How should central banks respond to digital technology? This has become an urgent question. The answer is partly that both they and governments have to get a grip on the new wild west of private money. But it is also that they must now introduce digital currencies of their own.
The state must not abandon its role in ensuring the safety and usability of money. The idea that it should is a libertarian fantasy. Moreover, action is now urgent. According to a paper by Gary Gorton of Yale and Jeffery Zhang of the Federal Reserve, innovators have now created more than 8,000 cryptocurrencies.
Gorton and Zhang divide these creations into two main categories: unbacked “fiat cryptocurrencies”, such as bitcoin; and “stablecoins”, backed one-for-one by government fiat money. Both are problematic, in different ways.