Risk, reward, regulation: central bankers eye crypto cautiously

Central bankers are seeking to balance the opportunities offered by cryptocurrencies with the risk that slow progress on regulating them could mean more losses for consumers.

Chiefs of the Reserve Bank of Australia, Swiss National Bank and Hong Kong Monetary Authority admitted broad uncertainties on the future of digital currencies and hailed the underlying technology while speaking on a panel on the sidelines of the Group of 20 finance meetings in Bali, Indonesia.

“Privately backed money can work for a while but it usually ends in disaster,” said RBA Governor Philip Lowe. “Periods of innovation tend to be associated with periods of speculative behavior” as people fear missing out. The central bank isn’t keen on issuing digital currencies for the retail market, but is considering a wholesale option to improve real-time gross settlements, he said.

Digital finance is a stated priority of the G-20 finance chiefs. On cryptocurrencies, policymakers have largely maintained a cautious tone as the plunge in the value of Terra and others exposed the markets’ fragility and raised questions about how to regulate them.

“We need a very globally coordinated approach in order for regulation to be effective,” said Eddie Yue, chief executive of the Hong Kong Monetary Authority. “We need to regulate the defi platforms early rather than later. The question is how.”

Among questions he wanted to tackle on CBDCs was how to ensure sufficient liquidity, and how to incentivize banks and businesses to switch from more traditional platforms, Yue said.

The central bank chiefs cited questions around anti-money laundering, data privacy and effects on broader financial stability as priorities for regulating cryptocurrencies, even as the tokens merited a different approach than traditional money.

The “fundamental challenge” in regulating crypto is in its nature — that, “if anything, crypto was conceived to undermine central banks,” said Tobias Adrian, director of the monetary and capital markets department at the International Monetary Fund. There’s no “one size fits all” approach for CBDCs, he added.

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