Can Cryptocurrency Replace Central Banks?

A look at the functioning of central banks

The task of monetary stabilization within a jurisdiction is that of the central bank. Central banks formulate all the rules and regulations which guide the working of national banks. Here are the crucial functions that central banks perform:

  • Monetary stability: Formulation and governance of monetary and exchange rate policy.
  • Financial stability and control: Supervision over policies and oversight of the market.
  • Management of policies: Holder of the foreign exchange reserves, and also a lender.
  • Provision for financial infrastructure: Provision of fiat currency, accounting and banking services, payment and settlement services within and between banks, and registry provision.

If you consider all of these functions that are performed by central banks, saying that cryptocurrencies will be able to perform them in a better manner would be completely incorrect. Here is why:

  • Monetary stability: Liquidity is a necessity to ensure stability. Unfortunately, cryptocurrencies are infamous as far as liquidity is concerned.
  • Financial stability and control: There is no regulation as far as protocols for cryptocurrencies are concerned.
  • Management of policies: Sadly, cryptocurrency protocols cannot accommodate policy management suitable for the national economy.
  • Provision for financial infrastructure: Cryptocurrencies have brought in state-of-the-art technology, payment models, and protocols.

It is evident that cryptocurrencies still cannot match up to central banks. As of now, the majority of crypto assets can render only a handful of functions that are offered by central banks which include non-regulated fiscal policy, money supply, and payment services. This is not surprising considering that it is just the emerging phase of Bitcoins. However, it is worth mentioning that central banks across the world are already taking the implications of crypto-assets into account. For instance, Central Bank Digital Currencies are being investigated and developed in some nations like China.

Although cryptocurrencies are not fighting for a spot against central banks as of now, it remains to be seen whether or not they will be eligible for the same place in the future. This is difficult to ascertain right now because there are many variables and assumptions that need to be considered. This shall comprise accounting for the effects of decentralization of finances across the global economics, the redefining of currencies, and whether Australian or Keynesian economics is followed. Moreover, this analysis will address the social and political aspects, including centralized governance, self-sovereign identity, privacy, and more, and also the effects they will have on the economy.

In spite of all of this, one thing holds true to replace central banks completely, crypto assets will have to first stand successfully against other monetary systems. Furthermore, they will have to ensure stability in price, finances, and payments.