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Do you agree that cryptocurrencies are currently a threat to the stability of the financial system, or can be expected to become a threat in the next couple of years? Do you agree that the regulatory oversight of cryptocurrencies needs to be increased? Economists relaxed about Bitcoin: Mainstream financial markets are thought to be suitably isolated from developments in Bitcoin, the largest cryptocurrency, which, in any case, has a market capitalisation that is small relative to the size of the economy.
But a majority of panel members are in favour of greater regulatory oversight, primarily because of concerns that the anonymity and opacity of cryptocurrencies facilitate tax evasion and other criminal activities. There is only limited support for regulating cryptocurrencies to preserve the effectiveness of monetary policy.
Cryptocurrencies have been a staple of news headlines in As the price of one Bitcoin has risen fold in sterling terms during the course of , the number of Google searches for Bitcoin has increased fold. A great deal has been written about Bitcoin, in many cases speculating on whether there is a bubble in its price and what might happen if and when the bubble bursts. This survey eschews the bubble question and asks instead whether cryptocurrencies are a threat to the financial system and therefore deserving of greater regulatory oversight by policy-makers.
In , a working paper [1] published by the European Central Bank ECB concluded that, in the current situation, virtual currency schemes:. The main argument of the ECB and other central banks [3] is that cryptocurrencies are too small and too detached from other financial markets to be a systemic risk. One reason for cryptocurrencies remaining small is current technological constraints, which show up as high transaction fees and limit the use of cryptocurrencies as a medium of exchange. Chiu and Koeppl estimate that the current Bitcoin scheme generates a flow welfare loss of 1.
Some authors see cryptocurrencies entering the mainstream markets as beneficial to the stability of the financial system. Dyhrberg explores the financial asset capabilities of Bitcoin in GARCH models and finds that it may be useful in risk management and ideal for risk-averse investors. Bianchi finds a similar relationship between returns on cryptocurrencies and commodities such as gold and energy, consistent with existing models in which trading is primarily driven by investor sentiment.
Forty-eight panel members answered this question. A large majority did not see cryptocurrencies as posing a threat to financial stability either now or in the next couple of years: A common argument of those who disagree with the statement is that the total value of cryptocurrencies is too small to be a systemic risk to financial stability.
Hence, cryptocurrencies do not seem to represent a threat to financial stability — for now. In their current state they seem largely innocuous for financial stability. Many of those who disagree with the statement believe that the financial system is largely insulated from developments in cryptocurrency markets.
As long as regulators treat it as a highly speculative investment, like so many other investments out there, then it should pose as much risk to the financial system as so many of these do. Those who agree with the statement stress the unprecedented uncertainties surrounding the future of cryptocurrencies. Some of those who disagree with the statement accept that cryptocurrencies may eventually threaten the stability of the financial system.
Cryptocurrencies would become attractive if central bank issued currencies became very unstable. Their widespread use in the financial system would be a result not a cause of instability. Bitcoin is currently classified as a commodity in the United States, so its trading is covered by the Commodity Exchange Act and overseen by the Commodity Futures Trading Commission. In common with other commodities such as gold or oil, there is no traditional management structure behind cryptocurrencies.
Bianchi ultimately sees holding Bitcoin as investing in the blockchain technology, since it shares more similarities with equity investment in a company than investments in traditional fiat currencies. The UK and other European Union EU governments are responding to concerns that cryptocurrencies are being used for money laundering and tax evasion. In the UK, the Treasury will bring regulation on cryptocurrencies in line with anti-money laundering and counter-terrorism financial legislation.
Anonymity will be lost as traders are forced to disclose their identities. The EU plan will require online cryptocurrency trading platforms to carry out due diligence on customers and report suspicious transactions.
If the current interest in cryptocurrencies is a precursor to their wider use as alternatives to the dollar, the pound, the euro and the yen, then this may threaten the monopoly on money creation that is held by policy-makers.
Central banks cannot print Bitcoins, so if the world switches away from fiat currencies, then they would be unable to print money to stimulate the economy. Conventional monetary policy would be ineffective, as would quantitative easing.
According to this argument, increased regulation of cryptocurrencies is needed so that central banks do not lose control of the money supply. There will always be boom and bust in cryptocurrencies, unlike for fiat currencies backed by central banks as lender of last resort. Supporters of cryptocurrencies argue that the lack of regulation has been instrumental in their successes to date, often presenting cryptocurrencies as the digital version of the nineteenth century gold standard when no attempt was made to equate the supply of money with demand.
A working paper [16] from the Bank of Finland in concludes that Bitcoin cannot be regulated and does not need to be regulated in any case.
Regulation is appropriate for monopolies run by management organisations, but not for monopolies run by protocols. Speaking at a press conference in October , ECB president Mario Draghi reasoned that cryptocurrencies are not mature enough to be considered for regulation, although they should be critically assessed for risk.
