Bitcoin and the City

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Question 1: Do you agree that cryptocurrencies are currently a threat to the stability of the financial system, or can be expected to become a threat in the next couple of years?

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Question 2: Do you agree that the regulatory oversight of cryptocurrencies needs to be increased?

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Summary

The majority of leading European economists do not believe that cryptocurrencies are a threat to the stability of the financial system, either now or in the next couple of years, according to the latest Centre for Macroeconomics and CEPR survey. Mainstream financial markets are thought to be suitably isolated from developments in Bitcoin, the largest cryptocurrency, which, in any case, has a market capitalisation that is small relative to the size of the economy. But a majority of panel members are in favour of greater regulatory oversight, primarily because of concerns that the anonymity and opacity of cryptocurrencies facilitate tax evasion and other criminal activities. There is only limited support for regulating cryptocurrencies to preserve the effectiveness of monetary policy.

Background

Cryptocurrencies have been a staple of news headlines in 2017. As the price of one Bitcoin has risen 12-fold in sterling terms during the course of 2017, the number of Google searches for Bitcoin has increased 14-fold. There are now more than 2,000 cryptocurrency ATMs across the globe, with the United States (1,107), Canada (293), the UK (97) and Austria (91) leading the way.

A great deal has been written about Bitcoin, in many cases speculating on whether there is a bubble in its price and what might happen if and when the bubble bursts. A Google search for ‘Bitcoin bubble’ produces 17.8 million page hits. This survey eschews the bubble question and asks instead whether cryptocurrencies are a threat to the financial system and therefore deserving of greater regulatory oversight by policy-makers.

Cryptocurrencies and the financial system

In 2012, a working paper [1] published by the European Central Bank (ECB) concluded that, in the current situation, virtual currency schemes:

  • do not pose a risk to price stability, provided that money creation continues to stay at a low level;
  • tend to be inherently unstable, but cannot jeopardise financial stability, owing to their limited connection with the real economy, their low volume traded and a lack of wider user acceptance.

The ECB returned to the theme in a working paper in 2015 [2]:

  • For the tasks of the ECB as regards monetary policy and price stability, financial stability, promoting the smooth operation of payment systems, and prudential supervision, the materialisation of risks depends on the volume of virtual currency issued, their connection to the real economy – including through supervised institutions involved with virtual currencies – their traded volume and user acceptance. For the moment, all these risk drivers have remained low, which implies that there is no material risk for any of the central bank’s tasks as yet.

The main argument of the ECB and other central banks [3] is that cryptocurrencies are too small and too detached from other financial markets to be a systemic risk. As reported by the Wall Street Journal, the top 1,000 or so cryptocurrencies are worth $350 billion, less than Facebook Inc., and if they all went to zero tomorrow, banks would barely notice. [4]

One reason for cryptocurrencies remaining small is current technological constraints, which show up as high transaction fees and limit the use of cryptocurrencies as a medium of exchange. [5] The maximum seven transactions per second capacity of Bitcoin compares with a peak processing capacity of 47,000 transactions per second at Visa. Chiu and Koeppl (2017) estimate that the current Bitcoin scheme generates a flow welfare loss of 1.4% of consumption in a general equilibrium monetary model. [6]

A less sanguine view is that Bitcoin’s increasing market capitalisation and trading volumes reflect accelerating professionalisation of investment in cryptocurrency markets, leading to a disruption of financial markets that poses risks for the stability of prices and the financial system.

In the latest evidence that cryptocurrencies are pushing deeper into the mainstream, recent months have seen asset management company Tobam launching Europe’s first Bitcoin mutual fund and US regulators giving the green light for two of the world’s largest futures exchanges – the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE) – to list futures contracts on Bitcoin. [7,8]

Concerns about bearing the risks of uncovered short selling in cryptocurrency markets have been expressed by the Futures Industry Association, a lobby group representing some of the world’s largest brokers, including Goldman Sachs, Morgan Stanley, J.P. Morgan and Citigroup. [9]

Some authors see cryptocurrencies entering the mainstream markets as beneficial to the stability of the financial system. Dyhrberg (2016) explores the financial asset capabilities of Bitcoin in GARCH models and finds that it may be useful in risk management and ideal for risk-averse investors. [10] She classifies Bitcoin as somewhere between gold and the US dollar in terms of its use as a medium of exchange and a store of value.

