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Costs and Benefits of CBDCs, Stablecoins and ... Bank Deposits.

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"It is not enough to analyze the problems of CBDCs and stablecoins. To decide whether it is beneficial to open up payment services to competition, you have to compare them with the problems faced by the current digital currency, bank deposits."

Economists, officials of central banks and international organizations, private consultants, think tanks, etc., have been for two years studying and analyzing the advantages and disadvantages of the new alternatives to the current monetary and banking system.

This task has focused, above all, on assessing the costs and benefits of the different CBDC models and the different forms of stablecoins. But the same analysis effort has not been made with the digital currency issued by commercial banks, that is, bank deposits. And yet it is the most important digital currency. It is the only digital money that citizens and businesses can use today.

Do a cost-benefit analysis of todas currencies is essential in deciding whether to introduce competition in payment services. It is not enough to just study the costs that we could incur when using stablecoins or CBDC, but it is essential to know the costs and disadvantages of continuing to use the traditional digital currency, deposits in banks.

Last Thursday, Jason Furman at the start of an excellent exhibition at the BIS on the problems of the entry of Bigtech into the financial system, advised the audience that they should take into account that the current system has many problems. He only mentioned a few disadvantages: the billions of people who do not have access to the financial system, the high commissions, the slowness and cost of international transactions ...

With great delicacy, Furman made it clear that, although he was going to talk about the problems that Bigtech can pose,  We should not forget that Bigtech have many positive effects and among others, those of solving those problems of the current system.

It is fine to analyze the problems that new alternatives may pose, but we can only make the right decisions by comparing them with the current problems of commercial bank deposits.

Let's look at an example. Among the disadvantages of CBDC and stablecoins is often mentioned that they would increase the problems of financial instability. It is said that citizens and companies would stop using bank deposits and would start using the new alternatives. And this "problem" (?) Has even led to proposing limits on the use of CBDC or demanding unjustified regulatory requirements to stablecoins.

But if we analyze the disadvantages of the current digital currency we would realize that The instability problems caused by using risky financial assets as a means of payment are immense, very serious, compared to those of the new alternatives. The comparison shows that the stability achieved by using CBDCs or 100% backed stablecoins stands out as an essential value when compared to the fragility, instability and possibilities of money collapse that the current digital currency has, bank deposits. The comparison would show that replacing deposits with 100% safe assets would not be a "problem" but rather an important contribution to solving the problems we currently have.

A separate question is study how the “transition” should be made from a monopolized system to a system with competition. Due to the importance of banking, the transition should not be left to spontaneous change, as has been done in other sectors.

Digital photography displaced the traditional one without the States having done anything special. They let the companies restructure however they wanted or could. And Kodak went bankrupt without causing any major problems. In many sectors "creative destruction" has worked by introducing competition. But in this case one could think of help banks transform so that they could compete with new providers. What, in no case, makes sense is to protect them from the effects of competition. They wouldn't even be able to delay the competition. Everything is going very fast.

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About the Author

Miguel A. Fernández Ordóñez

Miguel A. Fernández Ordóñez

State economist. Former Governor of the Bank of Spain and member of the Governing Council of the European Central Bank (ECB). He currently teaches Seminars on Monetary Policy and Financial Regulation at IEUniversity.

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