The Future of Cryptocurrency and Currency Trilemma Management in Digital Era: Central Bank Policy Perspectives

Transcription

1 The Future of Cryptocurrency and Currency Trilemma Management in Digital Era: Central Bank Policy Perspectives Dr. Solikin M. Juhro Bank Indonesia ADFIMI International Development Forum Istanbul, September

2 Abstract There is growing interest in cryptocurrencies. With their characteristics that constitute elements of money and technology, the prospect of using cryptocurrencies will be even higher in the future. These developments expose central banks to a problem of currency trilemma, constituting three policy concerns, namely opportunity to reap the maximum benefit of technological development, stability of financial system, and credibility of domestic currency. To optimally manage this currency trilemma, central banks should closely preemptively pay attention to the ties linking cryptocurrency and proper regulation environment, and thus strike the balance between nurturing innovation, preserving stability, and gaining currency credibility. Several policy measures can be highly considered, namely: (i) maintaining public trust in fiat currency by providing stable unit of account and attractive mean of exchange, while stay in the game in digital era; (ii) establishing more efficient payment system by developing payment infrastructure; and (iii) setting proper regulation, opening up sound competition to new players and technology, while maintaining traditional financial sector practices 2

3 Outline Industrial Revolution 4.0: Transforming Innovations Cryptocurrency: Developments and Regulations Central Bank Policy Perspectives & Currency Trilemma Management Closing 2

4 4IR: Transforming Innovation The brink of a technological revolution fundamentally alter the way we live The Fourth Industrial Revolution (4IR) The automation & data exchange in manufacturing technologies that includes artificial intelligence (AI), cyberphysical systems, internet of things (IoT), cloud computing, cognitive computing, smart technologies Driving Factors: GLOBALIZATION TECH.PROGRESS/ DIGITALIZATION Technological Progress: Industrial Revolution 4.0 Transforming various aspect, particularly social and economy aspects Exponential changes, supported by extraordinary technological capabilities and integration of various disciplines A catalyst for innovation, growth, and social prosperity vs. disruptive effects 4

5 DLT Marks the Future of Money & Economy The future of money and economy will be marked by innovation, new technologies and increased competition across borders Distributed ledger technology (DLT) potential leap DLT refers to the protocols and supporting infrastructure that allow computes in different locations to propose & validate transactions and update records in synchronized way across a network. DLT offered a solution for the double spending problem. Cryptocurrencies: A new form of currency using DLT What constitutes good money, and where do cryptocurrencies fit in? Source: Bech & Garratt (2017) found in BIS (March, 2018) 5

6 Cryptocurrencies: Definition & Characteristics Cryptocurrencies constitute both money and technology at the same time... There are some important differences between digital, virtual and cryptocurrencies In discussing cryptocurrency and money, we need to differentiate between: A virtual currency is a digital representation of value, not issued by a central bank, credit institution or e-money institution, which in some circumstances can be used as an alternative to money A digital currency is any currency stored and transferred electronically (e.g., PayPal); and A cryptocurrency is a digital and virtual currency protected by cryptography Privately-issued cryptocurrency (CBCC Retail) VS Central bank-issued cryptocurrency (CBCC Wholesale) If they can co-exist, Privately-issued cryptocurrencies can circulate concurrently with legal tender in the form of a central bank-issued cryptocurrency A central bank-issued cryptocurrency will most likely have to compete with private-sector alternatives Credible money will continue to arise from central bank decisions, taken in the light of day and in the public interest. (Carstens, 2018) 6

7 Cryptocurrencies: Definition and Characteristics CRYPTOCURRENCY DEFINITION BY INTERNATIONAL INSTITUTIONS (2015) - CC has several, but not all characteristics of currency (2012) - VC/CC is a type of digital money, not regulated, which is controlled by the developer (2016) - DC or Criptocurrency as an electronic form of money with distributed ledger and decentralized features No Regulator P2P Pseudonimiety CRYPTOCURRENCY RISKS CHARACTERISTICS Not issued by authorities (monetary authorities) No regulations regarding its implementation, incl. regulations of cryptocurrency algorithm management Not follow best practice or internationalal standard to ensure the implementation security and efficiency No legal certainty Transactions without formal intermediaries No guarantee of settlement certainty No legal ownership status of currencies The identity and transaction are hidden or cannot be identified, so that can be used for illegal activities (2016) CC is issued by private developers, denominated in separate units outside the fiat money denomination No Central Authority No central entity subject of regulation No parties that take in charge in management Issuance and price are determined by market (S/D) No consumer protection 7

