According to Morgan Stanley, Here is How the Rise of Cryptocurrencies Could Transform the Way in Which Central Banks Deal with Future Financial Crisis
Some central banks are exploring the new technologies and the use of virtual currencies, following a community interest in Bitcoin. The analysts at Morgan Stanley have examined the possible practical uses from the central banks for digital currencies.
Maybe their most interesting finding was that digital currencies could be utilized to enable deeper negative interest rates in the coming crisis, speaking financially.
Virtual currencies could permit to take an interest in rates in the broader negative territory
According to London, the central banks could utilize cryptocurrencies to allow them to more significant cut interest rates during the next period, mitigating the effects on any future financial crisis.
It is, according to one new report from Morgan Stanley, which dissects the possible central bank applications for digital currencies in the future.
The team of Morgan Stanley which was led by the strategist Sheena Shah has identified several areas of possible central bank use for crypto but made it clear that their research was not intended to suggest where they think a digital fiat currency could be implemented or all the reasons why.
Maybe one of the most attention-catching potential applications is in the area of monetary policy, where Morgan Stanley argues that digital currencies could permit central banks to take interest rates into some deeper negative territory than ever before, should they need to in the event of a significant financial crisis.
At the time of the last crisis, the global central banks have cut interest rates aggressively to protect customers, as well as the lenders from the worst effects of the crisis, like a central national bank of Sweden, Denmark, Japan, as well as the Eurozone, plugging rates into negative territory. Negative rates remain in a lot of states, even though no central bank has cut rates below -0.5%.
Several countries in Europe already have rates in negative territory.
Shah and her team suggest that the digital currencies could change that, saying theoretically that a monetary system which is 100% digital may enable deeper negative rates. This appeal only to individual banks, the team continued explaining.
They also explained freely circulating paper notes, and coins limits and the ability of the central banks to force some negative deposit rates. A digital version of cash could theoretically permit negative deposit rates to be charged on all of the money in circulation within any economy.
It can be a significant reassurance idea for all central banks. When the next financial crisis hits, with UBS Investment Bank arguing from 2017, the rates in leading economies could be forced to drop as low as -5% to mitigate its effects. Using some traditional monetary policy tools to do so would be virtually impossible, but the advent of central bank digital currencies may provide an outlet for such kind of possibility.
As with any other experimental idea, there are some probable drawbacks, with Morgan Stanley saying that deep and long-standing negative rates will eventually be problematic for banks.
Also, the central banks, according to them, would then have to go directly to currency users to implement monetary policy, reducing leverage in the system significantly, as well as cutting GDP growth.
The interests in crypto space from the central banks have also increased importantly over the last year and a half or so, with the likes of the Bank of England setting up some specifically focused task forces to examine the benefits of digital currencies. In Sweden, for instance, the Riksbank is considering the introduction of its independent digital currency, the eKrona.
Some central banks are more skeptical
Some central bankers are more skeptical about this. For example, last year, the head of the Bundesbank of Germany, named Jens Weidmann, warned that digital currencies such as Bitcoin have the power to make some financial crisis in the future even more devastating.
Morgan Stanley also said that he thinks the central banks are eventually going to create their own digital currencies to reassure average citizens that such coins are safe, as well as stable, but in doing so could also increase the risk of bank runs in the future crisis.