On Sunday, the governor of the Australian central bank said that digital tokens that are consumer focused and issued by private companies could actually be better than those issued by central banks. However, he said that this was only applicable in the case that these are regulated properly.
Regulation of private digital currencies
A meeting of the finance official of G20 countries was held in Indonesia and Phillip Lowe talked about this issue in the panel discussion. The chief of the Hong Kong Monetary Authority (HKMA) also said in the same discussion that if these tokens are properly scrutinized, it could also help in eliminating the risks associated with decentralized finance (DeFi) platforms, which are a big part of the crypto ecosystem.
There are a number of central banks all over the globe that are working on developing their own central bank digital currencies (CBDCs). These are either wholesale tokens that will only be used by banks that are part of the financial systems or are retail tokens that will be issued to the public for direct use.
This issue of privately issued digital currencies arose because of stablecoins like USDC and Tether, which are such tokens. The value of these stablecoins is pegged to a traditional asset, mostly the US dollar. They are used for making payments and as a store of value as well.
However, it should be noted that these tokens do not come without their risks and these were highlighted back in May. This was when one stablecoin i.e. the TerraUSD (UST) collapsed, along with its sister token LUNA and they sent the crypto market tumbling. These tokens were used for underpinning numerous DeFi applications and were not used for making payments in the real world.
Lowe said that if such tokens are to be used widely, then it is essential that they are regulated, similar to bank deposits, or are backed by the state. He said that these privately issued tokens were a better choice, as long as they could be regulated because the private sector is significantly better in terms of design and innovation. Moreover, he said that the central bank would have to incur a hefty cost for setting up a system for digital tokens.
A strong system
Lowe, along with other members of the panel, agreed that they need to create a strong system for regulating these tokens sufficiently. Eddie Yue, the CEO of HKMA, said that the risks from DeFi could be eliminated with the help of more scrutiny.
Yue asserted that crypto exchanges and stablecoins serve as gateways to the world of decentralized finance (DeFi) and regulating them would be easier than regulating the products. He also asserted that even though the UST and LUNA incident had shaken the DeFi ecosystem, it was not likely to disappear anytime soon. But, he added that they could be held back because their developments and technologies could do wonders for the financial system in the future.