8 Cryptocurrency Market Developments Market Capitalization: Yearly Overview (Top 50 Coins) Peak Exponential & volatile developments The total market capitalization of virtual currencies have reached its peak US$ 828 billion, until now, in which the greatest capitalization, per Aug 20, is Bitcoin (51.7%) Market capitalization and trading volume have dipped substantially since its peak, and seems to be on a downtrend toward levels one year ago. Market volatility remains very high Source: coinmarketcap.com; coingecko (2018) 8

9 Bright Future for Cryptocurrencies? Bitcoin and some other cryprocurrencie ownership and adoption could be about to rise... 42% of the top 50 universities around the world offer at least one class on blockchain or cryptocurrency, and 22% offer more than one. 9

10 Regulation Mapping Most cryptocurrencies, are not backed by any central bank/government... The visualization guideline of countries crypto asset regulation Global regulators View on bitcoin: Depending on the country. Policy on exchanges: No global regulator exists at the moment. ASIA Source: Data compiled by Bloomberg (Feb, 2018) Japan playing a dominant role after introduced a licensing system for digital-asset exchanges Hong Kong adopted a more hands-off approach while at the same time warning crypto platforms Singapore s deputy prime minister has called cryptocurrencies an experiment, Taiwan authorities are taking a wait-and-see approach China, once a global hub for cryptocurrency trading, now leads the world in cracking down. South Korea is also tightening oversight as it works on a comprehensive set of regulations India doesn t consider digital currencies to be legal tender, will take measures to curb their use Philippines plans to roll out rules for ICOs 10

11 Why should Central Bank be Concerned? Crypto Asset Prospectus: Double-edged Sword PROS* Expanding monetary policy instruments Recording (more) accurately the economic transaction Changing concepts of circulating money in the economy. BoE study: The CBCC issuance of 30% England GDP increases steady state level by 3% Increasing cash management efficiency, due to the reduction of money procurement, distribution and destruction cost Improving financial inclusion with easier and wider access range Increasing the faster and safer payment options because they are not in the banknotes forms Technology (S) Money (D) The digitized world has produced a number of advantages for the financial sector and society as a whole, but the increasing dependence on computers has also created a new threat in the form of cyber attacks. CONS Potential risks of cryptocurrencies issued by privates (CBCC retail) on monetary policy Mediumofexchange: Low risk if it is only a medium of exchange Store of value: financial stability risk if it is also a store of value Unit of account: monetary and financial stability risk if it is also a payment tool New risks: cyber, volatility, liquidity Source: Steven (2017); Koevoet (2017) & Mandeng (2018) Challenges for policy makers: Understanding risks and implications of crypto assets 11

12 Why should Central Bank be Concerned? Significant implications, especially on financial system stability, consumer protection, and AML-CFT Main Issues Risks/Consideration Implications CC as money/ payment tool CC as commodity Not issued by authorities (monetary authorities) Not have a clear legal status No guarantees for exchanging to fiat money; high price volatility Operational risk: system and ecosystem security have not proven Settlement risk: customers make transactions through virtual environment; there is no guarantee of settlement Not have underlying assets, only based on mathematical algorithmm High price volatility & depends on supply and demand No administrator whose responsible to manage the commodity Utilized as regulatory arbitrage where transactions are carried out in other countries with more accommodative provisions Financial System Stability Consumer Protection AML-CFT* *AML-CFT: Anti-Money Laundering- Combating the Funding of Terorism 12

13 Why should Central Bank be Concerned? Central Bank should also Monitor E-money & Understanding Their Implications... Q: Whether or not to issue its own digital currency that can be used by the general public to make payments? SCENARIO 1 SCENARIO 2 SCENARIO 3 A world of fiat money with several privately cryptocurrencies (i.e., the world right now) A word where cash has been officially abolished, a central bank-issued cryptocurrency is sole legal tender and all privately-issued cryptocurrency have withered away because of competition with the CBCC An intermediate scenario of cash, privatelyissued cryptocurrencies and the CBCC (+) CBCC is both legal tender and physical protocol (+) CB would need a protocol whereby it could easily adjust the money supply (+) CC will receive more patronage from institutional investors (+) central bank liability is assumed to be risk free, irredeemable, and legal tender (+) from CB s perspective, CBCC can be viewed as just another denomination of its currency whose existence in no way inhibits the conduct of monetary policy Source: SEACEN Research and Training Center 13

