A cryptocurrency is a form of digital currency that uses cryptography for the purpose of security. The currency has rapidly gained popularity in the public eye. There are many types of cryptocurrencies that include Bitcoin, Ethereum, Ripple, Bitcoin cash, Litecoin, Cardano, and Stellar Lumens among others.
While bankers have been against cryptocurrencies, they have incredible benefits over regular currencies. The banks are often citing the extreme volatility of this currency and their potential to be used for money laundering.
In this article, we will examine the reasons why banks do not agree with the use of digital currency and why they should carefully consider them as an option.
Will Cryptocurrency Destroy Banks?
Can Bitcoin Kill Central Banks?
Why do Bankers Hate the Cryptocurrency?
Why Governments are Afraid of Bitcoin?
Why is Digital Currency bad?
Should Central Banks Issue Digital Currency?
Will Cryptocurrency Destroy Banks?
We’re seeing more and more actions around blockchain-based technologies and the growing world of cryptocurrencies. Banks want to leverage this technology and an ecosystem of startups is mushrooming around the silicon valley.
Why? Because cryptocurrency is going to change everything. Or at least, the way we make payments in the coming years.
Read Also: Essential Guide on Blockchain and Cryptocurrencies
Blockchain is a disruptive technology that allows electronic transactions without a middleman. And cryptocurrency runs on that technology. It allows faster, cheaper and safer method of payments. Yes, you’ve got Paypal and credit card for electronic payments. And that works quite well. But how much are you spending each year on processing fees.
How many people got their credit card is stolen (online or offline). Fraud is exploding for credit cards. So merchants think twice before accepting cards now. And on top of that, they’ve got to absorb 3–5% fees each time they are selling you something.
Think of how Email has disrupted the post office business. 25 years ago, you would need to buy a stamp and wait for a few days, until your friend from across the globe gets your letter. Then Email came along and changed everything.
Picture this: you want to send out money right now to some cousins in a different country. What are your options?
With a Bank: if the bank isn’t closed, you’ve got to the bank, fill in a form, queue in line, give out the instructions, wait, sign some papers, wait, and finally understand that it will take between 3–5 days to reach your cousin’s bank account in Singapore. And of course, the 3–5% bank fee will be applied.
With Paypal: Assuming your cousin has Paypal, your cousin receives the money on its account right away. Great! Now, wait. You’ve just paid 3.5% processing fees and, for your cousin to get its money, he will have to submit a transfer to his bank account… taking about… 5 days!
By Western Union: This works well also. But you have a pay a real high fee to get the money sent out. We’re talking of an average of 7.7% processing fees in average. And I do not mention the time for you to go to a Western Union shop — and the same for your cousin. So much time wasted here.
Now, picture this with cryptocurrency. You take your phone, open your wallet app, input your cousin’s coin address, the amount and… done. How much you paid for that? A few cents on the dollar. In the case of bitcoin, you actually decides the rate you’re willing to pay and the higher, the faster. But you’re looking at a fee of less than 1%.
Now, when you get familiar with cryptocurrency, you understand how old the current payment system is. It feels like middle age. It feels like the postoffice days to send your message. Expensive and slow. With cryptocurrency, we get freedom. It’s lighting fast, through our phone, super safe (I’ll get the safety aspect in my next post) and way cheaper than any other current system.
So the question is — how long do you think before cryptocurrency takes on the whole world and becomes the default method of payment. And which cryptocurrency is going to emerge as the king of cryptocurrency. After all, cryptocurrency is like a social media. You’ll be using the one you’re friends, families and nearby shops are using.
Can Bitcoin Kill Central Banks?
Bitcoin is a digital currency that, in the words of its sponsors, “uses peer-to-peer technology to operate with no central authority or banks.” By its very definition Bitcoin seems well-positioned to kill off central banks. Could it? Would it? Should it?
Like just about everything else involving finance, the topic of central banks and their potential replacements is complex with valid arguments for and against.
Central Banks Play an Important Role
The digital era may be taking aim at central banks, but it has not yet managed to kill off the trusty Encyclopedia Britannica, so we turn to the venerable reference to learn that central banking can be traced back to Barcelona Spain in 1401. The first central bank, and those that followed in its wake, often helped nations fund wars and other government-supported initiatives.
