Central banks are not the biggest fans of cryptocurrencies. Although most of them are currently in some way or another working on their own central bank digital currency (CBDC), cryptocurrencies as such are not very popular amongst these institutions. This was supported this week, when several different central banks independently released their statements on this asset class, with most of the comments being negative. What exactly did they say and which central banks are we talking about?
Probably the most important central bank that has released its statement on the cryptocurrency topic this week was the Bank of Japan. Its governor, Haruhiko Kuroda, has said that cryptocurrencies are perceived as a big speculation, since they are valued out of “thin air.” He also mentioned that its volatility is one of the biggest “enemies” of the whole industry (Molchan, 2021).
On the other hand, he mentioned that stablecoins, have true value since they should be in theory pegged to fiat currencies. Therefore, they can be used as a means of payment. However, in order to do so, they would need to satisfy different regulatory frameworks that are being developed to protect consumers and households, as per Haruhiko Kuroda.
“An excessive level of leveraged cryptocurrency trading puts households at risk of financial damages considering the instability of crypto. We expect the increasing amount of crypto trading to have a negative impact on the financial system in any respect.”
Those are the words of Lee Ju-yeol (bloomberg.com/profile/person/6727912), head of South Korea’s central bank. He therefore highlighted the need for very close supervision of cryptocurrency trading and emphasized that overleveraged positions can lead to significant losses to the traders and, in case of sizable increase of the whole industry, even threaten the financial system (Lee, 2021).
However, as mentioned by many experts from the industry, the pure size of it is so small that it is almost impossible for it to threaten the whole financial system. Nevertheless, the comments of Lee Ju-yeol showed that the approach of South Korea’s central bank towards the cryptocurrency is very cautious and will be prone to more regulations.
Central bank of Nigeria: Crypto coming to life in Nigeria
A bit more positive approach was seen this week by Nigerian Central Bank whose governor, Godwin Emefiele ( Emefiele, 2021), expressed his feelings about this industry during the Monetary Policy Committee meeting. He said that he is very confident that the cryptocurrencies will be legal in the country, which is quite a big deal, since Nigeria can be considered almost a cryptocurrency superpower. With huge volumes of domestic as well as international cryptocurrency exchanges, the confident comments on the future of cryptocurrencies in the country can be seen as pretty optimistic (PARTZ , 2021).
On the other hand, Godwin Emefiele also said that cryptocurrencies are often used for illicit activities and therefore more regulations will be needed before Nigeria can progress more into the adoption of this asset class.
One of the key takeaways from all these comments is that more regulation is expected by almost all central bankers. This is not a surprise since it is consistent with official statements of the ECB, Federal Reserve, People’s Bank of China or Bank of England. All of these banks, and many more, have specified many times that they are looking more into the regulation and how to approach digital currencies as such (Crypto Assets, 2021).
The second takeaway is a bit more critical, since central banks still do not seem to understand (or do not want to understand) the main use of cryptocurrencies. All negative comments usually seem to either mention illicit activities or excessive volatility. However, volatility has always been a part of the crypto space and it is one of its features. Illicit activities, which are still being mentioned, are not as common as the central banks tend to say. This was proved by many different research papers. It is estimated that only 1.1% of all cryptocurrency transactions are used for illicit activities, which is a very small number. However, central banks still use this argument as one of the strongest ones (KAPILKOV , 2020).
Therefore, from the viewpoint of cryptocurrencies and their future, it will be critical to see what approach central banks and regulators choose. Whether they will be more lenient and try to incorporate this asset class more into the financial system or whether they take harsh measures and try to regulate or even ban it. As the recent statements however showed, these institutions might be prone to stricter regulations than needed.
Molchan, Y. (2021, 8 25). Bitcoin Drops to $36,570 As Bank of Japan Governor Joins Central Bankers on Criticizing BTC. Retrieved from U Today: https://u.today/bitcoin-drops-to-36570-as-bank-of-japan-governor-joins-central-bankers-on-criticizing-btc
Lee, S. (2021). Retrieved from Bitcoinist: https://bitcoinist.com/leveraged-crypto-trading-is-a-threat-to-financial-system-warns-bank-of-korea/
Emefiele, G. (2021). About CBN. Retrieved from Central Bank of Nigeria: https://www.cbn.gov.ng/AboutCBN/TheBoard.asp?Name=Mr%2E+Godwin+Emefiele+%28CON%29&Biodata=emefiele
PARTZ , H. (2021, 5 28). Crypto will ‘come to life’ in Nigeria, central bank governor says. Retrieved from Coin Telegraph: https://cointelegraph.com/news/crypto-will-come-to-life-in-nigeria-central-bank-governor-says
Crypto Assets. (2021). Retrieved from ECB: https://www.ecb.europa.eu/home/search/html/crypto-assets.en.html
KAPILKOV , M. (2020, 3 5). Chainalysis: Only 1% of $1 Trillion Transacted in Crypto in 2019 Was Illicit. Retrieved from Coin Telegraph: https://cointelegraph.com/news/chainalysis-only-1-of-1-trillion-transacted-in-crypto-in-2019-was-illicit