Cryptocurrencies just a bubble central bankers say, but it has them worried

CENTRAL bankers say the success of bitcoin and other cryptocurrencies is just a bubble.

But it keeps them awake at night, because these private currencies threaten their control of the banking system and money supply, that could undermine the monetary policies they use to manage inflation.

With bitcoin smashing through the $8 000 (R110 171) level for the first time this week after a 50 percent climb in eight days, they are also worried they will be blamed if the market crashes.

This is why several central banks are advocating regulations to impose control. Others are looking at whether to introduce their own digital currency and are testing payment platforms.

“The problem with bitcoin is that it could easily blow up and central banks could then be accused of not doing anything,” European Central Bank (ECB) policy-maker Ewald Nowotny told Reuters.

“So we’re trying to understand whether bank activity in relation to cryptocurrency trading needs to be better regulated.”

The global cryptocurrency market is worth $245 billion which is tiny compared to the trillion dollar plus balance sheets of the Bank of Japan, the US Federal Reserve or ECB.

These institutions issue yen, US dollars and euros, both by creating physical cash or by crediting banks’ accounts, as is the case with their bond-buying programmes.

Cryptocurrencies, however, are not centralised.

They do not pass through regulated banks and traditional payment systems. Instead, they often use blockchain, an online ledger of transactions that is maintained by a network of anonymous computers on the internet.

This has raised concerns about their vulnerability to hackers, as underlined by a score of incidents recently, and their use to finance crime.

Cryptocurrencies holders also have a claim on a private, rather than a public entity, which could go bust or stop functioning.

For these reasons, and given their low adoption by retailers, central banks have dismissed cryptocurrencies as risky commodities, with no bearing on the real economy.

“Bitcoin is a sort of tulip,” ECB vice-president Vitor Constancio said in September, comparing it to the Dutch 17th century trading bubble. “It’s an instrument of speculation.”

China and South Korea, where cryptocurrency speculation is popular, banned fundraising through token launches, whereby a new cryptocurrency is sold to finance a product development.

Rivals Russia’s central bank said it would block websites selling bitcoin and its rivals while the ECB told EU law-makers last year “they should not seek to promote the use of virtual currencies”, because these could “in principle affect the central banks’ control over the supply of money” and inflation.

Yet Japan in April recognised bitcoin as legal tender and approved several companies as operators of cryptocurrency exchanges, but required them to register with the government.

The BOJ last year set up a section in charge of fintech to offer guidance to banks seeking new business opportunities, and joined up with the ECB to study distributed ledger technology (DLT) like blockchain. - Reuters