The English refined the concept of central banking in 1844 with the Bank Charter Act, a legislative effort that laid the groundwork for an institution that had monopoly power to issue currency. The idea being that a bank with that level of power could help stabilize the financial system in times of crisis.
It’s a concept that many experts agree helped stave off disaster during the 2007-2008 financial crisis and the Great Recession that followed. Today, modern central banks play a variety of roles. The U.S. Federal Reserve, for example, is tasked with using monetary policy as a tool to do the following:
• Maintain full employment and stables prices
• Ensure the safety and soundness of the nation’s banking and financial system and enable consumers to access credit
• Stabilize the financial system in times of crisis
• Help to oversee the nation’s payment systems
To achieve these objectives, the Federal Reserve and other central banks can increase or decrease interest rates and create or destroy money.
For example, if the economy seems to be growing too quickly and causing prices for goods and services to rise so rapidly that they become unaffordable, a central bank can increase interest rates to make it more expensive for borrowers to access money.
A central bank can also remove money from the economy by reducing the amount of money the central bank makes available to other banks for borrowing purposes. Since money largely exists on electronic balance sheets, simply hitting delete can make it disappear.
Doing so reduces the amount of money available to purchase goods, theoretically causing prices to fall. Of course, every action has a reaction. While reducing the amount of money in circulation may cause prices to fall, it also makes it more difficult for businesses to borrow money. In turn, these businesses may become cautious, unwilling to invest, and unwilling to hire new workers.
If an economy is not growing quickly enough, central banks can reduce interest rates or create money. Reducing interest rates make it less expensive, and therefore easier and more appealing, for business and consumers to borrow money. Similarly, central banks can increase the amount of money banks have available to lend.
Central banks can also engage in additional efforts to manipulate economies. These efforts can include the purchase of securities (bonds) on the open market in an effort to generate demand for them. Increased demand leads to lower interest rates, as borrowers do not need to offer a higher rate because the central bank offers a ready and willing buyer.
Central bank-led efforts to steer economies on to the path to prosperity are fraught with peril. If interest rates are too low, inflation can become a problem. As prices rise and consumers can no longer afford to buy the items they wish to purchase, the economy can slow. If rates are too high, borrowing is stifled and the economy is hobbled.
Low-interest rates (relative to other nations) cause investors to pull money out of one country and send it to another country that offers a greater return in the form of higher interest rates.
Consider the plight of retirees who rely on high-interest rates to generate income. If rates are low, these people suffer a direct hit to their purchasing power and ability to pay their bills. Sending cash to a country that offers better returns is a logical decision.
Manipulation of interest rates and/or the monetary supply also has a direct effect on the value of a nation’s currency. A strong dollar makes it more expensive for domestic firms to sell goods abroad. This can lead to domestic unemployment. A weak dollar increases the price of imported goods, including oil and other commodities.
This can make it more expensive for consumers to purchase imports and for domestic companies to produce goods that rely on imported parts or materials. Arguably, a weak dollar is beneficial for a slow economy that needs to pick up steam while a strong dollar is good for consumers.
Because there is a lag between the time a central bank begins to implement a policy change and that change actually having an impact on a nation’s economy, central banks are always looking to the future. They want to make policy changes today that will enable them to achieve future goals.
Central Bank are Unnecessary
The very complexities associated with national and global economies set the stage for an argument that these economies are too unpredictable to be successfully managed by the type of manipulation central banks engage in.
This argument, made by proponents of the Austrian School of Economics, can be used to support the implementation of Bitcoin-style peer-to-peer currency that eliminates central banks and their complex schemes.
Furthermore, modern central banks have been the subject of controversy since their inception. And the reasons for discontent are wide and varied. On one hand, the concept of monopoly power is profoundly disturbing to many people.
On another, the existence of an independent, opaque entity that has the power to manipulate an economy is even more disturbing. Along these lines, many people (including economists and politicians) believe that central banks make mistakes that have enormous ramifications in the lives of citizens.
