Almost 90% of the world’s central banks are developing digital currencies, apparently under pressure from the rise of Bitcoin and other cryptocurrencies.
Central banks, including the US Federal Reserve, are apparently trying to build on cryptocurrency’s cutting edge technology, including blockchain, an unbreakable record of transactions.
Chetan Ahya, chief economist and global head of economics at Morgan Stanley, a New York investment bank, said three key factors are driving central banks to launch their own digital currencies: monetary sovereignty, financial stability and financial inclusion.
“The rise of private, narrow money networks could shut out parts of the community, such as the bankless population,” said Chetan Ahya, chief economist and global head of economics at Morgan Stanley, in a recently published research report. Ahya is pictured at the fifth annual Morgan Stanley China Summit (the “Summit”) in Beijing in May 2019.
Private payment networks have grown rapidly and some, including Mastercard and Paypal, have added Bitcoin to their services.
“If (private networks) gain market share, these networks could become a primary means of transaction,” Ahya said in a research report. “Central banks may be concerned that money circulates almost exclusively within the networks and poses a threat to their administration of the global monetary system.”
This can lead to unintended consequences.
“The potential failure of a private digital cash provider could disrupt the payment system and destabilize the financial system,” said the Morgan Stanley analyst. “While regulators have taken steps to mitigate these risks, they cannot completely eliminate them. However, when (central banks) issue their own digital currencies, they can guarantee their reliability as a medium of exchange.”
Extensive use of cryptos could leave some behind.
“The rise of private, narrow money networks could exclude parts of the general public, such as the unbanked population,” said Ahya. “Like physical cash, a CBDC can be made more widely available and support greater financial inclusion.”
Switching to CBDCs, however, could disrupt ongoing banking operations and is not without risk.
The European Central Bank is developing a digital euro and is likely to accelerate its work with changes in the market, although the new currency may not be introduced for several years, Reuters reported.
It is still unclear whether a digital euro would withdraw money from commercial banks, and if so, how much. Morgan Stanley analysts said eurozone citizens aged 15 and over could withdraw up to € 3,000, or about $ 3,637, from existing accounts.
“This could theoretically reduce total deposits in the euro area, defined as deposits from households and non-financial corporations, by € 873 billion, or 8%,” said Morgan Stanley.
That could upset the average loan-to-deposit ratio. A lower ratio could undermine a bank’s ability to cover loan losses and customer withdrawals, limit future lending, and adversely affect the economy.
Moving money from existing accounts would likely not be felt in countries with large economies like France, Germany and Italy, but it could hurt banks in smaller countries like Latvia, Lithuania, Estonia, Slovakia, Slovenia and Greece, researchers said.
Researchers at the Massachusetts Institute of Technology and the Federal Reserve Bank of Boston are developing a prototype for a digital dollar.
“A CBDC is very different from existing electronic payment systems because it is ultimately a central bank liability,” MIT said in a research report. “This means that the owner of CBDC has no counterparty risk, as is the case with electronic payments through existing products and channels.
“With some designs, the owner would not have to rely on such an institution to store and transmit this value, as is the case with cash,” the report said. “This could open up our payment systems, increase competition, reduce costs and drive innovation.”
China has introduced a digital yuan and is testing it in selected cities. Some see it as a challenge for the greenback.
Cryptocurrencies were created to meet a perceived need and so far the market is agreeing.
A report by the St. Louis Federal Reserve Bank concluded that Ethereum, the world’s second largest cryptocurrency by market capitalization, is better suited for commercial transactions than Bitcoin.
Ethereum has spawned innovative financial products that could lead to decentralized funding called “DeFi” among crypto believers, which enables peer-to-peer transactions without the use of a commercial bank.
“DeFi is still a niche market with certain risks, but it also has interesting properties in terms of efficiency, transparency, accessibility and composability,” said Dr. Fabian Schär in a research report published by the St. Louis Fed. “DeFi can therefore potentially contribute to a more robust and transparent financial infrastructure.”
But there may not be anything Ethereum or any cryptocurrency can do that a CBDC couldn’t match and maybe surpass because it would be more stable.
Bitcoin and Ethereum seem to be diverging: Many see Bitcoin as a protection against inflation, while Ethereum’s technology seems more suitable for commercial activities.
India banned Bitcoin while El Salvador made it legal tender. It now seems unlikely that the US will ban Bitcoin. Instead, regulators could make it harder to use, especially if the cryptocurrency is being transferred or converted into dollars.
