Is it necessary for national banks to have their own cryptocurrencies?

Cryptocurrencies have become a popular investment and exchange commodity. Banks, being committed to customer service, can utilize their existing funds if there is demand for them.

Several commercial banks have already developed their own cryptocurrencies. Take JP Morgan investment bank as an example, they have created the JPM Coin to facilitate instant settlements between business partners.

In theory, the introduction of a new form of collateral for transactions can potentially enhance banks' ability to navigate financial crises with greater confidence.

With the rise of digital assets and the use of cryptocurrencies in various industries, the issue of transforming traditional financial organizations is becoming increasingly important. However, instead of creating their own cryptocurrencies, banks are focusing on adopting blockchain technology to enhance their existing systems. Central banks worldwide are actively developing public blockchain databases to optimize operational processes. In Russia, successful startups like Alfa Bank, S7 Airlines, and Gazprom Neft have developed a service for paying aviation fuel based on smart contracts. Similarly, Raiffeisenbank and the Megafon network have used blockchain to issue ruble bonds. Banks are slowly exploring advanced technology to find areas where it can be effectively utilized.

Despite the attempts of regulatory authorities to embrace blockchain technology, they remain skeptical about using cryptocurrencies for settlements. They criticize it for being insecure, anonymous, and volatile. Decentralization and free exchange are not favorable for traditional banks that regulate fiat cash to concentrate capital. On the other hand, experts believe that traditional banks may fail if they do not issue their own state-backed cryptocurrency. A bank-issued cryptocurrency would enhance its popularity among the population as it would provide affordable opportunities for electronic payments, peer-to-peer transactions, and easy conversion into cash or bank reserves. It could also offer maximum consumer anonymity, making it a viable alternative to traditional bank transfers. Additionally, central banks would maintain control over the money supply and trust in the national currency.

However, transitioning to peer-to-peer digital transactions would deprive central banks of a significant source of financing through deposits. They would need to develop appropriate regulatory frameworks, legislative norms, and increase cybersecurity to mitigate the risks of cryptocurrency theft. Therefore, the best option for both traditional bank customers and the banking system itself would be to use existing digital assets as legal financial instruments. These assets can be used as stocks to form reliable investment portfolios or practical platforms like Ripple. European financial organizations demonstrate a positive attitude towards virtual currencies, considering them as opportunities to keep up with innovations. Swiss bank Falcon Private Bank, for example, offers a service for clients to manage supported cryptocurrencies like Bitcoin, Ethereum, Litecoin, and Bitcoin Cash. Rabobank in the Netherlands is launching its own Rabobit wallet to provide a secure banking environment for clients to work with digital assets.

Cryptocurrencies completely contradict the features of real national currencies that are issued by banks in different countries. They work using blockchain technology, which provides accurate accounting of all financial transactions, making the system convenient to use. This technology has a future, as many national banks are already interested in it. However, it is unclear whether banks will be interested enough to use cryptocurrency as the main means of payment.

Bitcoins and altcoins may eventually compete with real currencies. Many states consider digital coins to be a new impetus in the development of trade and the global economy, while others see them as a potential threat. Regardless, there is agreement that the cryptocurrency market needs legal regulation. In America, bitcoins and alternative coins are actively supported, with many cryptocurrency exchangers in the country. Financial transactions with bitcoins are officially equated to transactions with securities. Digital coins were also protected earlier in China, but they are now banned.

The more anonymous cryptocurrencies become and the more the cryptocurrency market distances itself from state organizations, the more the state wants to control it. States have a monopoly on money issuance and the introduction of a new currency, regulated by the national state bank. State currencies are subject to legal regulation, including restrictions and taxes, but banks guarantee the security of users' funds and the speed of financial transactions.

Cryptocurrency coins cannot be linked to a specific jurisdiction due to their international nature. Different states can only unite cryptocurrencies if they combat illegal money laundering using the blockchain system. Cryptocurrencies have advantages for use as a national payment system, such as anonymity, low fees, and fast transactions. However, they also have downsides, such as the lack of user protection from the state and the absence of asset backing, relying solely on trust between parties.