These mistakes include increases in the monetary supply (creating inflation and hurting consumers by raising prices for the goods and services they purchase), the implementation of interest rate increases (hurting consumers who wish to borrow money), the formulation of policies that keep inflation too low (resulting in unemployment), and the implementation of unnaturally low interest rates (creating asset bubbles in real estate, stocks, or bonds).
Along these lines, no less an authority than former Chairman of the Federal Reserve Ben Bernanke blames manipulation by the central bank (which raised interest rates) for the Great Depression of 1929.
In an era when technology has enabled consumers to engage in commerce without the need for a central authority, an argument can be made that central banks are no longer necessary.
A broader examination of the banking system extends this argument. Corruption associated with the banking system resulted in the Great Recession and a host of scandals. Bankers have caused great angst in Greece and other nations.
Organizations such as the International Monetary Fund have been cited for fostering profits over people. And at the more local level, bankers make billions of dollars by serving as the middlemen in transactions between individuals. In this environment, the elimination of the entire banking system is an appealing concept to many people.
Central banks are currently the dominant structure nations use to manage their economies. They have monopoly power and are not going to give up that power without a fight. While Bitcoin and other digital currencies have generated significant interest, their adoption rates are minuscule and government support for them is virtually nonexistent.
Until and unless governments recognize Bitcoin as a legitimate currency, it has little hope of killing off central banks any time soon. That noted, central banks across the globe are watching and studying Bitcoin.
Based on the fact that metal coins are expensive to manufacture (often costing more than their face value), it is more likely than not that central banks will one day issue digital currencies of their own.
Why do Bankers Hate the Cryptocurrency?
The rate at which cryptocurrencies are growing over the last few months has filled bankers with abhorrence. Here are the main reasons why bankers are against cryptocurrencies.
1. Crypto market exceeds the size of large banks
As of 16th February 2018, the crypto market has a market cap of $470 billion, with BTC price breaking above $10,000. This exceeds that of JPMorgan Chase, the largest bank in the United States.
The market cap for Bitcoin alone compares to Bank of China’s. Ethereum follows this with a market cap comparable to Morgan Stanley.
The bankers are worried that the rate at which crypto market is growing will have a serious impact on their operation. The banks seem to fight cryptocurrencies to slow down their growth rate.
Many banks have recently banned their customers from purchasing cryptocurrency with their credit cards. This is a major move to slow down the growth of the crypto market.
2. The overwhelming increase of cryptocurrency value
In 2018, Bitcoin has tremendously increased from $1000 to $20,000 within the 12 months. However, according to a recent investigation, this value has decreased by more than $1000 over the past week.
Recent fall in price has led to some analysts speculating that Bitcoin might have experienced bubble bursting in late 2017. Michael Jackson a Bitcoin expert dismissed such a conclusion claiming that it is just a blip. He claims that it’s yet to reach the upper limit, which will be 100 times more worth than it is today.
Jamie Dimon, JP Morgan Chase CEO, once branded cryptocurrency “a fraud.” He later appreciated the underlying blockchain technology and regrets making the negative comment on Bitcoin.
He also insists that he is not interested in the topic though he has frequently made public comments on the same. It is interesting to see JP Morgan buying Bitcoin-based ETFs on the European exchange.
Increase in value of cryptocurrency will attract many people to using it instead of regular currency. As a result, the bankers’ operation will be disrupted.
3. Decentralization of cryptocurrency
Cryptocurrency being decentralized will not require a third party to make the transactions. This is contrary to what the bankers do.
As I said earlier, cryptocurrencies are rapidly growing and bankers fear they might lose control of overall money. If many people turn to cryptocurrency, bank customers will reduce, and hence the income will go down as well. And there are already many crypto telegram signals, that help the new trader in the crypto game to invest more efficiently.
The bankers fear that this new technology might replace them. Seeing cryptocurrencies as a competitor and not as a contributor is a major reason why bankers hate cryptocurrency.
Transferring a huge FIAT over long distances requires more time. With this new technology, it will only take a few minutes to transfer equivalent cryptocurrency. This means bankers will no longer have control over the economy.
4. The compliance cost incurred
Most of the cryptocurrency investors deposit large amounts. The bankers have a duty of investigating the funds to ensure that they are clean and not sourced from illegal activities. They carry out a thorough investigation on the source of the funds and the beneficial owner on the account.
