Oldřich Dědek, CNB Board Member
FinTech RegTech Global Summit
Singapur, 6th – 7th September 2018
This panel will discuss the arguments in favour and against the proposition that central banks are prepared for cryptocurrencies. Let me start with my belief that the answer to this question must be approached from at least two points of view corresponding to two major central banking policy areas – price stability and financial stability. Without this distinction it would be difficult to judge the degree of preparedness.
Risks for price stability
How valid are the exuberant concerns that cryptocurrencies may become a threat to, or a serious competitor of, fiat money in modern market economies? I am convinced that such risk is highly theoretical. So, why should central banks be preparing for something that will not happen?
So far cryptocurrencies have suffered from many infant defects:
- They have no intrinsic value because they are not linked to any national economy with its fundamentals or to a commodity.
- Their decentralised nature precludes the existence of a trustworthy issuing authority, acting as a guarantor of price stability and strict punisher of counterfeiting.
- As a consequence, cryptocurrencies exhibit wild fluctuations. Because of that, they fail to fulfil one of the key functions money must have, called store of value.
- The decentralized payment systems based on cryptocurrencies are inferior to the traditional ones administered by central banks. They are slow in transaction processing, particularly in light of the innovation of instant payments. They have limited capacity in terms of the number of executed transactions per second.
- Finally, validations of transactions in the blockchain are enormously energy intensive.
As a result, cryptocurrencies are responsible for a tiny fraction of business and household transactions on a global scale.
I admit that some central banks are considering the pros and cons of digital currencies of their own. The reason for that, however, is not a fear that cryptocurrencies will take over the payment business. It´s a separate debate unrelated to the presence of virtual currencies.
Risks for financial stability
Financial stability is the second domain of central banks’ interest. The key issue in this area is what should be a balanced regulatory approach. On the one hand, cryptocurrencies represent a young phenomenon which is the source of many financial innovations. So, excessive regulation would stifle this stream of desirable activity. On the other hand, cryptocurrencies may become the source of uncontrolled instability.
I believe that central banks have adopted the right approach.
First, central banks have familiarized themselves well with the technical properties and potential risks of cryptocurrencies, as documented in many reports. See, for example, the ECB report from 2012 or the EBA report from 2014. These institutions, by issuing warnings to consumers and other market players, actively communicate the risks involved. Central banks in their regulatory capacity want to make them aware that
- they may lose their money on the cryptocurrency exchanges
- their cryptocurrencies may be stolen from their digital wallets
- they are not protected when using cryptocurrencies as a means of payment
- transactions in cryptocurrencies may be misused for criminal activities
- individual holdings of cryptocurrencies may be subject to unforeseen tax liabilities.
Is that enough? It is said that, unfortunately, ten sheep are born per one shark every second in the world. There will always be people who do not want to listen to warnings, who are willing to invest all their assets in a suspicious business, who are fascinated by the fairy tales of getting rich soon.
Second, if some risks materialise, they are continually being addressed. To give some examples,
- abuse of cryptocurrencies for money laundering was followed by an amendment of anti-money laundering legislation
- in some jurisdictions, initial coin offerings became subject to existing regulation on disclosures and prospectus
- risks for the financial soundness of credit institutions like lending for cryptocurrency purchases are addressed within the framework of routine surveillance.
Conclusion
Central banks cannot be accused of a ‘too little, too late’ approach. Instead, they want to avoid a ‘too much, too soon’ approach. Because premature and unnecessary regulation and its enforcement is costly in terms of stifling financial innovations, supporting moral hazard and draining resources from the central bank’s core business.