By Eric Lam
Nine years since the birth of Bitcoin, central banks around the world are increasingly recognizing the potential upsides – and downsides – of digital currencies.
The guardians of the global economy have two sets of issues to address. First is what to do, if anything, about the growth of the private cryptocurrencies that are grabbing more and more attention for a host of reasons: security concerns after a $500 million exchange hack in Japan, volatile price moves and – in the case of Bitcoin, at least – their introduction on regulated derivatives exchanges. The second question is whether to issue official versions.
Here’s a wrap-up of how the the world’s largest central banks (and some smaller ones) are approaching the crypto phenomenon:
US: Privacy worry
The Federal Reserve’s investigation into cryptocurrencies is in its early days, and policy makers haven’t been overtly enthusiastic about the idea of a central-bank issued answer to Bitcoin. Jerome Powell, a board member and nominee for chairman, said in 2017 that technical issues with the technology remain and “governance and risk management will be critical.” Powell said there are “meaningful” challenges to a central-bank cryptocurrency, that privacy issues could be a problem, and private-sector alternatives may do the job.
Randal Quarles, vice chair for supervision at the Fed, said Dec. 1 while the central bank of the world’s biggest economy has no policy toward regulation of Bitcoin, it is “worth thinking about.” The volume of cryptocurrencies could at matter to monetary policy at some point, Powell said in answering a question at his Senate confirmation hearing in November. Right now, though, “they’re just not big enough,” he said.
Euro area: Tulip-like
The European Central Bank has repeatedly warned about the dangers of investing in digital currencies. Vice President Vitor Constancio said in September that Bitcoin isn’t a currency, but a “tulip” – alluding to the 17th-century bubble in the Netherlands. Colleague Benoit Coeure has warned about Bitcoin’s unstable value, saying its links to tax evasion and crime are major risks. ECB President Mario Draghi said in November that the impact of digital currencies on the euro-area economy was limited and they posed no threat to central banks’ monopoly on money.
Even when compared to some of history’s biggest bubbles, Bitcoin is wild: read more
China: Cracking down
China has made it clear: the central bank has full control over cryptocurrencies. With a research team set up in 2014 to develop digital fiat money, the People’s Bank of China believes “conditions are ripe” for it to embrace the technology. But at the same time, the authorities are cracking down on Bitcoin mining and cryptocurrency trading. While there’s no formal start date for introducing digital currencies, China says going digital could help improve payment efficiency and allow more accurate control of currencies.
Japan: Not needed
Cash is still king in Japan, according to the head of the central bank’s FinTech Center. The Bank of Japan is not considering issuing a digital currency as there is “no demand” for it, Yuko Kawai said this month, noting the rise of cashless transactions remains a work in progress in the country. Authorities may be forced to take action on the sector, however, after nearly $500 million in digital tokens was stolen from the Coincheck Inc. exchange in Tokyo on Jan. 26.
BOJ chief Haruhiko Kuroda said in December of Bitcoin that “if it’s a question of whether it’s functioning like currencies as a form of payment or means of settlement, I don’t think it is.” Bitcoin “is being traded for investing or for speculation,” he said. In October, he said the BOJ had no imminent plan to issue a digital currency, though it’s important to deepen knowledge about them. Taking such a step would involve revisiting “fundamental issues of central banking,” as it would effectively extend access to their accounts to the public.
Germany: Investors beware
In a country where a lot of people still prefer to pay in cash, the Bundesbank has been particularly wary of the emergence of Bitcoin and other virtual currencies. President Jens Weidmann described Bitcoin’s move in December as having a “speculative character,” but for regulators, “just because investors can lose money isn’t a reason to get involved.” Board member Carl-Ludwig Thiele said in September that a shift of deposits into blockchain would disrupt banks’ business models. At the same time, the Bundesbank has been actively studying the application of the technology in payment systems.
UK: Potential ‘revolution’
Bank of England Governor Mark Carney has cited cryptocurrencies as part of a potential “revolution” in finance. The central bank started a financial technology accelerator in 2016, a Silicon Valley practice aimed at incubating young companies. Carney says technology based on blockchain, the distributed accounting database, shows “great promise” in enabling central banks to strengthen their defenses against cyber-attacks and overhaul the way payments are made between institutions and consumers. He has nevertheless cautioned that the BOE is still a long way from from creating a digital version of sterling.
France: ‘Dark side’
Bank of France Governor Francois Villeroy de Galhau said in June that French officials “advise great caution with respect to Bitcoin because there is no public institution behind it to provide confidence – in history all examples of private currencies ended badly.” Bitcoin has a “dark side,” he said, citing data attacks. Villeroy de Galhau has warned that people who use the cryptocurrency “do so at their own risk.”
India: Not allowed
India’s central bank is opposed to cryptocurrencies given that they can be a channel for money laundering and terrorist financing. Nevertheless, the Reserve Bank of India has a group studying whether digital currencies backed by global central banks can be used as legal tender. Currently, the use of cryptocurrencies is a violation of foreign-exchange rules.
Singapore: Official warning
Characterized – sometimes with pride – as a nanny state, Singapore has lived up to that label when it comes to cryptocurrencies, issuing an an official warning to citizens to be wary. The city-state’s monetary authority said in a Dec. 19 statement it “is concerned that members of the public may be attracted to invest” in them because of the surge in prices. Buyers should be aware “they run the risk of losing all their capital.” The authority pointed out that there’s no regulatory protection for investors, and urged citizens to report fraud suspicions related to cryptocurrencies to the police.