Bianchi (2017) finds a similar relationship between returns on cryptocurrencies and commodities such as gold and energy, consistent with existing models in which trading is primarily driven by investor sentiment. [11]

Question 1: Do you agree that cryptocurrencies are currently a threat to the stability of the financial system, or can be expected to become a threat in the next couple of years?

Forty-eight panel members answered this question. A large majority did not see cryptocurrencies as posing a threat to financial stability either now or in the next couple of years: 73% of respondents either disagree or strongly disagree with the statement; 21% either agree or strongly agree; and 6% neither agree nor disagree. Those who disagree are the most confident in their assessments, raising the proportion of panel members disagreeing or strongly disagreeing to 75% when responses are weighted by self-reported confidence.

A common argument of those who disagree with the statement is that the total value of cryptocurrencies is too small to be a systemic risk to financial stability. As Robert Kollman (Université Libre de Bruxelles) puts it, ‘Despite recent growth, the market cap of cryptocurrencies remains modest, compared to the size of “conventional” financial markets. Hence, cryptocurrencies do not seem to represent a threat to financial stability – for now.’

Jordi Galí (Universitat Pompeu Fabra) is similarly relaxed, neither agreeing or disagreeing with the statement, while contending that ‘It depends on the volumes they end up representing relative to the size of the economy and the characteristics (e.g. degree of leverage) of their holders. In their current state they seem largely innocuous for financial stability.’

Many of those who disagree with the statement believe that the financial system is largely insulated from developments in cryptocurrency markets. Michael McMahon (University of Oxford) thinks cryptocurrencies are ‘still too small and lacking in widespread ownership, especially among large investment groups, to be a serious risk to the overall financial system’; and Ethan Ilzetzki (London School of Economics, LSE) asserts that at this point ‘Bitcoin and other cryptocurrencies remain a toy for a very narrow segment of investors and are detached from the financial system and the real economy.’

A note of caution is sounded by Wouter den Haan (LSE), who in agreeing with the statement recalls that ‘The LTCM crisis has taught us that it takes just one key financial institution taking on large risky positions to put the system at risk.’

In justifying why they disagree with the statement, Richard Portes (London Business School) argues that ‘cryptocurrencies have few attributes of money’; and Ricardo Reis (LSE) points out that ‘Bitcoin is inadequate as a currency.’ The latter sees cryptocurrencies as no more a threat to financial stability than gold, saying that ‘Like gold, [Bitcoin] fluctuates wildly in value and it is subject to fads and manias. As long as regulators treat it as a highly speculative investment, like so many other investments out there, then it should pose as much risk to the financial system as so many of these do.’

Those who agree with the statement stress the unprecedented uncertainties surrounding the future of cryptocurrencies. Etienne Wasmer (Sciences Po, Paris) worries that ‘this is radical uncertainty, nothing close in history as far as I can tell’, while Stefan Gerlach (BSI Bank, Switzerland) warns that ‘Cryptocurrencies are currently not a threat to the financial system but could very well become a serious concern in the near future if they become more important.’

Some of those who disagree with the statement accept that cryptocurrencies may eventually threaten the stability of the financial system. While David Smith (Sunday Times) believes that cryptocurrencies only have limited ability to damage the financial system now, ‘That will change, though not over the next two years.’ Tony Yates (longandvariable blog) is similarly unconvinced of the current threat but suggests that, ‘I doubt the situation would change much in two years. Perhaps in 10.’

Jürgen von Hagen (Universität Bonn) has a different reason for strongly disagreeing with the statement, maintaining that causation may run from instabilities in the financial system to the use of cryptocurrencies rather than the other way around. He does not consider cryptocurrencies as a threat to stability, writing ‘The financial system is still based on currencies issued by central banks. Cryptocurrencies would become attractive if central bank issued currencies became very unstable. Their widespread use in the financial system would be a result not a cause of instability.’

Cryptocurrencies and economic policy

Bitcoin is currently classified as a commodity in the United States, so its trading is covered by the Commodity Exchange Act and overseen by the Commodity Futures Trading Commission. In common with other commodities such as gold or oil, there is no traditional management structure behind cryptocurrencies. They are typically launched through an ‘initial coin offering’ (ICO), which allows investors to purchase cryptocurrencies in advance, an arrangement similar in spirit to an initial public offering (IPO) but bypassing the rigorous capital-raising process required by venture capitalists or financial intermediaries.

