German Central Bank Chief Pours Cold Water on Digital Currencies
Bundesbank chief Jens Wiedmann isn't keen on a central bank digital currency. | Source: Shutterstock
By CCN.com: Deutsche Bundesbank president Jens Weidmann has added a dampener to discussions on central bank digital currencies (CBDC), claiming they would destabilize financial systems and worsen bank runs.
The president of Germany’s central bank said, in a speech in Frankfurt, Germany, that widespread use of digital central bank money could have “serious consequences.”
CBDCs have become a popular topic recently. Lithuania’s central bank, Governor Vitas Vasiliauskas recently talked up the viability of CBDCs to the Bank of International Settlements (BIS).
The sentiment from the BIS, Vasiliauskas, and Weidmann is that there is merit in digital tokens; however, they condemn decentralized cryptocurrencies, like Bitcoin.
Vulnerable financial stability
CBDCs have been described as a new, more efficient, offering from central banks that would form a third ‘type’ of money. Through potential use of distributed ledger, a CBDC could operate without intermediaries and be far more accessible across the globe.
“Some argue it could be run on a distributed ledger,” expressed Vasiliauskas in describing their merits. “In such a case, it would replace or complement reserves at the central bank with a restricted-access digital token.”
“A token would be a bearer asset, meaning that during the transaction the sender would transfer value to the receiver, without intermediaries. This is something fundamentally different from the current system in which the central bank debits and credits the accounts without transferring actual values.”
Counter argument
These benefits were laid out by Vasiliauskas in his speech at a Washington conference at the end of May. Now, Weidmann has issued his warning against this new currency.
He said :
“In a crisis, financial stability may be more vulnerable than it is today, with digital central bank money very liquid and secure investment alternative. Therefore, both ‘escape to safety’ in general and a digital bank run, in particular, could take place faster and to a greater extent than in the past.”
Weidmann added that demand for CBDCs could be “greater or more volatile than that for cash, with corresponding effects on the central bank’s balance sheet.”
The Bundesbank president caveated his warning by stating they believes in updating its offerings to be more digitally inclined.
“I see ourselves [the Bundesbank] as having the duty to offer citizens modern, fast, and also internet-enabled means of payment. The idea is to develop solutions that are up to date with the latest technology without incurring unnecessary risks to financial stability.”
Not a fan of blockchain
In the same speech, Weidmann also shared his thoughts on blockchain technology, calling it slow and expensive. The president explained their trial project to integrate blockchain failed miserably.
Weidmann said:
“The blockchain solutions did not fare better in every way: the process took a bit longer and resulted in relatively high computational costs. Similar experiences have been made elsewhere in the financial sector. Despite numerous tests of blockchain-based prototypes, a real breakthrough in application is missing so far.”
While the benefits of digital currencies continue to permeate the mainstream, there are still varying approaches to them. Central bankers appear to be very skeptical of blockchain technology; predominantly underappreciating it.
However, the discussion around CBDCs continues to gather steam around the world. Nonetheless, their exact nature and function are a long way off of being confirmed.
