Central banks and regulators assess the possibility of state-run cryptocurrencies

This week has seen a conflict of opinion regarding the centralisation of cryptocurrency. While El Salvador had made a mid-week announcement stating that it was set to make bitcoin a legal tender, global regulator the Basel Committee on Banking Supervision just a day later voiced its concern that cryptocurrencies are some of the world’s most volatile assets. The regulator then called for tighter capital regulations as well as a stricter oversight of investors’ holdings.

This conflict comes as no surprise, as central banks and regulators fight for authority over digital currency as they swiftly become more of a problem for fiat currencies and threaten to take away the levers which policymakers rely on to maintain an oversight of economies.

Marion Laboure, an analyst at Deutsche Bank, stated:

Marion Laboure, Deutsche Bank

Marion Laboure
Source: LinkedIn

It is no surprise that governments are not inclined to give up their monetary monopolies. As cryptocurrencies begin to seriously compete with regular currencies and fiat currencies, regulators and policymakers will crack down.

Overall, there appears to be two options moving forward with the issue: competition and regulation. However, a majority of countries are slowly becoming more inclined towards a mixed approach of both tightening the supervision over private payment systems and digital currencies, while also approving of the development of digital coins which are backed by central banks.

The biggest difference between cryptocurrencies which function via decentralised systems and digital currencies run via central banks would be the fact that those from central banks would have the ability to pay out money to individuals on a direct basis, as the coins would be issued, backed and operated by domestic national banks. This would then mean that national governments and central banks could monitor each transaction carried out and log a database of all monetary movements within their economies.

Randall Kroszner of the University of Chicago Booth School of Business told the Financial Times:

Randall Kroszner, University of Chicago Booth School of Business

Randall Kroszner

A digital currency revolution could go in two directions: either a triumph of decentralisation and market forces or a triumph of centralisation and government monitoring of every transaction.

Such politics surrounding the ethical issues of centralised cryptocurrencies has left regulators and policymakers in a race against the clock to make an informed decision, while the economic significance of privately run cryptocurrencies grows at speed.

Research published by the Financial Conduct Authority (FCA) yesterday revealed that 2.3 million adults now have cryptoassets, a number that is 1.9 million higher than last year.

The Governor of the Bank of Japan recently joined a growing consensus from other central bankers regarding Bitcoin as a result of its recent volatility in the financial market. His viewpoints are reflective of similar remarks made by fellow peers, with Federal Reserve Chair Jerome Powell stating back in April that digital currencies were merely a vehicle for speculative estimates. Similarly, Luis de Guindos, European Central Bank Vice President, aired his opinion that digital tokens should not be viewed as genuine investments.


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