The world has been embroiled in a serious discussion about whether or not digitized fiat currency should exist in various countries. The argument was pushed when China first announced it would be
making its own version of digital currency in order to somehow combat Libra, but there may be other implications as well.
Things such as easier distribution of the currency and less reliance for travelers, immigrants or various other groups to physically change the currency, thus bringing in the risk of money laundering.
However, those are overblown reasons as to why the digital currency may have been implemented. The real reason is that Libra is a part of Facebook, which is officially banned in China due to political reasons.
Had it been pretty much anyone else creating the first corporate digital currency, such an answer would not have been the case from the Chinese government.
But other countries like the idea
No matter how wild a digital currency may sound for somebody who isn’t very tech-savvy, those who understand economics and finances are able to see immediate benefits in such a system. Why? Because printing money will become much easier in the future and
will cost nothing but the already common costs of inflation.
The amount of paper will stop being wasted on banknotes, thus adding a lot more value to the efforts of combatting climate change and deforestation.
This type of sentiment was voiced by the Finance minister of Germany who said that a
digital Euro would most definitely benefit the Union in the long run as economics keeps on reaching global levels to a point where cash is simply not a viable tool to base cooperation on, especially when the teams could be on different hemispheres.
However, he wholeheartedly denies the legitimacy of Libra simply because it’s an encroachment of the private sector on a territory that has been conquered by governments for centuries, and in all honesty, it should remain that way.
Why? Because in very few cases are monetary and fiscal policies processed for the profitability of the government, while new policies with a private company could be profit-oriented rather than balance-oriented.
The main reason is data
One of the main reasons that the digitalization of currencies will be very advantageous for governments is access to any and all transactions happening within the authorized networks.
These days, it’s becoming harder and harder to control the cash flow and prevent small cases of money laundering in various countries. Especially countries, where card payments are still outshined by cash payments.
Having a digitalized currency will make it impossible to avoid the gaze of the government, thus subjecting every transaction to relevant laws within the country. The black market would almost completely disappear, as it would be discovered within minutes
of searching the transaction data.
Cutting costs for printing money
As already mentioned above, the alternative reason is cutting costs on printing money, which continues to be made nearly every day in millions all over the world. To put it into perspective, we need to take a look at how much a single USD cost to make.
Well, let’s look at the statistics.
Making a 1 USD banknote costs 4.9 cents including the inflation it causes and everything.
Now imagine that the costs of the paper being used are removed completely, and only the cost of inflation remains. It would cut the costs considerably, right? Well, not necessarily.
Because imagine. If the government is printing $1 million, they’re essentially spending $50,000 on it. That $50,000 is leaving the economy thus reducing the supply despite the fact that new banknotes were just added.
This reduces the effects of money printing on inflation a bit, but not to a point that can be significant. However, the larger the amount the government prints, the more they have to spend on it, thus the reduction in supply is compounding.
Once those costs are removed. The money does not leave the economy, thus the supply grows even faster.
In the end, it’s obvious that the digitalization of currencies would cause much higher damage in terms of inflation when new “banknotes” are printed.
Is it worth to digitalize our currencies?
Most definitely, the benefits outweigh the issues that a country’s economy could face if their fiat currency was digitalized.
The reduction in wasted resources on banknotes, better control on how money leaves and enters the country thus creating a space for better budgeting and economic plans for the future, and overall a much safer environment.
The increased inflation rates due to money printing are sure to dissuade the governments from printing too much in the future, thus that issue can also be adjusted because if printing continues at the same rate it is now with physical fiat currency, we’d
have a global Venezuelan crisis.
Overall, the global digitalization of currencies needs to be a joint effort rather than piece by piece, country by country.