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Almost nine years since the birth of bitcoin, central banks around the world are increasingly recognizing the potential upsides and downsides of digital currencies.
The guardians of the global economy have two sets of issues to address. First is what to do, if anything, about the emergence and growth of the private cryptocurrencies that are grabbing more and more attention -- both for their volatile price moves and, in the case of bitcoin at least, their introduction on regulated derivatives exchanges. The second question is whether to issue official versions.
Following is an overview of how the world’s largest central banks (and some smaller ones) are approaching the subject:
U.S.: Privacy Worry
The Federal Reserve’s investigation into cryptocurrencies is in its early days, and it hasn’t been overtly enthusiastic about the idea of a central-bank issued answer to bitcoin. Jerome Powell, a board member and the chairman nominee, said earlier this year that technical issues remain with the technology and "governance and risk management will be critical." Powell said there are "meaningful" challenges to a central bank cryptocurrency, that privacy issues could be a problem, and private-sector alternatives may do the job.
Randal Quarles, vice chair for supervision at the Fed, said Dec. 1 while the central bank has no policy toward regulation of bitcoin it is “worth thinking about.” The volume of cryptocurrencies could at some point "matter" when it comes to monetary policy, Powell said in answering a question at his Senate confirmation hearing in November. "They’re just not big enough" today, however, he said.
Euro Area: Tulip-Like
The European Central Bank has repeatedly warned about the dangers of investing in digital currencies. Vice President Vitor Constancio said in September that bitcoin isn’t a currency, but a “tulip” -- alluding to the 17th-century bubble in the Netherlands. Colleague Benoit Coeure has warned bitcoin’s unstable value and links to tax evasion and crime create major risks. President Mario Draghi said in November the impact of digital currencies on the euro-area economy was limited and they posed no threat to central banks’ monopoly on money.
China: Conditions ‘Ripe’
China has made it clear: the central bank has full control over cryptocurrencies. With a research team set up in 2014 to develop digital fiat money, the People’s Bank of China believes "conditions are ripe" for it to embrace the technology. But it has cracked down on private digital issuers, banning exchange trading of bitcoin and others. While there’s no formal start date for introducing digital currencies, authorities say going digital could help improve payment efficiency and allow more accurate control of currencies.
Japan: Not a Currency
Bank of Japan Governor Haruhiko Kuroda said in December of bitcoin that "if it’s a question of whether it’s functioning like currencies as a form of payment or means of settlement, I don’t think it is.” Bitcoin "is being traded for investing or for speculation,” he said. Kuroda didn’t regard it as an "obstacle" for BOJ monetary policy. In October, he said the BOJ had no imminent plan to issue a digital currency, though it’s important to deepen knowledge about them. He said taking such a step would involve revisiting "fundamental issues of central banking," as it would effectively extend access to central bank accounts to the public.
Germany: Investors Beware
In a country where a lot of citizens still prefer to pay in cash, the Bundesbank has been particularly wary of the emergence of bitcoin and other virtual currencies. President Jens Weidmann in December described bitcoin’s move as having a "speculative character," though for regulators, “just because investors can lose money isn’t a reason to get involved." He said “the hurdle for regulatory action is quite high in my view.’’ Board member Carl-Ludwig Thiele said in September a shift of deposits into blockchain would disrupt banks’ business models. At the same time, the Bundesbank has been actively studying the application of the technology in payment systems.
U.K.: Potential ‘Revolution’
Bank of England Governor Mark Carney has cited cryptocurrencies as part of a potential “revolution” in finance. The central bank started a financial technology accelerator in 2016, a Silicon Valley practice to incubate young companies. Carney says technology based on blockchain, the distributed accounting database, shows “great promise” in enabling central banks to strengthen their defenses against cyber attack and overhaul the way payments are made between institutions and consumers. He has nevertheless cautioned the BOE is still a long way from from creating a digital version of sterling.
France: ‘Great Caution’
Bank of France Governor Francois Villeroy de Galhau said in June that French officials "advise great caution with respect to bitcoin because there is no public institution behind it to provide confidence. In history all examples of private currencies ended badly." Bitcoin even has a "dark side," he said, citing data attacks and warning that people who use the cryptocurrency "do so at their own risk."
India: Not Allowed
India’s central bank is opposed to cryptocurrencies given that they can be a channel for money laundering and terrorist financing. Nevertheless, the Reserve Bank of India has a group studying whether digital currencies backed by global central banks can be used as legal tender. Currently, the use of cryptocurrencies is a violation of foreign-exchange rules.
Singapore: Official Warning
Characterized, sometimes with pride, as a nanny state, Singapore has proved true to type with an official warning to its citizens to be wary of cryptocurrencies. The city-state’s monetary authority said in a Dec. 19 statement it "is concerned that members of the public may be attracted to invest" in them because of their run-ups in price. Buyers should be aware "they run the risk of losing all their capital." The statement highlighted that there’s no regulatory protection for investors, and urged citizens to report fraud suspicions to the police.
Brazil: Support Innovation
The Banco Central do Brasil sees “no immediate risk for the Brazilian financial system" but remains alert to the developments of the usage of those currencies, it said in a statement in November. The bank pledged “to support financial innovation, including new technologies that make the financial system safer and more efficient.”
