If you had bought a bitcoin on March 17, when Covid-19 was roiling financial markets, you would have more than doubled your money by July 27, when the value of bitcoin soared past US$10,000. Some other crypto assets such as Ethereum, Ripple and Monero have also been on a tear.
Stock markets have shot up as well, but their performance pales compared to the best performing crypto assets. Covid-19 has made crypto hot again.
Once the preserve of speculators and investment mavericks, crypto assets are moving higher up the radar screens of commercial banks, hedge funds and other institutional investors. In May, star fund manager Paul Tudor Jones revealed that he has been investing in bitcoin, which made many mainstream investors sit up.
But perhaps most interesting of all, some of the world’s central banks are warming to the world of crypto. While they have always watched the space with interest, the Covid-19 pandemic has created a greater sense of urgency for them to act.
In its June Annual Economic Report, the Bank for International Settlements (BIS) – the so-called “central banks of central banks” – had a chapter on central banks and payments in the digital era. It points to a greater willingness on the part of these institutions to not only embrace digital currencies, but also become more active participants.
Notably, the report points out that the balance of opinion among central bankers is shifting in favour of launching central bank digital currencies (CBDCs) at the retail level – that is, for the general public, something which they viewed with scepticism until as recently as last year. There are many motivations for this.
One is the growing proliferation of private digital currencies such as bitcoin and others. There is also a proposal by Facebook to launch a digital currency called Libra – a so-called “stablecoin”, which would not be hugely volatile because it would be pegged to major fiat currencies such as the US dollar and the euro.
These alternatives could threaten the hegemony of national currencies, which might, for example, find it hard to compete with Libra if it were extended to Facebook’s 2.6 billion users worldwide.
Despite running into regulatory roadblocks and being abandoned by many of the companies that had originally signed up as Facebook’s partners in the venture, Libra was a wake-up call for central banks.
The second motivation for some central banks to consider launching digital currencies is the dominance of the US dollar, which accounts for more than 60 per cent of bank reserves and more than 70 per cent of all transactions.
The “weaponisation” of the US dollar by the United States, for example, by restricting its use for cross-border transactions by countries under US sanctions, such as Iran and Venezuela, has galvanised some central banks to develop digital currencies that would enable their countries to work around such sanctions. This was almost certainly a major motivation for China to launch its own…
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