Additionally, the banker has to ensure that the account owner in a tax compliant. If you are from the US, the bank has to send a report on the transaction to the US IRS. For those in EU, the bank must comply with OECD CRS reporting requirements.
All this requires time and resources, which banks are not ready to incur.
5. Cryptocurrency is new technology
Cryptocurrencies are essentially new to many and the blockchain technology is complex and complicated to understand. As a result, many bankers get upset with it and tend to think of it as bad. They fail to understand the features and potential the blockchain present to them.
Just as a new gadget such as a smartphone. At first, people tend to despise the new technology in the gadgets. This is not because they do not like it, but because it’s new, complicated, and may be overwhelming to use.
In this case, some bankers have no idea on how this new technology works. It is unfortunate that those who understand it, hate it.
6. Tracking the source of funds
The other reason why bankers might hate cryptocurrency is that tracking the source of funds is impossible. There is no way that they are able to investigate the funds when sent from the cryptocurrency wallet to the bank account. With this, they cannot tell whether the money in your account is clean.
The bank could be liable for ill-gotten gains in their system. Therefore, they view this as high risks as they cannot prove how the funds were earned.
7. Employment
Another factor that makes bankers hate cryptocurrency is that it will ripple across the financial sector. If FIAT money comes to an end, the banks are likely to close down. What bankers fear the most is to lose their jobs since there would be no financial income.
To earn a living, every person needs a job. Bankers also fear that they might not have something else to do. If at all cryptocurrencies will surpass the banks, they will become outdated. The bankers will be forced to look for other jobs, which might require them to study another career.
Why Governments are Afraid of Bitcoin?
Bitcoin claims that “It is the first decentralized peer-to-peer payment network that is powered by its users with no central authority or middlemen.” That lack of central authority is the primary reason governments are afraid of the cryptocurrency. To understand this fear, it is important to know a little bit about governments and conventional currencies.
In What Do We Trust?
Fiat is a term used to describe the conventional currencies that are issued by governments. Fiat currencies have value because governments say that they do. To an increasing number of people, that promise means nothing. After all, fiat currencies are not backed by any tangible assets.
You can’t return the currency to the government in exchange for a bar of gold or silver, a can of beans, a pack of cigarettes, or any other items that might have value to you. Fiat currencies are backed by the full faith and credit of the government that issued them and nothing more. If you want gold, silver, beans, or smokes you need to exchange your fiat currency with a person or entity that possesses the item that you want.
Why Control Matters
Governments control fiat currencies. They use central banks to issue or destroy money out of thin air, using what is known as monetary policy to exert economic influence.
They also dictate how fiat currencies can be transferred, enabling them to track currency movement, dictate who profits from that movement, collect taxes on it, and trace criminal activity. All of this control is lost when non-government bodies create their own currencies.
Control over currency has many downstream impacts, perhaps most notably to a nation’s fiscal policy, business environment, and efforts to control crime. While each of these topics is broad and deep enough to fill volumes, a brief overview is enough to provide insight into the general concept.
Fiscal Policy
While the potential for crime captures the public’s attention, the role currency plays in a nation’s monetary policy has the potential to have a far greater impact.
Since governments intentionally increase or restrict the amount of money circulating in an economy in an effort to stimulate investment and spending, generate jobs, or avoid out-of-control inflation and recession, control over currency is an enormous concern. It’s also an extraordinarily complex topic.
The Business of Bitcoin
Bitcoin users don’t need the existing banking system. The currency is created in cyberspace when so-called “miners” use the power of their computers to solve complex algorithms that serve as verification for Bitcoin transactions.
Their reward is the payment with cyber currency, which is stored digitally and passed between buyers and sellers without the need for an intermediary. On a smaller scale, airlines reward miles function in a similar way, enabling travelers to purchase plane tickets, hotel rooms, and other items using airline miles as virtual currency.
If bitcoin or another cryptocurrency become widely adopted, the entire banking system could become irrelevant. While this may sound like a wonderful concept in light of the recent behavior of the banking industry, there are two sides to every story.
Without banks, who will you call when your mortgage payment gets hacked? How will you earn interest on your savings? Who will provide assistance when a transfer of assets fails or a technical glitch occurs?
