Legalization of digital currencies in central banks

Many countries around the world have shown interest in legalizing digital currencies with central banks creating digital currencies that complement cash and non-cash forms of money. This indicates that in the coming years, at the global level, there may be significant changes in monetary circulation, as well as in monetary policy and foreign exchange operations. The emergence and rapid development of non-state digital currencies (including cryptocurrencies) since the 2000s has shown the promise of virtual tokens, distributed ledgers, and smart contracts. There were even fears that cryptocurrencies would cause serious damage to national currencies and significantly undermine the monopoly of banks and international payment systems to make payments.

Contents of the topic Toggle Legalization of digital currencies with central banks Payment systems for cryptocurrencies More than a new form of money 1. Double entry for payments 2. Doubling of money The race for digital technology and global financial influence Some of the leading countries in this technology Legalization of digital currencies with central banks However, in practice, the legalization of digital currencies only enabled cryptocurrencies to become a means of exchange, but not a measure of value, meaning they did not acquire a full function of money.

The reason for this is the high volatility of the cryptocurrency exchange rate, which makes it difficult to establish stable prices for goods and services. Moreover, in most cases, digital assets are created as a commercial project aimed at increasing their value. But to become a measure of value, the cryptocurrency rate must remain unchanged for years or even decades. To resolve this paradox, efforts are being made to create stablecoins, digital currencies, whose value is “pegged” to less volatile or more predictable assets.

Therefore, nowadays, cryptocurrencies are viewed more as speculative instruments than as a means of payment and their legal status, which is still unstable, gives rise to scams. But a large-scale experiment, which in a short period of theoretical scientific developments turned into a market with a capital of more than $1 trillion by the beginning of 2021, attracted the attention of the “ideological enemies” of decentralized currencies and the central banks of most countries of the world. Cryptocurrency Payment Systems The situation is aggravated by the fact that with the legalization of cryptocurrencies, private IT companies have been creating their own payment systems for a long time.

As their ecosystems develop, the risk of concentrating a huge corpus of economic information and personal data in the hands of a limited circle of companies increases (which is especially dangerous for foreign companies). To counter this threat, countries have begun to take the lead in developing payments, settlements and big data infrastructure from the private sector and transnational corporations. According to the Bank for International Settlements, as early as 2020, 80% of all central banks were either in the process of creating digital currencies or were exploring such a possibility.

Currently, the pioneer in this direction is the People's Bank of China, which launched a pilot project of the state digital currency Digital Currency Electronic Payment (DCEP) with the prospect of starting its widespread circulation from 2022. The central bank also plans to start implementing the digital ruble from 2022 The advantage is the high level of development of the domestic IT sector, as well as the fact that the share of non-cash retail transactions is steadily increasing. Therefore, the digital ruble from a strategic perspective can become one of the world leaders among national digital currencies in terms of quantitative and qualitative indicators of development.

More than a new form of money Currently, most countries in the world have a two-tier banking system due to the legalization of digital currencies. The first level is the central bank, which has a monopoly on the issuance of the national currency in cash and is the government's agent for depositing government debt, as well as the lender of last resort to banks. The second level is commercial banks that provide payment, settlement, credit and deposit services to citizens and organizations.

In contrast, payment, settlement and non-cash money circulation transactions are based on a system of interbank correspondent accounts. This system allows two basic operations: 1. Double entry of payments. Liabilities or expenses of one bank are assets or income of another bank. This mechanism allows you to track transactions, including cross-border transactions. 2.

Multiplying Money The cashless circulation makes money issuers not only the central bank, but also the second level of the banking system – commercial banks – according to the formula “money supply = monetary base / reserve ratio”. Thus, 1,000 monetary units issued by the central bank and put into circulation at a reserve rate of 10% of the volume of each deposit theoretically increases the money supply by 1,000 / 0.1 = 10,000 monetary units. Central bank digital currencies, as the name suggests, assume legalization of digital currencies and a central bank monopoly on issuing them and making commercial banks unnecessary to double the money supply.

Thus, the central bank will be the creator, operator and custodian of the pool of digital monetary units. Customer transactions result in the transfer of funds from one checking account to another as if the banking system were one level. The role of commercial banks in such a system is to examine clients and their operations to ensure compliance with the requirements of legislation to combat the rationing of illegally obtained income.

They will also provide customers with payment and settlement infrastructure to transfer their funds from one form to another (cash, cashless, digital). In the future, such a system may lead to the fact that central banks will provide the non-financial sector of the economy not only settlement, but also credit and deposit services. This will make the traditional business model of banks uncompetitive, and thus many of them are already actively investing in fintech ecosystems today.

However, central banks have not yet developed a unified concept for issuing and trading national digital currencies. The right of commercial banks to issue digital currency in one form or another in some jurisdictions may still apply. The race for digital technology and global financial influence According to statements by central banks and international financial organizations, the introduction of the Central Bank of Central Banks, from a strategic perspective, will create a convenient and secure infrastructure for payment and settlement services for citizens and organizations, as well as reduce commissions for money transfers.

In parallel, digital currencies will provide an opportunity to “whiten” the shadow sectors of the economy and automate tax collection, as well as the provision of public services. For example, if an unconditional basic income model is introduced, the central bank would allow digital currencies to be legalized and, through appropriate proscriptive metadata, restrict the purchase of alcohol and tobacco products at the expense of the subsidies provided. However, there is at least one important reason why central banks are adopting digital currencies. It is directly related to geopolitical confrontation and external economic competition.

Read also: The most reliable digital currency trading platforms in the world Some of the leading countries in this technology The danger of legalizing digital currencies is that the country, which has become a leader in this technology, will be able to offer this tool to non-residents to service transactions in other countries. Moreover, digital currencies can only be traded on the issuer’s servers. This means that information about transactions will not be able to go to the tax authorities in the countries of residence of foreign users. In addition, foreign digital currencies will be able to “crowd out” national monetary and non-monetary monetary units, contributing to an imbalance in money circulation. The issuer of digital currency sought in foreign markets will also be able to influence foreign users.

For example, offer interest-free trade credit (or even at a negative rate) to foreign buyers of products from domestic manufacturers or service providers. These risks can only be effectively mitigated by creating a competitive national digital currency within the country.