By Kieran Smith
Decades before Bitcoin, the arrival of the internet prompted speculation that the relentless march of information technology would eventually put central banks in the same category as typewriters and cassettes—obsolete inventions that people once thought would last forever. The rise of cryptocurrency has rekindled this debate, and it is now being explored by one of the most powerful forces of the world economy—the International Monetary Fund.
In a blog post titled “Monetary Policy in the Digital Age”, fund director Dong He asserts that cryptocurrency has the potential to topple the monopoly of central banks, and that to stay relevant, banks must adapt to the demands of an evolving economy.
Toppling the monopoly
In a world of decentralised currency, the role of a centralised monetary policy is uncertain, and the blog suggests that in order to compete, banks must “strive to make fiat currencies better and more stable units of account”, noting that “effective monetary policy”, with an openness to fresh ideas, offers the best route towards economic stability.
This alone, however, will not be enough to guard against the dangers presented by cryptocurrency, and the post proposes rigorous regulation to prevent any “unfair competitive advantage” that might be offered by crypto-assets, along with reducing the possibility of them being used for “money laundering and the financing of terrorism.”
Finally, to adapt to the new era of digital finance, central banks should consider issuing tokens of their own—Central Bank Digital Currencies—which could also be exchanged peer-to-peer.
The post also explores what could happen if banks fail to adapt to widespread adoption of cryptocurrency. In this case, another potential scenario is put forward—one in which the demand for cryptocurrency over bank-issued currency undermines the authority of central banks’ monetary policies: “Central banks typically conduct monetary policy by setting short-term interest rates in the interbank market for reserves (or clearing balances they keep with the central bank). According to King (1999), ceasing to be the monopoly supplier of such reserves would indeed deprive central banks of their ability to carry out monetary policy.”
Aside from ideas of decentralisation, the post suggests that the cryptocurrency movement might in fact represent a deeper historical pattern in the evolution of finance—the decline of credit money, in favour of commodity money.
As he writes, “monetary systems seem to have alternated between commodity and credit money throughout history”, and crypto assets could be the impetus for another historic reversal.
A new SEC advisor
While pragmatic, the IMF report is unflinching in its call for regulation to address the risk and volatility that cryptos pose, suggesting that with better issuance rules— even “smart rules” based on artificial intelligence, their valuation could become more stable. Timely then, that a new advisor for digital asset regulation has recently been appointed by the SEC. Valerie Szczepanik is filling an entirely new position that will oversee the application of US securities law to cryptocurrencies and digital assets.
This appointment may be a sign that financial regulators are beginning to warm to cryptocurrency. Ms. Szczepanik, who moved from the Division of Enforcement’s Cyber Unit, has previously indicated a balanced approach to regulation. At a conference on Financial Fraud earlier this year, she spoke of the need for the SEC to strike a balance between protecting investors and facilitating the emerging technology, stating “We do not want to chill the markets…the promise of blockchain technology is not one that we want to ignore.”
Her efforts, like the recent fake ICO scam website “Howeycoins,” are likely to be focused on protecting investors without smothering innovation. Some commentators, however, are suggesting otherwise. Certain figures in the crypto community have taken a more adversarial position on recent events, and powerful influencer John McAfee has issued a declaration of currency independence, warning of an impending currency war against the “powerful forces trying to derail the progress of the cryptocurrency revolution.”