Worldwide regulation of cryptocurrencies that could kill off their kudos has moved a step closer with outright criticism from the Bank for International Settlements’ (BIS) general manager Agustín Carstens.
The BIS represents central banks from 60 countries that, between them, have 95% of the world’s GDP. All central banks are likely to take note.
Digital tokens masquerading as currencies
In a lecture “Money in the digital age: what role for central banks?”, Carstens today said: “The meteoric rise of cryptocurrencies should not make us forget the important role central banks play as stewards of public trust. Private digital tokens masquerading as currencies must not subvert this trust.”
He said central banks had a duty to make sure technological advances are not used to legitimise the profits from illegal activities, and to educate and protect investors and consumers. They must also ensure cryptocurrencies do not become entrenched and pose a risk to financial stability.
“Novel technology is not the same as better technology or better economics,” Carstens said. “That is clearly the case with Bitcoin: while perhaps intended as an alternative payment system with no government involvement, it has become a combination of a bubble, a Ponzi scheme and an environmental disaster.”
Examples of currency instability
Carstens was speaking at an event in Frankfurt organised by Sustainable Architecture for Finance in Europe (SAFE), the Center for Financial Studies and the Deutsche Bundesbank.
Carsten’s lecture was accompanied by a report into how the forerunners of central banks stabilised economies after the Thirty Year War in central Europe, 1618-1648.
Large price swings, high transaction costs and a lack of consumer and investor protection make cryptocurrencies unsafe and unsuited to fill money’s role as a shared means of payment, store of value and unit of account, he said. While he referred specifically to Bitcoin, he generalised about other cryptocurrencies, which include Ethereum, Ripple and Litecoin, for example.
Crypto exchanges regulation
Central banks and financial authorities should pay particular attention to the ties linking cryptocurrencies to real currencies, and ensure they do not become parasites on the institutional infrastructure of the wider financial system.
“To ensure level playing field for all participants in financial markets, access to legitimate banking and payment services should be limited to those exchanges and products that meet accepted high standards, Carstens said.
“This means ‘same risk, same regulation’. And no exceptions allowed,” he said.
Central banks vital to virtual currency regulation
In Carston’s lecture he argued: “Money is an indispensable social convention backed by an accountable institution within the State that enjoys public trust. Many things have served as money, but experience suggests that something widely accepted, reliably provided and stable in its command over goods and services works best.
“Experience has also shown that to be credible, money requires institutional backup, which is best provided by a central bank. While central banks’ actions and services will evolve with technological developments, the rise of cryptocurrencies only highlights the important role central banks have played, and continue to play, as stewards of public trust.
“Private digital tokens posing as currencies, such as bitcoin and other crypto-assets that have mushroomed of late, must not endanger this trust in the fundamental value and nature of money.”
Much of Carsten’s lecture discussed the nature of money and the digitisation process, With analysis summed up by the “money flower” diagram. It shows how currencies in various forms are related and available.
But Cartsten swiftly focussed on what he called the “leapfrogging” distributed ledger technology behind Bitcoin and other cryptocurrencies. While the technology had been examined by central banks it had yet proved itself to be valuable and safe, despite the rash of new cryptocurrencies.
“Trust is the fundamental tenet that underpins credible currencies, and this trust has to be earned and supported,” he said.
Mexico had dozens of banknotes
He referred to three periods: examples of when currencies had lacked trust. In addition to the Thirty year war, he included the United States Free Banking Era, from 1837 to 1863, when many banks sprang up that issued currency with no oversight of any kind by the federal government.
He also included his own country, Mexico. “Mexico had the first series of hyperinflations at the beginning of the 20th century. My country had a revolution from 1910 to 1921, in which no central government existed in an effective way, with many factions fighting and disputing different territories.
A winning faction would arrive in a territory, print its own money and make void previously issued cash. So different bills issued by different factions coexisted, leading to chaos and hyperinflation,” he said.
Several trunks of banknotes confiscated by the US Navy in 1914 were recently returned and in them were a dozen forms of currency Mexico’s central bank had never known existed.
“The unhappy experience with private forms of money raises deep questions about whether the proliferation of cryptocurrencies is desirable or sustainable,” Carstens said.
“Even if the supply of one type of cryptocurrency is limited, the mushrooming of so many of them means that the total supply of all forms of cryptocurrency is unlimited. Added to this is the practice of “forking”, where an offshoot of an existing cryptocurrency can be conjured up from thin air.
“Given the experience with currency debasement that has peppered history, the proliferation of such private monies should give everyone pause for thought.”