Thinkpad: The Empire Strikes Back
We have seen a certain setback of empire – the established international monetary system – against so-called new forms of money.
The IMF has warned of the financial stability risks posed by cryptocurrencies. The Bank for International Settlements has warned that even central bank digital currencies, considered the more legitimate cousin of cryptocurrencies, present systemic risks.
The IMF, releasing part of its Global Financial Stability Report, estimates that the total market value of all crypto assets exceeded $ 2 trillion in September 2021, a ten-fold increase since early 2020. It suspects that emerging and developing markets are leading. soaring transaction volumes.
The fear in the IMF note is barely disguised. The fund talks about the risks associated with consumer protection. He referred to fears related to money laundering and the financing of terrorism, concerns expressed in many regions, including India.
He fears that “cryptoisation” may reduce the ability of central banks to effectively implement monetary policy. It can also present risks to financial stability.
Crypto believers will see this as the establishment protecting its territory. Unbelievers will say ‘we told you so.’ But this is clear – given the rapid advance in crypto, policymakers can no longer remain undecided.
Or as Yoda said in Star Wars – “Do or don’t. There is no trial. “
For a while, it was believed that central bank digital currencies could, at least in part, counter the need for cryptocurrency. A number of central banks, including India, are studying CBDCs.
Well, the Bank for International Settlements also burst that bubble. While the design and technology issues around CBDCs have been debated for some time, BIS has chosen to bring attention back to more real world concerns.
The BIS, citing central bank research papers, warned that central bank digital currencies could exacerbate bank runs. Government-backed digital currencies “could lead to higher deposit volatility and / or a significant, long-term reduction in customer deposits.”
Give it a try, but under strict controls it seemed like the advice of BIS.
In the midst of a rapidly changing age, we say to central banks: “May the force be with you”.
As central banks struggle (or join) with change, some of them have more bread and butter to worry about – inflation, growth, interest rate liquidity.
Here we return to a favorite theme (for the last time in a while, we promise) – the Reserve Bank of India’s dilemma over whether or not to start standardization.
The October monetary policy meeting is taking place this week and before that there were some interesting signals. Those obsessed with monetary policy would have noticed that the central bank set a higher threshold this week in its floating rate repo auctions. In simpler terms, what does this mean? This may (MAY) mean that the central bank is now signaling its discomfort with ultra-low short-term rates.
Citibank became the first major house to predict a 15 basis point hike in the repo rate this week.
We know the central bank faces tough choices. How difficult? This article by A Prasanna and Abhishek Upadhyay attempts to assess a “shadow policy rate” for India, which measures the impact of all unconventional monetary easing measures taken by the central bank.
The result of their analysis: “While the effective policy rate, i.e. the repo rate, was reduced by 155 basis points during the pandemic, the total accommodation estimated based on the decline in the real effective policy rate is 2.5 times that value, to 390 basis points.“
This explains why the decision to start reversing monetary policy is so critical but also so difficult.
In the end, that may not even be the central bank’s decision. TCA Srinivasa Raghavan, while likening us monetary policy watchers to those who bet on which crow would fly off the tree first, writes in the Business Standard that it is ultimately the government and not the RBI that will decide when standardize policy.
We are warning you of panting monetary policy coverage this week.
Until then, have a good weekend.