Bianchi (2017) ultimately sees holding Bitcoin as investing in the blockchain technology, since it shares more similarities with equity investment in a company than investments in traditional fiat currencies. [11]

The UK and other European Union (EU) governments are responding to concerns that cryptocurrencies are being used for money laundering and tax evasion. In the UK, the Treasury will bring regulation on cryptocurrencies in line with anti-money laundering and counter-terrorism financial legislation. Anonymity will be lost as traders are forced to disclose their identities.

The EU plan will require online cryptocurrency trading platforms to carry out due diligence on customers and report suspicious transactions. [12] In her speech at the conference to mark 20 years of independence of the Bank of England, Christine Lagarde proposed the International Monetary Fund as the ideal platform to coordinate regulatory policy on new models of financial intermediation. [13]

If the current interest in cryptocurrencies is a precursor to their wider use as alternatives to the dollar, the pound, the euro and the yen, then this may threaten the monopoly on money creation that is held by policy-makers. Central banks cannot print Bitcoins, so if the world switches away from fiat currencies, then they would be unable to print money to stimulate the economy. Conventional monetary policy would be ineffective, as would quantitative easing.

According to this argument, increased regulation of cryptocurrencies is needed so that central banks do not lose control of the money supply. Tony Yates [14], who was formerly a Bank of England economist, as well as former president of the Bundesbank Axel Weber [15] doubt that this would a problem, arguing instead that cryptocurrencies will fail to take off because they lack any ‘lender of last resort’ function. There will always be boom and bust in cryptocurrencies, unlike for fiat currencies backed by central banks as lender of last resort.

Supporters of cryptocurrencies argue that the lack of regulation has been instrumental in their successes to date, often presenting cryptocurrencies as the digital version of the nineteenth century gold standard when no attempt was made to equate the supply of money with demand.

A working paper [16] from the Bank of Finland in 2017 concludes that Bitcoin cannot be regulated and does not need to be regulated in any case. Regulation is appropriate for monopolies run by management organisations, but not for monopolies run by protocols. Speaking at a press conference in October 2017, ECB president Mario Draghi reasoned that cryptocurrencies are not mature enough to be considered for regulation, although they should be critically assessed for risk. [17]

Question 2: Do you agree that the regulatory oversight of cryptocurrencies needs to be increased?

Forty-nine panel members answered this question. A clear majority wished to see greater regulation of cryptocurrencies: 61% of respondents either agree or strongly agree with the statement; 31% either disagree or strongly disagree; and 8% neither agree nor disagree. Those who agree are most confident in their assessments, raising the proportion of panel members agreeing or strongly agreeing to 73% and decreasing the proportion disagreeing or strongly disagreeing to 29% when responses are weighted by self-reported confidence.

The most common reason for agreeing with the statement is a concern that the anonymity of cryptocurrencies promotes nefarious activities. Fabrizio Coricelli (Paris School of Economics) is worried about the ‘likely use of Bitcoin for recycling revenues from illegal transactions’; while Franck Portier (University College London) advocates greater oversight of cryptocurrencies because ‘as cash, they are used for tax evasion and criminal activities.’

For Nicholas Oulton (LSE), cryptocurrencies should be subject to additional supervision because ‘One strand of current policy is to crack down on money laundering and tax evasion through tax havens. So it would seem odd to let cryptocurrencies get around these restrictions.’

There is some support for increased regulatory oversight to preserve the effectiveness of monetary policy, although this is far from being a widespread belief among respondents. Sylvester Eijffinger (Tilburg University) agrees with the statement because he sees cryptocurrencies as ‘undermining the monopoly of money creation by the central banks and [leading to] the ineffectiveness of conventional and unconventional monetary policy.’

But Pietro Reichlin (Università LUISS G. Carli) disagrees, arguing that the power of monetary policy may not be affected by cryptocurrencies because ‘Central Banks (or governments) are the only authorities able to provide the fiscal backing required to offer safe assets and generate lender of last resort type of policies.’ He concludes that more oversight is unnecessary ‘as long as Bitcoin holders are aware of what [the] risks are.’

Thorsten Beck (Cass Business School) also disagrees with the statement, but recommends a cautious approach in which ‘regulators should carefully watch the development’ and there is ‘careful monitoring of “this space”.’

A different argument for disagreeing with the statement is provided by Jon Hassler (Stockholm University), who is worried that ‘there is a risk that regulatory oversight may create a perception that cryptocurrencies are legitimate investments. They should not be perceived like that.’