While the financial crisis gave bankers an even worse reputation than they already had, there is something to be said for institutions that oversee timely, effective, and trustworthy asset transfers and their associated record keeping. There’s also the issue of the fees banks earn for the services they provide. Those fees generate a lot of revenue and a lot of jobs across the global banking industry.
Without banks, those jobs disappear, as does the tax revenue those banks and their employees’ paychecks generate. Money transfer business would also disappear in a virtual world. Nobody needs a Western Union or its competitors if everybody is using bitcoin.
Crime Concerns
So much has been written about virtual currency and crime, that it is enough to recap the issue by stating that untraceable financial transactions facilitate crime.
Drug trafficking, prostitution, terrorism, money laundering, tax evasion, and other illegal and subversive activity all benefit from the ability to move money in untraceable ways. The now-defunct Silk Road online drug market is a case in point. Its founder credits Bitcoin for its success.
The Other Side of the Bitcoin
Aside from the headline-grabbing fact that virtual currencies can and are used to engage in a wide range of illicit activity (it should be noted that cash is used for many of these same transactions), there is a legitimate theoretical argument in favor of their use.
It is based on the reality that central bank tinkering with the money supply has induced recessions, exacerbated unemployment, and given rise to a global banking system based on profiteering and corruption.
We need look only as far as the mortgage-market shenanigans underpinning the financial crisis of 2009 for insight into why disaffected consumers everywhere would support the efforts of anonymous programmers in subverting a system that has done them no favors. These ideas are not new.
The Austrian School, a school of economic thought founded in 1871, holds among its core tenets the idea that economic manipulation by central banks is not beneficial.
Before You Buy-In
Before you convert your national currency to bitcoin, you want to consider a few additional facts. Bitcoin was created by an anonymous computer programmer or programmers (there’s no consensus on this and identities are still unconfirmed).
Mt. Gox, the largest exchange service converting dollars to bitcoins, failed in spectacular fashion when hackers allegedly stole bitcoins valued at hundreds of millions of dollars. An earlier alleged hacking netted $8.75 million dollars. Other bitcoin exchanges have also blamed hackers for losses.
The currency is digital, so there’s nothing you can touch or hold. Its value fluctuates in a highly volatile manner. It is created by anonymous programmers through a methodology that it too complex for most people to understand much less participate in.
Since bitcoins are often stored on users’ computers, “users face the risk of losing their money if they don’t implement adequate antivirus and backup measures” according to Virtual Currency Schemes, a research paper released by the European Central Bank.
Hardware failure aside, tossing an old computer in the trash without first removing your bitcoins is also an easy way to lose your digital fortune.
In summary, if you use bitcoin, you are trusting your money to a complex system you don’t understand, people you know nothing about, and an environment where you have limited legal recourse. In the traditional world of investing, this would raise enough red flags to make it a bad idea.
On the other hand, the European Central Bank reported in 2018 that Bitcoin is just one of over 1600 digital currencies now in circulation around the world. Even it Bitcoin ultimately fails or is relegated a minor role on the world stage, one of its successors could radically alter the way the world thinks of currency.
A Bitcoin for Your Thoughts
So what does the future hold for Bitcoin and other virtual currencies? It is safe to say that they are here to stay. You can use the virtual currency to make purchases in a wide variety of video games and at some retailers like overstock.com and tigerdirect.com.
You can also use bitcoin to safely purchase gift cards for hundreds of business like Home Depot, Target, and amazon.com.
However, the Bitcoin website notes that “Bitcoin is not a fiat currency with legal tender status in any jurisdiction.” And based on the regulatory and enforcement actions of major governments, including the United States and Russia, that status is unlikely to change anytime soon.
Why is Digital Currency bad?
Some call cryptocurrency the “digital gold rush.” Digital coins like Bitcoin and TRON have captivated thousands around the world to invest in this digital revolution. Although sceptics have their concerns, there’s no denying cryptocurrency’s popularity, viability and everyday usability is steadily rising.
Think back to the days before the reign of the mobile phone. Remember the process of letting family, friends and colleagues know if you were running late?
