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The e-monetary of the new digital economy

by SonaH

Have you ever thought that someday we could keep our money in our phones or we could have a crypto wallet? If you tell this to people some 20 years ago they will laugh at you, but now it’s completely normal. As normal as to have a new currency and crypto market. Cryptocurrency nowadays seems to be quite usual, like dollars or euros. You can buy anything online with cryptos, you can buy and sell cryptos. 

You may think this sounds like a dream, but digital money has its advantages and disadvantages. 

Cash is utilized less and less as more and more things are offered online. Digital money arises as a new form of payment that people find appealing, placing new demands on the financial industry as a result of this new digital economy. 

Risks of digital currency 

  1.  Will the issuer have the ability to sell these assets and convert the cryptocurrency into euros for those users who desire to do so, even during periods of strong demand or financial duress, if each unit of a cryptocurrency is backed by a set of assets with a EUR value?
  2.  What happens to the user’s cryptocurrency holdings if the private issuer fails?
  3. Consider what would happen if the assets used to support a cryptocurrency suddenly lost value. The issuer will in fact have issued more digital currency than it would be required to. It might be obliged to “devalue” the cryptocurrency as a result, which could result in losses for its users.
  4.  The nature of money creates network effects, which can result in a natural monopoly where one currency “rules” all exchanges. The more participants that use a currency, the more appealing it becomes as a form of payment. As a result, in the absence of sufficient regulation, the issuer may erect obstacles to the entrance and collect fees from bitcoin users.

Central banks and digital currency

The adoption of digital money and the degree to which it affects the current financial system will be major factors in creating the new macro-financial environment, which will be heavily influenced by central banks.

A single, secure payment system that is open to the entire population has been guaranteed by central banks, who in the past were forced to monopolize the production of banknotes. Therefore, the central bank releasing its own digital money is a natural substitute for private cryptocurrencies.

In general, a central bank digital currency could entail the opening of current accounts by the central bank directly with individuals, households, and businesses. For the consumer, this would be similar to the current system of bank deposits and transfers, with the exception that their current account would be held in the central bank.

Even though it might seem like a logical next step, this strategy would need the central bank to take on an unusually active role, including luring consumers, verifying their personal information and engaging with them, building technology, etc. A central bank may not have the necessary expertise to do these jobs, which could also jeopardize its reputation.

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