5 Implications That Digital Currencies Have on Central Banks
Tue 19 01 2021

Since the beginning of the growth of digital currencies, central banks have been thinking of the consequences of such innovations. Paper money has been used for centuries and now there could be something threatening its existence. This pushes central banks to think of their future and the future of the traditional financial system. Will paper money lose in front of the digital currency? Will they have to take new steps? What is their future? In this article we will talk about 5 implications digital currencies have on central banks.

1. The use of money is already electronic

Sweden is one of the first countries where the use of cash is shrinking quickly, however, most of the countries still use physical currencies. The difference today is that transactions that happen without the use of physical money in our hands are growing. People instead use mobile phones and credit cards to pay. On the other hand, a big part of the money that the central bank issues, called the bank reserves, does exist only in an electronic form. This makes the concept of digital currencies not completely new to the financial system.  

2. It is not likely that cryptocurrencies will replace the government-backed currency soon

While the main fear for central banks is that crypto and digital currencies replace the money they issue, speculations say that this is not happening soon. Even though many cryptocurrencies are quite popular such as Bitcoin, lots of people still do not trust them the way they trust strong currencies like the US dollar, and the euro, which are backed by central banks. Even with the decrease of confidence between the people and their government, they still prefer the use of money that is backed by a trusted financial source, and professionals say that this won’t change soon.

3. However, some big changes to the financial system could happen

There are big hopes for digital currencies as they are believed to be able to increase the speed of cross-border and domestic transactions, decrease the costs of transactions and also make the financial system accessible by even the rural households and the poor.

4. Digital currencies will bring big challenges

Many benefits are associated with the use of digital currencies. Transactions won’t cost as much as it did, also sharing and acquiring information’s cost will decrease. This can increase contagion between markets and can destabilize financial markets. They could also neglect the business model adopted by central banks and traditional financial systems, which could affect the ability of central banks to maintain financial stability.

5. Central banks are thinking if they need to issue their digital currencies

Until today, the number of central banks thinking of issuing their digital currency is still low, however, the conversation is going on. Some central banks have created their digital currencies such as Tunisia and Ecuador. Sweden is also studying the possibility of issuing an e-krona currency. By having their currencies, central banks prevent the loss of market share to other crypto or digital currencies. However, having a digital currency could reduce the roles of banks as being intermediate lenders which could be a problem especially during financial crises.