Digital Finance Without Cryptocurrencies.
A better way to pay for things, more competition, and more savings for everyone in the world is possible with digital payments and financial transactions. In terms of digital currencies, central banks should lead the way, not free-floating cryptocurrencies or stablecoins. This is because these types of currencies don't have a fixed value.
New York City Tesla CEO Elon Musk talked about Dogecoin and Bitcoin, which made their prices go up. People in some countries aren't sure if they want to use private digital money. El Salvador, on the other hand, has made Bitcoin an official currency. A lot of people have been getting licenses from the New York State Department of Financial Services (NYDFS) so that they can make and trade cryptocurrencies. China, on the other hand, has recently banned both the mining of cryptocurrencies and the use of them as a form of payment.
When there are so many different types of policy, how should we look at the social costs and benefits of different types of digital currency? Let's look at free-floating cryptocurrencies, stablecoins, and digital currencies from central banks (CBDCs).
The prices of free-floating cryptocurrencies, like Bitcoin, are not tied to any other thing. Despite their rapid growth, it is important to keep in mind that cryptocurrencies have no real value and are therefore vulnerable to price drops.
It looks like the price of tulips went up in the Netherlands in the 1600s, when a rise in the price attracted more buyers, which led to even higher prices. In the future, some news that doesn't make sense could end the cryptocurrency boom and send prices spiraling down as people rush to get out of the market.
One of the things that makes cryptocurrencies appealing to investors and gamblers is that they look a lot like lottery tickets. You can only lose what you pay for them, but you could make a lot of money. Even though we don't know for sure who is trading cryptocurrencies, research on lottery tickets suggests that people who aren't very rich are more likely to be interested in this market. People can buy cryptocurrencies on exchanges like Coinbase, which have made it as easy as buying a lottery ticket. The minimum trade is just $2. So if prices go down, the people who can't afford to lose their savings will be the ones who get hit.
There are stablecoins, which have a fixed value that is either tied to an official currency like the US dollar, the Japanese yen, or a precious commodity like gold or oil. This gives stablecoins a natural anchor for their prices. Investors should first check to see if a stablecoin issuer is fully backed by the same amount of real money as their coin. Otherwise, the value of the stablecoin should be based on the risk that, in the event of a major market crash, the coin provider may not have enough money to convert all of their coins to high-quality assets without cutting the promised value.
As with any other stablecoin provider, even those who say they'll keep full collateral should have their reserves checked on a regular basis by someone else. A lot of the time, organizations like the NYDFS that give operating licenses to coin providers don't do that.
Countries with a history of high inflation or hyperinflation, like some in Latin America and Africa may be able to use stable coins as a way to exchange money. The problem with stablecoins is that they could make it more difficult for central banks to control the overall amount of money in the economy. In addition, both stablecoins and cryptocurrencies that don't have a fixed value can be used to hide money and make illegal money transactions.
We also have to be careful that our national interests don't get in the way of each other. In December 2020, for example, the New York Department of Financial Services approved GYEN, a stablecoin that is based on the yen and can be used to buy things like food and clothes. GYEN is thought of by New York State as a digital financial innovation that makes money and jobs for the state. However, if this stablecoin became a popular way to pay for things in Japan, then its costs, like a loss of seigniorage revenue and less effective monetary policy, would be felt there as well.
CBDCs are a much better bet than a bank account. For one thing, they can save governments billions of dollars because they don't have to circulate and keep track of money and coins, which costs money. A lot of money is spent in the United States right now making and printing coins and paper money. This costs more than $1 billion a year. The money that would be saved by having an official digital dollar could be used to help people who don't have health insurance, like giving 31.1 million people free Medicaid or funding the National Endowment for the Arts five times over.
In addition to being a form of payment, CBDCs are also a way to pay that could be used instead of a credit card. This can put pressure on existing payment providers to become more efficient and lower their transaction fees. Consumers and businesses will both be better off.
Furthermore, because digital currencies are made by central banks, they don't hurt the ability of monetary policy to work. CBDCs, on the other hand, have just as good a chance as their private-sector counterparts of addressing concerns about data security and the protection of personal information as their private-sector counterparts.
Free-floating cryptocurrencies don't have a bright future and could cause financial instability. CBDCs, on the other hand, will help improve the efficiency of the money system. These coins are somewhere in the middle. In the next few years, we shouldn't be surprised if more countries ban free-floating cryptocurrencies as a way to exchange money, roll out official digital currencies, and put strict rules on stablecoins, because they can be dangerous.