In trailblazing fashion, the Deputy Director of the International Monetary Fund (IMF) has come out with a report last week, urging central banks and government bodies to join the cryptocurrency revolution, or risk the demise of central bank and fiat authority. Deputy Director Dong He’s report warns central banks that interest reduction tactics may not be enough to define economic value as technological adoption spreads throughout the globe. In response, Dong He urges central banks to make ‘fiat currencies better’ in order to fend off ‘competitive pressure’ from crypto assets via issuing their own digital tokens to be exchanged in a peer to peer fashion. In other words, there’s no stopping the cryptocurrency revolution, and if you can’t beat em’, join em’.
Dong He’s sentiment echoes statements made by IMF director, Christine Lagarde, calling on governments to utilize blockhain technology to facilitate a more ‘even-handed’ global regulatory framework for cryptocurrency to combat serious market inequalities.
Whilst regulations seem to be the biggest pain point for ICO founders, investors and cryptocurrency enthusiasts, lets take a leaf from the IMF’s book and consider the long-term impact that consistent regulations and central bank technological adoption can have on us as investors, budding start-ups and economic entities.
With the widespread fragility of the market and the often shaky image that ICOs and the market have amongst investors, investor confidence is often at the core of investor concerns. Fraud, security breaches, associations to illicit activities and operational flops have given investors good reason to incite major mistrust in cryptocurrency.
A globally government-backed regulatory framework that utilizes digital ledger technology (DLT) to combat these concerns will not only boost investor confidence, but encourage newcomers to start investing in crypto-assets. By removing the battle field of ‘financial terrorism’ and money laundering in the crypto landscape, and allowing for greater institutional consensus, this will minimize the risk aspect of crypto-assets and facilitate a greater space for technological innovation and adoption. In short, if your government and global authorities are looking out for you and your crypto-assets, people will feel safer and will be more likely to invest.
Whilst some crypto-friendly countries have been quick on the uptake of the blockchain and encouraging regulatory frameworks for ICO start-ups, this has created regulatory arbitrage galore.
(What is regulatory arbitrage you might ask? Where firms exploit loopholes left by the uneven treatment of cryptocurrency regulation in order not to be caught under any unfavourable legislation).
As a result of arbitrage, budding crypto-specialists and rising stars are being poached from their country of origin to operate within these crypto-friendly nations, ensuring the stagnation of the crypto-community in less friendlier countries. Furthermore, ICOs are being channelled into countries such as Switzerland, Singapore and South Korea due to welcoming legislation, and as such have a monopoly over the ICO industry. A global regulatory framework and ‘even’ legislation will facilitate an equal playing field and the rise of a global industry, where different nations and ICO start-ups can get a foothold in the industry and compete with the crypto-boss nations. As such, global uptake of legislation will eradicate any unfair competitive advantage that discourages many people who believe in the power of their ideas to actualize their ICO dream.
The benefits of DLT are obvious – faster transactions with no middle man. An uptake of DLT by global institutions could help the global economy to run more efficiently, aided by smart-contract technology. Whilst Dubai, Singapore, UK, Estonia & Singapore have already begun DLT adoption for improving government services, internal structures and payment efficiency, the biggest winners from DLT could be developing countries.
Rather than financing loans from traditional banks and institutions who do not want to set up shop in developing and remote areas, many small-time business owners rely on microfinancing to get their businesses going. However, by granting people in developing countries with BTC/ETH wallets, this is a much easier, more cost-effective way of financing their activity, with much more accountability. As such, developing countries will be able to ‘leapfrog’ into the latest technological innovation and development. This will provide a platform for these countries to rise to economic equality by skipping the processes of technology that have been successfully implemented in developed countries, but haven’t yet passed through developing countries.
Now let’s bring it back to the big guns, the central banks. As outlined in Dong He’s report, if crypto-assets continue to rise, the ability of the central banks to control monetary policy via setting short-term interest for reserves decreases. In other words, in a seesaw effect, the higher the value of crypto-assets, this lowers the authority of the central bank. In order to navigate from a central bank blow-out, whereby central bank money is no longer a measure of economic value, banks must start issuing digital tokens to represent fiat or bank reserves.