Crypto-assets, threat of central bank supremacy?

When Satoshi Nakamoto launched Bitcoin in January 2009, no one would have imagined what impact it would have on our economies. Prohibited in some countries like Afghanistan and Pakistan, then worshiped in others like Salvador and Vietnam, it must be said that this epiphenomena in its time was accentuated with the acceleration of the digital, which is a digital revolution in the payment world. Virtual digital assets based on so-called “blockchain” technology through a decentralized ledger and an encrypted computer protocol, cryptocurrencies today arouse both desire and concern and generate enthusiasm and fear in all organizations, even the most modern. .

Originally developed by private institutions, they are not backed by central banks and are increasingly occupying a prominent place as a payment and investment instrument. They are considered by some as payment and investment opportunities, and they are thus gradually being assimilated into digital currency, competing with and creating an alternative to traditional currency. For others, they are instruments of diversion and pure speculation that represent a risk to subscribers and the stability of the financial system.

Do cryptocurrencies threaten the sovereignty of central banks today? Long regarded as the sole depository for payment systems and regulators of international exchanges, central banks are struggling with the gradual erosion of their power over the financial economy.

Ever-increasing trade and transaction volumes as the main challenge …The increase in the volume of international financial transactions is strongly correlated with the increase in world trade. These financial transactions are regulated because they were carried out almost exclusively in foreign currency until the creation of cryptocurrencies in 2008. In September 2019, the Bank for International Settlements mentioned a daily currency exchange volume of $ 6.6 trillion, an increase of 30% 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 arouses the appetite of various players. In addition, the limited access to traditional financial services for peoples of developing countries, combined with the acceleration of the digital, is gradually leading to the implementation of disruptive technologies affecting our economies. Another problem is that the strengthening of local and international control systems in response to the fight against terrorist financing and money laundering is unlikely to slow down the rise of cryptocurrencies escaping banking control, central government, regulatory bodies and states.

Attracting investors

The scale of the phenomenon is palpable to such an extent that it has provoked reactions from states, international organizations and investors, which has pressured stakeholders to develop strategies to respond to this information war. Bitcoin, which is the most important cryptocurrency, reached a value of 68,513 US dollars in November 2021, defying all forecasts and stimulating all appetite. 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 during the year 2021. The IMF expects more than 2,000 billion US dollars the amount of cryptocurrencies in circulation in 2021, ten times more than in the beginning of 2020, enough to arouse investor dissatisfaction with traditional financial assets.

A rejection tactic by central banks and regulators

One of the central 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 in control of them, they regulate the monetary system and monitor the functioning of the financial markets. In contrast, cryptocurrencies are not based on any physical form and are beyond the control of regulators. Central banks that are capable of disappearing as quickly as they are created advocate that cryptocurrencies are unreliable and suffer from a lack of transparency and control when it comes to risk management. However, their impact on the economy is so significant that states are raising awareness of their harmfulness to deter public opinion from leaning heavily against this type of asset. Crypto-assets thus give rise to concern due to their volatility and speculative nature.

Benoit Coeuré, director of BRI’s technology innovation hub, said: “We have made it clear that bitcoin does not meet the conditions for being considered 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.

Tycoon Warren Buffett, meanwhile, assured that cryptocurrencies are one of the worst bubbles ever ….

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

Lipsky, senior adviser to former director of the International Monetary Fund (IMF), Christine Lagarde, says the biggest risk with cryptocurrencies is that they could threaten monetary sovereignty in any country “and that regulators should consider new rules to control the volume of circulation.

Recognized economists are also skeptical about the future of cryptocurrencies as by Joseph Stiglitz and Paul Krugman.

… For the replacement

Promoting digital currency as a crypto-replacement strategycurrencies got its way. Andrew Baileys, governor of the Bank of England, which is fighting against the advent of cryptocurrencies, calls it one of the “most important innovations in history”. Thus, the Bahamas’ central bank formalized the “Sand Dollar”, its digital currency on October 20, 2020. Other states, through their central banks such as China, Russia, Sweden, the United Kingdom, have not hidden their ambitions to develop a digital currency. If the goal is to allow quick and easy payments, it is also paves the way for innovative financial services for populations with poor access to banking services. Since it is issued by the central banks, which will control it, the digital currency will thus be a palliative for cryptocurrencies with the advantage that it is guaranteed by their issuer.

But a brave and ever-increasing dynamic of cryptocurrencies …

Despite the reluctance of regulators in the rise of cryptocurrencies, cryptocurrency exchange platforms have so far not been regulated. It should be noted that they have several benefits that facilitate their development. In November 2021, the IMF estimated that out of 16,000 cryptocurrencies listed on stock exchanges, only 9,000 would still be in circulation, that is, a 50% survival rate in ten years. However, several factors combine to promote these values.

Traders and hedge funds : The high volatility of cryptocurrencies is increasingly attracting those most interested in profits: traders. Constantly looking for high returns, they are gradually moving towards highly speculative assets to the detriment of traditional currencies, which are assets under central bank control and therefore more stable. According to the Bank for International Settlements, the latter’s currency speculation fell by 30% from 2016 to 2019 due to the increase in cryptocurrencies (bitcoinethereum, etc.)

blind passengers or pseudo crypto-investors : It is these investors with a traditional economic activity, but who because of their statements and actions promote cryptocurrencies. Thus, Elon Musk, head of Tesla, has increased the value of a cryptocurrency simply by these tweets. Tesla’s recognition of “Dogecoin” as a means of payment for these products has sparked a wave of interest in cryptocurrencies. 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 only currency in the world for 10 years. “

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

“I do not think anyone can stop it now, given that this technology, this concept, is in the minds of 500 million people.” Some international companies even plan to launch their own electronic money due to the resounding success of cryptocurrencies.

The lack of consensus on the question is also one of the factors behind the emergence of cryptocurrencies. Struggled by some countries, they are galvanized by others. The decision by El Salvador, a small Central American country, to introduce bitcoin as its official currency marks the end of the recognition of cryptocurrencies as an essential element of the international financial ecosystem.

Constant creativity of crypto-assets trading platforms : They understood the threat that hung over their existence and renewed themselves by creating less volatile products. Based on unfounded cryptocurrencies, they have thus gradually created new cryptocurrencies called “Stablecoins”, which are cryptocurrencies that are supported by classical currencies and which undergo some variation.

It is undeniable that cryptocurrencies are now a part of our economic lives. If they were to gain more popular support, they would have to be regulated, so would the advent of digital technology and the progressive access of the world population to the Internet and new technologies.

Armand Pandong


Leave a Comment