During the last financial crisis, the central banks in most countries were forced to cut down on their interest rates by a huge margin to protect their customers from the full brunt of the crisis’ impact. In fact, the situation became so extreme that banks from Sweden, Denmark, Japan and the Eurozone even saw their interest rates go below zero percent, with the lowest of all at -0.5%.
However, all this is going to change with the introduction of cryptocurrencies into the global central banks’ ecosystem.
Cryptocurrencies Allow For Even More Negative Interest Rates
With the advent of cryptocurrencies, central banks now have the leeway to bring interest rates down to a deeper negative territory, hence alleviating the impacts of any financial crisis in the future.
This discovery was made by Morgan Stanley and was published in a report, in which the researchers explored the possible applications of cryptocurrencies in central banks. The team, led by strategist Sheena Shah, found a few areas where central banks could incorporate cryptocurrencies into their system. However, a disclaimer was made by the team: the research was “not intended to suggest where we think a digital fiat currency could be implemented or all the reasons why.”
The team identified a potential for a breakthrough in the area of monetary policy, where they suggested that cryptocurrencies will allow banks to lower their interest to “negative territory” in the event of a financial crisis.
“Theoretically, a monetary system that is 100% digital may enable deeper negative rates…This appeals to certain central banks, (as) freely circulating paper notes and coins (cash) limits the ability of the central banks to force negative deposit rates. A digital version of cash could theoretically allow negative deposit rates to be charged on all money in circulation within any economy.”
Uncharted Waters Bears Uncertainties
Since this is merely a hypothetical idea, there are certain limitations when it comes to assessing the effectiveness of cryptocurrencies in mitigating the efforts of a financial crisis. However, Morgan Stanley argues that it is worth a try, as “deep and long-standing negative rates eventually are problematic for banks.”
“Central banks would then have to go direct to currency users to implement monetary policy, reducing leverage in the system significantly and cutting GDP growth.”
Nevertheless, there are various central banks in the world that have taken a special interest in cryptocurrencies, especially in the last 18 months. For example, the Bank of England has set aside specific divisions to explore the potential benefits of digital currencies. The central bank of Sweden, Riksbank also has plans to introduce its own digital currency, the eKrona.