Two analysts at the Bank of International Settlements intriguingly suggested in a new white paper that central banks could find their own digital alternative to cash helpful. “New cryptocurrencies are emerging almost daily, and many interested parties are wondering whether central banks should issue their own versions,” the analysts began. “But what might central bank cryptocurrencies (CBCCs) look like and would they be useful?”
Currently, the only way the public can hold central bank money is in the form of cash, the paper said. “If someone wishes to digitize that holding, he/she has to convert the central bank liability into a commercial bank liability by depositing the cash in a bank,” the analysts added. However, if a central bank provided an electronic alternative, consumers could hold central bank liabilities in digital form, the paper suggested. “But this would also be possible if the public were allowed to have central bank accounts, an idea that has been around for a long time,” the analysts continued.
The primary advantage that a consumer-facing retail CBCC would have over centralized central bank accounts is the anonymity of cash. “In particular, peer-to-peer transfers allow anonymity vis-à-vis any third party,” the BIS pair said. If that’s not very important to the public, “then many of the alleged benefits of retail CBCCs can be achieved by giving broad access to accounts at the central bank.”
Eventually, all central banks may have to decide if issuing retail or wholesale CBCCs makes sense for their respective countries, the analysts concluded. “In making this decision, central banks will have to consider not only consumer preferences for privacy and possible efficiency gains – in terms of payments, clearing, and settlement – but also the risks it may entail for the financial system and the wider economy, as well as any implications for monetary policy.”