Forty-nine panel members answered this question. A clear majority wished to see greater regulation of cryptocurrencies: The most common reason for agreeing with the statement is a concern that the anonymity of cryptocurrencies promotes nefarious activities. So it would seem odd to let cryptocurrencies get around these restrictions. There is some support for increased regulatory oversight to preserve the effectiveness of monetary policy, although this is far from being a widespread belief among respondents.
They should not be perceived like that. Such currencies are created to avoid the supposed evil effects of government regulation on monetary and financial stability. The CFM surveys informs the public about the views held by prominent economists based in Europe on important macroeconomic and public policy questions. Some surveys focus specifically on the UK economy as the CFM is a UK research centre , but surveys can in principle focus on any macroeconomic question for any region.
The surveys shed light on the extent to which there is agreement or disagreement among these experts. An important motivation for the survey is to give a more comprehensive overview of the beliefs held by economists and in particular to include the views of those economists whose opinions are not frequently heard in public debates. Questions mainly focus on macroeconomic and public policy topics.
Home Surveys The experts About. Background Cryptocurrencies have been a staple of news headlines in Cryptocurrencies and the financial system In , a working paper [1] published by the European Central Bank ECB concluded that, in the current situation, virtual currency schemes: The ECB returned to the theme in a working paper in [2]: For the tasks of the ECB as regards monetary policy and price stability, financial stability, promoting the smooth operation of payment systems, and prudential supervision, the materialisation of risks depends on the volume of virtual currency issued, their connection to the real economy — including through supervised institutions involved with virtual currencies — their traded volume and user acceptance.
Contact us for more information. Cryptocurrencies and the financial system Participant Answer Confidence level Comment Michael McMahon University of Oxford Disagree Confident I think it is still too small and lacking in widespread ownership, especially among large investment groups, to be a serious risk to the overall financial system.
Crypto currencies are currently not a threat to the financial system but could very well become a serious concern in the near future if they become more important.
If that happens, I would expect financial regulation to be introduced and central banks to issue ecurrencies to compete with them. It is inconceivable that any major component of the financial system would remain unrelated in light of the obvious risks.
It depends on the volumes they end up representing relative to the size of the economy and the characteristics e. The financial system is still based on currencies issued by central banks. Their wide-spread use in the financial system would be a result not a cause of instability. At this point, Bitcoin and other cryptocurrencies remain a toy for a very narrow segment of investors and is detached from the financial system and the real economy. Despite the volatility and the bubble component of bitcoin valuation, it appears the number of bitcoin users and transactions are not large enough and sufficiently interconnected to represent a high risk of contagion.
Bitcoin bubble will deflate, and everyone will wonder why it inflated in the first place. The technology may turn out to be useful, if they can reduce the energy consumption. But the 'cryptocurrencies' have few attributes of money. The Bitcoin bubble is an example of a speculative bubble that can be explained rationally from an individual perspective but not from a collective perspective and is comparable with Tulpenmania.
Surely the valuation of Bitcoin reflects bubbly expectations. Such assets are a threat to financial stability provided i they are sufficiently bug and ii they are held by institutions that are sufficiently leveraged so that default is translated into losses in other parts of the financial system.
Both conditions are necessary for cryptocurrencies being a threat to financial stability. It is quite unlikely that they will be met in a couple of years. For the moment, crypto-currencies are simply a hype, similar to Dutch tulip bulbs; but as they are not linked to the banking system, there does not seem any immediate stability threat.
Bitcoin use is still too small to be a risk to the financial system at present. Although it is unlikely to present a systemic risk in the next two years, if its price contunues to rise at the present rate it could become a major risk to holders. The main concern is that its attraction is now largely as a speculative asset rather than as a vehicle currency or an inflation hedge. I doubt the situation would change much in two years. Though cryptocurrencies are growing rapidly, their size and the fact that they are yet to become mainstream limits the damage they could do to the financial system.
That will change, though not over the next two years. Bitcoin is inadequate as a currency. As an asset that provides some small benefits to its userschiefly anonymity and irreversibility of transactionsand that has a fairly limited and steady supply though, it is quite similar to gold. Even the arguments of some of its fans are eerily familiar to those that one has heard for decades about gold.
Like gold, it fluctuates wildly in value and it is subject to fads and manias. They seem too small at the moment to be a threat.
Also, were a cryptocurrency to implode, the impact would probably be less country-specific than, say, a sudden large decline in London house prices, and this might indicate a less dramatic impact on financial stability. Of course, exponential growth in cryptocurrencies could change this within a reasonable horizon so it would seem prudent for policy makers to keep an eye these currencies. Bitcoin is probably too small to matter much - huge fluctuations in value will impact criminals, the gullible and the risk lovers.
Cryptocurrencies are marginal now but their potential growth rate in total value is subject to diminishing returns, unless the appreciation race continues, but if it does it will attract more entry already happening and competition will slow down the appreciation race. Despite recent growth, the market cap of cryptocurrencies remains modest, compared to the size of 'conventional' financial markets. Hence, cryptocurrencies do not seem to represent a threat to financial stability--for now.
Hard to tell, this is radical uncertainty, nothing close in history as far as I can tell. The main new risk comes from the fact that most people don't understand the supply and the encryption process.