The Road to Digital currency, Decentralised Economy

Cash, cash… endangered cash? You must have noticed that this practice is spreading more and more among traders. So much so that some even look surprised if you give them cash! In some countries, cash is used less and less often. Could this trend be reversed? That would be amazing, especially since online purchases cannot be paid for in cash.

Usually, we keep most of our money in the bank. After all, we can always access it when we need it, for example, to make our electronic payments. But when the financial system is shaken - as it happened in 2008 on a global scale - many people turn to cash. Their reaction is logical: Regardless of the country considered, cash remains the safest liquid financial asset, since its issuer - the central bank - cannot fail like a commercial bank.

It is true that deposit insurance protects customers of commercial banks in the event of bankruptcy, but it is not a silver bullet. First, there are limits to the amounts insured. Second, you rarely get your money back by snapping your fingers.

Added to this is the almost daily emergence of new payment platforms that compete with cash. All offer speed, safety and convenience.

Like traditional currencies, the digital economy has a mechanism for issuing and injecting new liquidity into its marketplaces. The large price variations repeatedly suffered by cryptocurrencies raise questions about the impropriety of their use as a transactional tool. As the majority of economic players cannot tolerate the currency risk associated with these assets, a solution has emerged to limit these fluctuations.

What about private digital currencies?

Although some see them as the future of money, private digital currencies, including Emocoin, are of little use in paying for a purchase or saving. In fact, very few traders accept them, given their very fluctuating value and the slowness of their compensation mechanism.

Perhaps these problems will be alleviated - or even fixed - with the digital currencies of tomorrow, which would thus gain in popularity.

On the other hand, their widespread adoption would present great risks, for the economy as for the financial system. It could be that the transmitter closes its doors or that it is the victim of cyber thieves. In such cases, people would risk losing confidence in the payment system.

Private digital currencies could even undermine the central bank's ability to control inflation and provide lending of last resort, as its monetary policy tools - overnight rates and lending mechanisms, only operate in the currency it issues.

If private digital currencies are not the answer, then is there another form of ultra-secure digital currency that could be used in the future? Central bank digital currency is being researched at the Bank, which makes sense in this context. In theory, such a currency could be as secure as cash and as convenient as electronic means of payment.

A solution to combat the volatility of cryptocurrencies

This cryptocurrency, based on a protocol to centrally create and manage the circulating quantity of a new digital currency, is linked to its green counterpart through a reserve system. Thus, for each newly issued unit, one dollar - quite tangible - must be deposited in a bank account to guarantee convertibility between the two entities, and therefore the balance between the price and that of the dollar. This system, therefore, offers an escape from the volatility of cryptocurrencies, while avoiding the long and costly process of converting between digital currencies and traditional currencies.

A centralized problem in a decentralized solution

The case is emblematic of the challenges facing the decentralized economy. Blockchain, the technology on which the majority of digital currencies are based, promises to redefine economic exchanges by replacing the factor of trust, thus replacing traditional intermediaries. But as long as a centralized actor can manipulate and profit from the information, the primary utility of blockchain as a creator of the trust cannot be fully exploited. The real challenge will be to get rid of these centralized systems to offer real solutions, in line with the spirit of this new economy. 

The road to a central bank digital currency would have its share of hurdles to think about. For example, people might decide to keep a good portion of their money in this form rather than in a regular bank account. This digital variant of the traditional wool stocking would be even easier to make.

This could make it harder to get credit - including mortgages and business loans. If this were to cause companies to invest less, productivity and innovation could suffer. This is because to create new products and services, and more generally to innovate, companies often need to borrow.