Jürgen von Hagen (Universität Bonn) goes further in defending cryptocurrencies by asking ‘What is the point of a privately issued currency regulated by the government? Such currencies are created to avoid the supposed evil effects of government regulation on monetary and financial stability.’ Francesco Lippi (Università di Sassari) doubts that regulation would be possible in any case, concluding that ‘None of the arguments… proves more regulation is desirable, nor that it would be effective.’

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[1] Virtual currency schemes, https://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf

[2] Virtual currency schemes – a further analysis, https://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemesen.pdf

[3] Bitcoin price soars above $11,000 as central bankers seek to calm fears, https://www.theguardian.com/technology/2017/nov/29/bitcoin-world-economy-bank-of-england-jon-cunliffe-price

[4] Is It Time to Regulate Bitcoin?, https://www.wsj.com/articles/is-it-time-to-regulate-bitcoin-1512409004

[5] Bitcoin’s High Transaction Fees Show Its Limits, https://www.bloomberg.com/view/articles/2017-11-14/bitcoin-s-high-transaction-fees-show-its-limits

[6] Chiu and Koeppl, ‘The Economics of Cryptocurrencies – Bitcoin and Beyond’, https://www.chapman.edu/research/institutes-and-centers/economic-science-institute/_files/ifree-papers-and-photos/koeppel-april2017.pdf

[7] Europe’s first bitcoin mutual fund launched by Tobam, https://www.ft.com/content/fa3897da-ceac-11e7-9dbb-291a884dd8c6

[8] CBOE, CME to launch bitcoin futures contracts, https://www.reuters.com/article/us-bitcoin-futures-contracts/cboe-cme-to-launch-bitcoin-futures-contracts-idUSKBN1E10KC?il=0

[9] Wall Street banks push back on launch of bitcoin futures, https://www.ft.com/content/5ee5fda2-daa7-11e7-a039-c64b1c09b482

[10] Dyhrberg, ‘Bitcoin, Gold and the Dollar – A GARCH Volatility Analysis’, https://ac.els-cdn.com/S1544612315001038/1-s2.0-S1544612315001038-main.pdf?_tid=d3e72e8e-db54-11e7-afc7-00000aab0f01&acdnat=1512654484_0ae3270449219b0975e08a2689657195

[11] Bianchi, ‘Cryptocurrencies as an Asset Class: An Empirical Assessment’, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3077685

[12] Bitcoin: UK and EU plan crackdown amid crime and tax evasion fears, https://www.theguardian.com/technology/2017/dec/04/bitcoin-uk-eu-plan-cryptocurrency-price-traders-anonymity

[13] Lagarde, ‘Central Banking and Fintech – A Brave New World?’ https://www.imf.org/en/News/Articles/2017/09/28/sp092917-central-banking-and-fintech-a-brave-new-world

[14] The consequences of allowing a cryptocurrency takeover, or trying to head one off, https://ftalphaville.ft.com/2017/06/07/2189849/guest-post-the-consequences-of-allowing-a-cryptocurrency-takeover-or-trying-to-head-one-off/

[15] UBS Chairman: Bitcoin Currency Will Fail, Has No Lender of Last Resort, https://www.financemagnates.com/cryptocurrency/news/ubs-chairman-bitcoin-currency-will-fail-has-no-lender-of-last-resort/

[16] Huberman et al, ‘Monopoly without a Monopolist: An Economic Analysis of the Bitcoin Payment System’, https://helda.helsinki.fi/bof/bitstream/handle/123456789/14912/BoF_DP_1727.pdf?sequence=1&isAllowed=y

[17] Cryptocurrencies like bitcoin are not 'mature' enough to regulate, ECB chief Mario Draghi says, https://www.cnbc.com/2017/10/19/cryptocurrencies-are-not-mature-enough-ecb-chief-mario-draghi.html

 

 

 

 

 

