The development of financial technologies and cryptocurrencies has stirred the water
in the world of finance and banking.
New ways of saving and investing and spending money have changed our lives.
Currently, we pay more and more often not with physical money, but with a card.
But more importantly, with the advent of cryptocurrencies, the specter of private money - means of payment
that is beyond the control of the state - has haunted the world.
Some people enjoy it, others worry.
Governments tend to worry about this as it significantly changes the way society functions.
These changes in the way you pay and the emergence of cryptocurrencies have forced governments
to somehow adapt to the new reality.
A frequent problem faced by cryptocurrency users is the high volatility of their value
and the problem of ensuring the security of their electronic means of payment.
Some states have decided to solve these problems by providing their own infrastructure for
conducting transactions with cryptocurrencies and introducing their own digital currencies.
Technically, central bank digital currencies (which we will call digital currencies from
now on) are not cryptocurrencies.
Cryptocurrencies are based on blockchain technology.
Meanwhile, digital currencies may or may not be blockchain-based.
It depends on what technology central banks decide to use.
Digital currencies may also take the form of accounting entries only in an account held
on a platform managed by a central bank.
The topic of the central bank's digital currency is more complex than it seems.
In order to understand the significance and impact of introducing these types of currencies,
it is necessary to be aware of several elements that together make up a central bank's digital
currency system: 1) a central bank's digital currency requires an appropriate platform;
2) digital currency can be of various natures; 3) the digital currency of a central bank
is changing the way economic policy is conducted.
Therefore, as part of the introduction to the topic of digital currencies, it is worth
discussing briefly the most important issues related to the functioning of these currencies
and the changes related to their introduction.
As the name suggests, digital currency is used in digital transactions.
We do not have physical money in hand to spend, but we do dispose of money in digital form.
For this, you need an appropriate digital platform that processes transactions and connects
directly or indirectly people using digital means of payment.
Establishing such a platform for digital currency has three goals: 1) include cryptocurrencies
in the official money circulation; 2) provide better protection of the ownership of means
of payment in accounts and physical cryptocurrency wallets; 3) ensure that digital currency can
be traded.
Currently, existing banking platforms for electronic transactions do not process transactions
using digital currencies and cryptocurrencies.
Therefore, a central bank that wants to control cryptocurrency trading and introduce digital
money similar to cryptocurrencies must expand the existing platforms.
And it can do this in two ways in the first place.
First method: an electronic platform not based on blockchain.
The central bank may set up a centralized platform that will be operated entirely by
the central bank.
Like Google, Amazon and Facebook, the central bank will have servers and computers to operate
this platform, which will handle transactions between banks, but will also have individual
accounts and record who they are and how much money they have.
If the bank decides to go for such a centralized platform, the digital currency will not be
a cryptocurrency as it will not be based on blockchain.
Second method: use a centralized blockchain network.
In general, we associate blockchain with decentralization, but this is not always true.
Blockchain can be centralized in the sense that subsequent computers that wish to connect
and process transactions must be approved by the main body that has started building
the entire network.
Moreover, such a body may also introduce changes to the functioning of the network without
the consent of the other members of the network.
Such a private blockchain is used, for example, in the e-crown pilot project run by Sweden's
central bank.
It is the central bank that approves who can join the blockchain network that it manages.
In this way, the system can grow and does not rely solely on the central bank, but still
the central bank controls the entire network, the issuance of electronic currency, its features
and its circulation.
In both of these cases, such a central bank managed platform makes it possible for people
to open an account directly with the central bank.
Now, the central bank will be able to maintain the accounts of everyone and will have access
to each of these accounts.
The central bank will also have control over the properties of digital money.
Digital money has many forms.
Since this money is completely digital, the state can issue different types of digital
currency.
Therefore, when digital currencies are introduced, it is important to keep track of what a particular
currency put into circulation by a state is.
Firstly, digital currency can be a form of digital cash.
This money is not redeemable for cash, but is a different form of money that is only
an electronic record on a digital platform or a physical cryptocurrency wallet.
