With bitcoin reaching the unseen territory of prices beyond $15,000, it becomes more likely that the cryptocurrency will indeed have effects on the global financial system. Institutions, banks, and economists are partially aware of this risk.
Maybe there is a specter, to paraphrase Marx, haunting the financial institutions, and maybe it’s bitcoin and the fear that the cryptocurrency will destabilize financial systems.
That bitcoin, a stateless, bankless and inflation-free form of money, could spark significant effects on the world’s financial system, when adopted widely has been stated since 2009. Not as an accident, but as the goal of the cryptocurrency movement. Bitcoin was not made to coexist peacefully with the legacy monetary system; it was made to challenge, combat and replace it. Bitcoin eliminates the leverage of intermediaries and states on monetary affairs.
However, the possibility for this to happen has long been nothing but ridiculed and laughed at, as bitcoin has been a tiny, minuscule drop in the ocean of world’s financial system. Regulators around the world have noticed bitcoin and have started to regulate it to prevent criminal abuse on the micro level. But they completely ignored the possibility of bitcoin taking effect on the macro level of whole economies and global financial markets. Maybe because it was too absurd to think about.
Even today, after having grown to prices of more than $15,000, the leading cryptocurrency is still too small to matter in this regard. But at least, with a market cap of more than $280 billion, bitcoin might already have some effect on major markets, and it comes close to be visible on a global scale. The prediction that bitcoin will disrupt global financial markets is no longer ridiculously overblown; it has become a not so unlikely possibility.
Are there some indications, that major financial institutions have begun to deal with this? That they prepare themselves for the coming ‘cryptocoinization’ of the world economy? We take a look around.
Bodies of the US Government
In the past month, several US agencies commented on Bitcoin. These comments indicate that the times in which you could wish-wash the topic away as tiny and irrelevant are gone. Instead, the bodies are closely watching cryptocurrencies and have begun to talk about potential risks publicly.
The new Governor of the USA’s central bank, the Federal Reserve, Randal Quarles, recently warned,”While these digital currencies may not pose major concerns at their current levels of use, more serious financial stability issues may result if they achieve wide-scale usage.”
Quarles rarely mentioned Bitcoin explicitly. His talk was rather about digital currencies as a new paradigm of representing value technologically. In this regard, his worries aim less at Bitcoin taking over the world’s financials, but on the central banks being pushed into using digital currencies by themselves.
“I am particularly concerned that a central-bank-issued digital currency that’s held widely around the globe could be the subject of serious cyberattacks and could be widely used in money laundering and terrorist financing. The effect of all this would significantly divert our focus from work to improve or establish new private-sector retail payment systems based on existing institutions.”
Quarles comments come along with another warning from US agencies, this time from a group of regulators, consisting of the Treasury Department, the Federal Reserve and the Securities and Exchange Commission. The group of governmental bodies is concerned with the growing popularity of bitcoin and other digital currencies. They demand that cryptocurrencies are put under closer scrutiny to prevent them causing potential financial stability risks. However, the report doesn’t dig deep into the details.
Banks have always been quick to warn against Bitcoin. In most cases, their warnings have not been a result of insight and analysis, but of the (understandable) resentiment against digital currencies, since they do not need banks and cause significant regulatory trouble for banks to deal with. Usually, these warnings ridiculed digital currencies as irrelevant and tiny.
However, in late 2017, the sound of the warnings changed. A perfect example is the list of 30 global financial risks in 2018, issued by Deutsche Bank. The list, made by Deutsche Bank’s Chief International Economist Torsten Slok, ranked a bitcoin crash as the thirteenth-highest risk.
It might have been a bit overblown of the analyst, to ascribe global and broad impacts to a bitcoin crash, but it demonstrates how aware the world has become, and how far the once tiny, minuscule digital money has grown. We are close to that point where bitcoin becomes too big to be allowed to fail.
If there is something like a financial world government, it is the International Monetary Fund, IMF. It’s Managing Director Christine Lagarde recently commented on bitcoin.
“For now, virtual currencies such as Bitcoin pose little or no challenge to the existing order of fiat currencies and central banks,” Lagarde said. “Why? Because they are too volatile, too risky, too energy intensive, and because the underlying technologies are not yet scalable. Many are too opaque for regulators; and some have been hacked.”
In other words, the IMF doesn’t see bitcoin or other cryptocurrencies as real competition for fiat money and thus does not see so much of a risk in it. However, Lagarde adds:
“Not so long ago, some experts argued that personal computers would never be adopted, and that tablets would only be used as expensive coffee trays. So I think it may not be wise to dismiss virtual currencies.”
In a press briefing, an IMF officer widened the insights into the IMF’s perceptive on Bitcoin.
“We have also alerted for, cautioned, that cryptocurrencies can also pose considerable risks as potential vehicles for such things as money laundering, terrorist financing, tax evasion and so on. So there’s a need for a balanced assessment of cryptocurrencies.” Cryptocurrencies as well as ICOs, the press officer said, should be subject to appropriate regulation and supervision.
After all, the IMF seems to take Bitcoin as it was taken in previous years; as an object of regulation and law enforcement. A serious effect on the global financial systems seems not to be taken into account.
Joseph E. Stiglitz is one of the most prominent economists of our time. The former senior vice president and chief economist of the World Bank was awarded the Nobel Memorial Prize in Economic Sciences, usually called “the Nobel Prize.”
In a recent interview, Stiglitz blatantly called for the ban of bitcoin and other cryptocurrencies: “One of the main functions of government is to create currency, and bitcoin is successful only because of its potential for circumvention, lack of oversight. So it seems to me it ought to be outlawed.”
Also, Bitcoin “doesn’t serve any socially useful function,” according to Stiglitz. “We ought to just go back to what we always have had.… [In terms of] the medium exchange that we use for transaction, and what I was trying to say is, let’s move away from paper into the 21st century of a digital economy.” Bitcoin, Stiglitz continues, “ought to be outlawed.”
While Stiglitz just thinks Bitcoin does more harm than good but doesn’t indicate to be aware of systematic risks due to Bitcoin’s growth, Sandra Phlippen, an economist from Belgium, thinks that a Bitcoin crash can destabilize the real world economy.
“We know the price is rising fast, so billions of dollars have to be invested,” Phlippen writes. “And there is the real danger. A bitcoin world can destabilize the real economy.” For the economist, Bitcoin causes several problems; “First, the bitcoin undermines the government because a lot of transactions are about money laundering and tax avoidance. Another problem is that the profits of new bitcoins that come with it do not benefit the government (as with normal money creation), but are absorbed in heavily environmentally harmful computer power.”
Most users like the fact that the central banks do not influence Bitcoin in any way. For Phlippen this is dangerous:
“In times of crisis, central banks can, through their influence on ordinary banks, ease credit conditions and encourage people to consume. The bank has no control over the bitcoin economy and an economic crisis can become deeper.”
With these worries, Phlippen seems to be mostly alone. There still seems no widespread concern about the influence of bitcoin on globally scaled markets.