A member of the Swiss Central Bank, Andrea Maechler, claimed in a recent speech that government-backed cryptocurrencies would “give rise to incalculable risks with regard to financial stability.” She also stated that cryptocurrencies are not true competitors to conventional fiat currency, and threw cold water on the idea of Switzerland adopting a state-backed cryptocurrency anytime soon.
From the perspective of central banks, a state-backed cryptocurrency does have some significant drawbacks. The way the banking system is currently structured is a two-tier system, in which citizens bank with commercial banks while commercial banks bank with the central bank, which acts as a lender of last resort. Central bank paper currencies aren’t distributed directly from the central bank to consumers, they are distributed to commercial banks, who when distribute them to bank depositors as needed.
A state-backed cryptocurrency would upend that system, as the central bank could then provide the cryptocurrency directly to consumers, something for which most central banks have neither the equipment, manpower, nor expertise. In fact, because cryptocurrencies allow for every individual to be his own bank, a state-backed cryptocurrency could bypass the banking system completely, making banks obsolete. That would mean that central banks would lose the control they currently exercise over the banking system, something that they would be loath to allow to happen.
For consumers, a state-backed cryptocurrency has significant drawbacks too. State-backed cryptocurrencies still require trust on the part of the citizens that the government won’t abuse its position as the currency issuer to devalue the cryptocurrency it issues. Given the history of government abuses of the power to create money, that’s a significantly high hurdle to market acceptance of state-issued cryptocurrencies.
While Mrs. Maechler doesn’t believe that digital currencies can function as money and can’t challenge state-created fiat currencies, she did at least acknowledge that privately-created digital currencies are superior to state-created cryptocurrencies. As Bitcoin investors and enthusiasts understand, central bankers and mainstream financial industry figures are still slow to realize the many benefits that cryptocurrencies will bring to the financial world. While it will still take a few years for cryptocurrencies to realize their full potential, the central bankers of the world will be in for a wakeup call when that finally takes place.