Viewpoint: Chief Economist

Crypto Challenge

  • 06 July 2021
  • 15min read

Key points

Key data releases last week did not move the bond market: there is still too much “noise”, particularly in the US because of the magnitude of the fiscal push. “Policy thinking” on crypto currencies is accelerating, highlighting the deep ramifications even their most “prudent” forms – such as digital currencies issued by central banks – would have on the entire financial system.


Despite the release of some key economic variables last week – job creation and wage growth in the US, inflation in the Euro area – the bond market was non-plussed. The acceleration in American wages still needs to be tested for the absorption of the fiscal push, and the Euro area is at least for now escaping much of the impact of the “reopening catch-up” and “microchip shortage” with are behind the current price spike in the US. While we continue to wait for more conclusive data, we can devote more energy to exploring long-term issues.

We have noticed an acceleration in “policy thinking” around crypto currencies lately, epitomized by the Bank for International Settlements (BIS) annual economic report. The discussion on digital currencies is often obscured by political considerations around the “control of money”. We think the arguments in favour of substituting private digital currencies to the current monetary system dominated by independent central banks in order to better protect the “value of money” are weak and vastly offset by the threats to financial stability.  Still, the BIS makes the point quite eloquently that the current payment system is expensive. The “status quo” is probably not tenable and this explains why central banks are eager to develop their own digital offer.

Digital currencies are first and foremost a technological innovation which can be harnessed to promote inclusiveness and make the financial system more efficient without the most glaring financial stability risks if central banks get involved. However, even if those Central Bank Digital Currencies (CBDCs) win against private ones, their development could profoundly change the structure of the financial system. Under certain forms, fully-fledged CBDCs could “devitalize” banking, accelerating the trend towards the disintermediation of investment.

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