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Crypto-assets, threat of central bank supremacy?

When Satoshi Nakamoto launched Bitcoin in January 2009, no one would have imagined the impact it would have on our economies. Banned in some countries like Afghanistan and Pakistan, then adored in others like Salvador and Vietnam, it must be said that this epiphenomenon in its time was accentuated with the acceleration of the digital which is a digital revolution in the world of payments. Virtual digital assets that are based on so-called ”blockchain” technology through a decentralized ledger and an encrypted computer protocol, crypto-assets nowadays stir up both lust and concern and generate excitement and fears in all organizations, even the most modern ones.

Initially developed by private institutions, they are not backed by central banks and are increasingly taking a prominent place as a payment and investment instrument. Considered by some as means of payment and investment opportunities, they are thus gradually assimilated to digital currency, competing with and creating an alternative to traditional currency. For others, they are instruments of diversion and pure speculation, representing a risk for subscribers and the stability of the financial system.

Do crypto-assets threaten the supremacy of central banks today? Long considered the sole depositary of payment systems and regulators of international exchanges, central banks are struggling with the gradual erosion of their power over the financial economy.

Ever-increasing trading and transaction volumes as the main challenge…The increase in the volume of international financial transactions is strongly correlated with that of the increase in world trade. These financial transactions are regulated because they were carried out almost exclusively in foreign currencies until the creation of crypto-assets in 2008. In September 2019, the Bank for International Settlements mentioned a daily currency exchange volume of 6.600 billion dollars, in 30% increase over a three-year period (from 2016 to 2019). This constant increase in the volume of transactions accelerated by the uberisation of the financial markets is whetting the appetites of various players. In addition, the limited access to traditional financial services for populations in developing countries, coupled with the acceleration of digital, is gradually leading to the implementation of disruptive technologies that are impacting our economies. Another issue is that the strengthening of local and international control systems in response to the fight against the financing of terrorism and money laundering is not likely to curb the rise of crypto-currencies that escape bank controls. central authorities, regulatory bodies and States.

The attraction of investors

The extent of the phenomenon is palpable to such an extent that it has provoked reactions at the level of States, international organizations and investors, pushing stakeholders to develop strategies to respond to this information war. Bitcoin which is the main cryptocurrency reached a value of 68,513 US dollars in November 2021, defying all forecasts and stimulating all appetites. According to the annual report published by the analysis platform “The Block”, the decentralized exchange platforms posted more than 1,000 billion US dollars in transaction volume over the year 2021. The IMF expects more than 2,000 billion US dollars the volume crypto-assets in circulation in 2021, ten times more than at the start of 2020, enough to arouse investor disaffection for traditional financial assets.

A rejection tactic from central banks and regulators

One of the main roles of a central bank is to ensure the banking and financial stability of a country or an area by guaranteeing a regulated and efficient payment ecosystem. As issuers of money and holding control over it, they regulate the monetary system and oversee the functioning of financial markets. In contrast, cryptocurrencies are not based on any physical form and are beyond the control of regulators. Capable of disappearing as quickly as they are created, central banks advocate that crypto-assets are unreliable and suffer from a lack of transparency and governance when it comes to risk management. However, their influence on the economy is so significant that States are raising awareness of their harmfulness in order to discourage public opinion from leaning strongly towards this type of asset. Crypto-assets thus raise concerns given their volatility and speculative nature.

Benoit Coeuré, director of the BRI’s technology innovation hub, said: “We have made it clear that bitcoin does not meet the conditions to be considered as a means of payment. It is a speculative asset”.

diversion strategy

“It’s a shitty currency,” says New York University economist Nouriel Roubini, referring to bitcoin.

The tycoon Warren Buffett, meanwhile, assured that cryptocurrencies are one of the worst bubbles of all time….

Andrew Bailey, Governor of the Bank of England said: “Buy them if you’re ready to lose all your money”.

Mr. Lipsky, senior adviser to former International Monetary Fund (IMF) director Ms. Christine Lagarde says the biggest risk of cryptocurrencies is that they can threaten the monetary sovereignty of any country” and that regulators should consider new rules to control the amount of money in circulation.

Renowned economists are also skeptical about the future of crypto-assets like by Joseph Stiglitz and Paul Krugman.

… to that of replacement

Promoting digital currency as a crypto-replacement strategycurrencies made its way. Andrew Baileys, Governor of the Bank of England battling the rise of cryptocurrencies, calls it one of the “most important innovations in history”. The central bank of the Bahamas thus formalized the “Sand Dollar”, its digital currency on October 20, 2020. Other States through their central banks such as China, Russia, Sweden, Great Britain have not hidden their ambitions to develop a digital currency. If the objective is to allow quick and easy payments, it also paves the way for innovative financial services for populations with little access to banking services. Being issued by the central banks which will control it, the digital currency would thus be a palliative to crypto-currencies with the advantage of being guaranteed by their issuer.

But a courageous and ever-increasing dynamic of crypto-assets…

Despite the reluctance displayed by regulatory bodies on the rise of crypto-assets, crypto-currency exchange platforms are so far not regulated. It should be noted that they have several advantages that facilitate their development. In November 2021, the IMF estimated that out of 16,000 crypto-currencies listed on exchanges, only 9,000 would still be in circulation, i.e. a survival percentage of 50% in ten years. However, several factors combine to promote these values.

Traders and Hedge Funds : The high volatility of crypto-assets is increasingly attracting the most keen on profits: Traders. Constantly looking for high yields, they are gradually moving towards highly speculative assets to the detriment of traditional currencies, which are assets under the control of central banks and therefore more stable. According to the Bank for International Settlements, currency speculation by the latter fell by 30% from 2016 to 2019 due to the rise of crypto-currencies (bitcoinsethereum, etc)

Stowaways or pseudo crypto-investors : These are those investors with a traditional economic activity but who, because of their declarations and actions, promote crypto-assets. Thus Elon Musk, boss of Tesla, boosted the value of a cryptocurrency just by these tweets. Tesla’s recognition of “Dogecoin” as a means of payment for these products has sparked a wave of interest in crypto-assets. Thus, the value of this crypto-currency increased by 36% in three days.

Others like Jack Dorsey, CEO of Twitter and Square said:Bitcoin is changing everything…for the better” and “the only currency in the world in 10 years.”

Changpeng Zhao, CEO of Binance, the world’s largest cryptocurrency exchange by trading volume, said:

“I don’t think anyone can stop it now, given that this technology, this concept, is in the minds of 500 million people.” Some international companies are even planning to launch their own electronic money due to the resounding success of crypto-assets.

The lack of consensus on the issue is also one of the factors behind the rise of crypto-assets. Fighted by some countries, they are galvanized by others. The decision of El Salvador, a small Central American country, to adopt bitcoin as its official currency marks the end of the recognition of crypto-assets as a significant element of the international financial ecosystem.

Constant creativity of crypto-asset trading platforms : They understood the threat hanging over their existence and innovated by creating less volatile products. Thus, starting from unfounded crypto-currencies, they have gradually created new crypto-assets called “Stablecoins” which are crypto-currencies backed by classic currencies and undergoing little variation.

It is undeniable that crypto-assets are now part of our economic life. If they were to win more popular support, they would have to be regulated lest the advent of digital technology and the progressive access of the world’s population to the internet and new technologies.

Armand Pandong

Privileges

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