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Deutsche: "If Trust In Monetary And Political Stability Were Lost, People Would Turn To Cryptocurencies"

Despite the establishment's ongoing efforts to FUD 'average joes' around the world out of cryptocurrencies and create such negative sentiment that no patriotic-minded citizen should even 'want' to decentralize their wealth away from government (by bank proxy) control, we noted in surprise the frankness of The New York Fed's economists last week, when they admitted...

If we lived in a dystopian world without trust, bitcoin might dominate existing payment methods. But in this world, where people do tend to trust financial institutions to handle payments and central banks to maintain the value of money it seems unlikely that bitcoin could ever be as convenient as existing payment means.

Which begged the question: what happens when the "trust" dies?

The answer, of course, is the very existence of cryptos: to create a world in which not one network is reliant on "trust" and the presence of a master node.

Which brings us to the question of a central-bank-issued cryptocurrency - an odd amalgum of distributed ledger and centralized control? Deutsche Bank attempts to answer the question simply - Why would we use crypto-euros? (Spoiler Alert: they're not convinced... at all).

The rise of bitcoin and other cryptocurrencies and the decline in cash payments are the background for a new concept: digital cash issued by central banks. An old academic debate about who creates money and how is resurfacing, but what about the user’s perspective? Why would we use crypto euros?

Central banks are looking into cryptocurrencies and the underlying distributed ledger technology, as they carry responsibility for issuing physical cash, overseeing and/or providing payment clearing and settlement systems, conducting monetary policy and safeguarding financial stability.

In the areas of payments and savings, digital cash would compete against bank deposits, physical cash and private cryptocurrencies to win over consumers.

Unless its use was strongly pushed by regulation, digital cash would need to convince users by offering better and more convenient payment solutions than other payment systems. In particular, it would need to match current low fee levels and high safety standards for regulated consumer payments.

In an environment of high trust in public institutions, consumers would probably not be concerned if digital cash offered little data privacy.

For savings purposes, consumers would simply base their choice between digital cash and bank deposits on the difference in interest rates.

However, in times of financial or political uncertainty, people may think beyond convenience and yield.

In case of financial turmoil, consumers can use central bank money – physical or digital cash – as a safe haven.

However, if fundamental trust in monetary and political stability were lost, people would probably turn away from any form of the sovereign currency in favour of other alternative assets or private cryptocurrencies.

Private cryptocurrencies are proving to be more than a short-lived tech gimmick.

The rise of bitcoin and questions about the future of cash have been the breeding ground for a new concept: digital cash, issued by a central bank. Indeed, central bank-issued digital cash (or currency) – CBDC – is the focal point of various technical and economic developments.

Existing "monies" – cash, bank deposits and private cryptocurrencies – can be characterized by their issuer, form, accessibility and transfer mechanism. This also helps to understand the essence of CBDC.

Sovereign currencies like the US dollar, euro or pound sterling are fiat currencies steered by a (supra-) national central bank. And they are largely digital, because most of the money supply is not held in physical cash, but in the form of bank deposits. In the euro area, for instance, bank deposits constitute about 80% of total money. Payments with bank deposits are largely digital, too: card payments, (online) credit transfers and direct debits are processed electronically via bank or card payment systems with a central settlement point.

This contrasts with the decentralised payment and record-keeping system of private cryptocurrencies, which was first successfully introduced with the bitcoin protocol. Private cryptocurrencies allow for digital, peer-to-peer transfers of value on the basis of distributed ledger technology.

Cash and private cryptocurrencies certainly offer a higher degree of anonymity than bank deposits or CBDC.

But for the purpose of everyday retail payments, many consumers value convenience over data privacy. Many households may find it acceptable to use crypto euros even if they are required to register with their true identity, especially if registration is not too cumbersome and payments are convenient. This would help a central bank to design digital cash in a way that meets anti-money laundering requirements.

However, Deutsche admits that the degree of anonymity will only matter in specific and exceptional situations - in fact the very situations that the move to crypto was created for in the first place.

If a payer has doubts about the trustworthiness of his counterparty, he may not want to reveal much personal information, e.g. to prevent spam advertisement or potential identity theft. In case of a general lack of trust in the government, the legal system of a country or the currency, payers will seek third-party anonymity. They would not want authorities to be able to monitor their payments. In such an extreme case, digital cash issued by the central bank will surely not be the payment type of choice to avoid state surveillance or tight capital controls. Private cryptocurrencies, though, are well positioned to enable citizens to circumvent state-controlled payment systems, as is happening in China, Zimbabwe or Venezuela.

So, Deutsche Bank concludes, why would we use crypto euros?

There are two possible use cases: for payments and for saving purposes.

We would use crypto euros for payments if they offered a higher service level than other payment options at comparable levels of cost and safety. With DLT still in its infancy and competitive private retail payment solutions available, this will hardly be the case. CBDC’s chance of gaining substantial market share by catering to unserved payment needs is low given the popularity of established digital payment means and ongoing innovation by incumbent and new service providers. Moreover, it remains an open question whether DLT can deliver the same level of cost efficiency and safety as existing technical set-ups. For day-to-day use, privacy concerns have proven to be of minor relevance to consumers. So even if CBDC was designed with a high degree of anonymity, this would not be a competitive edge – at least not for legal transactions. Unless the acceptance of CBDC is pushed by regulation, CBDC is not likely to gain sufficient reach to become a competitive payment network.

But what about crypto euros for saving purposes? In an environment of popular trust in public institutions and financial stability, digital cash or bank deposits will be the most convenient options for consumers. The biggest difference between these two would be a potential difference in remuneration. The highest yielding digital money will simply be the most attractive.

However, in times of financial or political uncertainty, people may think beyond convenience and yield.

As long as there is “only” doubt about the liquidity of the banking system, physical and digital central bank money will be perceived as a safe haven until the crisis is resolved.

If fundamental trust in monetary and political stability is lost, though, digital cash will simply be sovereign currency. In order to escape it, consumers would have to turn to private cryptocurrencies or other alternative assets.

In conclusion, Deutsche Bank concludes, a compelling reason for consumers to switch voluntarily to crypto euros is hard to see – at least for the time being.

The Bottom Line is that we now have both private and central banks admitting what is already the biggest selling-point behind Bitcoin and its peers: when the system collapses everyone will turn to crypto!