The report, which examines how central banks could use state-sponsored cryptocurrencies to more effectively govern their monetary supplies, theorizes that this technology would allow central banks take negative interest rates to historic levels by imposing policies directly on the monetary supply instead of through intermediaries such as financial institutions.
“Theoretically, a monetary system that is 100% digital may enable deeper negative rates,” a Morgan Stanley team lead by strategist Sheena Sha wrote in the report, according to Business Insider. “This appeals to certain central banks.”
This would be possible, Shah and her team said, because the central bank would have the ability to simultaneously enact its policies across the entire circulating monetary supply, which it cannot do with physical cash.
From the report:
“Freely circulating paper notes and coins (cash) limits the ability of the central banks to force negative deposit rates. A digital version of cash could theoretically allow negative deposit rates to be charged on all money in circulation within any economy.”
“Central banks would then have to go direct to currency users to implement monetary policy, reducing leverage in the system significantly and cutting GDP growth,” the Morgan Stanley researchers added.
But while such a system would greatly increase the efficiency of implementing central bank policies, one imagines that — because cash would no longer be available as a safe harbor — it could also lead to massive capital outflows to decentralized cryptocurrencies.
Once rumors begin to circulate that a bank is set to begin imposing a negative interest rate — a policy that effectively forces people to pay a fee to hold the currency — people could turn to bitcoin or other decentralized cryptocurrencies to secure their wealth, though this decision would likely hinge on the volatility of those assets.