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How the experts responded

Cryptocurrencies and the financial system

Participant Answer Confidence level Comment
Michael McMahon University of Oxford Disagree Confident
I think it is still too small and lacking in widespread ownership, especially among large investment groups, to be a serious risk to the overall financial system.
Stefan Gerlach EFG Bank Agree Confident
Crypto currencies are currently not a threat to the financial system but could very well become a serious concern in the near future if they become more important. If that happens, I would expect financial regulation to be introduced and central banks to issue ecurrencies to compete with them. It is inconceivable that any major component of the financial system would remain unrelated in light of the obvious risks. .
Jordi Galí CREI, Universitat Pompeu Fabra and Barcelona GSE Neither agree nor disagree Confident
It depends on the volumes they end up representing relative to the size of the economy and the characteristics (e.g. degree of leverage) of their holders. In their current state they seem largely innocuous for financial stability.
Gianluca Benigno London School of Economics Neither agree nor disagree Not confident
it is hard to say. it seems to me that they could become a way to transfer money among agents and as such they could affect the standard intermediation role of the banking system. in that sense their increasing use could have implications for the financial system.
Jürgen von Hagen Universität Bonn Strongly disagree Very confident
The financial system is still based on currencies issued by central banks. Cryptocurrencies would become attractive if central bank issued currencies became very unstable. Their wide-spread use in the financial system would be a result not a cause of instability.
Ethan Ilzetzki London School of Economics Strongly disagree Confident
At this point, Bitcoin and other cryptocurrencies remain a toy for a very narrow segment of investors and is detached from the financial system and the real economy.
Pietro Reichlin Università LUISS G. Carli Disagree Confident
Despite the volatility and the bubble component of bitcoin valuation, it appears the number of bitcoin users and transactions are not large enough and sufficiently interconnected to represent a high risk of contagion.
Giuseppe Bertola Università di Torino Disagree Confident
Richard Portes London Business School and CEPR Disagree Very confident
Not big enough. Key: no significant systemic interconnections. Bitcoin bubble will deflate, and everyone will wonder why it inflated in the first place. The technology may turn out to be useful, if they can reduce the energy consumption. But the 'cryptocurrencies' have few attributes of money.
Franck Portier Toulouse School of Economics Disagree Confident
Harry Huizinga CentER, Tilburg University Disagree Very confident
Sylvester Eijffinger CentER, Tilburg University Strongly agree Extremely confident
The increase of volume of cryptocurrencies, the launching of Europe’s first Bitcoin mutual fund and the U.S. acceptance to list futures contracts on Bitcoin imply a threat to the stability of the financial system in the coming years on which the ECB and Federal Reserve should act upon. The Bitcoin bubble is an example of a speculative bubble that can be explained rationally from an individual perspective but not from a collective perspective and is comparable with Tulpenmania.
Nicholas Oulton London School of Economics Disagree Not confident
They are not currently a threat but they could become one if left unregulated.
John Hassler Institute for International Economic Studies (IIES), Stockholm University Strongly disagree Confident
Surely the valuation of Bitcoin reflects bubbly expectations. Such assets are a threat to financial stability provided i) they are sufficiently bug and ii) they are held by institutions that are sufficiently leveraged so that default is translated into losses in other parts of the financial system. Both conditions are necessary for cryptocurrencies being a threat to financial stability. It is quite unlikely that they will be met in a couple of years.
Harris Dellas University of Bern Strongly disagree Very confident
Philippe Bacchetta Université de Lausanne Strongly disagree Confident
Fabio Canova BI Norwegian School of Management Agree Confident
David Cobham Heriot Watt University Disagree Confident
Not a threat so far, or for a good while yet, though it is conceivable things could change.
Thorsten Beck Cass Business School Strongly disagree Very confident
For the moment, crypto-currencies are simply a hype, similar to Dutch tulip bulbs; but as they are not linked to the banking system, there does not seem any immediate stability threat.
Michael Wickens Cardiff Business School & University of York Disagree Not confident
Bitcoin use is still too small to be a risk to the financial system at present. Although it is unlikely to present a systemic risk in the next two years, if its price contunues to rise at the present rate it could become a major risk to holders. The main concern is that its attraction is now largely as a speculative asset rather than as a vehicle currency or an inflation hedge.
Jan Eeckhout University College London Disagree Very confident
Tony Yates University of Birmingham Disagree Confident
