[ad_1]
The unstoppable prices of bitcoin and other cryptocurrencies are validating the skeptics that exclude them as purely speculative bubbles, allowing a cesspool of illegal trade. The environmental cost of the massive consumption of energy needed to create bitcoins is another attack against it. Whatever happens to bitcoin, its underlying technology, called a blockchain, could transform the world of finance and the central banking system.
Central banks, including the US Federal Reserve, need to understand the implications of these generalized registry technologies and how to adapt to them. At the very least, there are impending changes on how central banks manage monetary policy and guarantee financial stability.
Unofficial cryptocurrencies are not going to replace central bank currencies. In addition, the Fed probably has little to worry about the dominance of the US financial markets and the dollar in global finance. However, even the Fed risks being overcome by rapid technological changes in the financial markets that could affect its core functions. Instead, it should seize the opportunity to lead the world's central banks by exploiting the powers of the new technology.
Blockchain is a distributed electronic register that can record transactions between two parties efficiently and in a verifiable and permanent manner. Each transaction is recorded on multiple electronic registers, is visible to anyone with a computer and can not be manipulated anywhere.
This process is the crux of the fascination of technology. Rather than having transactions verified by a central bank or a commercial bank, blockchain does so through the power of the people. Trust comes from the public verification of multiple agents in a network, all of which must be agreed.
The adoption of distributed register technology could transform modern financial systems, which are full of inefficiencies. Making payments, checking the different phases of a transaction and ensuring the purpose of these transactions takes time and money. Banks apply high rates to process domestic payments. International transactions are even worse, with the process that takes days and involves a strict tax.
New technology can make these processes more efficient, faster and cheaper. It could allow a group of banks to settle transactions without having to go through a trusted intermediary like a central bank. Unlike the public bitcoin registry, they could restrict access to the ledger to a network of participating banks. This would also make it easier to transfer funds between countries, at low cost and with immediate verification.
All this benefits the financial institutions and their clients, but could leave central banks a diminished role, making it more difficult to monitor and control domestic and cross-border financial transactions.
Some central banks, such as Singapore and Sweden, plan to release digital versions of their currencies to maintain their key role in national payment systems. Many emerging market economies, including China and Uruguay, have similar plans in the works. Their governments consider official digital currencies as a way to also expand financial inclusion.
The Fed is making an important effort to improve retail and interbank payment systems in the United States. But he remains skeptical that digital currencies can contribute to this effort. Attempts by Russia and Venezuela to issue their cryptocurrencies to circumvent financial sanctions have increased skepticism about the necessity and legitimacy of official digital currencies. This could be a lost opportunity.
The Fed and other central banks can implement technology to the benefit of their countries. Unlike paper currency, digital cash is potentially less expensive and easier to use and makes it more difficult to evade taxes or feed illegal activities. Central banks could also use technology to improve the speed and efficiency of payment systems, making it easier to make and verify payments between people, businesses and financial institutions.
Should central banks simply accommodate new cryptocurrencies and decentralized payment systems? This depends on the fact that the trust that individual citizens and financial institutions place in central banks can never be replaced by decentralized verification mechanisms. These alternatives could work well in normal times. But during times of stress on the financial markets, citizens' trust in decentralized payment systems could vanish, bringing financial systems and economies to a halt.
Central banks will have to innovate and adapt to changing financial technologies. But their biggest advantage is the trust that families and businesses have in them. In finance, people's power can do a lot, but it will not replace that trust. The Fed and other central banks should adopt new financial technologies to build on that trust and use them to make financial markets more efficient and stable.
The writer is a professor at Cornell University and a senior fellow at the Brookings Institution