Losing the key to a bitcoin wallet means funds cannot be recovered, and confirmed transactions cannot be canceled. Furthermore, if a person fails to fulfill their obligations after receiving an advance payment, they will not be held responsible. Additionally, the value of electronic money depends on demand and investor interest, and owners are vulnerable to hacker attacks. For governments, these issues result in a negligible tax revenue percentage, which affects the country's economy, and for unethical individuals, it opens up opportunities for illegal activities. Cryptocurrencies are highly volatile and unstable, making them unsuitable for international trade or lending.

Some experts believe that cryptocurrencies will eventually be used by certain states, but their anonymity will be lost, resulting in decreased demand and value.

The use of digital currencies for purchases, online payments, and earning money is widespread across the globe, suggesting significant potential for growth in the financial industry. Efficiency, security, and speed are crucial factors for the mass adoption of these assets over traditional financial institutions. However, central banking systems remain costly and slow. Cryptocurrencies offer a solution by streamlining and enhancing transactions.

The rise of cryptocurrencies, starting with Bitcoin, has posed challenges for national financial regulators. While the decentralized nature and untraceability of transactions may be advantageous, they can also be seen as negative characteristics from a public administration perspective.

Cryptocurrencies fundamentally differ from printed money issued by sovereign states. They are private, dispersed, and operate through open systems. Nevertheless, the underlying blockchain technology used in cryptocurrency projects allows for transparency and user-friendliness. This versatility has led to the creation of numerous types of coins.

Central banks have taken notice of this modern technology, with discussions such as the Masterchain project in Russia's financial department. This project aimed to create a closed network for domestic money transfers based on blockchain systems. However, these efforts are still in the discussion phase, as governments are carefully considering the implementation and potential risks.

Another positive factor for the integration of cryptocurrencies into national financial structures is the European Union Court of Justice's decision to practically equate Bitcoin with other recognized currencies. This was achieved by exempting Bitcoin from value-added tax during conversions, bringing it closer to being treated as a legitimate part of the global economy.

While the technological advancements and progressive developments in the cryptocurrency market hold promise, digital coins are unlikely to replace traditional payment tools for banks. Instead, they are viewed as profitable auxiliary mechanisms that can simplify tasks and modernize operations.

Launching a cryptocurrency project is relatively inexpensive and straightforward, enabling its widespread adoption at any level of the government. However, strong government support and regulatory measures are essential for successful implementation.

The necessity of national banks having their own cryptocurrencies is a subject of ongoing debate among experts. Proponents argue that national cryptocurrencies could provide various benefits, such as increased transparency, lower transaction costs, and improved financial inclusion. It could also help central banks maintain better control over the monetary system and combat illicit activities. However, there are concerns about the potential risks and challenges associated with national cryptocurrencies, including issues related to security, privacy, and the impact on traditional banking systems. Ultimately, the decision to develop a national cryptocurrency would depend on a country's specific economic and regulatory circumstances, and the perceived benefits compared to the potential drawbacks.

Here are a few more points to consider regarding national banks and their own cryptocurrencies:

1. Monetary Policy Control: National banks could use their own cryptocurrencies as a tool to have better control over monetary policy. By issuing a digital currency, central banks can potentially have more direct influence on factors like money supply, interest rates, and inflation.

2. Financial Stability: National cryptocurrencies may help enhance financial stability by offering greater visibility into transactions, making it easier to monitor and prevent illicit activities such as money laundering and tax evasion. This increased transparency could also assist with regulatory compliance.

3. Cross-Border Transactions: Having a national cryptocurrency could streamline cross-border transactions, reducing costs and increasing efficiency. It may eliminate the need for intermediaries, like correspondent banks, and simplify the process of transferring funds internationally.

4. Financial Inclusion: National cryptocurrencies could potentially improve financial inclusion by providing access to banking services to those who are currently unbanked or underbanked. A digital currency could be more accessible and offer basic financial services to individuals with limited access to traditional banking systems.

5. Security and Privacy Concerns: Developing a secure digital currency is a significant challenge, as it would need to withstand hacking attempts or threats to its integrity. Additionally, concerns have been raised about potential infringements on individual privacy, as central banks would have access to detailed transaction data.

6. Impact on Commercial Banks: The introduction of a national cryptocurrency could have implications for commercial banks, as it may alter the dynamics of traditional banking systems. It could change the role of commercial banks, potentially reducing their importance as intermediaries and impacting their revenue sources.