If that is the strategy, a digital dollar could make cryptos increasingly irrelevant. That could mean Bitcoin and other cryptos will be remembered less for manic price fluctuations than they are for developing the technology used in a new financial system powered by CBDCs.
In 1971, the late President Richard Nixon lifted the dollar off the gold standard. This eventually led to the collapse of the Bretton Woods system of mainstream exchange rates, which had been in use since the end of World War II.
Nixon’s action and cryptocurrencies raise a fundamental question: What exactly does money get its value from?
In Wednesday’s midday trading, Bitcoin changed hands at $ 38,816.51, down 3.20% in the past 24 hours but up 33.13% for the year. The 24-hour range is between $ 38,594.53 and $ 41,316.60. The all-time high is $ 64,829.14. The current market capitalization is $ 727.26 billion, reported CoinDesk.
Retail sales fell in May, but bar and restaurant spending rose as COVID-19 vaccination rates rose as more people tried to get out of the house and socialize.
A new survey found that those who did not get vaccinated feel “more comfortable” visiting a restaurant, bar, or large event than those who were fully vaccinated.
Frederic J. Brown / Getty Images
Retail spending was down 1.7% in May from April as shoppers declined in large items such as furniture, electronics and automobiles, the US Department of Commerce said.
But bar and restaurant sales rose 1.8% last month from April and 70.6% from May 2020, when the economy shut down as part of efforts to contain the spread of the coronavirus.
“With a significant portion of their pre-COVID footprint in more vaccinated states, Shake Shack, Cheesecake Factory, Habit, Denny’s, Panera and Del Taco outperformed more than 20 points in less vaccinated states,” said Earnest Research, a New York-based Data company said in a research report.
“Dunkin, Chipotle, Starbucks and Potbelly, among others, outperformed 10 to 20 points,” the report said. “Several of the national (quick service restaurant) brands like McDonald’s, Burger King, KFC, Wendy’s, and Taco Bell saw minimal performance differences at under 5 points. Meanwhile, Jack and Popeyes actually saw a few points under performance conditions in the less vaccinated.”
Despite the decline in retail sales in May, total sales increased 36.2% from March 2021 to May 2021 compared to the same period last year. Americans spent more on clothing, health and beauty products in May as lockdown restrictions were relaxed.
Consumer spending makes up about two-thirds of the US economy. However, kinks in the supply chain limited inventory levels in key sectors.
A global shortage of semiconductors slowed automobile production. Computer chips are used to boost engine performance and a number of other applications, including anti-lock brakes, entertainment, and dashboard displays.
Lower inventory levels have pushed prices up. According to JD Power, the average price of a new car hit a record high of $ 38,255 in May, up 12% from the same month last year.
Americans kept cash in savings accounts during the pandemic lockdown and are now ready to spend.
The Federal Reserve, the country’s central bank, kept interest rates low to support the economy during the lockdown and stimulate consumer spending during the recovery. However, inflation remains a matter of concern.
The prices charged by suppliers to companies, the Producer-Price Index (PPI), rose 0.8% in May compared with April. The index rose 0.6% in April compared with March.
Core prices, which exclude food and energy costs, rose 0.7% in May compared to the previous month.
The PPI is different from the Department of Commerce’s closely monitored index of consumer prices (CPI), which reflects the final price consumers pay for goods and services.
The CPI includes taxes, service charges, and the price of imported goods as all of them add to the final cost to consumers.
The PPI tracks prices as products move through the economy. It seems that rising production costs, including materials and transportation, are passed on to the consumer. Consumer prices were up 5% yoy in May, the fastest clip in 13 years and the surge in the PPI is one reason.
Trillions of dollars in government incentives helped fuel the recovery, including retail spending. The US economy grew at an annual rate of 6.4% in the first quarter and it appears that consumer spending will continue to fuel the recovery in the months ahead.
The strong retail spending appears to reflect both growing consumer confidence and increased spending opportunities as the COVID-19 pandemic subsides.
The key questions: will inflation continue to rise? If so, when will consumers start cutting their spending and what could that mean for recovery?
The Federal Reserve said it expected the recent surge in inflation to be “temporary”. The Fed expects inflation to exceed its 2% target this year and next before subsiding.
So far, consumers have not let the joy of getting out of the house after the lockdown spoil with higher prices, and as a result, the tills continue to ring.