The Governor of the Central Bank of Ireland’s Thoughts on Cryptocurrency

The financial landscape is changing, and the central bank is also adapting to this change. The Governor of the Central Bank of Ireland, Mr. Gabriel Makhlouf, talked about his thinking and understanding of cryptocurrency in his blog. He believes that the work on the digital euro, the continuous development of the EU regulatory framework and the broader international development will help better Understand the benefits and risks of introducing central bank digital currencies. He also believes that, as a public policy maker, it is the responsibility to provide clear rules for cryptocurrency to ensure that innovation serves the public interest. The Institute of Financial Technology, Renmin University of China compiled the core content of this article.

Currency plays a key role in society and economy. It has three key functions: a medium of exchange for purchasing goods and services, a unit of account, and a store of value. People must have confidence in the currency they hold to perform these functions, and they must also have confidence in the work of the central bank that manages the currency.

Currency and Central Bank

Earlier this month, the European Central Bank decided to continue studying the potential of issuing a digital euro. This is a preliminary analysis on this subject following our report last year. A key goal of our work is to protect the public benefits provided by the euro to citizens (free access to simple, universally accepted, risk-free, and reliable payment methods), while being prepared to deal with the reduction in cash usage and the increase in digitalization. We have a responsibility to consider these issues to ensure that central bank currency is still suitable as a public good.

Although we have not yet decided whether or not to introduce a digital euro, I think this is likely to happen. In my opinion, this is not a question of “if” but a question of “how and when”. What needs to be clear is that cash will not disappear, and the digital euro will serve as a supplement to cash.

Regardless of whether it is a coin, paper currency or digital currency, the three functions of currency are applicable. Now, you may think that digital currency already exists because you may be used to using a computer or phone to pay bills by bank transfer, or when paying with a card or mobile app in a store. However, these experiences highlight the growing digitization and technological advancement in the payment field, and do not represent a mature digital currency. Technology has improved the efficiency and ease of use of payments, but the introduction of the digital euro will represent a fundamental change in the financial architecture of the euro zone.

Cryptocurrency

Of course, the digital euro (or U.S. dollar, British pound, or RMB) is not the only problem with the increasing digitalization of finance. In addition to the central bank and existing private sector financial service providers, other participants are also increasingly involved in the payment field.

Perhaps the most famous development is the rise of what is sometimes referred to as “cryptocurrency.” I have no doubt that this is an unhelpful and misleading description-the “currency” label means that the characteristics of currency exist, but in fact cryptocurrency does not have currency attributes: for example, the value of Bitcoin has experienced huge fluctuations (at least To some extent it is driven by speculation, see below) making it inappropriate as a store of value. In view of the limited number of companies and individuals willing to use it for transactions, it is also not a useful medium of exchange or unit of account. There are currently a variety of cryptocurrencies, including subcategories such as tokens and stablecoins. (It is estimated that over 8,000 cryptocurrencies have been created in the past ten years or so)

The Governor of the Central Bank of Ireland's Thoughts on Cryptocurrency

Figure 1: Monthly changes in the S&P 500 Index and Bitcoin

Several issues have been identified in the cryptocurrency field. First, the anonymity they provide makes them attractive to criminals. Of course, cash also provides anonymity, but managing large amounts of physical currency is much more difficult than trading with cryptocurrency; secondly, there are sufficient concerns about the energy consumption used to issue and use certain types of cryptocurrency; thirdly, there are Concerns about financial stability and consumer protection, I will discuss in detail later.

As far as today is concerned, the negative effects surrounding cryptocurrency far outweigh any benefits. But we should not ignore the positive factors of the underlying technology. Distributed Ledger Technology (DLT) is essentially a way of storing information records in a secure and decentralized network, and is a key architecture for certain types of cryptocurrencies. It has the potential to reduce the transmission cost of the financial system because it can eliminate the need for intermediaries in certain transactions. It can also load smart contracts, once the agreed standards are met, it can speed up the specified operations in the contract. In recent years, the use of DLT has increased-it certainly has potential-although its popularity remains to be seen.

Why cryptocurrencies are important to policymakers

When it comes to the specific interests of public authorities, including the central bank, cryptocurrency has not yet caused financial stability problems because it has a relatively limited effect on most financial system participants and most of the public. However, central banks and regulators are considering their risks (for example, the Basel Committee on Banking Supervision recently issued a public consultation on how to deal with cryptographic risk exposures on bank balance sheets). These risks and consumer protection considerations are mutually exclusive. Associated.

When considering these issues, it is helpful to distinguish between different types of cryptocurrencies.

Some cryptocurrencies are not connected to any underlying assets, so they do not provide an “anchor” for value stability, exhibit extreme price fluctuations, and are very risky for investors. But on the other hand, some people do like to collect and use them, just as some people like to collect other things (such as stamps). Purchasing such items can be profitable, but it can also cause losses (the recent interest in cryptocurrency purchases does have some characteristics similar to the buying craze generated by tulips in the 17th century). From a macro perspective, if these types of cryptocurrencies become an important presence in the financial system, their volatility may cause losses, which may have an impact on financial stability, especially in the case of leverage.

Stablecoins are a different type of cryptocurrency and claim to provide conversions of currencies such as U.S. dollars or Euros at a fixed exchange rate. Given the connection with basic stable assets such as the euro, this seems to solve the problem of extreme price fluctuations, and from a payment perspective and as a medium of exchange, stablecoins may be useful. However, this of course means that their quality depends on the governance behind them. If the widely used stablecoins are not properly managed, consumers cannot fully convert their holdings into the base currency—for example, if the assets invested by the stablecoin issuer lack liquidity—this may also have an impact on financial stability.

As the public considers investing part of their funds in cryptocurrencies, the risk is increasing (although its impact on most people is still limited at the moment). In addition to considering the inherent risks of cryptocurrency, people may also face scams and fraud due to the opaque nature of the product. The European Commission has proposed a new regulation—Regulations on the crypto asset market (“REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on Markets in Crypto-assets, and amending Directive Markets in Crypto-assets, and amending Directive”, MiCA). Legislation requires greater legal certainty and consumer protection (and supports financial stability). Currently, there is no regulatory protection for consumers in the cryptocurrency world.

The Governor of the Central Bank of Ireland's Thoughts on Cryptocurrency

Figure 2: EU regulations on the crypto asset market

in conclusion

The financial landscape is changing, and the central bank is also adapting to this change. Our work on the digital euro, the continued development of the EU regulatory framework and broader international development will help us better understand the benefits and risks of introducing central bank digital currencies. More generally, as public policy makers, we have the responsibility to ensure that innovation serves the public interest by providing clear rules to innovators while interacting with a wide range of stakeholders (especially households, businesses, and the payment industry).

Source | BIS

Author | Gabriel Makhlouf

Compilation | Sun Yi

 

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