The crypto currency market is much too small at the moment, and banks/investment banks are not much involved in it as yet. I doubt the situation would change much in two years. Perhaps in 10.
David Smith Sunday Times Disagree Very confident
Though cryptocurrencies are growing rapidly, their size and the fact that they are yet to become mainstream limits the damage they could do to the financial system. That will change, though not over the next two years.
Fabrizio Coricelli Paris School of Economics Disagree Very confident
The size of the bitcoin transactions is still very low to threaten financial stability.
Ricardo Reis London School of Economics and Columbia University Disagree Confident
Bitcoin is inadequate as a currency. As an asset that provides some small benefits to its users---chiefly anonymity and irreversibility of transactions---and that has a fairly limited and steady supply though, it is quite similar to gold. Even the arguments of some of its fans are eerily familiar to those that one has heard for decades about gold. Like gold, it fluctuates wildly in value and it is subject to fads and manias. As long as regulators treat it as a highly speculative investment, like so many other investments out there, then it should pose as much risk to the financial system as so many of these do.
Morten Ravn University College London Disagree Confident
They seem too small at the moment to be a threat. Also, were a cryptocurrency to implode, the impact would probably be less country-specific than, say, a sudden large decline in London house prices, and this might indicate a less dramatic impact on financial stability. Of course, exponential growth in cryptocurrencies could change this within a reasonable horizon so it would seem prudent for policy makers to keep an eye these currencies.
David Miles Imperial College Disagree Not confident
Bitcoin is probably too small to matter much - huge fluctuations in value will impact criminals, the gullible and the risk lovers.
Martin Ellison University of Oxford Strongly disagree Confident
Ramon Marimon European University institute and UPF-BarcelonaGSE Strongly disagree Confident
Cryptocurrencies are marginal now but their potential growth rate (in total value) is subject to diminishing returns, unless the appreciation race continues, but if it does it will attract more entry (already happening) and competition will slow down the appreciation race.
Antonio Fatás INSEAD, Singapore Neither agree nor disagree Confident
Philip Jung University of Dortmund Strongly disagree Confident
Robert Kollmann Université Libre de Bruxelles Disagree Confident
Despite recent growth, the market cap of cryptocurrencies remains modest, compared to the size of 'conventional' financial markets. Hence, cryptocurrencies do not seem to represent a threat to financial stability--for now.
Etienne Wasmer Sciences Po, Paris Strongly agree Confident
Hard to tell, this is radical uncertainty, nothing close in history as far as I can tell. The main new risk comes from the fact that most people don't understand the supply and the encryption process. Once, when I was a graduate student, someone told me: nobody understands monetary theory, but some understand a bit better. The same is true power 3 in crypto currencies.
Gernot Müller Eberhard-Karls-Universität Tübingen Disagree Confident
Ugo Panizza The Graduate Institute, Geneva (HEID) Strongly disagree Confident
Currently they are too small to pose any systemic risk, and they are unlikely to reach a dimension that would make them a source of concern in the next couple of years.
Costas Milas University of Liverpool Agree Confident
Cédric Tille The Graduate Institute, Geneva Disagree Confident
Gino A. Gancia CREI and Universitat Pompeu Fabra Agree Confident
Francesco Lippi Università di Sassari Disagree Confident
I agree with the ECB analysis that the overall volume of trades is too small to matter. The development of derivative markets based on cryptocurrencies might affect the stability of their prices either way (e.g. creating a market to absorb bursts in demand for a fixed supply factor (e.g. bitcoin) might stabilize its price).
Wouter Den Haan London School of Economics Agree Not confident
The LTCM crisis has taught us that it takes just one key financial institution taking on large risky positions to put the system at risk. Given that cryptocurrences are not backed by anything, they are potentially an extremely risky investment.
Mirko Wiederholt Goethe University Frankfurt Agree Not confident
Michèle Tertilt Universität Mannheim Strongly disagree Extremely confident
Philippe Martin Sciences Po, Paris Agree Confident
Paul De Grauwe London School of Economics Disagree Confident
Per Krusell Stockholm University Strongly disagree Very confident
Alan Sutherland University of St. Andrews Disagree Confident
Roger Farmer University of Warwick Strongly agree Very confident
Bitcoin can go much higher. But then it will fall much further when the crash comes. Ironically, that crash is likely to be triggered by regulation which becomes more likely, the more successful Bitcoin becomes. Central banks should act sooner rather than later. To be truly successful, Bitcoin must become a currency: not a speculative asset. If that happens, it will generate a reversion to a gold standard like regime in which central bank control of the currency becomes irrelevant. Central banks cannot and will not let that happen.
Charles Nolan University of Glasgow Disagree Very confident

