Cryptocurrencies, the threat to central banks

Written by Davies on / Reading time: 5 minutes.

Cryptocurrencies, the threat to central banks

Have you heard about cryptocurrencies? Do you know what they are? Are they a threat to central banks? Why?

These are the questions that began to take shape in the banking systems since the first digital currency in 2009. Bitcoin took the first step in the revolution of instant payments, as well as the possible bank decentralization. As a result, all the questions we shared with you at the beginning of this post arise. Who has not heard of Bitcoin?

Today, we want to tell you what cryptocurrencies are and their threats to banks. Are you ready? Let’s start!

What are cryptocurrencies?

Su popularidad ha ido creciendo en los últimos años. A continuación, os contamos cómo han reaccionado los bancos y cuáles son sus alternativas.

Without going any further, cryptocurrencies are virtual coins which do not belong to any bank or Government. A digital medium of exchange which guarantees the security, integrity, and the balance of your statements without intermediaries. How do you get it? Thanks to the so-called mining activity. They are the key of the blockchain technology for cryptocurrencies. They are the ones responsible for confirming all the transactions that are made with a certain cryptocurrency anywhere in the world.

Cryptocurrencies have become in a robust way to create the so called 'The Internet of Value', because no exchange of money is made but the value in the form of cryptocurrencies. However, their main difference with respect to payments made through banks is in the latter there are intermediaries, while in the cryptocurrencies those intermediaries disappear, reducing transactions cost, times, and eliminating the need of use brokers to perform them, causing a democratization of money.

Its popularity has been growing in recent years. Then, we want to share with you how banks have reacted and what are their alternatives.

Statements of banks about Bitcoin

It's been 10 years since the world began to work in the creation of virtual currencies. It seemed that something was changing, but a factor has continued. In almost all the world, the highest monetary authority of countries are the heads of central banks. It is illogical to doubt it, especially taking into account the power under its shadow.

However, today we make ourselves this question: why have banks seen a threat in the cryptocurrencies? To find the answer we based us in reality, so we have collected some statements of banks to do a review of their reactions. The media have echoed them:

  • February, 2018, Central banks must prepare to act against cryptocurrencies to ensure they do not become entrenched and undermine trust in central banks, the head of the Bank for International Settlements said.
  • June, 2018, Engage. “The Financial Conduct Authority (FCA) has published a Dear CEO letter sent by Jonathan Davidson and Megan Butler, the FCA's Executive Directors of Supervision for retail and authorisations and investment, wholesale and specialists respectively, to banks regarding good practice for firms on how they should handle the financial risks posed by cryptoassets.”
  • January, 2018, CNBC. It seems that in USA there are concers about privacy. Jerome Powell said that "meaningful technical challenges" and "privacy issues" exists. In addition, he said a central bank-issued digital currency "may stifle innovation over the long run" since it would compete with improvements in federal payments technology and private sector innovations.
  • January, 2018, Bitcoinist. François Villeroy de Galhau, Bank of France Governos, advised caution, because “Bitcoin is in no way a currency or even a cryptocurrency. It is a speculative asset. Its value and extreme volatility have no economic basis, and they are nobody’s responsibility”.
  • May 2018, Coin Desk. Bank of Spain Governor Luis Maria Linde said that cryptocurrencies "present more risks than benefits." [Cryptocurrencies] “have low acceptance as a means of payment, suffer extreme volatility, present multiple operational vulnerabilities and have been related to fraudulent or illicit activities in many cases."

They have already begun to shuffle possibilities to not be so reticent with new electronic payment systems. The IMF Director, Christine Lagarde, suggested that the Central Bank and financial institutions in the world should adopt a more open attitude.

What threats have central bank seen in cryptocurrencies?

Maybe talking about cryptocurrencies scare central banks. However, when we refer to the blockchain technology, this issue, sometimes, changes. Opposition, warning, support, requirements, praise, caution... There are such diverse reactions that the countries of the world have had that it is too difficult to define them in a single word.

Yes, we have seen that some personalities of the financial world, as the Bank of England Governor, have taken a positive approach to the Blockchain technology as he sees cryptocurrencies as part of a potential “revolution” in finance. In Brazil, for example, the central bank considers that "there is an immediate risk to the Brazilian financial system".

However, most agree to observe the world of digital currencies as a threat. Why they fear cryptocurrencies?

  1. It could put an end to cash.
  2. It can be a channel for money laundering and the financing of terrorism.
  3. It parasitizes real currencies and put at risk the financial statehood.

How I am going to trust a payment system that does not have a central authority supporting it? This tends to be the edge that haunt central banks when they talk about cryptocurrencies.

However, blockchain for digital payment systems technology is breaking with these myths to provide a safe and efficient system. Some banks have already integrated this idea, so every time they joined more investments for blockchain-based applications.

In short, we are facing two opposing parties: those who consider it a miracle, and those who see it as a lethal danger.

Time will bring the best answers.