The volatility of bitcoin and crypto make it inconvenient as a method of payment in transactions. This means you could be paying for something but the bitcoin you just used might double in value in a short time. On the flip side bitcoin could drop by half it's value, and as someone accepting bitcoin as a payment, you might lose half your money.
Bitcoin has not gained traction as a payment system because of this. This is where central banks want to try to capitalize on the digital currency market and make their own digital money. Support is growing for digital currency, and former Federal Deposit and Insurance Corporation chair Sheila Bair is pushing for central banks to provide stable digital currency. Unlike the volatility crypto, it would be more stable like fiat is, where people trust in the consistency of the value.
Digital money could lessen the risk of a financial crisis and provide better monetary policies, but it also has the risk of undermining credit availability since banks use deposits to create money as loans. when a financial crisis occurs, like the subprime mortgage in the U.S. or the debt criss in Europe in 2008, people make a run on the bank to get their money out. This outflow disrupts the flow of pay payments and can liquidate banks.
Everyone's money isn't really in the bank, it's only there in a ledger. The bank can doll out cash because not everyone wants all their money at once. Converting cash to digital currency would prevent this problem of banking instability, as they don't need cash on hand. A digiital currency would greatly reduce costs and inefficiencies like printing money, depositing cash, processing cash, paying bills with cash or checks. Fees would also probably go down.
A "FedCoin" that had interest attached to it could permit the Fed to raise interest rates when the economy is overheating, and lower the interest on the currency during recessionary times to motivate people to spend and stimulate the economy.
But this coin could disrupt the availability of credit in the system. With more than $10 trillion deposited in bank accounts used to create loans to lend out, it could all disappear if people moved their accounts to a FedCoin. To prevent everyone from jumping on the new bandwagon all at once and creating this mass withdrawal of deposit accounts, the FedCoin could be limited, so as to make converting all money impossible.
The private sector digital currencies of crypto are not being attacked though. Bair has previously said she is against banning bitcoin, and even admits the only value any money has is based on belief, trust, loyalty and faith in it having the value it does, not on physical properties:
"I don’t think we should ban it – the green bills in your pocket don’t have an intrinsic value, either. The value is based on what others think is its value. That's true of any currency.... Let the market figure out what it’s worth. That is what it is doing now."
The Federal Reserve Bank and other central banks are faced with emerging technology that they can adopt or ignore. If they fail to stay ahead of technology then they can be left in the dust with instability on the markets growing. Digital currency might be a way for them to stay relevant and keep the existing economy afloat, despite the illusory bubbles we are in.
The housing bubble is still there again, and the derivatives market of over $500 trillion hasn't been called yet. This is more money than exists in the world. Once the bubbles of the traditional financial system pop, crypto might be the only one left standing up.
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