Can Cryptocurrencies Drive out Money?
According to Reuters, Victor Constancio, the Vice President of the European Central Bank, said on November 9 cryptocurrencies will not serve to be an alternative substitute for money, and central banks are unlikely to create digital currencies independently without placing limitations.
Central banks worldwide have been forced to monitor the price of bitcoin which has soared, with some predicting a crash. Thus precautions are necessary to avoid the likely potential threat to stability.
Constanico said in Rome:
“Their designation is a misnomer as they are not a currency but just a commodity used as a speculative asset and as a restricted medium of exchange in very special circumstances, comprising criminal activities or failed states with collapsed institutions.”
The ECB does not view cryptocurrencies as a monetary threat since there are consumer protection concerns and the scalability and adoption digital currencies are rather small at present.
Constancio expressed his concerns about the disorder that supporting cryptocurrencies may create for the banking industry as a whole, which drives the argument for why cryptocurrencies are very unlikely to become mainstream.
“The use of the blockchain by central banks to create digital currency open to all citizens without limits would be really disruptive,” he said. “This would be a radical political choice that could end banking as we know it and is therefore unlikely to happen.”
Since the idea behind the blockchain is a decentralized platform to create independence without the need for intermediaries such as banks, they would be driven out of the market if such technological advances were to lead to widespread adoption.
According to the Bank of England’s Quarterly bulletin from 2014, the widespread usage and adoption of Bitcoin involves potential risks to monetary instability and the world’s oldest central bank recognizes that they can potentially become obsolete.
The central bank recognizes their lack of control over the current users of cryptocurrencies and their ability to influence the interest rate and the money supply of the ‘crypto economy,’ therefore, weakening the monetary transmission mechanism. The central bank has no power and is unable impact demand for this particular group of people, and is more exaggerated the bigger this group becomes. For example, since the Bank of England or any other central bank cannot control the supply or interest rate of cryptocurrencies, they have no tools to influence demand traditionally to stabilize short-term economic fluctuations:
“Potential risks to monetary stability would only be likely to emerge once digital currencies had achieved substantial usage across the economy. If a subset of people transacted exclusively in a digital currency, then the Bank’s ability to influence demand for this group may potentially be impaired.”
It could also be possible that widespread adoption of bitcoin would prompt the central banks to engage in open market purchases, similar to how they influence the prices of stocks and other financial assets, in an attempt to affect demand via the wealth effect.