If they don\u2019t get a handle on bitcoin and their ilk,\u00a0and more people adopt them, central banks could see an erosion of their control over the money supply. The solution may be in the old adage, if you can\u2019t beat them, join them.<\/p>\n
The People\u2019s Bank of China has done trial runs of its prototype cryptocurrency, taking it a step closer to being the first major central bank to issue digital money.<\/p>\n
The Bank of Japan and the European Central Bank have launched a joint research project which studies the possible use of distributed ledger – the technology that underpins cryptocurrencies – for market infrastructure.<\/p>\n
Read more about China\u2019s digital currency efforts.<\/p>\n
The Dutch central bank has created its own cryptocurrency – for internal circulation only to better understand how it works.<\/p>\n
And Ben Bernanke, the former chairman of the Federal Reserve who has said digital currencies show “long term promise,” will be the keynote speaker at a blockchain and banking conference in October hosted by Ripple, the startup behind the fourth largest digital currency.<\/p>\n
Russia, too, has shown interest in ethereum, the second-largest digital currency, with the central bank deploying a blockchain pilot program.<\/p>\n
In the US, both banks and regulators are studying distributed ledger technology and Fed officials have made a couple of formal speeches on the topic in the past 12 months, but have voiced reservations about digital currencies themselves.<\/p>\n
Policy Issues<\/strong><\/p>\n Fed Governor Jerome Powell said in March there were \u201csignificant policy issues\u201d concerning them that needed further study, including vulnerability to cyber-attack, privacy and counterfeiting. He also cautioned that a central bank digital currency could stifle innovations to improve the existing payments system.<\/p>\n At the same time, central bankers are obviously wary of the risks posed by alternative currencies – including financial instability and fraud. One example: The Tokyo-based Mt. Gox exchange collapsed spectacularly in 2014 after disclosing that it lost hundreds of millions of dollars worth of bitcoin.<\/p>\n But for all their theoretical tinkering, official-money guardians have largely stood by as digital currencies have taken off. The explosion in initial coin offerings, or ICOs, is evidence. Investors have poured hundreds of millions of dollars into the digital currency market this year alone.<\/p>\n The dollar value of the 20 biggest cryptocurrencies is around $150 billion, according to data from Coinmarketcap.com. Bitcoin itself has soared more than 380 percent this year and hit a record – but it\u2019s also prone to wild swings, like a 50 percent slump at the end of 2013.<\/p>\n “At a global level, there is an urgent need for regulatory clarity given the growth of the market,”\u00a0said Daniel Heller, Visiting Fellow at the Peterson Institute for International Economics and previously head of financial stability at the Swiss National Bank.<\/p>\n Self Interest<\/strong><\/p>\n Rather than trying to regulate the world of virtual currencies, central banks are mainly warning of risks and attempting to garner some advantage from distributed-ledger technology for their own purposes, like upgrading payments systems.<\/p>\n Carl-Ludwig Thiele, a board member of Germany\u2019s Bundesbank, has described bitcoin as a \u201cniche phenomenon\u201d but blockchain as far more interesting, if it can be adapted for central-bank use.<\/p>\n In July, Austria\u2019s Ewald Nowotny said the he\u2019s open to new technologies but doesn\u2019t believe that will lead to a new currency, and that dealing in bitcoin is effectively \u201c gambling.\u201d<\/p>\n There could also be a monetary policy aspect to consider. ECB Governing Council member Jan Smets said in December that a central-bank digital currency could give policy makers more leeway when interest rates are negative.<\/p>\n Policy makers have long been concerned that if they cut rates too low, people will simply hoard cash. The ECB\u2019s deposit rate is currently minus 0.4 percent.<\/p>\n Other central banks see the uses of distributed ledger technology, but worry about the abuses virtual money can be put to outside the official system — like criminal money laundering and the sale of illegal goods. That\u2019s not to mention the risk that virtual currencies could pose to the rest of the financial system if the bubble were to pop.<\/p>\n \u2018Great Promise\u2019<\/strong><\/p>\n Bank of England Governor Mark Carney – who has said blockchain shows \u201c great promise\u201d – also warned regulators this year to keep on top of developments in financial technology if they want to avoid a 2008-style crisis.<\/p>\n While Mt. Gox cast a shadow over bitcoin in Japan, it now has many supporters in the world\u2019s third-biggest economy. Parliament\u00a0passed a law in April this year making it a legal method of payment.<\/p>\n Japan\u2019s largest banks have invested in bitcoin exchanges and small-cap stocks linked to the cryptocurrency or its underlying technology have rallied this year as it begins to win favor with some retailers.<\/p>\n With the nation\u2019s Financial Services Agency responsible for bitcoin\u2019s regulation, the BOJ remains focused on studying its distributed ledger technology.<\/p>\n Not Ready Yet<\/strong><\/p>\n “Central banks are not yet ready for regulating digital currencies,”\u00a0said Xiao Geng, a professor of finance and public policy at the University of Hong Kong. “But they have to in the future since unregulated digital currencies are prone to crime and Ponzi-type speculation.”<\/p>\n To be sure, the attraction of virtual currencies for many remains speculation, rather than for households or companies buying and selling goods.<\/p>\n “It is a fad that will die down and it will be used by less than 1% of consumers and accepted by even fewer merchants,” said Sumit Agarwal of Georgetown University, who was previously a senior financial economist at the Federal Reserve Bank of Chicago.<\/p>\n “Even if we can make the digital currency safe it has many hurdles.”<\/p>\n The founders of Exio Coin argue they have developed a middle way with principles of governance that will set the trend for the blockchain industry. While some regulation is inevitable, cryptocurrencies are intended to be a global form of currency and not subject to the rules and regulations of one jurisdiction, said Johnson.<\/p>\n With all the misgivings about cryptocurrencies, having a sovereign endorser – rather than an issuer – may be a pragmatic way of offering the benefits of digital money with less of the worry.<\/p>\n “With no one central bank maintaining control Exio Coin will retain its decentralized characteristics,” Johnson said. “The sovereign endorser shares our vision for the future.”<\/p>\n
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