Cryptocurrencies are making a lot of noise these days. Unfortunately, not all of it is positive and constructive. Narratives are being projected like Bitcoin as the global panacea that has triggered a decentralized movement for everything. Also, heightened security, scalability, and agility of the blockchain movement have made cryptocurrencies immensely popular. However, it is essential to draw a line between the truth and false. This blog will unveil the truth from the claim of replacing central banks through cryptocurrencies.
What Do Central Banks Do?
To understand how the traditional banking system works, we first need to understand what central banks do. Central banks bring in financial stability in a specific jurisdiction. They formulate the protocol under which all national banks should operate. Also, there is the Bank of International Settlement (BIS), which is essentially the central bank of all central banks. Its objective is to help central banks attain monetary stability and foster international cooperation. Thus, BIS plays the same role for central banks that central banks play for regional and private banks.
How Do The Central Banks Operate?
Central banks carry out the following functions.
They help in establishing and regulating fiscal and exchange rate policies.
They provide valuable market oversight and prudential policy supervision.
Central banks help in managing policies for reserves holders, foreign exchange intervention, and lender’s last resort.
They provide banking and accounting services apart from provisions for fiat currency and registry.
The Role of Cryptocurrencies As Banking Option
However, what is important to ask is if cryptocurrencies can carry out the central bank’s role with better efficiency. If that is true, replacing central banks through cryptocurrencies could soon become a reality. Let’s see if that is possible.
Liquidity is necessary for stability, and the entire world knows how illiquid are cryptocurrencies. For example, gold has a $7 trillion market, and the value of forex is ten times that of gold. However, the entire crypto industry is worth only $250 billion.
Currently, there are no regulatory oversights embedded into crypto protocols.
There is no policy management that is suitable for a national economy embedded into crypto protocols.
Cryptocurrencies have ushered in new technology infrastructure, payment models, and protocol stack.
Comparison Between Central Banks And Cryptocurrencies
It is evident that cryptocurrencies are nowhere near central banks currently. Most cryptocurrencies offer only some of the functions of central banks, which include an unpegged fiscal policy that is fixed initially but can be changed later by miners. They also include payment services and money supply. It isn’t surprising considering the nascent stage that cryptocurrencies are in at the moment. However, many central banks around the world have already gotten in touch with cryptocurrency advisors to tap the applications of digital currencies. China is the latest example of this where its central bank is researching and developing Central Bank Digital Currencies.
Although the odds are heavily skewed and tilted in favor of central banks, they will surely face fierce competition from cryptocurrencies in the future. However, that analysis would need to take into account questions of higher socio-political significance on centralized governance, self-sovereign identity, privacy, and their combined effects on the economy. Replacing central banks through cryptocurrencies wouldn’t become a reality until they start competing as alternative financial systems, thereby ensuring financial stability.