The Central Bank Business Model Is Under Attack

Although different from a central bank-issued digital currency, Libra, if launched as originally conceived, is positioned to become a major alternative payment mechanism to traditional fiat, perhaps more so than cryptocurrencies such as bitcoin.

Central banks are under threat from new technologies, just as Netflix disrupted Blockbuster.

Thanks to Facebook, the central banks suddenly took notice of the threat a privately backed digital currency would make to their business model.

If an independent currency were to gain more use than central bank fiat, central banks' ability to use monetary policy as a tool would be greatly diminished.

The deputy director of the People's Bank of China said its motivation for launching a digital currency is "To protect our monetary sovereignty" Other countries and regions, including the other BRIC nations followed with their own announcements.

Second, central banks can cut their reliance on dominant currencies including the US dollar.

Since the 2008 recession many countries, including Switzerland, have chafed under the challenges that increased US compliance, coupled with the dollar being used as the global reserve currency, has presented to the banking industry.

A digital currency is simply a currency issued by an entity in digital form.

Cryptocurrencies such as bitcoin, on the other hand, are not issued by a central authority and rely on a network of decentralized miners to issue the currency and verify transactions.

Ironically, the increased global demand for decentralized bitcoin, as well as the interest in decentralized finance that gained steam in 2019, may have woken up central banks to the fact that they are under threat from new technologies, just as Netflix disrupted Blockbuster and Amazon disrupted Barnes and Noble.