How Central Banks Intend To Fight CryptoCurrencies

Towards the end of his speech, Dr. Weidman remarked that policy intervention may be required, not to address a crisis, but to address technology. Digitalization has the potential to provide financial benefits to the economy, with the risk, however, of disintermediating central banks. As such, the ability of central banks to conduct monetary policy diminishes proportionally to the increase of digitalization.

by Louis Cammarosano of Smaulgld

Based on remarks to Bundesbank Policy Symposium in a Speech “Frontiers in Central Banking – Past, Present and Future” contain clues of the battleplan. What if they fail?

As cryptocurrencies, which trade outside the banking system attract more capital, governments and central banks are devising ways to try and stop and or control their rise.

In “Cryptocurrencies Fiat Killers or Strengtheners” we noted how some Ethereum projects aim to make blockchain assets spendable through the banking system via connecting them to Visa and Mastercard.

In “Bill Would Require a Declaration of Digital Currency Holdings at the Border” we noted that the US Congress has tasked the U.S. Secretary of Homeland Security and Commissioner of U.S. Customs and Border Protection to devise a plan to stop the flows of cryptocurrencies into the country.

Last week, at the Bundesbank Policy Symposium, in a speech entitled “Frontiers in Central Banking – Past, Present and Future” Dr Jens Weidmann, President of the Deutsche Bundesbank and Chairman of the Board of Directors of the Bank for International Settlements gave a speech outlining some ideas on how to best address the challenges that cyrptocurrencies pose to central banks.

The Plan

After explaining that central banks are creatures born of crisis in that they are designed to come to the rescue when there are financial crisis, Dr. Weidman, noted that market interventions by central banks often provide financial stability, but not with out creating additional risks.

Towards the end of his speech, Dr. Weidman remarked that policy intervention may be required, not to address a crisis, but to address technology. Digitalization has the potential to provide financial benefits to the economy, with the risk, however, of disintermediating central banks. As such, the ability of central banks to conduct monetary policy diminishes proportionally to the increase of digitalization.

Dr. Weidman dismisses the notion that privately issued digital currencies may eliminate central bank currencies, reasoning that “central banks are better able to deliver price stability than a rigid monetary rule or an algorithm.”

Therefore, one consideration might be that the central banks themselves would issue their own digital currencies- something that the central banks of Russia and China are considering. If central banks created digital currencies it would make those holding their liquid assets in the form of central bank digital currencies, the public would have greater protection because “central banks cannot become insolvent.”

Dr. Weidman notes that in times of crisis, money holders would withdraw their bank deposits and transfer them into the official digital currency, thereby rapidly withdrawing liquidity from the private banking sector in a digital bank run.

Without deposits, Dr. Weidman observes, banks could not make loans.

Weidman’s Conclusion

“My personal take on this is that central banks should strive to make existing payment systems more efficient and still faster than they already are – instant payment is the buzzword here. I am pretty confident that this will reduce most citizens’ interest in digital currencies.

Discussion

1. Will “instant payment systems” run by central banks render public interest in private cryptocurrencies irrelevant or keep them at the fringe?

2. What if the central banks create instant payment systems, but the public interest in cryptocurrencies does not abate?

3. Will central banks instead create their own digital currencies and in effect kill off the private banking sector and become the banking system in their respective countries with the abilities to create loans, make credit decisions, issue credit and track all transactions?

 

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