Some thoughts About Central Banks Backed Digital Currencies Part II

This is a continuation of previous article in which we discussed an idea that has been causing some noise in financial markets around the world. The core of the idea is about the potential for central banks to issue their own digital currency, The first part of this essay discussed some of the most immediate implications about the relationship between central banks and cryptocoins. Today, I would like to deep dive a bit into that analysis by dissecting some other implications that the behavior of financial markets could have in digital currencies issued by central banks.

The idea of countries and central banks issuing their own digital currencies might seem ludicrous at first but we should not be quick to discard it. A few days ago, the Bank of International Settlements(BIS) produced a 16-page analysis that presented the idea of central banks-backed digital currencies as a way to participate and influence the, in their own worlds, “new taxonomy of money”. In the previous article, we explored three key implications of this ideas. Let’s now discuss a few others:

1 — Central Bank Money in Public Blockchains

One of the not-so-subtle implications of a digital currency backed by central banks is the fact that the cryptocoins will have to be hosted in places(blockchains ) outside banks. More specifically, national cryptocurrencies will operate on public blockchains such as Ethereum. As a result, banks will have to grow accustomed to the idea of relinquishing a lot of the currency control mechanisms they have traditionally enjoyed.

2 — Influence by Existing Market Instruments

The financial market is still trying to figure out what influences the price of Bitcoin besides news. Venture capitalist Nikhil Kalshatgi recently suggested the idea that there might be baskets of stocks that influence the price of Bitcoin but he also mentioned he wasn’t confident enough to pick those stocks. That picture radically changes when we start talking about a digital currency backed by a central bank. In that scenario, financial instruments tied to the parent central bank can indirectly influence the price of the cryptocoin. Instruments such as treasury bonds or simple GDP metrics can be highly influential on the price of a digital currencies backed by central banks.

3 — Influence by National Indicators

Similarly to the behavior of FOREX markets, central bank-backed digital currencies are likely to influenced by indicators that reflect the economic health of a nation. Employment reports, the US Index of Economic Indicators (LEI), trade deficit metrics, consumer confidence reports, retail sales are just some examples of indicators that can become relevant of central bank digital coins.

4 — Anonymity and Taxes

One interesting balance-act for central bank digital currencies will be how to reconcile the anonimity of cryptocoins with tax obligations. A national cryptocoin can almost become a substitute for traditional cash transactions which are notorious for not being reflected in tax reports.

5 — National ICOs

To leave the most polemic observation to the end; the idea of raising funds for central bank digital currencies via initial coin offerings(ICOs) is very intriguing. The process can be similar to the sales of bonds or other debt instruments and can be restricted to accredited investors. This idea is more viable in emerging markets than in large first world economies.

CEO of IntoTheBlock, Chief Scientist at Invector Labs, I write The Sequence Newsletter, Guest lecturer at Columbia University, Angel Investor, Author, Speaker.

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