More central banks set to explore crypto
Dzulfiqar Fathur Rahman
The Jakarta Post
The Bank for International Settlements (BIS) expects more and more central banks to begin studying and developing digital currencies in the coming years but warns that authorities must ensure resilience and inclusion. As of January, 68 central banks have publicly announced that they were working on their own central bank digital currency (CBDC), and 28 others have already launched pilot project, BIS data shows. Meanwhile, the central banks of Nigeria and the Bahamas, as well as the Eastern Caribbean Central Bank, have issued digital currencies. Agustín Carstens, the general manager of the BIS, said central banks had to make sure that their digital currency systems could handle millions of transactions per minute so as not go down and thereby keep consumers from using their money. Central banks also need to ensure that all parts of the country had access to the digital currency, which posed a challenge particularly for countries of huge territory, like Indonesia, Carstens said, adding that a CBDC could help to improve financial inclusion. “Hopefully, in the next few years, we will see different examples of countries jumping into CBDC more decisively,” Carstens told The Jakarta Post in a video interview on Feb. 8. “I would say that there is a huge amount of resources [and] intelligence being invested into CBDC. But, again, this is a matter of getting it right rather than getting it fast,” said Carstens, who served as the governor of the Bank of Mexico between 2010 and 2017. The CBDC concept continues to draw attention as more and more consumers make online transactions, especially during the COVID-19 pandemic that has made people worry about contracting the virus from bank notes. Some governments also disburse social assistance through digital payments, such as the preemployment card program in Indonesia, which involves e-wallet providers. While central banks were largely cautious initially, the announcement of social media giant Facebook’s Libra, a digital currency now known as Diem, became the tipping point for central banks, according to a BIS study. The share of central banks likely to issue a CBDC in one to six years doubled to 20 percent in 2019. Established cryptocurrencies like bitcoin and ether are continuing to gain in popularity, especially among investors. In a reflection of strong demand, bitcoin reached a recordhigh price of US$67,566.83 on Nov. 8, 2021, according to coinmarketcap.com, a cryptocurrency data provider. However, the highly volatile asset dropped to about half that value within months, though it has since recovered somewhat to trade slightly above $42,000 on Sunday. Carstens said there was a “noticeable expression of alternative money” for cryptocurrencies, yet they had not been able to replace traditional money so far, partly because they served as speculative assets and were not widely available. Central banks are learning from the innovative technology of cryptocurrencies for the development of their own CBDC, according to Carstens. “What we want to do as central banks is to learn what is going on in the technology field and find the best application of that for financial markets, and we are doing so,” said the head of the BIS, which on its website describes itself as “a bank for central banks”. Carstens added that there was no one-size-fits-all policy for implementing CDBC systems, hence solutions would be unique to each country. Indonesia, which currently holds the Group of 20 presidency and will host the G20 summit later this year, plans to facilitate a discussion on the general principles of CBDC, in addition to cross-border payment systems and how to bring down transaction costs. Josua Pardede, the chief economist at publicly listed Bank Permata, said the G20 forum was expected to discuss how to integrate the use of digital currencies when many countries had started rolling them out in the short run. Learning from the experience of China, Josua said the use of CBDC for cross-border payments had to, among other conditions, comply with regulations in the involved countries and ensure the interoperability with domestic payment systems. “[In the G20 forum], we hope policymakers can come up with the foundations and principles in the process of integrating CBDCs, although the timeline of the road map varies from one country to another,” Josua told the Post in a text message on Friday. Bank Indonesia did not immediately respond to a request for comment about possible plans for an Indonesian CBDC. Investors are bracing for more gyrations in bitcoin and other cryptocurrencies, as worries over a hawkish United States Federal Reserve threaten to squelch risk appetite across markets. The volatility traditionally