The thought of a central bank cryptocurrency may seem like a bit of an oxymoron, but apparently, some countries are looking into the plausibility of creating one. If any of them ever become a reality, central bank cryptocurrencies will likely be linked to fiat currencies and be more like digital versions of them rather than true cryptocurrencies. After all, it’s hard to imagine any central bank in any country creating a digital currency that’s totally anonymous. However, that hasn’t kept regulators in some countries from discussing the topic.

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The great debate about central bank cryptocurrencies

Morgan Stanley strategist Sheena Shah released a report on central bank cryptocurrencies this month, outlining what regulators are saying about the topic in various countries. She explained that multiple central banks are talking about introducing a digital form of cash using various platforms, including everything from current platforms to others based on the blockchain.

Regulators who are thinking about central bank cryptocurrencies see it as potentially a way to better monitor and track currency flows. Shah doesn’t believe central banks will use bitcoin or any other private blockchain networks. Instead, she expects regulators to create their own digital currencies. She also noted that there aren’t many transactions that do support cryptocurrencies for payments, which means that they don’t “currently exert a significant influence on macro outcomes.”

Rather, she believes that regulators are focused on understanding digital currencies from the perspective of “financial stability.”

Cryptocurrencies and interest rates

One particularly interesting theory expressed by Shah is in connection with interest rates. Several major central banks around the world resorted to negative interest rates for a time, as they tried to spur recovery in the global economy. Shah believes that a 100%-digital monetary system might enable central banks to push rates even deeper into negative territory.

She explained that when there is paper currency circulating freely, regulators are limited in how low they can push deposit rates. Theoretically, the only way negative rates can spread throughout an economy is if all deposits are held in the banking system.

However, digital currencies may enable negative rates on all of the money that’s in circulation throughout the entire economy. She added that this theory is challenged though by the reality that “deep and long-standing negative rates” eventually become a problem for central banks. The result would be that regulators would be forced to “go direct to currency users to implement monetary policy, reducing leverage in the system significantly and cutting GDP growth.”

According to Shah, this debate is still theoretical, so it’s unclear what central banks might decide about it.

Sweden considers an e-krona

One country in which central bank cryptocurrencies are being discussed more seriously than in others is Sweden, and according to Shaw, the country has the greatest percentage of card payments among developed countries. Sweden also has low levels of cash currently in circulation, as regulators have taken multiple steps to limit the amount of cash that’s available. Shah also said that other countries with little cash circulating may be more interested in central bank cryptocurrencies than other countries.

She also said that Sweden is considering creating an e-krona because regulators are worried about cash usage falling too fast, which she said could make it “difficult to maintain the cash infrastructure.” Swedish regulators are now soliciting feedback from tech firms about how they could implement an e-krona.

Although she didn’t mention Russia, regulators there are also close to creating a cryptoruble, Stratfor said last month. The Kremlin apparently plans to profit off all the illicit monetary activities that go on in the country by attaching a 13% transaction fee whenever investor buy cryptoruble without documenting where their funds came from.

Venezuela’s petro cryptocurrency is another example of a national digital currency, although it was created to enable the nation to dodge U.S. sanctions amid a climate of hyperinflation. China has also said it plans to create a digital currency as it tries to eliminate private cryptocurrencies by banning them.

Japan isn’t planning a central bank cryptocurrency

An official with the Bank of Japan said last month at a conference with the International Monetary Fund that they don’t plan to create their own cryptocurrency because of concerns about financial stability. It makes sense, as Shah reported that the Asian nation has one of the highest levels of cash in circulation relative to its GDP among both developed and emerging markets. Last year, Japanese regulators said they aim to double cash-less payments over the next decade by encouraging use of the blockchain.

However, even though Japanese regulators say they don’t plan to create a central bank cryptocurrency, Shah said she wouldn’t be surprised if they did create one at some point.

Debate about central bank cryptocurrencies rages on

Meanwhile, the debate about central bank cryptocurrencies continues in developed countries. Just this week, Federal Reserve Governor Lael Brainard said that central bank cryptocurrencies present too great of a risk. She warned that such a network could make it easy for hackers to attack the monetary system while also providing an easy way to launder money. She also told a digital currency forum in San Francisco that she sees “no compelling demonstrated need” for a Fed-backed cryptocurrency.

Further, she said that just creating a central bank cryptocurrency would present massive technological challenges and present other risks, such as making it harder for banks to make loans for certain activities.

Brainard isn’t the only Fed official who’s against creating a Fed-backed digital currency. Officials with the St. Louis Federal Reserve also argued against a Fed-backed cryptocurrency last month, explaining that the very nature of a cryptocurrency runs counter to what central banks do. They explained that it would theoretically be easy for a central bank to create its own digital currency based on the Ethereum blockchain or on a new blockchain created by the central bank itself.

Cryptocurrencies versus digital currencies

However, they said creating a “Fedcoin” could create immense “reputational risk” because it could be used for money laundering or by terrorists to buy weapons. They also said banks would begin to question why they should be required to follow “know your customer” and “anti-money laundering” regulations when the Fed itself is undermining these same regulations by creating “an anonymous cryptocurrency with permissionless access.”

Essentially, they pointed out that a digital currency is only a cryptocurrency when it offers an anonymous way to complete transactions—something central banks probably wouldn’t or shouldn’t do. However, the St. Louis Fed officials are in favor of a fiat currency-backed digital currency.”

At the end of the day, it seems like the debate about central bank cryptocurrencies hangs at least partially on semantics. It’s one thing for regulators to create a digital currency backed by their country’s own fiat currency, and another thing for them to build a blockchain-based network that offers all the anonymity of major cryptocurrencies.