In a speech given last week at BitFin 2014, a virtual currency conference in Dublin, a senior official at the Central Bank of Ireland, Gareth Murphy, expressed a number of regulatory concerns about how cryptocurrencies would impact the financial world of the future. He began his speech with a simple thought experiment, saying:
[I]magine a world in which a virtual currency develops to the point where a substantial amount of the goods and services produced and consumed in the economy are paid for in that virtual currency.
From this premise, Murphy foresees a variety of potential risks that might occur in a predominantly cryptocurrency economy. These challenges range from the mundane (the increased complexity of measuring economic activity), to the more serious (loss of tax revenue into the hard-to-monitor world of the cryptocurrency economy).
There is a substantial threat to the country’s finances if more and more transactions for goods and services in the national economy disappear from the tax net.
Furthermore, Murphy expressed concerns that cryptocurrencies could “test” the anti-money-laundering capabilities of even first world governments, saying:
[…]it is well-documented that virtual currencies could provide an alternative channel whereby the proceeds of crime could be used to purchase goods and services. In this case, the application of current anti-money laundering (AML) regulations will be tested.
Murphy went on at some length about the regulatory difficulties of cryptocurrencies, which are primarily related to the difficulty of collecting data on cryptocurrency activity, saying:
The first step is fundamental. Data is the lifeblood of any rational discipline ‒ regulation included. It supports the next step which involves analyzing the issues of concern to regulatory authorities. […] Where do we start with the collection of data? Many parties who are transacting are simply anonymous (or pseudonymous) and are therefore off the radar.
On a more profound level, Murphy expressed concern that, in the long run, very popular global cryptocurrencies could be a threat to the power and authority of the central banks and the countries that support them.
However, in thinking about these policy issues, it is important to highlight the fundamental question which many policy-makers are asking which is “should anyone else be allowed to create money other than a central bank?” For the reasons I outlined earlier touching on monetary and fiscal policy, there is potentially an issue of sovereignty at stake here. Clearly rivals to the national legal tender pose challenges to central banks in terms of how to influence the price of credit for the whole economy. The implications for fiscal authorities are similar.
On the whole, the speech was a surprisingly interesting insight into the thinking of regulators when confronted with the issue of how to cope with the brave new world of cryptocurrency economics – and an insight into the fears that even regulators operating in good faith might feel, driving them towards hasty and destructive regulation.
Photo Credit: Public Domain Image by DubhEire