Cryptocurrencies and economic policy

Participant Answer Confidence level Comment
Michael McMahon University of Oxford Agree Confident
Jordi Galí CREI, Universitat Pompeu Fabra and Barcelona GSE Agree Confident
In what pertains to their potential use for money-laundering and other criminal activilties. Otherwise they should be treated as any other high risk asset. Prices of goods and services are quoted in "conventional" currencies, and so are interest rates set by central banks or in private financial contracts. That remains key for the effectiveness of monetary policy.
Stefan Gerlach EFG Bank Agree Very confident
The regulatory oversight needs to be increased if and when crypto currencies become an important part of the financial system
Gianluca Benigno London School of Economics Neither agree nor disagree Not confident
Jürgen von Hagen Universität Bonn Strongly disagree Very confident
What is the point of a privately issued currency regulated by the government? Such currencies are created to avoid the supposed evil effects of government regulation on monetary and financial stability.
Ethan Ilzetzki London School of Economics Disagree Confident
It is hard to envision these currencies becoming true alternatives to government-based fiat currencies in the forseeable future, so they will likely continue to be toys for a limitted number of collectors. In terms of financial stability, a more likely threat is web-based financial institutions (internet banks) playing a larger and larger role, augmenting or disrupting the existing financial system. This seems inevitable to me and may change the regulartory requirements dramatically. (And internet banks will largely borrow and lend in government based currencies, not in Bitcoin, ect.)
Pietro Reichlin Università LUISS G. Carli Disagree Confident
I share the view that bitcoins are mostly held as store of value in limited supply (similar to gold). Holders are mainly motivated by speculative activity and subject to risks of capital losses. As long as bitcoin holders are aware of what these risks are, I don't see why we need more regulation or oversight than it already in place for other stores of value. The power of monetary policy may not be affected by bitcoin diffusion, since Central Banks (or governments) are the only authorities able to provide the fiscal backing required to offer safe assets and generate lender of last resort type of policies.
Giuseppe Bertola Università di Torino Disagree Confident
Maybe to make them less crypto but these are not currencies, prices of goods and services are not and never will be set in terms of bitcoins (or of gold, oil, or any volatile commodity).
Franck Portier Toulouse School of Economics Strongly agree Extremely confident
There is middle way between the jungle and Orwell's 1984 world. Cryptocurrencies should be regulated, not because they threaten financial system stability, but because, as cash, they are used for tax evasion and criminal activities. I do not think that this supervision will infringe human rights.
Richard Portes London Business School and CEPR Disagree Very confident
Financial regulators have many more important things to worry about. Cryptocurrencies have no systemic significance, and if (when) individual investors lose money, that's their problem - no justification for 'consumer protection' here.
Sylvester Eijffinger CentER, Tilburg University Strongly agree Extremely confident
The regulatory oversight of cryptocurrencies needs to be increased by the ECB, Federal Reserve and Bank of England because of the threat to the stability of the financial system (see question 1) by undermining the monopoly of money creation by the central banks and the ineffectiveness of conventional and unconventional monetary policy and by the systemic risk of cryptocurrencies.
Harry Huizinga CentER, Tilburg University Strongly agree Very confident
Nicholas Oulton London School of Economics Strongly agree Very confident
In practice crypto currenices have been strongly linked to criminality as the Mt Gox affair shows. A parallel is the Albanian Ponzi schemes of the 1990s which seriously destabilised Albania. One strand of current policy is to crack down on money laundering and tax evasion through tax havens. So it would seem odd to let crypto currencies get around these restrictions. It would be a good idea if the "crypto" were taken out of crypto currencies. But then they might not be very attractive to investors and promoters.
John Hassler Institute for International Economic Studies (IIES), Stockholm University Disagree Not confident
I think there is a risk that regulatory oversight may create a perception that cryptocurrencies are legitimate investments. They should not be perceived like that. The value of regulation is currently low and therefore I think it should not be done.
Harris Dellas University of Bern Strongly disagree Very confident
Philippe Bacchetta Université de Lausanne Agree Not confident
Fabio Canova BI Norwegian School of Management Agree Confident
David Cobham Heriot Watt University Neither agree nor disagree Confident
Thorsten Beck Cass Business School Neither agree nor disagree Very confident
As long as banks (or other financial intermediaries under the implicit financial safety net) are not directly connected to this market (and they should not given the nature of crypto-currencies as speculative investment), there is no need for regulatory oversight. On the other hand, regulators should carefully watch the development, if crypt-currencies are increasingly used by the financial system and/or if crypto-currency trading entities become more closely linked to institutions within the regulatory perimeter. So, no immediate regulatory need, but careful monitoring of "this space".
