Why governments want cryptocurrencies of their own

Governments of many countries are considering, or are in the process of developing their own ‘Central Bank Digital Currencies’ or CBDCs. These are proposed to be akin to an official ‘Government Cryptocurrency’.The enthusiasm of states is understandable.

Firstly, digital currency is far easier to track which means that they’ll be better equipped to tackle tax evasion, money laundering and terrorist financing. A digital currency will also provide states with near total knowledge of their economy. This information could be used to form more effective economic policy with more growth and smaller recessions, but perhaps the biggest reason that states are keen on CBDCs is that CBDCs protect their monetary sovereignty.

Digital Currencies like Bitcoin and DM threaten states monetary sovereignty. Let’s use DM as an example. DM (originally called libra) is Facebook’s proposed digital currency. The worry for states, especially states with unstable economies is that citizens might start using DM as their default currency instead of their state’s currency, which would limit a country’s ability to affect monetary policy. If people aren’t using the state’s official currency, then increasing supply, manipulating interest rates and all of the standard economic tools become far less effective.

Official state CBDCs have some advantages over DM and other cryptos and states are hoping that CBDCs can dissuade citizens from abandoning their national currencies and turn to the ‘digital dollar’ instead, which leads us on to the next question: Why would citizens agree to CBDCs?

In addition to creating better economic conditions for the whole country, they’re also more hygienic than banknotes and it’s plausible that states might legally require the digital currency; entirely phasing out the physical variant. But perhaps the biggest advantage to individuals is that CBDCs will be cheaper and more convenient.

At the moment, there is an entire infrastructure of third-party private companies that facilitate mobile payment. Think of PayTm or Google Pay in the UK and India or WeChat Pay in China. One of the functions of Commercial banks is to act as middlemen between the Central Bank and the individual. Transaction fees for this, for an average person is 350 dollars a year in the US. But if the state decides to facilitate a direct connection between the Central Bank and individuals instead, then this should in theory mean lower transaction costs, making things cheaper and easier for individuals and businesses.