Do you prefer bitcoin or britcoin as a digital currency?

More and more central banks are looking to develop their own crypto currency. But before it really gets to that point, some high hurdles in terms of privacy and sustainability must first be overcome.

It seems to be the perfect lightning rod for the protracted negotiations about the substance of Brexit: the britcoin. This is how British Finance Minister Rishi Sunak described the initiative to develop a digital currency together with the Bank of England. The first thing to do is to identify the opportunities and risks associated with your own crypto currency. While britcoin received a lot of attention this week, other central banks have been developing a digital currency for much longer. One of the big advantages is that it gives them a direct grip on the economy.

For example, it will be possible to transfer money directly to consumers, without the intervention of banks. This is useful if the economy needs a major boost, for example after a shock moment such as a virus outbreak. Benefits and allowances can also be transferred directly to households. That sounds very nice, until you consider that the crypto coins of central banks leave a digital trail.

Privacy and CO2
Authorities can see what you spend your money on - and may even rule out certain options. For example, a government could determine that a benefit may not be used for the purchase of spirits. In a democratic country such as the Netherlands, such an approach will undoubtedly encounter fierce resistance. But the question is how that works in other countries where less value is attached to privacy. A good example is China, where the central bank has already collected more crypto patents than all other central banks combined.

The large climate impact is potentially an even greater disadvantage of the issuance of digital currencies by central banks. Handling all transactions takes a lot of computer power. For example, the bitcoin industry consumes as much electricity as a country like Sweden or the Ukraine, calculated the Cambridge Bitcoin Electricity Consumption Index. It is estimated that the same amount of CO2 is released as a megacity such as London emits annually. Until a solution is found, the introduction of a crypto currency by a central bank is still years in the future.

What does the dollar do?
Incidentally, the emergence of new digital currencies is not at the expense of the dynamics in the foreign exchange market. We will continue to deal with euros in the future and global currency flows will continue to exist. With regard to the latter, there is more than enough happening this time. The British pound has taken a step back after March in the run-up to the Scottish parliamentary elections on 6 May. And the dollar is also under pressure. The flow of US first-quarter data will reach a peak in the coming days. It will be very interesting to hear what business expects from the economy once the pandemic really comes under control.  

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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