14 A Policy Perspective: Currency Trilemma Management Crypto Cryptocurrency s characteristics Technology-driven protocol, not D/S; speculative motive No backup assets No regulation Inherent volatility What constitutes a credible money? Standard text book of money function: unit of account, means of exchange, and store of value Institutional/asset backup Representing public trust CREDIBILITY Currency Environment of digital era Technology and innovation: benefit on efficiency and growth Rise of block chain technology Implicit endorsement: literacy and regulatory concerns Currency Trilemma (IN)STABILITY OPPORTUNITY Striking the balance: preserving stability, nurturing innovation, and gaining credibility/public trust Necessary: Maintaining public trust in fiat currency by providing stable unit of account and attractive mean of exchange, while stay in the game in digital era Sufficient: - Establishing more efficient payment system by developing payment infrastructure - Setting proper regulation, opening up sound competition to new players and technology, while maintaining traditional financial sector practices. 14

15 Bank Indonesia Policy Bank Indonesia regulations related to virtual/cryptocurrencies Act No. 7/2011 on The Currency Currency shall be money of which issued by the Republic of Indonesia and every transaction that has the purpose of payment, or other obligations which need to be fulfilled with money, or other financial transactions conducted within the territory of the Republic of Indonesia, has to be fulfilled with Rupiah. Bank Indonesia Regulation No. 17/3/PBI/2015 Every transactions in Indonesia has to be fulfilled with Rupiah Bank Indonesia Regulation No. 18/40/PBI/2016 Payment system service providers are prohibited to conduct payment transaction process with virtual/cryptocurrency (Article 34) Bank Indonesia Regulation No. 19/12/PBI/2017 FP Fintech providers are prohibited to conduct payment system activities with virtual/cryptocurrency (Article 8) Bank Indonesia also continuingly pursues improvement on security aspect in the industry by developing the framework of cyber resilience. 15

16 Bank Indonesia Policy Bank Indonesia policy stances. (press release at January 13, 2018) BI POLICY STANCE TOWARD CRYPTOCURRENCIES PROHIBITED The use of Virtual Currency/CC as a payment instrument in Indonesia Payment system service providers & financial technology providers, both banks and institution other that banks, to process payment transaction using VC/CC Context: Act on the currency, Bank Indonesia Regulation (on payment system service providers & fintech providers) WARNING The public is advised not to buy/sell/trade VC/CC (investment) Warning context: AML/CFT, consumer protection, financial system stability Notes: Digital money; i.e: electronic money, voucher/reward point/loyalty etc., does not being an object of BI Policy Stance (release at January 2018) 16

17 Bank Indonesia Policy Sufficient condition, reaping the maximum benefits of digital economy GOAL Developing a framework of payment system for digital economy and finance to support financial inclusion, particularly for SMEs, and national economy. 1 Developing National Payment Gateway To integrate payment instruments, delivery channels, and transactions through interconnection and interoperability of domestic transaction to be more efficient and faster using any instrument in any financial institution. 2 3 Accelerating Electronification in the Economy Electronification for social transfer, government operation, mode of transportation, remittance, billing payment, and invoice. Developing Fintech in the area of Payment System Promoting Fintech innovation while at the same time taking into account consumer protection and prudential principles: Regulatory Sandbox. Coordination with government and FSA to develop e-commerce and Fintech as digital market for SMEs financing. 17

18 Closing There is growing interest in cryptocurrencies. With their characteristics that constitute elements of "money" and "technology", the prospect of using cryptocurrencies will be even higher in the future. These new generation of e- money are raising important questions for central banks, the financial system and the economy. Central banking practices and the idea of new money will change a lot in the future due to new innovations, improving public literacy, and regulatory concerns. These developments expose central banks to a problem of currency trilemma, constituting three policy concerns, namely opportunity to reap the maximum benefit of technological development, stability of financial system, and credibility of domestic currency. To optimally manage this currency trilemma, central banks should closely preemptively pay attention to the ties linking cryptocurrency and proper regulation environment. In this case, central banks should strike the balance between nurturing innovation, preserving stability, and gaining currency credibility. Central banks, thus, acting by themselves and/or in coordination with other financial authorities may also need to act, given their roles in safeguarding monetary and financial system stability. Bank Indonesia currently is in the early stage of reviewing on the feasibility to use the digital currency. At a broader perspective, to reap the maximum benefits of digital economy, Bank Indonesia is strengthening payment infrastructure and developing a framework of payment system for digital economy and finance to support financial inclusion, particularly for SMEs, and national economy. 18

19 The Future of Criptocurrency and Currency Trilemma Management in Digital Era: Central Bank PolicyPerspectives Dr. Solikin M. Juhro Bank Indonesia ADFIMI International Development Forum Istanbul, September