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Positive to Digital Currencies but Negative to Crypto is the European Parliament
Editorial Team

In its latest report” Virtual Currencies, Monetary Dialogue, July 2018″ the European’s Economic and Monetary Affairs Committee has been in favor of supporting digital currencies, but negative when it comes to cryptocurrencies.

They separate by claiming that cryptocurrencies use cryptographic functions in the processes like authorizing or verifying transactions, while digital currencies include all currencies that are implemented on computer systems.

The authors of the report claim that crypto cannot supplant traditional currencies to a significant degree, an opinion that echoes Mark Carney’s sentiment earlier this year. The basic argument for them is the scalability. Specifically, it would be so expensive to conduct even a moderate batch of transactions now handled via traditional currencies through crypto.

According to the report, crypto and crypto-related assets are by now used more as a vehicle for financial speculation, rather than a medium of exchange. They are also not based on any sound underlying values. The huge price fluctuations are attractive for investors who are searching for outsized returns. Additionally, they mentioned the hardness of getting a handle on the volatility of these assets in order to apply proper risk management. They said that this fact would suggest and support high capital requirements as an appropriate future regulatory response.

According to cryptoglobe.com, Central Bank Digital Currencies (CBDC) would permit the public to access non-tangible central bank money, guaranteeing free convertibility of CBDC units to cash at a fixed rate of 1:1 and ensuring the same degree of price stability as the official currency from the beginning.

The central bank would likely act as a central counterparty to ensure the authenticity of transactions with a rather trustworthy issuer. As a result, the possible disadvantages of cryptocurrencies with respect to slow and expensive transactions would ease.

The report states on one hand that they are in favor of the issuance of central bank digital currencies, but on the other hand that commercial banks would increasingly lose the ability to attract deposits.

So far, in the Euro area, more than 80 percent of monetary aggregate is sight deposits. The time that the holding and the transferring money on CBDC accounts would be convenient, secure and frictionless, an increasing number of people and businesses would probably prefer to hold liquidity in such type of accounts.

Sight deposits are a major and secure source of funding for commercial banks. In fact, an integral part of the business model of banks consists of collecting short-run deposits and granting long-run loans. In case a vast number of depositors transferred their money to CBDC accounts, the fractional reserve banking system would be challenged as its core.

 

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