Bitcoin versus digital euro: "A new currency war is looming"

Christian de Boissieu is Professor Emeritus at the University of Paris I (Panthéon-Sorbonne), Vice-President of the Circle of Economists, former President of the Council of Economic Analysis.

Until now, the currency war mainly refers to competitive devaluations, the desire of some countries to improve their competitiveness through the undervaluation of their exchange rate.

A new currency war is emerging, one between public (or official) currencies and private currencies and whose issues, eminently political, affect power, control and national sovereignty.

Because, as the British economist Roy Harrod said, "

money is power

", and not just purchasing power ... The public monopoly of monetary issuance, already fallen with the rise of commercial banks, risks losing this which remains with the rise of private currencies.

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The success of bitcoin illustrates the rise of cryptocurrencies, these digital currencies of private initiative, with unstable prices for many of them, and devoid of central banks able to serve as a "

lender of last resort

" in the event of a downturn. tobacco.

Admittedly, bitcoin and other cryptocurrencies do not fulfill all the functions of a complete currency, but they still compete with official currencies for certain uses.

The announced arrival of Facebook in 2021 with its currency Libra, recently renamed Diem, would give a huge boost to the growth of private cryptocurrencies since the American giant has 2.5 billion users!

Faced with the privatization of the currency, which takes us far back in history, the public authorities are not left out.

Almost everywhere, central banks are working on the launch of public digital currencies.

The ECB is totally on this line, with the project of a digital euro mentioned on several occasions by Christine Lagarde.

Central banks want to regain control of private monetary initiatives, in particular that of Facebook.

Why such an interest?

Central banks are only implementing, each in its own sphere of control, new digital technologies, whether blockchain, artificial intelligence, etc. Technologies which initially come under private and decentralized initiatives , as evidenced by the pioneering work of S. Nakamoto in 2009, which immediately linked technology (blockchain) and cryptocurrency (in this case bitcoin).

A second reason is strategic: central banks want to regain control of private monetary initiatives, in particular that of Facebook.

Take the digital euro for example.

It will be issued by the ECB, as euro banknotes are today, and as such, like banknotes or as commercial bank reserves with the central bank, it will represent a claim of those who hold it against vis-à-vis the ECB.

From this point of view, essential, it differs from cryptocurrencies (bitcoin, ethereum, etc.) which are debts for private issuers.

The digital euro would complement cash, often undoubtedly replacing it in part.

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Everywhere, the share of cash in total means of payment is declining, under the effect of successive waves of technological innovations: payment and credit cards, Internet, AI, etc. I do not believe in the disappearance of cash.

Part of the current transactions will continue to be done in cash for reasons of habit and convenience, not to mention that the informal economy, present even in the most advanced countries, operates, for reasons easy to understand, with the cash.

The digital euro will trade at 1/1 parity against all other forms of the euro, which seems obvious.

It will therefore be a "

stable coin

", just as the Diem is expected to be a "

stable coin

" against the dollar.

This property will avoid the price volatility inherent in many cryptocurrencies that are not pegged to one or more public currencies.

Digital widens the field of possibilities, at the same time that it can lend itself to malicious intrusions in the form of cyber attacks

The digital euro will not only be a technological update of the single European currency.

For everyone, businesses and households as well as financial institutions, it will reduce transaction costs, speed up and secure payments.

Digital widens the field of possibilities, at the same time that it can lend itself to malicious intrusions in the form of cyber attacks.

With the digital currencies of central banks, the articulation between public and private currencies will become essential.

Bitcoin and other cryptocurrencies - which central banks prefer to call crypto-assets because they dispute their fully monetary character - are left for their price in the permanent play of the law of supply and demand.

What must be called "

bitcoin madness

", with astronomical prices, amply illustrates this at the moment.

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By definition, the digital euro will have the ECB as lender of last resort.

Public and private digital currencies will compete.

I would gladly refer here to Hayek's work on monetary competition and its determinants, in particular on what constitutes the quality of a currency: the stability of its value, the depth of the financial markets to which it is backed and the quantity of said currency being only one element of quality among others.

But public and private digital currencies will also be complementary.

Convertibility between them, in both directions and with numerous crossing points, will be crucial information for the fight against tax evasion, against the laundering of dirty money and against the financing of terrorism.