The relevant record is then transferred during the purchase in the system controlled by the
central bank from one account to another or transferred from one wallet to another.
Secondly, the digital currency of a central bank can be a standard accounting entry, as
can our deposits.
Its nature may be similar to our deposited funds in a bank.
When we deposit funds, then the bank owes us liabilities.
When paying electronically through our bank, we instruct our bank to transfer the appropriate
amount of money to another person's account.
Nowadays, when paying by internet transfer, we transfer the ownership of certain funds
to other people - namely the ownership of the physical cash.
It may be similar in the case of digital currency - the digital currency of a central bank may
also be such a title to physical cash.
If it would work like this, the digital currency is nothing controversial - just a new form
of ownership title to cash.
Unfortunately, governments and central banks are currently striving for a cashless society
- that is, all means of payment are to be in an electronic form, and cash is to be liquidated.
This means that a person with such a digital currency will not be able to exchange it for
cash, as it is currently the case with funds in a bank account.
Digital currency has one feature that current central bank money does not have - it can
be programmed.
This means that a central bank can issue different digital currencies, and each will be slightly
different - for example, several types of dollars.
This is because the central bank can program its currency, so it has the ability to issue
different dollars depending on its needs.
For example, one type of dollar may have an expiration date - it will disappear from your
bill after a while if it is not spent.
It is also possible to specify different interest rates for different digital currencies; for
example, the rates for this dollar that will be used to buy energy-efficient cars or household
appliances will be lower.
Therefore, one central bank can essentially issue not one digital currency, but digital
currencies!
The ability to program digital currency and release different types of currency is changing
the nature of central bank policy.
Until now, the central bank influenced the economy by manipulating the interest rates
at which it concluded transactions with financial entities.
Now, the central bank will be able to influence the economy in a completely different way
- it can influence the costs of purchasing certain types of goods or directly stimulate
or reduce people's spending.
Digital currencies can function quite differently from current bank money.
They are programmed and issued by the central bank, and this gives it the ability to differentiate
interest rates on loans for specific purposes or determine how a specific digital currency
can be spent.
By programming digital currencies, the government can determine the cost of buying something
- for example, a loan to buy goods and services that the government thinks should be purchased
will be cheaper because interest rates will be much lower.
At the same time, the central bank will be able to program what can be purchased for
a given digital currency - so it can decide what that currency is allowed to be invested
in and what is not allowed, or what should be bought and what should not.
The news that governments want to build cashless societies, and central banks are introducing
their own digital currencies and payment systems using digital currencies and cryptocurrencies,
has sparked concerns among people.
It was feared that the government would now have even more control over people because
anonymity would be reduced even more.
In addition, greater centralization makes the government even more able to cut people
off from their livelihoods, which is all the more dangerous that in the case of a cashless
society, the victim of the government is completely deprived of livelihoods, and it is more difficult
to receive help.
Of course, the anonymity of our expenses is already low, because when we pay by card,
the bank knows where and how much we have spent.
The government, on the other hand, is able to obtain this information from banks.
Moreover, as we have recently seen from the example of Canada, the government already
has the power to cut off livelihoods for those who do not want to comply with it.
However, in the event that the banks keep the accounts, the bank may try to resist by
saying "no" to politicians and launching its own political campaign to mobilize people
to fight the politicians.
Meanwhile, in the case of digital currency, the government will simply cut people off
without going through other institutions.
The second problem is the manipulation of people mentioned above.
By programming currencies, the government can make people do what it wants, imposing
costs on them and manipulating them, for example, with different interest rates on a loan for
various purposes borrowers may have.
The third problem is the ability to manipulate expenses.
Thanks to digital currencies, the government, through the central bank, can now manipulate
people's spending more efficiently by simply increasing or decreasing their cash balances
or determining the expiration date of money.
That way, if the government wants to stimulate or suppress inflation, it will give or take
money from the people overnight.
It can also destroy some people's savings if they think they have accumulated too much.
So controlling the platform and programming digital currencies is a powerful and dangerous
tool in the hands of politicians that can be very easily misused for evil purposes.