Michael Wickens Cardiff Business School & University of York Agree Confident
Although regulation may not be required yet, any asset whose price and use is rising at the current rate of Bitcoin ought to monitored carefully by the financial authorities. The focus should be on the risks of financial institutions that hold bitcoins and the unregulated supply of bitcoins.
Jan Eeckhout University College London Disagree Very confident
Tony Yates University of Birmingham Disagree Confident
I think the existing regulations governing financial intermediaries give the authorities the scope they need to monitor investments in these assets, which obviously should be deemed highly risky, with potentially no value whatsoever in the event of a crisis.
David Smith Sunday Times Strongly agree Very confident
Regulators have tended to regard cryptocurrencies as a harmless curiosity but that is not a position that is tenable for the long-term. So regulatory oversight will have to be increased. Central banks should also be considering issuing their own digital currencies and in time will do so.
Fabrizio Coricelli Paris School of Economics Agree Extremely confident
Both the likely use of bitcoin for recycling revenues from illegal transactions and the risk of manipulation of the market would call for an increased regulatory oversight.
Ricardo Reis London School of Economics and Columbia University Disagree Confident
Only as much as we regulate gold, silver, baseball cards, or any other asset that can potentially emerge as a currency (and we know from monetary theory that many can). Market regulators can regulate it, as the CFTC will be doing, but central banks through macro prudential regulation should be weary of jumping to tightly regulate anything that moves, including speculative new assets that banks and SIFIs should not be holding in the first place.
Morten Ravn University College London Agree Confident
I don't see why. It seems pretty obvious that the cryptocurrencies have appeal for illicit markets and for tax evasion, both issues of concerns to policy. This should be regulated.
David Miles Imperial College Agree Not confident
More oversight may be warranted on grounds of reducing orgnaised crime rather than on financial stability grounds.
Martin Ellison University of Oxford Strongly disagree Confident
Roel Beetsma University of Amsterdam Agree Not confident
Important reasons are already mentioned above: to reduce money laundering, tax evasion and the like.
Ramon Marimon European University institute and UPF-BarcelonaGSE Agree Not confident
No more than the oversight of 'fake news'. Unless the right answer to Question 1 turns out to be NO.
Antonio Fatás INSEAD, Singapore Strongly agree Very confident
Philip Jung University of Dortmund Neither agree nor disagree Confident
The demand for Cryptocurrency seems to come from a convex combination of various mafia organisations, libertarians who distrust the Government and financial speculators. The question seems to suggest that there exists a technology to control these groups by some central bankers, maybe sending a calvo fairy to forbid mining coins every other month to create price stickeness and finally gain some traction? We do not even fully understand what the transmission process of bitcoins to the real economy is but we are already debating regulatory oversight?
Robert Kollmann Université Libre de Bruxelles Strongly agree Extremely confident
Strict regulation and oversight are needed to combat the use of cryptocurrencies for money laundering, tax evasion and other criminal activities.
Etienne Wasmer Sciences Po, Paris Strongly agree Extremely confident
Oversight is one thing, coordination is another (and more difficult) matter.
Gernot Müller Eberhard-Karls-Universität Tübingen Agree Not confident
Ugo Panizza The Graduate Institute, Geneva (HEID) Agree Confident
because of the money laundering tax evasion implications not because of the monetary policy argument (I don't think cryptocurrencies will reduce the effectiveness of monetary policy)
Costas Milas University of Liverpool Agree Confident
Cédric Tille The Graduate Institute, Geneva Agree Confident
Gino A. Gancia CREI and Universitat Pompeu Fabra Agree Confident
Francesco Lippi Università di Sassari Disagree Confident
None of the arguments reviews above proves more regulation is desirable, nor that it would be effective.
Wouter Den Haan London School of Economics Agree Confident
All assets which are not backed by anything real or central backing should be regulated when they become sufficiently important. Not sure whether we have reached this point, but it is better to be too early than too late.
Mirko Wiederholt Goethe University Frankfurt Agree Confident
Michèle Tertilt Universität Mannheim Disagree Very confident
Paul De Grauwe London School of Economics Disagree Confident
Philippe Martin Sciences Po, Paris Agree Very confident
Alan Sutherland University of St. Andrews Agree Confident
Roger Farmer University of Warwick Agree Extremely confident
See my answer to question 1. Bitcoin and other cryptocurrencies are asset price bubbles that, if allowed to grow at current rates, will prove incredibly destructive to the financial system when they burst. They WILL burst.
Per Krusell Stockholm University Disagree Not confident
Charles Nolan University of Glasgow Agree Very confident