Nearly 90% of the world’s central banks are developing digital currencies, apparently pressured by the rise of Bitcoin and other cryptocurrencies.
Central banks, including the U.S. Federal Reserve, apparently seek to build on cryptocurrency’s innovative 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 drive central banks to launch their own digital currencies: monetary sovereignty, financial stability and financial inclusion.
Private payment networks have grown quickly and some, including Mastercard and Paypal, have expanded their services to include Bitcoin.
“As (private networks) gain market share, these networks could become a primary means of transactions,” Ahya said in a research report. “Central banks may be concerned that money will circulate almost exclusively within the networks, posing a threat to their management of the global monetary system.”
That could lead to unintended consequences.
“The potential failure of a private provider of digital cash could disrupt the payment system and destabilize the financial system,” the Morgan Stanley analyst said. “While regulators have taken steps to mitigate these risks, they can’t completely eliminate them. But if (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 segments of the general public, such as the unbanked population,” Ahya said. “A CBDC, just like physical cash, can be made available more broadly and support greater financial inclusion.”
However, the move to CBDCs could disrupt current banking operations, and isn’t without risk.
The European Central Bank is developing a digital euro and is likely to speed up work with the changes in the market, although the new currency may not be launched for several years, Reuters reported.
It is still unclear if a digital euro would pull money out of commercial banks and if so, how much. Morgan Stanley analysts said Eurozone citizens aged 15 and above could pull as much as 3,000 euros, or about $3,637, from existing accounts.
“This could theoretically reduce euro area total deposits, defined as households’ and non-financial corporations’ deposits, by 873 billion euros, or 8%,” Morgan Stanley said.
That might roil the average loan-to-deposit ratio. A lower ratio might erode a bank’s ability to cover loan losses and customer withdrawals, limit future lending and ripple through the economy.
Moving money from existing accounts probably wouldn’t be felt in countries with large economies such as France, Germany and Italy, but could crimp banks in smaller nations such as 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 liability on the central bank,” MIT said in a research report. “This means the holder of CBDC does not have counterparty risk the way one does when one takes payments electronically through existing products and channels.
“In some designs, the holder would not be reliant upon such an institution at all to store and transfer that value, the way they do with cash,” the report said. “This could open up our payment systems, increasing competition, reducing costs, and spurring innovation.”
China has launched a digital yuan and is testing it in selected cities. Some see it as a challenge to the greenback.
Cryptocurrencies were developed to fill a perceived need, and so far, the market agrees.
A report by the St. Louis Federal Reserve Bank concluded that Ethereum, the world’s second-largest cryptocurrency by market cap, is better suited to commercial transactions than Bitcoin.
Ethereum has sparked innovative financial products that could lead to decentralized finance, called “DeFi” among the crypto faithful, allowing peer-to-peer transactions without using a commercial bank.
“DeFi still is a niche market with certain risks but it also has interesting properties in terms of efficiency, transparency, accessibility, and composability,” Dr. Fabian Schär said in a research report published by the St. Louis Fed. “As such, DeFi may potentially contribute to a more robust and transparent financial infrastructure.”
But there may be nothing that Ethereum or any crypto can do that a CBDC couldn’t match, and perhaps exceed, because it would be more stable.
Bitcoin and Ethereum appear to be diverging: Many see Bitcoin as an inflation hedge, while Ethereum’s technology appears more suited for commercial activity.
India has banned Bitcoin while El Salvador has made it legal tender. It now appears unlikely that the U.S. will ban Bitcoin. Instead, regulators might make it more difficult to use, especially when transferring the crypto or converting it to dollars.
If that’s the strategy, a digital dollar might make cryptos increasingly irrelevant. That could mean the Bitcoin and other cryptos will be remembered less for manic price swings than for developing the technology used in a new financial system driven by CBDCs.
In 1971, the late President Richard Nixon took the dollar off the gold standard. This eventually led to the collapse of the Bretton Woods system of established exchange rates used since the end of World War II.
Nixon’s action and cryptocurrencies raise a basic question: Money derives its value from what, exactly?
In mid-day trading Wednesday, Bitcoin changed hands at $38,816.51, down 3.20% in the last 24 hours but up 33.13% for the year. The 24-hour range is $38,594.53 to $41,316.60. The all-time high is $64,829.14. The current market cap is $727.26 billion, CoinDesk reported.
Retail sales dipped in May, but spending at bars and restaurants surged as COVID-19 vaccination rates rose as more people sought to get out of the house and socialize.
Frederic J. Brown/Getty Images
Retail spending fell 1.7% in May from April as shoppers cut back on big-ticket items such as furniture, electronics and cars, the U.S. Commerce Department said.
But sales at bars and restaurants rose 1.8% last month from April and were up 70.6% from May 2020 when the economy shut down as part of the effort to curb 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 saw 20+ points of outperformance across less vaccinated states,” Earnest Research, a New York-based data company, said in a research report.
“Dunkin, Chipotle, Starbucks, and Potbelly, among others, saw 10 to 20 points of outperformance,” the report said. “Several of the national (quick service restaurant) brands, such as 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 of underperformance in the less vaccinated states.”
Despite May’s dip in retail sales, total sales for March 2021 through May 2021 were up 36.2% from the same period a year ago. Americans spent more in May on clothing, health and beauty products as lockdown restrictions eased.
Consumer spending represents about two-thirds of the U.S. economy. However, kinks in the supply chain limited inventory in key sectors.
A worldwide shortage of semiconductors slowed auto production. Computer chips are used to boost engine performance and a range of other applications, including anti-lock brakes, entertainment and in-dash displays.
Lower inventory has driven prices higher. JD Power said the average price of a new car hit a record high of $38,255 in May, up 12% from the same month a year ago.
Americans stashed cash in savings accounts during the pandemic lockdown and are now ready to spend.
The Federal Reserve, the nation’s central bank, kept interest rates low to support the economy during the lockdown and to drive consumer spending during the recovery. However, inflation remains a concern.
The prices suppliers charge businesses, the Producer-Price Index (PPI), increased 0.8% in May from April. The index increased 0.6% in April from March.
Core prices, which exclude food and energy costs, rose 0.7% in May from the month before.
The PPI differs from the Commerce Department’s closely watched Consumer-Price Index (CPI), which tracks the final price consumers pay for goods and services.
The CPI includes taxes, service charges and the price of imported goods because all contribute to the final cost for consumers.
The PPI tracks prices as products move through the economy. It appears that rising production costs, including materials and transportation, are being passed on to the consumer. Consumer prices have jumped 5% in May from a year ago, the fastest clip in 13 years and the jump in the PPI is part of the reason.
Trillions of dollars in government stimulus has helped drive the recovery, including retail spending.The U.S. economy grew at a 6.4% annual rate in the first quarter and it appears consumer spending will continue to drive the recovery in coming months.
Strong retail spending appears to reflect both growing consumer confidence and increased opportunities to spend as the COVID-19 pandemic abates.
The key questions: Will inflation continue to rise? If so, at what point will consumers start to cut back on spending, and what might that mean for the recovery?
The Federal Reserve said it expects the recent increase in inflation to be “transitory.” The Fed expects inflation to exceed its 2% target this year and into next before subsiding.
So far, consumers haven’t let higher prices impinge on the joy of getting out of the house after the lockdown, and cash registers continue to ring as a result.