for banking and payment services – can do the same. Without an intermediate system this also means that CBDCs are basically becoming a utility and the use of it could even be free.
Paul Budde