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Cryptocurrencies don’t belong in central banks

The conservative bureaucracies would likely kill all innovation.
The world of cryptocurrencies needs further experimentation, not bureaucratisation. Picture: Shutterstock

Should central banks embrace cryptocurrencies, or even pioneer their own? In a nutshell, no. Crypto assets are an unusual innovation, still in flux and often poorly understood. Trying to centralise them in a bureaucracy is exactly the wrong way to go.

Yet China’s central bank claims it is working toward a blockchain-based digital currency. Singapore has already experimented in this direction. The phrase “Fedcoin” is sometimes bandied about, though I’ve seen no concrete sign of the US Federal Reserve jumping on this bandwagon. In its recent quarterly review, the Bank of International Settlements asked central banks to consider whether cryptocurrencies might make sense for them.  

Central banks, however, are intrinsically conservative bureaucracies. They shun bad publicity, and they don’t like to be “out there” ahead of the curve. They don’t want their names connected with potential mishaps — because they value their credibility and their political capital so highly. That’s appropriate, because central bank independence is typically fragile.

Given that background, should we foist a new and potentially risky responsibility on them? Central banks will feel some anxiety at having to manage a crypto project. To conserve their political capital, they will take fewer risks elsewhere, such as unorthodox monetary policy or larger balance sheets. Yet the response to the 2008 financial crisis shows a certain amount of central bank risk-taking is needed. I’m worried about central banks taking on unnecessary risky projects, thereby rendering them too cautious in other areas.

An additional reason for scepticism stems from the nature of crypto assets. The word “cryptocurrency” is far more common than “crypto asset,” but it’s a misleading term. Bitcoin, for instance, is used only rarely in retail transactions, and for all its success it isn’t becoming more important as a medium of exchange. Bitcoin thus isn’t much of a currency in the literal sense of that term. There is a version of bitcoin, Bitcoin Cash, that changed the initial rules to be better suited as an exchange medium, but it isn’t nearly as popular.

If you think of these assets as “cryptocurrencies,” central bank involvement will seem natural, because of course central banks do manage currencies. Instead, this new class of assets is better conceptualised as ledger systems, designed to create agreement about some states of the world without the final judgment of a centralised authority, which use a crypto asset to pay participants for maintaining the flow and accuracy of information. Arguably these innovations come closer to being substitutes for corporations and legal systems than for currencies. 

Put in those terms, an active (rather than merely supervisory) role for central banks in crypto assets is suddenly far from obvious. Consider other financial innovations: Does anyone suggest that central banks should run their own versions of ETFs or high-frequency trading? Is there a need for central banks to start managing the development of accounting and governance systems?

Finally, bitcoin and other crypto assets are still in the midst of rapid evolution, with basic questions still unanswered. Should bitcoin “fork” to allow for greater speed in processing transactions? Is the future going to favour bitcoin, the Ethereum platform, or something else altogether? How many initial coin offerings make economic sense, as opposed to being bubbles? Should initial coin offerings be used to fund startups? How many crypto assets should survive in the long run? Can blockchains be used to record and settle the transfer of property titles? Are there any circumstances when it should be possible to revise transactions on a blockchain?

Because crypto assets are not large enough to pose systemic risks for economies, it’s best to let markets try to figure out the answers to these and other questions. What’s needed now is further experimentation, not bureaucratisation. If central banks move into this world, the danger is that they will try to settle issues on the basis of their conservative judgments. The Fed would command the bulk of market attention; it would be hard for alternative crypto systems to be seen as anything but competitors and potential sources of risk or disruption. (In this regard, a Singaporean project is less likely to dominate the market and thus it would be less of a problem.) Innovation is likely to slow down.

In general, I think the central banks in the world’s developed economies have done a pretty good job. But consider a simple question: Would any central bank have had the inspiration or taken the risk of initiating the bitcoin protocol in the first place?

So why should central banks be given a commandeering position in steering these evolving innovations?

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

© 2017 Bloomberg

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You think the global central banks have done a “pretty good job” ? Really? On whose watch? for whom? The US Fed for example, has since its inception debased the currency to the point that on US$ today buys what less than 5c did when the Fed arrived on the scene. Savers have been robbed of the value of their money by the central banks.

The global central banks have adopted a system where money is debt and the debt can only grow. The system is designed that the central bank gets to own the debt and thus enslave the population using irredeemable debt.

The boom bust cycle (business cycle) and its attendant misery can be traced directly to expansionist / contractionist phases of central bank easing/tightening.

The current zero interest rate policy has robbed savers of income, rewarded borrowers and driven housing and equity yields way down creating bubbles in every which way you look. Ripe for bursting. More misery.

The US Fed has certainly done a “pretty good job” for its masters, its shareholders which are a secret. The Fed monetises debt and pays interest to its secret shareholders on the bonds it holds. Basically the US taxpayer is bled dry for these shareholders. Can you or I become a shareholder of the Fed ? of course not.

The Central Banks cannot afford to launch cryptocurrencies as an alternative to the regular fiat currencies for the simple reason that it will restrict them in the process of earning the “inflation tax”.

You see, contrary to the view of bitcoin skeptics(like myself), cryptocurrencies actually do have intrinsic value. There is a valuable “backing” for bitcoin. The factor that determines the minimum value of a cryptocurrency is the cost of the energy used to mine an additional unit. The cost of electricity is the ultimate backing for bitcoin. The fact that bitcoin is massively overvalued relative to it’s “backing” is not the point.

The point is that Central Banks do not have such a restriction on the creation of fiat currencies. There is no limitation to the printing of money by Central Banks. The cost of electricity prevents Central Banks from adopting Bitcoin. Unless they tweak the algorithm to save electricity of course. But Bitcoin have also got that option to save electricity.

The ultimate “backing” for the Zimbabwe dollar was the cost to fly a cargo plane, loaded with freshly printed billion dollar bills, from Germany to Zimbabwe. Eventually the cost to transport the freshly printed money was more than the value of the entire cargo.

To add to the comment of Richardthe Great, the “miracles” delivered to us by Central Banks is funded by the purchasing power they stole from us. The Central Banks are robbing Peter to pay Paul. With Paul being the owner of inflation-beating assets, and Peter being the owner of interest-bearing assets and the poor guy without assets. In essence the wealth gap is created by non other than our trusted Central Banks.

The feudal system is alive and well in all developed “free market” economies. With the Central Bank acting as the feudal landlord, the owners of inflation-beating assets being the Knights and Barons, and those without assets, or with interest-bearing assets being the peasants.

This “copy and paste” article policy of Moneyweb is deplorable
Bloomberg? ignorami , fake news etc etc like BBC.Why bother?

The comments by the persons above,Richardthe Great and Sensei, have been the most insightful reading material re btc ever.Perhaps they should be invited to educate the editors

End of comments.

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