Jens Weidmann, the head of Germany’s central bank Bundesbank and one of the most powerful bankers in Europe, proposed the development of central bank-issued digital currencies to compete with Bitcoin.
Weidmann argued that Bitcoin could potentially worsen future financial crisis due to its decentralized nature and the non-existence of central entities within the Bitcoin network.
Although Weidmann’s recognition of the explosive growth of the Fintech and cryptocurrency markets should be appreciated, he is dismissive of the structure of Bitcoin and the characteristics of decentralized cryptocurrencies that make settlement networks such as Bitcoin valuable.
To this date, only a very limited group of traders, experts, analysts, investors and users understand the technical intricacies of Bitcoin. While Bitcoin’s concept is simple in theory, it has been difficult for the vast majority of people within the traditional finance sector to understand because they have learned to deal with centralized monetary systems and financial networks.
For most, it is difficult to embrace Bitcoin’s decentralized nature because it contradicts the very purpose of the global financial sector.
During a speech featured by Business Insider, Weidmann stated that the issuance of central bank-based centralized digital currencies is safer for the public as a central bank cannot become insolvent. He stated:
“Allowing the public to hold claims on the central bank might make their liquid assets safer, because a central bank cannot become insolvent. This is a feature which will become relevant especially in times of crisis – when there will be a strong incentive for money holders to switch bank deposits into the official digital currency simply at the push of a button. But what might be a boon for savers in search of safety might be a bane for banks, as this makes a bank run potentially even easier.”
However, Weidmann was dismissive of the reason behind the rising demand and explosive growth of cryptocurrencies. The vast majority of investors trading and purchasing cryptocurrencies such as Bitcoin are looking for decentralized settlement networks with which they can process transactions without intermediaries and with lower costs.
The rest have invested in Bitcoin as a safe haven asset because its value and price are not dependent on the economy and the performance of other sectors. Rather, Bitcoin’s price is solely affected by its market and the demand from investors.
Technically, Weidmann’s basic point in that central banks can’t become insolvent or bankrupt because they are supported by their respective governments is accurate. But, his point that central bank-backed centralized digital currencies could compete with Bitcoin is not valid as investors and users of Bitcoin perceive the cryptocurrency as the alternative financial network to the global banking system.
More importantly, Weidmann brought up an issue with liquidity which could become an issue for Bitcoin in its later stages. Most overseas markets have already heavily regulated Bitcoin and in many regions including Singapore, Hong Kong, Japan, South Korea, Australia and the Philippines, Bitcoin is recognized as a legal payment method and currency.