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Digital currency: cryptocoin or money-on-account?

from Joseph Huber

People have become used to hearing about digital currencies (DC) such as Bitcoin. These currencies are based on new technology known as distributed ledger and blockchain technology and are also referred to as cryptocurrencies because of the data encryption involved. Cryptocurrencies represent a radical alternative to the current banking system, in that they bypass retail banks and defy central-bank control from the outset.

Against this background, central banks are now thinking about producing their own DC. Initially, such central-bank issued DC was imagined in the technical form of cryptocurrency. The new technology, however, is still in its infancy. In comparison, tried and tested ways of managing account balances and payments from and to accounts are well suited for implementing DC. In the foreseeable future, central-bank issued DC is thus likely to take the form of account balances (money-on-account). In this context, “digital money” and “electronic money” are interchangeable terms.

First design studies of DC were put forward by Barrdear and Kumhof of the Bank of England, the Swedish Riksbank and the Basel Bank for International Settlements, and were also presented at an early stage by monetary reformers and other economists. The number of central banks and international monetary institutions that have expressed an interest in DC has been steadily growing.

DC is conceived of as a means of payment in general use among nonbanks, similar to traditional cash. The use of central-bank digital or electronic money would thus no longer be the privilege of banks in the interbank circulation (where DC is called “reserves”). Instead, DC would basically become available to everyone. In public circulation, DC is intended to circulate in parallel and in competition with bankmoney (i.e. bank deposit money, generally referred to as sight or demand or overnight deposits). Bankmoney side by side with DC is comparable to the familiar co-existence of bankmoney with cash.

At the beginning, this may not involve immediate individual access by nonbanks to the central bank payment system. As long as there is not a comprehensive infrastructure of DC accounts, payment service providers (including banks providing such services) can manage the DC of customers in custody as a separate trust asset. DC can also be managed by using mobile apps and e-cash cards.[6] This does not exclude the future application of cryptographic technology to managing DC.

People and organisations would opt to maintain their present bankmoney account (bank giro account), or to use a DC device or digital currency account as the new alternatives, or to use bankmoney and DC in parallel, depending on the prevailing conditions and individual preferences. However, the introduction of DC in public use is bound to face a variety of possible obstacles and problems, as discussed hereafter.


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