You first had to find a phone booth, park the car, scroll through a massive phone book to find a number, scrimmage around for loose change and finally, hope the person we were trying to reach had access to a landline as well. While it was all we knew at the time, looking back it clearly feels like a terribly antiquated and unnecessarily time-consuming process.
What about life before email or the Internet? These modern-day platforms have offered us conveniences we now expect every moment of the day. Without email and the internet, we would lose communication efficiency to which we have become accustomed.
As a society, we have digitised the way we speak, write, buy goods and interact with one another. Would you want to go back to the days of letter writing or library research?
In just the same way the mobile phone, email and the Internet have changed our way of life, cryptocurrency has the potential to do the same, by transforming the entire financial industry and every transaction within it.
The Good
The majority of financial companies including banks are intermediary services or brokers. A bank is, at its core, a broker between people who have money (deposits) and people who need money (loans). This allows people who have money (debtors) to transfer to people who need money (creditors) for delivered services or goods.
Across the industry, there is still a lot of human interaction and manual labour to complete transactions – leaving significant room for digitisation and automation. The four-eyes principle is written in every compliance manual of financial companies and banks, requiring at least two-person approval and slowing the process even more.
While caution is prudent in areas of finances, it also creates a great logjam in an era where digital immediacy has become the norm.
With digital coins the transaction process is completely automated and in need of no human intervention from processing to completion, subsequently eliminating human error. Structured as a peer-to-peer system, digital currency built on blockchain technology is a permissionless, global network – an alternative way to store value.
As blockchain allows for such uninterrupted transactions, processes and efficiency can skyrocket. Digital financial transactions built on blockchain have the potential to make traditional banking practices obsolete.
What’s more, blockchain will open the doors to additional applications in the future – not just financial transactions but paper ones, as well as a host of other things.
In addition to speed, blockchain-based cryptocurrency ensures financial transactions are highly secure. They are guarded by NSA created cryptography, making it nearly impossible for any outside interception between transfers and preventing anyone other than the owner of the digital wallet to initiate and confirm them.
Although still a new concept, cryptocurrency offers security unlike any other formal or informal financial transactions before it, appealing to many consumers.
The Bad
Because blockchain and digital coins have the potential to replace people in most aspects of the transaction process, millions of jobs could be in jeopardy with the arrival of such technology. Innovation always comes at a cost, and some worry these costs might be catastrophic.
Bank tellers alone account for more than 500,000 jobs in the banking and financial industry. Since their day-to-day labour consists of processing financial transactions, they are the first to lose employment when the tide of innovation rises.
As this innovation rears its head, CEOs and advisory boards have a responsibility to adopt new changes and technology. Sadly, they are at risk of implementing these changes too slowly, and in turn, their organisations end up gambling with the livelihood of millions of families.
While other industries and platforms work at a nearly instantaneous pace, at the same time and with the same access to technology, banks still need three or more days to process foreign transactions. This timeline doesn’t bode well as automation and blockchain currencies take over.
Another concern is that as cryptocurrency is relatively new, it is not heavily regulated. Many people struggle to understand and grasp the concept of blockchain and how it allows digital coins like Bitcoin to be distributed securely without a middleman. The whole idea can be intimidating, and breeches – although rare compared to other platforms – are still possible.
The Ugly
Digital coins are, of course, not a perfect solution for the financial industry. Many alternative coins are unlikely the next Bitcoin, and there’s a chance most of them won’t stand the test of time.
As with any platform, the old fade away and giants like Google, Amazon, Facebook, etc. take their place. It’s a game of thrones for these alternatives to Bitcoin. It’s unclear who will win and who will face their demise.
As cryptocurrency startups are born, Initial Coin Offerings (ICOs) come in handy in raising money to fund the new project. However, with the absence of legal guidelines in their operation, many ICOs are scams. It’s difficult to determine which ICOs are productive and which are money-grab schemes.
The presence of scammers in this space makes finding investors an interesting challenge, as the wealthy and experienced won’t be likely to contribute to such a new, abstract field.
When using digital coins in a transaction it is a final decision – transactions are irreversible. If currency is accidentally transferred to the wrong person or in the wrong amount, there is no real way to recover the same currency.
Additionally, since the currency is stored within certain accounts and devices, if a user were to forget their login details or lose a device, it would be essentially the same as losing a physical wallet.
