Crypto assets, a threat to central bank sovereignty?

When Satoshi Nakamoto launched Bitcoin in January 2009, no one could have imagined its impact on our economies. Banned in some countries such as Afghanistan and Pakistan, and then loved in other countries such as Salvador and Vietnam, it must be said that this phenomenon in its time has emerged with the acceleration of digital transformation, which is a digital revolution in the world of payments. Virtual digital assets based on the so-called “blockchain” technology through a decentralized ledger and encrypted computer protocol, and crypto assets nowadays arouse lust and anxiety and generate excitement and fears in all institutions, even the most modern.

Initially developed by private institutions, it is not backed by central banks and is increasingly gaining prominence as a payment and investment tool. Some consider it a means of payment and investment opportunities, and therefore they are gradually assimilated into digital currency, competing with traditional currency and creating an alternative to it. For others, they are tools of conversion and pure speculation, and represent a risk to subscribers and the stability of the financial system.

Do Crypto Assets Threaten the Sovereignty of Central Banks Today? Central banks have long been the sole custodians of payment systems and regulators of international exchanges, and they struggle with the gradual erosion of their power over the financial economy.

Increasing trading volume and transactions as the main challenge…The increase in the volume of international financial transactions is closely related to the increase in world trade. These financial transactions are regulated because they were conducted almost exclusively in foreign currencies until the creation of crypto assets in 2008. In September 2019, the Bank for International Settlements reported a daily currency exchange volume of $6,600 billion, an increase of 30% over the three-year period (from 2016 to 2019). This continuous increase in the volume of transactions, which has been accelerated by the inflation of the financial markets, arouses the appetites of various players. In addition, the limited access to traditional financial services for the population in developing countries, along with the acceleration of digital technology, is gradually leading to the implementation of disruptive technologies that affect our economies. Another issue is that strengthening domestic and international control systems in response to combating terrorist financing and money laundering is unlikely to limit the rise of cryptocurrencies that escape the control of banks, central authorities, regulators, and states.

Attractive Investors

The scale of the phenomenon is so obvious that it provoked reactions at the level of states, international organizations and investors, prompting stakeholders to develop strategies to respond to this media war. Bitcoin, the main cryptocurrency, reached a value of $68,513 in November 2021, defying all expectations and stimulating all appetite. according to annual report Published by the analysis platform “The Block”, decentralized exchanges recorded more than 1,000 billion USD in transaction volume during 2021. The International Monetary Fund expects more than 2,000 billion USD in crypto assets to trade in 2021, ten times more than it was At the beginning of 2020, enough to provoke investor discontent with traditional financial assets.

Rejection tactic of central banks and regulators

One of the main roles of the central bank is to ensure the banking and financial stability of a country or region by ensuring an orderly and efficient payment system. As exporters and controllers of money, 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 being created, central banks claim that crypto assets are unreliable and suffer from a lack of transparency and governance when it comes to risk management. However, its impact on the economy is so great that countries are working to raise awareness of its harm in order to discourage public opinion from leaning strongly towards this type of asset. Hence, crypto assets raise concerns due to their volatility and speculative nature.

“We have made it clear that bitcoin does not meet the conditions for it to be considered a means of payment. It is a speculative asset,” said Benoit Coeuré, director of BRI’s Center for Technology Innovation.

conversion strategy

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

Meanwhile, billionaire Warren Buffett asserted that cryptocurrency is one of the worst bubbles ever…

“Buy it if you are ready to lose all your money,” said Andrew Bailey, Governor of the Bank of England.

Mr Lipsky, a senior advisor to former International Monetary Fund (IMF) Director Christine Lagarde, says the biggest risk to cryptocurrencies is that they could threaten a country’s monetary sovereignty “and that regulators should consider new rules to control the amount of money in circulation.”

Renowned economists are also questioning the future of crypto assets such as by Joseph Stiglitz and Paul Krugman.

… to that substitution

Promoting digital currency as a strategy to replace cryptoCoins made their way. Andrew Baileys, the governor of the Bank of England who has been fighting the rise of cryptocurrencies, calls it one of the “most important innovations in history.” Thus the Central Bank of the Bahamas formalized the “Sand Dollar”, its digital currency on October 20, 2020. Other countries such as China, Russia, Sweden and Great Britain have not hidden through their central banks their ambitions to develop a digital currency. If the goal is to allow quick and easy payments It also paves the way for innovative financial services for a population with little access to banking services. Since it is issued by the central banks that will control it, the digital currency will therefore be a softening factor for cryptocurrencies with the advantage of being guaranteed by its issuer.

But a brave and growing dynamism of crypto assets…

Despite the reluctance shown by regulators about the rise of crypto assets, cryptocurrency exchanges are not yet regulated. It should be noted that it has many advantages that facilitate its development. In November 2021, the International Monetary Fund estimated that of the 16,000 cryptocurrencies listed on exchanges, 9,000 were still in circulation, with a survival rate of 50% within ten years. However, several factors combine to reinforce these values.

Traders and hedge funds : The high volatility of crypto assets is increasingly attracting the most profit-seeking: traders. Constantly looking for high returns, they are gradually turning to highly speculative assets at the expense of traditional currencies, which are assets that are controlled by central banks and are therefore more stable. According to the Bank for International Settlements, currency speculation by the latter decreased by 30% from 2016 to 2019 due to the rise of cryptocurrencies (Bitcoinethereum, etc.)

Stealths or Fake Cryptocurrency Investors : These are the investors who have a traditional economic activity but who, due to their statements and actions, are promoting crypto-assets. And so Elon Musk, the head of Tesla, only boosted the value of the cryptocurrency through 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 cryptocurrency 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 world’s only currency”10 years ago. “

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 on 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.

Lack of consensus On this issue is also one of the factors behind the emergence of crypto assets. Some countries fight it, and it is stimulated 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 an important component of the international financial ecosystem.

Continuous innovation of crypto-asset trading platforms : They understood the threat to their existence and innovated by producing less volatile products. Thus, starting with baseless cryptocurrencies, they gradually created new crypto assets called “Stablecoins” which are cryptocurrencies backed by classic currencies and subject to slight changes.

It is undeniable that crypto assets are now a part of our economic life. If they are to have more popular support, they will have to organize for fear of the emergence of digital technology and the gradual access of the world’s population to the Internet and new technologies.

Armand Bandung


Leave a Reply

Your email address will not be published.