Bitcoin has smashed through the highest level this week; Central bankers are worried they will be blamed if the market crashes
Central bankers are of the opinion that the success of bitcoin and other cryptocurrencies is just a bubble. This keeps them awake at night because the private currencies threaten their control of the banking system as well as the money supply which could undermine the monetary policies they use to manage inflation. Bitcoin has smashed through the $10,000 level for the first time in the week after a 50 percent climb in eight days. Central bankers are also worried they will be blamed if the market crashes and this is why they are advocating regulations to impose control. Others are also looking at whether to introduce their own digital currency and are testing the payment platforms
A European Central Bank policymaker mentioned that the problem with bitcoin is that it could easily blow up and central banks could be accused of not doing anything. Hence, they are trying to understand whether bank activity in terms of cryptocurrency trading needs to be regulated. The global market is worth $245 billion which is very tiny as compared to the trillion dollar plus balance sheets of the Bank of Japan, ECB or the US Federal Reserve. All these institutions issue US dollars, yen and euros by creating physical cash or crediting the bank accounts. But cryptocurrencies are not centralized and they do not pass through the regulated banks or traditional payment systems. Instead they use blockchain which is an online ledger of transactions that is maintained by a network of anonymous computers on the internet. Due to this, there are concerns about the vulnerability to hackers as underlined by various incidents in the past few months. Due to this and given the low adoption by retailers, central banks have dismissed cryptocurrencies as risky commodities with no bearing on the real economy.
The holders of crypocurrencies also have a claim on a private entity which could stop functioning. Cryptocurrency speculation is popular in South Korea and China which have banned fundraising through token launches where in a new cryptocurrency is sold to finance the development of a product. The central bank of Russia said it will block the websites selling bitcoin and its rivals. Yet Japan recognized bitcoin as a legal tender and also approved several companies as operators of the cryptocurrency exchanges but required them to register with the government. It also set up a section in charge of fintech to offer guidance to banks seeking new opportunities for business and joined up with ECB in order to study the distributed ledger technology like blockchain.
Further, commercial banks have been lukewarm to existing digital currencies. With electronic payments already supplanting cash, they are alert on the danger of losing business if the clients decided to switch to them. This is why UBS, the Swiss banking giant is leading a consortium of six banks trying to create its own digital cash equivalent of each of the major currencies backed by central banks. This would then allow the financial markets to make payment as well as settle transactions with ease and it poses risks for central bankers.