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Central bankers’ agreement on regulations for cryptocurrencies?


Central bankers largely agree with one another that privately issued cryptocurrencies such as Bitcoin and Ethereum aren’t set to replace traditional currencies. This consensus was well-summarized in the recent IMF “Global Financial Stability Report,” which noted how cryptocurrencies are still far from fulfilling the three textbook functions of money. “While they may serve as a store of value, their use as a medium of exchange has been limited and their elevated volatility has prevented them from becoming a reliable unit of account,” IMF researchers wrote.
Regulators also agree that there are much bigger things to worry about than keeping a watchful eye on cryptocurrencies. Bitcoin and Altcoin still represent only a tiny share of the global financial system: Their total market value has grown but remains less than 3 percent of the combined balance sheet of the world’s four largest central banks.
But the central banker consensus breaks down when it comes to how to regulate cryptocurrencies. In a new paper for the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, Eswar Prasad, a professor of economics at Cornell University, has offered an extensive list of the many ways in which regulators have approached the Bitcoin question. This ranges from the United States, where the Commodity Futures Trading Commission (CFTC) has taken a more laissez-faire approach by classifying cryptocurrencies as commodities, to China, where the People’s Bank of China has banned all cryptocurrency trading.
The differences in approach mean the effectiveness of regulation is limited. A consumer based in China can still trade Bitcoin on an exchange based in the U.S. Crypto-trading is a risky activity, and not just because of the volatility: There have already been instances of fraud and technological vulnerabilities on a number of exchanges. Were there to be a much larger failure, this would trigger a confidence crisis, whose repercussions would be global. In the face of widespread losses among consumers, regulators would be left scrambling to reconcile their different positions.
The impact on financial stability, however, could be negative: As customers chose to hold central bank digital currencies, commercial lenders would be deprived of a cheap source of funding. During a crisis, many depositors who had preferred to keep their money in an account with a private lender would seek shelter in the central bank digital currency, causing a run. Finally, a crisis could prompt severe cross-country flows, as customers chose to move their money away from a given digital currency into a safer one. The transnational implications of these changes are therefore pretty clear. Regulators based in a country experiencing a severe outflow of digital currencies may feel obliged to impose capital controls. Meanwhile, their colleagues who see substantial inflows into their “safe haven” country may prefer to restrict foreigners from holding their own digital currency, to avoid excessive exposure abroad.
Think about this, in the financial world, there have been scams, fraud, and what not all these while. Surely when it comes to crypto world, such things are expected to take place. Can central bank’s digital currencies or privately issued currencies give a good “run for your cryptomoney”? The answer likely to be answered by regulations perhaps?

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