The Federal Reserve Bank of Cleveland’s Loretta Mester has raised the prospect of Americans having an account with the Fed, into which the central bank could directly pump digital dollars, thus bypassing the banks as the main mechanism for quantitative easing (QE).

The European Central Bank has reportedly filed to trademark the term ‘digital euro’ as it assesses the pros and cons of digital currencies.

And the Bank of Japan is openly discussing what it calls central bank digital currency (CBDC), with work beginning in spring 2021 on issues such as resilience, ahead of trials with a limited number
of households.

To prevent a public panic the Bank of Japan continues to stress CBDCs will be used to complement, not supplement, paper money.

Supporters of such experiments will argue they offer another potentially useful tool in the central banker’s kitbox, as the existing policy suite of zero rates, QE, inflation targeting and so on struggles to deliver the growth and inflation the monetary and political authorities crave, to help them escape from their debt burdens.

Sceptics will wonder where this will lead next, with rampant money creation, to fund government debts, interest payments and spending plans, and inflation both possible consequences, unintentional or otherwise.

These doubters may be in the camp that warms to gold in such circumstances or even cryptocurrencies which, rather to this column’s surprise it must be said, refuse to go away.

Bouncing back

Bitcoin may still be trading well below its 2017 all-time high of $18,941 but it is making plenty of ground.

According to coinmarketcap.com, bitcoin’s total value is $210 billion, a fraction below its high for the calendar year. That figure is also pretty much double the value of the FTSE 100’s largest stock by market cap, AstraZeneca (AZN). The total crypto universe, which now comes to over 3,600 different counters, is currently valued at $361 billion according to the same website.

Some may see this as another reason to view financial markets as worryingly frothy, as a plentiful supply of liquidity from central banks and hopes for fiscal stimulus keep them bubbly.

Others will argue that cryptocurrencies’ return to favour supports the view that central bank policies are debasing existing currencies and merely one step down the path toward a reset of how fiat money works, with CBDC experiments the next logical development.

Perhaps Facebook’s work on its own blockchain-based payment system, Libra, is prompting central banks to get cracking on their own version.

Long arm of the law

Regulators are sceptical. Attempts to launch exchange-traded funds (ETFs) dedicated to tracking cryptocurrencies have foundered in the US and Britain’s Financial Conduct Authority has just banned the sale of derivatives and exchange-traded note trackers related to bitcoin to retail investors, citing ‘the inherent nature of the underlying assets, which means they have no reliable basis for valuation.’

No matter how sceptical many financial market watchdogs or participants may be, it can still be argued that if someone, somewhere thinks that cryptocurrencies have a value, then a value is what they have.

Questions over the cost of the bitcoin mining process, the level of mining and transaction fees and efficiency of cryptocurrencies as a payment system relative to cash, or existing credit and debit networks, will also deter many from using bitcoin, let alone treating it as an investable asset class.

Yet the cap on the supply of bitcoin to 21 million will continue to appeal to some investors as they see government deficits balloon and central banks draw up plans for digital currencies and seek out a place to preserve or even hide wealth.

Gold bugs may argue that bitcoin has no physical backing or practical use but critics of the precious metal will assert it is an inert element that generates no yield and is not in frequent use when investors pay for their weekly groceries, either.

Libertarians may also jump in at this point, citing how central bank-backed digital currencies could be the ultimate surveillance tool in any civilised country, let alone despotic, corrupt ones. As such, the battle lines between true believers and nocoiners (and gold bugs) remain drawn.

The ability to pay tax in cryptocurrency or even buy groceries would be a tectonic shift but that looks a long way away. For the moment, the former is having a better year of it than the latter.

The forced shift from cash to cashless payment during the current pandemic is unlikely to do the cause of digital currencies any harm, as more people become accustomed to using their card or mobile device to make a payment in person, let alone online.

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