With the rise of popularity in bitcoin and cryptocurrency in the past two years, more and more people are hopping on board this trend of digital currencies, to the extent that even financial institutions are considering of creating their own cryptocurrency.
While this may benefit these institutions greatly, there are also some cons involved.
There’s no denying that a cashless society is growing and in demand. Take a look at Guangzhou, China for example, where their society has evolved to an almost completely cashless society to the point where some shops no longer accept cash transactions anymore. Simultaneously, we are also seeing the same happening in Sweden along with digital payment systems such as PayPal, Venmo, Alipay, et cetera on the rise. These services seem to offer more attractive alternatives comparing to the traditional commercial banks even though they are all connected to the banks and none of them actually rely on cryptocurrencies or blockchain. So, the question to ask will be, if banks introduce cryptocurrencies into their system, will they be introduced into the aforementioned digital payment systems as well? Or will things still remain the same? If bank cryptocurrencies are introduced, will this firstly replace all cryptocurrencies currently on the market and secondly will this replace cash transactions altogether.
As of time of this writing, it seems that the world’s central banks’ reserves are already operating as digital currencies, making them extremely efficient and cost-effective at mediating interbank payments and lending transactions. By allowing clients to make transactions via the world’s central banks, there would be no need to cash transactions in the long term, eliminating traditional bank accounts and possibly even digital payment systems. The bonus to this is that banks already have permissioned, private and non-distributed ledgers which allow for payments and transactions to be processed safely and effectively, where areas with most of the commercial cryptocurrencies currently out there, a lot are questionable in their reliability.
Furthermore, banks can also make transactions and deposits anonymous, similar to the attractive features of current cryptocurrencies out on the market, and only when necessary by law, to have them traceable.
So, with so many positive features about banks starting their own cryptocurrencies, what could be the downside to it all? One of the main problems would be the sudden introduction of banking digital currencies could lead to a disruption in the current fractional-reserve system if planning is not made carefully. This means that commercial banks could possibly create money by lending out more than they hold in liquid deposits. Banks rely on deposits in order to make loans and investment decisions. If all banks were to move all their currencies into digital cryptocurrencies, then the traditional bank will need to become loanable-fund intermediaries, borrowing long-term funds to finance long-term loans such as mortgages. This is not all bad news however, it could also mean that banks would have much more control of credit bubbles, pause bank runs, prevent maturity mismatches and/or regulate risky credit and lending decisions.
While the above features seem exciting as the human race moves towards a cashless society, there is no current country at the time of writing that has made the decision to transition into crypto-banking. Replacing cash transactions entirely is also not something that can be implemented immediately, as careful planning needs to be accommodated along with adjustments along the way. It is, however, exciting to envision a future where all transactions can be smooth, safe and efficient.