Token Effort – Bitcoin Crosses $ 50,000 | Finance and economics

ANYONE WHO bought bitcoin a year ago must feel justified and rich. The price of the cryptocurrency first crossed $ 50,000 on February 16, a five-fold increase from last year. The greats of Wall Street, including BlackRock, Bank of New York Mellon and Morgan Stanley, are considering having some for their clients. Last week, Tesla, an electric car maker, said it had bought $ 1.5 billion worth of bitcoin and would accept it as payment for its cars.

Investor interest in bitcoin as an asset may increase, but the inefficiencies and transaction costs associated with its use make it unlikely to become a viable currency. Here, the action took place within the central banks. As consumers abandoned the use of physical money and private companies, such as Facebook, expressed interest in launching their own tokens, many central banks began to consider issuing their own currencies. digital. The Bank for International Settlements, a club of central banks, said last month that it expects a fifth of the world’s population to have access to a central bank digital currency (CBDC) by 2024.

China is clearly the favorite. On February 17, it completed the third major test of its digital currency, distributing 10 million yuan ($ 1.5 million) to 50,000 buyers in Beijing. He announced a joint venture with FAST, an interbank messaging system used for cross-border payments. Sweden, another champion, has extended its pilot project.

The last major central bank to take a CBDC is the European Central Bank (BCE). Its public consultation, soliciting opinions on desirable characteristics CBDCs, concluded in January, garnering more than 8,000 responses. Talk to The Economist on February 10, Christine Lagarde, its president, announced that she planned to seek the approval of her colleagues to start preparing for a digital euro. A decision is expected in April. Ms Lagarde hopes the currency will be put into use by 2025.

Like other central banks, the BCE wants to offer consumers a digital tender that is as secure as cash. Unlike bank deposits, a claim on central bank reserves does not carry any credit risk. Digital currency transactions could be settled instantly on the central bank’s ledger, rather than using the channels of card networks and banks. This could provide a back-up system in the event that blackouts or cyber attacks cause private payment channels to fail.

The bank also sees a digital currency as a potential tool to strengthen the international role of the euro, which accounts for just 20% of central bank reserves worldwide, compared to 60% of the dollar. It could allow foreigners to settle cross-border transactions directly in central bank money, which would be faster, cheaper and more secure than directing them through a network of “correspondent” banks. This could make the digital euro attractive to businesses and investors.

Its main appeal may be that it offers a level of privacy that neither America nor China can promise, says Dave Birch, a FinTech expert. The first uses its financial system to apply sanctions; the latter seeks control. But making the right design will be difficult: the European Union still wants to be able to track laundered or hidden cash to avoid taxes. One solution could be to allow users to open e-wallets only after they have been verified by banks, but the use of the digital currency itself is not monitored.

A highly successful digital euro could divert deposits from banks and threaten the availability of credit. Remedies being considered include capping the amount of currency that users can hold or, like Fabio Panetta, a member of the BCEExecutive Council, suggested Feb. 10, to impose penalties for use above a threshold. A digital euro could also imply “huge legal reform”, says Huw van Steenis of UBS, a bank. The ‘purpose of settlement’ – which governs when a payment is made and cannot be reversed – varies across the 19 euro area countries and should be harmonized. Start a CBDC will take more than symbolic efforts. ■

^{For the full interview with Christine Lagarde, visit economist.com/CLpod}

This article appeared in the Finance & Economics section of the print edition under the title “Token gestures”