Brazil: Support innovation
The Banco Central do Brasil sees “no immediate risk for the Brazilian financial system” from cryptocurrencies, but remains alert to the developments in their usage, according to a statement issued in November. The central bank pledged “to support financial innovation, including new technologies that make the financial system safer and more efficient.”
Carolyn Wilkins, the Bank of Canada’s senior deputy governor, is leading research on cryptocurrencies, and said in November that cryptocurrencies aren’t true forms of money. “This is really an asset, or a security, and so it should be treated that way,” Wilkins said. Like others, she viewed distributed-ledger technology as promising for making the financial system more efficient. BOC staff are also exploring the circumstances under which it might be appropriate for the bank to issue its own digital currency for retail transactions.
South Korea: Crime watch
Authorities in South Korea have focused on protecting consumers and preventing cryptocurrencies from being used as a tool of crime. While the government continues to weigh legislation to shut down cryptocurrency exchanges, the nation’s Financial Services Commission is setting up a special team to probe cryptocurrency trading. South Korea will begin a real-name account system for such trading on Jan. 30. Bank of Korea Deputy Governor Shin Ho-soon said in November more research and monitoring was needed. So many Koreans have embraced Bitcoin that the prime minister has warned cryptocurrencies might corrupt the nation’s youth.
Russia: ‘Pyramid schemes’
Russia’s central bank has expressed concern over potential risks from digital currencies, with Governor Elvira Nabiullina saying “we don’t legalize pyramid schemes” and “we are totally opposed to private money, no matter if it is in physical or virtual form.” For the moment, the Bank of Russia prefers to delay a decision on regulating the financial instruments unless President Vladimir Putin pushes for action sooner. The central bank will work with prosecutors to block websites that allow retail investors access to Bitcoin exchanges, according to Sergey Shvetsov, a deputy governor at the central bank. Speaking with reporters in January, Shvetsov said he didn’t see any demand for a cryptoruble as the regulator can’t afford to issue something that allows laws to be violated.
Australia: Speculative mania
Australia’s central bank chief criticized cryptocurrencies in a speech in Sydney Dec. 13, arguing the asset is more likely to appeal to criminals than consumers. “The current fascination with these currencies feels more like a speculative mania than it has to do with their use as an efficient and convenient form of electronic payment,” said Philip Lowe, the Reserve Bank of Australia’s governor. The bank is not planning to issue its own digital currency as a case hasn’t been made to do so, Lowe said. The RBA is in close contact with its peers in other countries and few see electronic banknotes on the horizon, he said.
Turkey: Important element
Digital currencies may contribute to financial stability if designed well, Turkish Central Bank Governor Murat Cetinkaya said in Istanbul in November. But they do pose new risks to central banks, including to their control of money supply and price stability, and the transmission of monetary policy, Cetinkaya said. Even so, the Turkish central banker said that cryptocurrencies may be an important element for a cashless economy, and the technologies used can help speed up and make payment systems more efficient.
Netherlands: Own cryptocurrency
The Dutch have been among the most daring when it comes to experimenting with digital currencies. Two years ago the central bank created its own cryptocurrency called DNBcoin – for internal circulation only – to better understand how it works. Presenting the results in 2016, Ron Berndsen, who was in charge of the project, said blockchain may be “naturally applicable” in the settlement of complex financial transactions.
Scandinavia: Exploring options
Like the Dutch, some Nordic authorities have been keen to explore the idea of digital cash. Sweden’s Riksbank, the world’s oldest central bank, is probing options including a digital register-based e-krona, with balances in central-database accounts or with values stored in an app or on a card. The bank says the introduction of an e-krona poses “no major obstacles” to monetary policy.
In an environment where the use of cash is decreasing, Norway’s Norges Bank is looking at possibilities such as individual accounts at the central bank, plastic cards or an app to use for payments, it said in a May report. Denmark has backtracked somewhat on its initial enthusiasm, with Deputy Governor Per Callesen cautioning against central banks offering digital currencies directly to consumers. One argument is that such direct access to central bank liquidity could contribute to runs on commercial banks in times of crisis.
New Zealand: Too unstable
The Reserve Bank of New Zealand’s Acting Governor Grant Spencer has warned that Bitcoin’s runaway gains look like a speculative bubble. “Digital currencies, cryptocurrencies, are a real and serious proposition for the future,” Spencer said in a Dec. 10 interview with TVNZ. “I think they are part of the future, but not the sort that we see in Bitcoin.” The central bank, once a pioneer on the global stage with its early introduction of inflation targeting, said in an analytical note in November that it’s considering future plans for currency issuance and how digital units may fit into those strategies.
Morocco: Violating law
In one of the more strident reactions, Morocco has deemed that all transactions involving virtual currencies violate exchange regulations and are punishable by law. Cryptocurrencies amount to a hidden payment system not backed by any institution and involve significant risks for their users, authorities said in a statement in November.
Bank for International Settlements: Can’t ignore
The central bank for central banks has said that policy makers can’t ignore the growth of cryptocurrencies and will likely have to consider whether it makes sense for them to issue their own digital currencies at some point. “Bitcoin has gone from being an obscure curiosity to a household name,” the BIS said in September. One option is a currency available to the public, with only the central bank able to issue units that would be directly convertible to cash and reserves. There might be a greater risk of bank runs, however, and commercial lenders might face a shortage of deposits. Privacy could also be a concern.
Agustin Carstens, the incoming head of the BIS, told Bloomberg that Bitcoin deserves close scrutiny. “Anything that grows in price as fast as Bitcoin has done it, without having a real clear understanding of what is behind it, should at least raise some eyebrows,” he said.
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