Can Central Bank Digital Currencies Be Used to Fight Financial Crimes?

Can Central Bank Digital Currencies Be Used to Fight Financial Crimes?

Paper money today is a marginal part of the currency in circulation and represents a direct relationship between the end user and the central bank. Its use is, however, unknown to the central bank; in a certain sense, it can therefore be said that like cryptocurrencies, cash can be used for illicit purposes. Central banks could start the process of digitizing paper money and thus create their own digital currency. Such a solution would have the great advantage of combating the shadow economy and illegal activities, and could be a viable alternative to corporate-backed digital currencies like Libra.

Cash circulation

The amount of cash circulating in the world is around 10% of the total money supply [the author derived this calculation using information from individual central banks]. De facto, cash represents a direct and untraceable relationship between the end user and the central bank. In many ways, the cash in circulation is similar to crypto: Central banks and regulatory institutions are not aware of what you do with cash — unless you run into Anti-Money Laundering policies, exactly as it happens when you exit the banking system and move toward the cryptocurrencies markets. With crypto, the transactions are recorded on blockchains, which are encrypted accounting ledgers. However, tracking an operation in crypto assets is like searching for the contents of a safety deposit box without knowing the bank, the address and without having the key.

Comparing different assetsComparing different assets

In the crypto world, a series of regulatory provisions have arguably failed. The United States Treasury — followed by other countries — has established a taxation of the capital gains on crypto assets held on exchanges without obtaining significant revenues, possibly because many decided not to provide information that is encrypted. Back in September 2017, Chinese monetary authorities banned operations concerning crypto assets in order to control capital flight, when the Peoples Bank of China (PBoC) forbid financial transfers from the banking system to cryptocurrency exchanges. However, in this case as well — likely due to the same reason highlighted in the U.S. case — it seems as though the PBoC could not reach its goal.

Nevertheless, a trackable nonencrypted digital currency would be desirable from the perspective of regulators eager to fight the shadow economy.

Digital currency as an alternative?

A fresh approach is needed, starting from the regulatory framework, such as deciding whether a cryptocurrency is a real currency or a simple financial asset. So far, the wait-and-see approach of the authorities — who are worried about rapid changes in the financial system — has only delayed the entry of institutional investors into the field, g ...

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Tags: Central bank, Digital currency, Cash, circulation, Bank, People’s Bank of China, International Monetary Fundacion, United States Department of the Treasury, European Central Bank, Banknote