Cryptocurrencies and the institutional powers of central banks - My current work in progress
Last year, when Russia invaded Ukraine, I wrote some content and articles about Russia using or not using cryptocurrencies. At that time, many experts and analysts were discussing whether Russia would use cryptocurrencies to escape sanctions imposed by the EU, the USA, and others. One of my main points was that Russia as a government was mainly against cryptocurrencies for different reasons, such as distrust of political and economic freedom.
During the same year, the Russian central bank made a publication about cryptocurrencies. While many analysts in 2022 feared that the Russian government would use cryptocurrencies to avoid sanctions after the invasion of Ukraine, the Russian government and central bank made statements officially and between the rows that cryptocurrencies are bad since criminals use them would hurt the Russian economy and also provide individuals with more autonomy and freedom, something that the Putin's regime is not in favor of.
In the publication, the Russian central bank presents several arguments and opinions against cryptocurrencies in the provided text:
- The central bank suggests that cryptocurrencies have limited potential for settlement use. They view the rapid growth in cryptocurrency market value as being primarily driven by speculative demand and the expectation of further price increases, which they consider a sign of a market bubble.
- The central bank characterizes the cryptocurrency market as speculative, with prices driven by demand from new market participants rather than intrinsic value. This speculative nature is seen as a risk to investors.
- Cryptocurrency exchange rates are highly volatile, posing a risk to investors. The central bank also highlights the considerable number of frauds associated with cryptocurrency transactions, which could result in significant financial losses for individuals.
- The central bank expresses concerns that the proliferation of cryptocurrencies could impact the country's monetary policy sovereignty. They suggest that to control potential inflation caused by cryptocurrency use. The central bank might have to maintain a higher key interest rate, making credit less affordable for households and businesses.
- The spread of cryptocurrencies is seen as potentially detrimental to the Russian financial sector's ability to fund the real economy and support economic growth. This, in turn, is believed to reduce job opportunities and hinder household income growth.
- Cryptocurrencies are criticized for their use in unlawful activities such as money laundering, drug trafficking, and terrorist financing. The central bank asserts that the growth of cryptocurrencies creates a favorable environment for criminal operations, extortion, and bribery, posing challenges to global anti-money laundering and counter-financing of terrorism efforts.
- Cryptocurrency transactions' lack of transparency is mentioned as a challenge. The central bank notes that it's impossible to ensure full transparency of cryptocurrency transactions, making it difficult to track and regulate illicit activities.
- The text highlights a general trend toward tightening cryptocurrency regulations in many countries. While there's no single global approach, the trend suggests growing concerns about the potential risks associated with cryptocurrencies.
- The central bank emphasizes that the risks posed by cryptocurrencies are significantly higher in emerging market economies, including Russia, due to higher dollarization and lower financial literacy.
- The central bank advocates for developing central bank digital currencies (CBDCs) and faster payment systems as cryptocurrency alternatives. They believe these technologies can offer some of the advantages of cryptocurrencies while maintaining regulatory control and protecting investors.
In general, the Russian central bank's main arguments against cryptocurrencies revolve around their perceived risks to financial stability, speculative nature, potential to facilitate unlawful activities, and potential impact on monetary policy and the broader economy. They emphasize the need for stricter regulation and the development of alternative digital financial assets to mitigate these concerns.
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