What if cryptocurrencies finally took over fiat? Imagine a world where banks lose their dominant influence and make their way to a blockchain-powered financial system. It may sound too good to be true right now, but we cannot keep endlessly treading water. The rapid tech development coupled with the imperfections of financial institutions beg for change. But maybe central banks are going to fight back and issue their own crypto assets instead?
Libra Coin Influence
One way or another, the struggle is getting real. Apparently, it got even more intense when Facebook announced the launch of its Libra coin. It was (and still is) all over the news: the tech giant is actively partnering with a non-crypto business for strong back-up and plans to provide easy access to financial services. The best part is that these services will be available to anyone in need. And this was probably the first-ever occasion where the authorities and financial institutions felt an actual threat and mobilized. But the crypto industry has been around for a while, so why is it any different now?
Facebook has a massive user base in both Asia and Africa, the continents where most people have no access to basic banking services. By offering cheap and easy money transfers, Libra holds a very substantial blockchain promise for third-world countries. The promise is not only to simplify the process of buying things online, but also go way beyond that. The new digital currency can potentially dethrone the US dollar and become a new source of wealth.
In his article in Bloomberg, Andy Mukherjee reasons that developing Asian economies are in need of a strong native currency that will power international trade and become a competitive store of value. Right now, they bet on their local fiat currencies and can even manipulate them whenever it’s convenient. For example, they can keep it artificially cheaper in order to boost exports. But what if Libra shows them different?
It’s obvious that people will always choose the cheaper and more convenient way to organize their finances, and that’s why crypto definitely has an advantage. Keeping that in mind, it won’t come as a surprise if governments start issuing their own national cryptocurrencies. And on top of that pay interest. Which could potentially lead to national digital currencies competing with each other and eventually transforming into, essentially, a war of crypto.
Cryptocurrency vs Banks
If you want to understand the interest of central banks in cryptocurrencies and blockchain technology in general, you need to understand the basics.
What are the main functions of banks?
- Monetary policy, controlling interest rates and the amount of money in circulation
- Sustaining financial stability and cooperation with governments and other banks
- Regulatory functions, especially when it’s commerce banks dealing with people’s savings and credits
How do you provide financial stability and high liquidity? Obviously, by using your national currency as the main tool. But what if people start carrying out transactions in Bitcoin or any other digital currency and the central bank loses its ability to stay in control and be the lender of last resort? Well, it can try keeping its funds in crypto instead of (or together with) gold and ask other financial institutions to do the same. And, as a result, carry out its monetary policy in two types of currencies, fiat and digital. Pegging crypto to a stable, if there is such a thing at all, fiat currency like the USD is not a new idea. Stablecoins are already authorities’ favorite piece of crypto.
But things get even more complicated when we think about the regulatory side of the equation. Although central banks act as regulatory authorities in their own countries, they are not doing it all by themselves. They are a part of the global financial ecosystem and need to cooperate with all sorts of financial institutions worldwide. This means that central banks simply cannot fight on their own and do whatever they please. Regulatory coordination is not a local matter, it’s international.
Unfortunately, governments and institutions are not always as fast and productive as tech companies. They cannot casually keep up with the progress. And most importantly, they are not fond of bowing to someone else’s interests apart from their own.
The Way Out
And even if a miracle happens and banks and governments are willing to consider the people’s interest first, their possibilities are still restricted. The speed and complexity of the global economic system are unbelievable and regular financial crises only prove this point. There can hardly be any centralized model of global regulation policy that would work effectively for everyone. And truth be told, strict regulations never work. A certain percentage of any field always stays wayward and no one can possibly control everything.
So what can be done? First of all, we need the banking industry to be a lot more transparent. Governments can encourage banks to, let’s say, publish all their activities online so everyone can monitor what they are doing. People, companies, and other organizations can study the dynamics and suggest their proposals and leave remarks. Or even help execute some of the laws, why not?
However, the authorities have to prepare to seriously reconsider their role in the system. Apart from governing, they need to understand that a money monopoly is no longer going to be their prerogative. In the new world where cryptocurrency is the main currency, banks and governments are going to lose the better half of their power and act as equals, not as kings.
The Bottom Line
National cryptocurrencies are not necessarily going to work for the sake of people. Or even work at all. Remember Venezuela’s Petro that turned out to be something in between the biggest scam and a complete disaster? Many countries keep exploring the idea: we keep reading news about China’s crypto yuan or Russia’s crypto ruble but the critics have already pulled them to pieces.
There are a couple of huge obstacles in the way of a new free and regulated peer-to-peer financial system – and they are central banks and governments themselves. Until these archaic and power hungry institutions face the reality where they no longer can control our finances, they will hardly change a thing.