Okay, it’s not that funny. But it says something about how nervous
central bankers are about the brave new world of cryptos. Since
cryptocurrencies have gone mainstream, there has been a deluge of speeches
and research papers from the world’s top supervisors over the
role of digital currencies and the regulatory questions they raise. It’s clear
that the cross-border nature of digital currencies means coordination on the
regulatory front is required; but there is little consensus over how to do
Central bankers generally agree with one another that privately issued
cryptocurrencies such as Bitcoin and Ethereum aren’t set to
replace traditional currencies. This consensus was well-summarized in the
recent IMF “Global Financial Stability Report,” which
noted how cryptocurrencies are still far from fulfilling the three textbook
functions of money. “While they may serve as a store of value, their use as a
medium of exchange has been limited and their elevated volatility has prevented
them from becoming a reliable unit of account,” IMF researchers wrote.
Regulators also agree that, while they need to keep a watchful eye on
cryptocurrencies, there are much bigger things to worry about. The likes of
Bitcoin still represent only a tiny share of the global financial system: Their
total market value has grown exponentially, but remains less than 3 percent of
the combined balance sheet of the world’s four largest central banks.
But the central banker consensus breaks down when it comes to how to
regulate cryptocurrencies. In a new paper for the Hutchins Center
on Fiscal and Monetary Policy at the Brookings Institution, Eswar Prasad, a
professor of economics at Cornell University, has offered an extensive list of
the many ways in which regulators have approached the Bitcoin question. This
ranges from the United States, where the Commodity Futures Trading Commission
(CFTC) has taken a more laissez-faire approach by classifying cryptocurrencies
as commodities, to China, where the People’s Bank of China has banned all
The differences in approach mean the
effectiveness of regulation is limited. A consumer based in China can still
trade Bitcoin on an exchange based in the U.S. Crypto-trading is a risky
activity, and not just because of the volatility: There have already been
instances of fraud and technological vulnerabilities on a number of exchanges.
Were there to be a much larger failure, this would trigger a confidence crisis,
whose repercussions would be global. In the face of widespread losses among
consumers, regulators would be left scrambling to reconcile their different
The need for coordination would be even greater were central banks to
issue their own digital currencies, as some (for example in Sweden) have begun to consider. This idea
could entail letting citizens have an account directly with the central bank,
much as they do now with commercial lenders.
As Prasad notes, a central bank digital currency would have major implications
both for the running of monetary policy and for financial stability. Central
banks may find it easier to implement a range of unorthodox policies, such as
“helicopter drops” or “negative rates.” These policies would be applied
directly in each individual’s central bank account, which would make them more
powerful than if they had to go through the banking system.
The impact on financial stability, however, could be negative: As
customers chose to hold central bank digital currencies, commercial lenders
would be deprived of a cheap source of funding. During a crisis, many
depositors who had preferred to keep their money in an account with a private
lender would seek shelter in the central bank digital currency, causing a run.
Finally, a crisis could prompt severe cross-country flows, as customers chose
to move their money away from a given digital currency into a safer one. The
transnational implications of these changes are therefore pretty clear.
Regulators based in a country experiencing a severe outflow of digital
currencies may feel obliged to impose capital controls. Meanwhile, their
colleagues who see substantial inflows into their “safe haven” country may
prefer to restrict foreigners from holding their own digital currency, to avoid
excessive exposure abroad.
So far, there have been some limited attempts at central bank
cooperation: The Bank of Japan and the European Central Bank teamed up to study
the technology underlying digital currencies, before concluding this was not mature
enough to power the world’s main payment systems. The Bank of Canada and the
Monetary Authority of Singapore have chosen to collaborate on a
study, too. The Bank for International Settlements — of which 60 central
banks are members — is spearheading the international
efforts into the analysis of digital currencies.
The trouble is that countries face different incentives in deciding
whether to develop an official digital currency. Sweden’s Riksbank has moved
ahead of the pack because the use of cash is collapsing there. Central banks in
emerging markets could quickly follow: The advantages in terms of improving the
payment systems and increasing access to finance are greater there than in
advanced economies. These central banks also have less to fear about
outcompeting traditional lenders, since their banking systems are typically
underdeveloped. Countries will naturally move at different speeds, which will inevitably
make cooperation harder.
Of course, we are still far from the moment when one of the world’s
largest central banks chooses to adopt a digital currency. And monetary policy
makers have well-established channels of communication, which have proven very
effective during the financial crisis and other moments of turmoil. But it’s
clear already that it would be far better if countries came up with shared
ideas rather than going it alone. It would make for duller panel discussions at
conferences, but a more resilient financial system.