Although there are several sides to cryptocurrency and digital coins – the good, the bad and the ugly – there are also astounding opportunities that await us in an even more digitised future. Companies and consumers will have a whole new method of buying, selling, lending and borrowing available to them.
As the financial industry adopts innovative technologies that allow blockchain compatibility and efficiency, our world will become more familiar with the concept, and we will see a dramatic shift in the way we transfer money from hand to hand.
Should Central Banks Issue Digital Currency?
Earlier in 2019, the possibility that we might see state-backed digital currencies any time soon seemed remote. Augustín Carstens, general manager of the Bank of International Settlements, the so-called central bank for central banks, was less than enthusiastic in a March speech: “Research and experimentation have so far failed to put forward a convincing case,” he said. “Central banks are not seeing today the value of venturing into uncharted territory.”
In July, however, Carstens did an about face. “It might be that it is sooner than we think that there is a market and we need to be able to provide central bank digital currencies,” he told the Financial Times.
What changed? In June 2019, Facebook revealed its plans to issue a new stablecoin, called Libra, which will be backed by a reserve made up of sovereign currencies. The prospect of a non-sovereign currency that could instantly reach the billions of people across the globe who use Facebook products suddenly has central bankers playing defense.
Libra vs. the State
Out in front is the People’s Bank of China. In fact, the PBOC has been serious about digital currency since it began studying the technology in 2014.
It has a research institute specifically devoted to this. Wang Xin, director of the PBOC’s research bureau, said in July that the bank was paying “high attention” to Libra, which Facebook wants to launch next year. In August, Mu Changchun, deputy director of the PBOC’s payments department, said a digital version of the renminbi, which will be a medium for consumer payments, is “close to being out.”
Libra hasn’t just caused a stir in China. France and Germany have vowed to block it, calling it a potential threat to “monetary sovereignty.” European Central Bank board member Benoît Coeuré said last month that stablecoins give rise to “serious risks.”
Libra has been a “wake-up call,” he said, adding: “We also need to step up our thinking on a central bank digital currency.” Two US lawmakers cited risks posed by Libra in a letter urging the Federal Reserve to consider creating a digital version of the dollar.
Fear and inspiration
What exactly are the risks posed by private stablecoins? Besides standard concerns over money laundering and terrorist financing, much of this discussion boils down to whether you trust a technology company with your money.
Private stablecoin providers could unseat banks, which generally face strict consumer protection rules, as the main intermediaries between central banks and consumers.
That could have unforeseen consequences, according to Adrian and Mancini-Griffoli of the IMF. “Tech giants could use their networks to shut out competitors and monetize information, using proprietary access to data on customer transactions,” they write.
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The two economists suggest that stablecoins could undermine financial stability, and that stablecoin users risk losing their money: “Whether stablecoins are indeed stable is questionable.” It depends on the safety and availability of the underlying assets, and whether they are “protected from other creditors if the stablecoin provider goes bankrupt.”
Adrian and Mancini-Griffoli say that perhaps governments should require stablecoin providers to “fully back coins with central bank reserves—the safest and most liquid assets available.”
They point out that China already requires popular payment platforms Alipay and WeChat Pay to do this. The approach could be used to protect consumers’ money if the stablecoin provider goes bankrupt, they write.
Fear of its potential dangers is not the only reason central bankers find Libra compelling, however. In a recent speech, Bank of England governor Mark Carney suggested that a safer alternative to Libra might be a public version.
Like Libra, it might be backed by multiple sovereign currencies, but its network would be run by central banks, not companies. “Even if the initial variants of the idea prove wanting, the concept is intriguing,” Carney said.
Conclusion
Cryptocurrencies remain a big threat for bankers. It’s overwhelming how fast the crypto world is growing in the past few months. There are hundreds of ICOs and enormous fluctuations in major cryptocurrencies such as Bitcoin and Ethereum.
Despite this being a big hurdle for banks, it is what many investors love. However, not all bankers hate cryptocurrency. Some have already invested in cryptocurrencies.
In future, the FIAT money controlled by bankers is likely to change. According to many analysts, cryptocurrency will be the new way of buying and exchanging products and services.