associated with cryptocurrencies has been on full display in recent weeks. Bitcoin, the largest cryptocurrency, is up by around 33 percent since Jan. 24 and recently traded at US$43,850, rebounding from a tumble that cut its price in half from November’s record high. Its main rival, ether, is up around 45 percent since Jan. 24 at around $3,200, following a nearly 56 percent nosedive from its record high of $4,868, also in November. While proponents of cryptocurrencies once touted their lack of correlation to other assets, bitcoin and its peers saw huge gains over the last two years, rallying along with stocks as the Fed and other central banks pumped unprecedented levels of stimulus into the global economy. Bitcoin is up 1,039 percent since March 2020 and ether has risen 2,940 percent, though the rallies in both cryptocurrencies have been interrupted by numerous stomach-churning sell-offs. Their recent volatility has come amid a broader market sell-off driven by investors recalibrating their portfolios to account for a more aggressive Fed, which is now expected to raise rates as many as seven times this year as it fights surging inflation. The benchmark S&P 500 index is down 5.5 percent year-to-date (YTD), while the tech-heavy Nasdaq has lost 9.3 percent. Worries that an aggressive central bank tightening cycle going forward will hamstring risky assets has made it difficult for some traders to maintain their bullish outlook on bitcoin and other cryptos, an asset class already identified with intense volatility. Bitcoin has “really become the ultimate momentum trade and there are so many risks that can trigger a 40 percent drop out of nowhere”, said Ed Moya, senior analyst at Oanda. Bitcoin’s volatility has not stopped some analysts from trying to gauge the currency’s fair value or point out potentially important price levels. Analysts at JPMorgan estimate bitcoin’s current fair value at around $38,000 — some 15 percent below its recent price — based on its volatility in comparison with that of gold, another asset investors often use to hedge their portfolios against inflation and economic uncertainty. Vanda Research, meanwhile, said in a recent note that most of the bearish bets on a weaker bitcoin price were entered at around $47,000, and “there could be a large short-squeeze if the aforementioned threshold is crossed, and retail investors return to crypto-trading”. Meanwhile, correlations between bitcoin and the S&P 500 reached an all-time high on Jan. 31, according to data from BofA Global Research, undercutting the case for those hoping to use the cryptocurrency as a hedge against market turbulence. Investors next week are expecting minutes from the Fed’s most recent monetary policy meeting, due out Wednesday. Walmart and chipmaker Nvidia Corp will be among the companies reporting results, as corporate earnings season rolls on. Some investors are steeling themselves to ride out the volatility in bitcoin, betting that the long-term value proposition of blockchain technology, the builtin supply limit and the network effect it produces, will endure despite frequent price swings. Jurrien Timmer, director of global macro at Fidelity, likened the current speculation in cryptocurrencies to the turbulence tech stocks experienced during the dot-com era more than two decades ago, a boom-and-bust period that saw a comparatively small group of companies left standing. “Amazon is still around and Apple is still around and they’re bigger than ever and the thinking is that for bitcoin that will be the same,” he said. “But it’s not immune to those waves of speculation and sentiment.” Bitcoin could reach $100,000 as soon as 2023, Timmer has said, based on his supply and demand models. Others believe mature cryptocurrencies like bitcoin and ether are unlikely to deliver the kind of eye-watering gains they have notched since their founding. Instead, they are looking to the universe of new, alternative coins that are being created to take advantage of the money pouring into the crypto space, including the metaverse and NFTs, which saw $30 billion worth of venture capital investment last year, according to PitchBook. Some altcoins include cosmos, Terra Luna and Polkadot, which are down around 20.5 percent, 38 percent and 25.5 percent YTD, respectively, according to coinmarketcap.com. Understanding the risks linked to them and decentralized finance is going to be one of the main challenges for investors in 2022, said Lily Francus, director of quantitative research strategy at Moody’s Analytics. Cryptocurrencies “are going to remain very volatile going forward, but there are significant players on both the institutional side and the retail side that are still growing, so the interest is still growing”, said Oanda’s Moya.