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David Drake

March 12, 2018 Article

Why Some Central Banks are Developing their Own Virtual Currencies

Cryptocurrencies continue to dominate the financial market, particularly after their explosive growth in 2017. As such, they have attracted the attention of central banks in different countries. Towards the end of 2017, central banks in seven leading economies, the G7 countries, indicated that they would start acquiring cryptocurrencies for purposes of strengthening foreign reserves.

Coming at a time when investing in digital currencies was a preserve of tech savvy investors, the move by central banks was largely viewed as a win for virtual currencies by most industry players.

Owning Virtual Currencies

In some countries, central banks have gone a notch higher and have started considering development of their own digital currencies. Riksbank, Sweden's central bank, has already started to explore possibilities of introducing a virtual currency known as eKrona. Russia is also looking into the possibility of introducing cryptocurrencies in the country.

The Russian government has plans of introducing a digital currency called cryptorouble to circumvent international sanctions. Israel is also considering the possibilities of introducing its own cryptocurrency to develop faster systems of payment and cut down on the amounts of cash in circulation.

"We know that in the current world system moving money from one place to another can be difficult, and crypto has answered that problem effectively. Banks, corporations, and now some governments have seen the value of blockchain technology and are exploring ways of incorporating it into their systems," says Roman Guelfi-Gibbs, CEO of
Pinnacle Brilliance.

Complementary Role

Though the reasons for developing virtual currencies differ from one country to another, there is a clear appreciation of the complementary role that cryptocurrencies can play in supporting conventional monetary systems.

Dr. John Mathews, ACA, Chief Finance Officer at
Bitnation, says, "Cryptocurrencies can compliment current monetary systems by “delayering” banks to produce faster, cheaper and more efficient services."

Even so, the integration of cryptocurrencies in government monetary systems does not necessarily mean that virtual currencies would be replacing cash. According to Guelfi-Gibbs, it does not cause crypto to replace cash.

"It is one way that the two could continue side by side. The possibility of cash being replaced is a very real thing. Many governments feel that cash encourages criminal behavior and would prefer to shift to a form of exchange that is fully traceable. Crypto could certainly fit into such a scenario. We see that happen in sci-fi movies, and it makes sense that something like this would eventually happen. The complication will be getting that first generation or two to switch over. There are many theories of how that could come about, but we'll have to watch this unfold," he says.

Agreeing on the possibility of fiat replacement, Mathews holds that it will only be possible if cryptocurrencies offer more benefits to end users than fiat money.

"Replacing the current monetary system outright could occur only if the replacement is easier to use and offers tangible benefits to end-users, otherwise merchants and store owners will not be incentivised to transition," he says.

The Flip Side

On the flip side, central banks that take on cryptocurrencies are likely to centralize them for the purpose of conducting monetary policy.

"If left in the hands of central banks, centralized emission of cryptocurrencies will be retained otherwise they will lose the opportunity to conduct monetary policy. Therefore, investors should not expect banks that own digital currencies to use them as deflationary tools or a means of investment. At the same time, such a currency can be used for smart contracts, decentralized exchange and many other useful tasks," notes
WealthMan CEO, Andrei Huseu.

Disclaimer: David Drake is on the advisory board for most of the firms mentioned or quoted in this article.

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