While cryptocurrency has transformed the world of finance, it has created new headaches for regulators. Central banks across the world have the same problem: how are they supposed to deal with the explosion of new, unregulated cryptocurrencies like Bitcoin, Ethereum, and many others. As central banks are also tasked with protecting their economies and managing the finances and fiscal policies of the nation, how do they manage the unregulated rise of these cryptocurrencies?
In the following sections, we will see how central banks have tried to interject their authority, and how they have tried to regulate the rise of cryptocurrencies.
Why Central Banks Care About Bitcoin and Cryptos
Managing inflations, stabilizing the currency, and maintaining fiscal discipline are some of the most critical tasks central banks are assigned with. With unregulated and decentralized nature of cryptocurrencies, it worries central banks, for it puts their entire system under threat
Problems for central banks:
- Disruption: As cryptocurrencies start to become commonplace, central banks will have to grapple with controlling the money and interest rates like they have been used to.
- Maintaining Currency Integrity: Cryptocurrencies are not backed like traditional currency, and are not governed by monetary systems can pose threats traditional markets.
- Scams: With their ease of access and ease of masking a person’s identity, Cryptos make it incredibly easy to scam people and businesses.
WHAT DO CENTRAL BANKS DO AND HOW DO THEY REGULATE CRYPTOCURRENCIES?
Each central bank has its governing regulations around crypto. Some central bank are outright embracing it, while others are overly sceptical or wholly against it. Let’s explore how more central banks are responding:
THE US FEDERAL RESERVE
The US Federal Reserve has been outright concerned about the volatility of cryptocurrency. The US, is however, in the process of formulating regulations around it and are also exploring the concept of Central Bank Digital Currencies, or the ‘CBDC’.
Stablecoins: The Fed, in collaboration with other regulators within the country, has the mandate to track the activities of stablecoins and other cryptocurrencies to ensure that they do not pose a threat to the economy.
CBDC research: The Fed has been making attempts to put together a blueprint for a digital dollar but has not implemented anything yet.
THE EUROPEAN CENTRAL BANK (ECB)
The European Central Bank (ECB) has also been skeptical of cryptocurrencies, particularly the Bitcoin. Christine Legarde, the president of the ECB, has been pushing for countries with crypto assets to regulate them.
MiCA regulation: The Markets in Crypto Assets (MiCA) regulation is looking to introduce, in all member states of the EU, a regulation that focuses on comprehensive coverage of crypto exchanges and stablecoins.
CBDC Development: The ECB is also currently working on issuing a digital euro to retain block on the digital assets.
The People’s Bank of China (PBOC)
China has implemented significant restrictions on cryptocurrency by banning exchanges and mining activities. In parallel, the People’s Bank of China (PBOC) is spearheading the initiative to develop China’s digital yuan (CBDC).
Digital Yuan: China’s digital yuan is one of the world’s most sophisticated CBDCs and is already undergoing testing in several cities.
Crypto Crackdown: In spite of the CBDC’s advancements, the use of cryptocurrency remains effectively banned in China.
The Bank of England (BoE)
The Bank of England has shown interest in a digital counterpart—the digital pound. At the same time, the BoE is concerned with the adverse impacts of cryptocurrency on the economy and is in the process of creating rules to govern crypto assets.
Research on CBDC: The BoE is looking into the potential of a digital pound and how it can function in synergy with traditional currencies.
The Role of Central Banks in Crypto Regulation
Central Banks do not only take on the traditional role of a regulator; they can also take the lead in determining the future of cryptocurrency. Some of the functions they can take on include the following:
Regulatory Frameworks
Collaboration between central banks and governments is being made to develop regulations that control the utilization and trading of cryptocurrencies, such as:
- Granting licenses to exchanges to ensure that they operate within regulatory compliance.
- Creation of a handling policy on Initial Coin Offerings (ICOs) to curb deceitful activities through fraudulent legal systems.
Consumer Protection
Protecting users is a central focus for the crypto exchange offices as the central banks ensure compliance with KYC and Anti-Money Laundering regulations.
Central Bank Digital Currencies (CBDCs)
These initiatives are aimed at creating state-backed contenders to cryptocurrencies and enhancing the efficacy of financial transactions too. Central banks are developing CBDCs to keep the control over digital currencies.
With CBDCs, central banks are able to strengthen their control over the currency and give a digital face to cash, thereby enhancing the efficiency of transactions.
Monetary Policy and Financial Stability
Traditional financial stability and monetary control are the objectives of central banks. To ensure that their policies do not face disruption, the monitoring of the emergence of cryptocurrencies is becoming increasingly important as they are a significant threat to the monetary policy and financial systems.
The Evolution of Central Banks with Cryptocurrency
The increase adoption of cryptocurrency will likely drive central banks to put in more efforts in underlying policies that will manage these digital currencies. Such policies could highlight:
- Stricter Enforcement of Regulations: Greater compliance with reporting requirements will be enforced, especially in the areas of taxation and Anti-Money Laundering/KYC for crypto exchanges.
- International Collaboration: It is likely that central banks will coordinate their efforts to define rules on crypto, thereby working towards the stability of the economy.
- Greater Focus on Developing CBDCs: More central banks are likely to issue their own CBDCs, offering a state-backed alternative to decentralized cryptocurrencies.
Conclusion
In the management of cryptocurrencies, central banks are pivotal because they try to balance innovation and financial stability. While other aspects of a central bank’s function focuses on monetary policy, many are venturing into exploring Central Bank Digital Currencies (CBDCs) to allow governments to retain control over digital currencies.
Key Takeaways:
- CBDCs are slated to be of great importance in the future of crypto, offering government-backed digital currencies.
- More stringent policies are expected for crypto exchanges and AML/KYC compliance.
- Increased international cooperation will expand consistent and harmonized regulations for crypto.
- As the crypto market evolves, central banks will play a larger active role in regulation, ensuring the market is safe, stable, and secure.
FAQs: Central Banks and Their Role in Regulating Crypto
Q1: Can central banks regulate cryptocurrencies?
Of course! Central banks have the power to regulate crypto exchanges, enforce AML/KYC, and legislate frameworks for crypto activities.
Q2: What is a Central Bank Digital Currency (CBDC)?
A digital currency issued by the government is a CBDC, operating in parallel to other currencies, granting central banks control over a portion of the digital currency supply.
Q3: What concerns do central banks have with cryptocurrencies?
Central banks worry about losing control over monetary policy, financial stability, and the potential for illicit activity in the crypto space.
Q4: What is the impact of CBDCs on traditional cryptocurrencies?
CBDCs could serve as a government-sponsored substitute for cryptocurrencies, which may provide enhanced security and stability, albeit with greater central regulation over systems of digital currencies.
