The Future of Money and Banking
Central Bank Digital Currency and Beyond
“What is a Swedish Krona if there is no physical Swedish Krona?” Just what it has always been. A unit for measuring value. Value of what? That leads to the question why anything has value and the answer to that is demand.
The Swedish Krona is the unit used in Sweden to denominate the debt owed to the national government in taxes for the services the government renders to its citizens. This debt is what gives the Krona demand.
Unless Sweden plays by different rules than the central banks I have studied, the Swedish Krona, both physical cash and central bank reserves, are created as an asset/liability pair to purchase government bonds. Therefore, Swedish Kronas, both cash and reserves, are the perpetually unpaid principal debt of the national taxpayers to the central bank which is serviced as an interest-only loan.
The Swedish Krona is also the unit used in Sweden to denominate the value of the productivity of its citizens required to pay those taxes and any other debt. It is a uniform unit of measurement domestically and a comparative unit internationally.
Any existing cryptocurrency could define itself as being equal in value to a Swedish Krona, and by doing so, it becomes a de facto Swedish Krona.
Certainly the Bank of Sweden could offer Kronas as crypto legal tender, instead of or in addition to cash. Would you like your withdrawal in paper cash and coins in your pocket or cryptocurrency you can store on your phone?
Given that we already do banking transactions instantly over our phones, where is the demand going to come from for a Bank of Sweden cryptocurrency to do the same thing?
Crypto enthusiasts don’t want anything to do with banks or governments or centralized anything. How does a central bank set up a distributed ledger, a worldwide network of nodes, that exists independently outside of itself? What are the logistics? Who would trust its neutrality?
Lastly, despite the ideological “freedom” rhetoric, the enthusiasm for cryptocurrencies is mostly based on the desire to get something for nothing. I get lots of promotional materials in my email that prove the point. A stable value, or one tied to the national money unit, reduces the opportunity for “astronomical gains” to zero.
The main rationale for a CBDC seems to come from the central banks: reduced expenditure relative to the costs of maintaining physical cash. However, the problem of what to do when the power goes off won’t be solved with CBDC or any other form of electronic network money. To continue the supply of physical cash seems prudent but it will cost more money to do both cash and CBDC. If customers don’t care if its CBDC or bank credit they transact with, as retail banking is already amazingly convenient, the demand for CBDC might not materialize.
A cautionary tale:
This past winter a brutal windstorm took out the electricity for up to 11 days in our area. We witnessed panic at the grocery store and gas station as people, on the first day, were unable to buy water, food or gasoline because they didn’t have any cash at all put aside for emergencies – no water, food or gasoline either, apparently. These cashless people were reduced to begging for loans of cash from anyone they knew. Fortunately, we live on a small island. I am sure this must happen on larger scales in big cities hit by bigger disasters. Physical cash is an emergency preparedness measure that would be foolish to abandon.
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