While EU authorities have had a fairly neutral stance towards cryptocurrencies up until now, the European Parliament’s Committee for Economic and Monetary Affairs believes that central bank-based digital currencies (CBDC) may pave the way for a more stable global financial system in the future.

Bitcoin Can’t Replace Traditional Currencies

According to a report issued by the European Union committee, there are several reasons why standard cryptocurrencies can’t beat fiat money. According to the authors, conducting a moderate share of transactions via digital currencies rather than fiat would be ‘prohibitively expensive’.

The second reason would be that at this time, crypto assets are mostly used as speculation instruments for earning profits and not as a medium of exchange. While alt currencies are certainly disruptive to the market, holding and transacting liquidity via CBDCs rather than bank accounts, will lead to a more stable and innovative financial system.

According to the report:

“To avoid recurrent instability of the banking system, commercial banks would need to come up with more reliable funding sources than deposits. As the fractional reserve character of the current banking system can be a major source of instability, such a disruptive change is not necessarily a bad development, but could finally pave the way for a more stable financial system.” 

Final Take

Additional information regarding how central banks could implement a standardized procedure for CBDCs is not yet available. Despite the report, bank officials in Australia and New Zealand do not agree with the findings. According to them, replacing traditional deposit accounts with CBDCs would lead to further financial instability and not the other way around.

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