Canada: Asset-Like
The Bank of Canada’s senior deputy governor, Carolyn Wilkins, who is leading research on cryptocurrencies, said in a November interview that cryptocurrencies aren’t true forms of money. “This is really an asset, or a security, and so it should be treated that way,” Wilkins said. As others, she viewed distributed-ledger technology as promising for making the financial system more efficient. BOC staff are also exploring the circumstances under which it might be appropriate for it to issue its own digital currency for retail transactions.
South Korea: Crime Watch
The Bank of Korea’s focus has been protecting consumers and preventing cryptocurrencies from being used as a tool of crime. Deputy Governor Shin Ho-soon said in November more research and monitoring was needed. So many Koreans have embraced bitcoin that the prime minister has warned cryptocurrencies might corrupt the nation’s youth. Policy makers are setting up a task force to review a possible cryptocurrency capital-gains tax, while seeking to avoid hurting blockchain technology.
Russia: ‘Pyramid Schemes’
Russia’s central bank has expressed concerns about potential risks from digital currencies, with Governor Elvira Nabiullina saying “we don’t legalize pyramid schemes” and “we are totally opposed to private money, no matter if it is in physical or virtual form.” For the moment, the Bank of Russia prefers to delay a decision on regulating the financial instruments unless President Vladimir Putin pushes for action sooner. The central bank will work with prosecutors to block websites that allow retail investors access to bitcoin exchanges, according to Sergey Shvetsov, a deputy governor.
Australia: Speculative Mania
Australia’s central bank chief criticized cryptocurrencies in a speech in Sydney Dec. 13, arguing the asset is more likely to appeal to criminals than consumers. “The current fascination with these currencies feels more like a speculative mania than it has to do with their use as an efficient and convenient form of electronic payment,” said Philip Lowe, Reserve Bank of Australia Governor. The bank is not planning to issue its own digital currency as a case hasn’t been made to do so, Lowe said. The RBA is in close contact with its peers in other countries and few see electronic banknotes coming, he said.
Turkey: Important Element
Digital currencies may contribute to financial stability if designed well, Turkish Central Bank Governor Murat Cetinkaya said in Istanbul in November. Digital currencies pose new risks to central banks, including their control of money supply and price stability, and the transmission of monetary policy, Cetinkaya said. Even so, the Turkish central banker said that digital currencies may be an important element for a cashless economy, and the technologies used can help speed up and make payment systems more efficient.
Netherlands: Most Daring
The Dutch have been among the most daring when it comes to experimenting with digital currencies. Two years ago the central bank created its own cryptocurrency called DNBcoin -- for internal circulation only -- to better understand how it works. Presenting the results in 2016, Ron Berndsen, who was in charge of the project, said blockchain may be “naturally applicable” in the settlement of complex financial transactions.
Scandinavia: Exploring Options
Like the Dutch, some Nordic authorities have been at the forefront of exploring the idea of digital cash. Sweden’s Riksbank, the world’s oldest central bank, is probing options including a digital register-based e-krona, with balances in central-database accounts or with values stored in an app or on a card. The bank says the introduction of an e-krona poses "no major obstacles" to monetary policy.
In an environment of decreasing use of cash, Norway’s Norges Bank is looking at possibilities such as individual accounts at the central bank or plastic cards or an app to use for payments, it said in a May report. Denmark has backtracked somewhat from initial enthusiasm, with Deputy Governor Per Callesen cautioning against central banks offering digital currencies directly to consumers. One argument is that such direct access to central bank liquidity could contribute to runs on commercial banks in times of crisis.
New Zealand: Too Unstable
The Reserve Bank of New Zealand’s Acting Governor Grant Spencer warned bitcoin’s runaway gains look like a speculative bubble. “Digital currencies, cryptocurrencies, are a real and serious proposition for the future,” Spencer said in a Dec. 10 interview with TVNZ. “I think they are part of the future, but not the sort that we see in bitcoin.” The central bank, once a pioneer on the global stage with its early introduction of an inflation target, had said in what it termed an analytical note in November it’s considering its future plans for currency issuance, and how digital units may fit into those strategies.
Morocco: Violating Law
Representing one of the more stringent reactions, the country has deemed that all transactions involving virtual currencies as violating exchange regulations and punishable by law. Cryptocurrencies amount to a hidden payment system, not backed by any institution and involving significant risks for their users, authorities said in a November statement.
Bank for International Settlements: Can’t Ignore
The central bank for central banks has said that policy makers can’t ignore the growth of cryptocurrencies and will likely have to consider whether it makes sense for them to issue their own digital currencies at some point. “Bitcoin has gone from being an obscure curiosity to a household name,” the BIS said in September. One option is a currency available to the public, with only the central bank able to issue units that would be directly convertible to cash and reserves. There might be a greater risk of bank runs, however, and commercial lenders might face a shortage of deposits. Privacy could also be a concern.
Agustin Carstens, the incoming head of the BIS, told Bloomberg that bitcoin deserves close scrutiny. "Anything that grows in price as fast as bitcoin has done it, without having a real clear understanding of what is behind it, should at least raise some eyebrows," he said.
— With assistance by Yinan Zhao, Paul Abelsky, Mark Deen, Anirban Nag, Kati Pohjanpalo, Toru Fujioka, Jiyeun Lee, Hannah Dormido, Jeanna Smialek, Nick Rigillo, Peter Levring, Ahmed Feteha, Jill Ward, and Piotr Skolimowski