- The current economy represents a dual monetary space
- The private sector provides innovation and product diversity, the public sector ensures stability and efficiency
- With the emergence of the central bank digital currency (CBDC), a form of digitalized cash, two outcomes are possible
Everybody appreciates innovation in terms of money. The possibility to swipe a card, wave a phone, or click on a mouse in one day to make payments is a very interesting facility.
Today’s world represents a dual monetary space. It involves privately-released money, issued by banks of all kinds, telecom institutions, or expert payment providers. This form of money is based on the foundation of publicly-issued money that the central banks issue.
With its pros and cons, this system provides noteworthy advantages. While the private sector provides innovation and product diversity, the public sector ensures stability and efficiency.
The positive harmony between private and public
The central banks need to navigate the existing barter. This involves decisions revolving around the degree of reliance upon the private sector in contrast to the decision of how much to redesign themselves. Much depends on inclination, accessible technology, and the effectiveness of regulation.
Thus, when a new technology arrives, it is natural to enquire about the potential evolution of the current dual monetary system. With the emergence of the central bank digital currency (CBDC), a form of digitalized cash, two outcomes are possible. Either it will replace privately-issued money or it will ensure its prosperity. The first holds more chances of occurrence, by mode of more strict regulation. The second will occur if there is an extension to the logic of today’s dual monetary system.
Significantly, central banks should not have the choice between providing central bank digital currency and stimulating the private sector to offer its digital variant. The two can coexist and accompany each other well.
The potential reason for dependence
The reason why public money still holds its authority is that it shares a fundamental symbiotic relationship with the private sector. The relationship offers a choice to redeem private money into extremely secure and liquid public money. It could be in the form of notes and coins or some holdings of selected banks in the form of central bank reserves.
The private money with an offer of redemption at fixed face worth into central bank currency becomes a steady store of value. When this privately-issued money becomes compatible, it encourages competition too. In conclusion, the choice of redemption into central bank currency is important. As it brings stability, compatibility, innovation, and multiplicity of privately-issued money.
A setup with private money will prove to be extremely risky. And if there’s only central bank currency in action, the economy will be devoid of important innovations. Every kind of money depends on the other to constitute the modern dual money system, a balanced service indeed.
Thus, when countries decide to proceed with central bank digital currencies, they need to consider how to hold the private sector in its network. So, the current dual-monetary system can conveniently stretch to the digital age. Central bank currency will carry on to be important to support the stability and effectiveness of the payment system. And privately-issued money can complement this establishment with innovation and diversity, perhaps even in better forms today.
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