Why are Central Banks Freaking Out Of Bitcoin?

Given the rapidly growing rate of bitcoin popularity, many federal central banks have raised alarming concerns regarding the impact of bitcoin on the value of fiat currencies and the potential of its use in money laundering and funding terrorism.
Apart from the anonymity of bitcoin, central banks have raised many concerns regarding the financial and economical consequences of mass adoption of bitcoin and other cryptocurrencies.

The risk imposed by Bitcoin and cryptocurrencies in general on central banks is comprised of four pillars:

• The price volatility and financial instability of these virtual currencies.
• The stability of the payment platforms and systems of cryptocurrencies.
• Lack of regulatory legislation for bitcoin and decentralized currencies in general.
• Lack of credibility of the blockchain and similar P2P payment networks. (ECB 2012)

For central banks, cryptocurrencies render price stability a hard goal to aim at, especially that with increasing popularity of bitcoin, this can affect central banks' control over monetary supplies via open market operations. As central banks' control over federal money supply declines, this can influence financial stability via central banks' ability to manipulate interest rates and the rates of foreign currency exchange.

Despite the attempts of several countries, including USA, China, Russia....etc, to legislate cryptocurrencies, there is still no impermeable legislator framework that can regulate virtual currency transactions, in a manner that provides clear delineation of the obligations and rights of the parties engaging in a transaction. The attempts of some of the world's central banks to exile cryptocurrencies reduces the interaction between Fiat money and virtual currencies in general.

Given the popularity of bitcoin today, one can consider that the overall influence of federal central banks on the adoption of cryptocurrencies can be somehow limited. Monetary policies crucially rely on a stable rate of monetary supplies. Nonetheless, as virtual currencies are becoming more and more popular, they can affect the rate of monetary supplies, reduce the fiat monetary base and more importantly, reduce central bank's controlling grip over monetary liabilities.

According to Plassaras (2013), virtual currencies can undermine the effectiveness of federal monetary policies, yet he argued in his research that this can be alleviated by greater international collaboration through the International Monetary Fund (IMF). Typically, central banks own reserves that can protect them against speculative attacking targeting national currencies. On the other hand, a bank can resort to its IMF quotas, whenever it runs out of its reserves. Moreover, it can raise interest rates and fine tune foreign exchange rates to counter such speculative attacks. Accordingly, if rich bitcoiners launch a speculative attack on a country's national currency, there is little that central banks can do today, as neither federal central banks nor the IMF hold any reserves in bitcoin.

Conclusion:

Even though some of the world's biggest central banks are trying to restrict the use of bitcoin, its popularity is increasing almost exponentially, which mandates central banks to incorporate virtual currencies into the financial system to be well prepared against speculative currency attacks and to help the people of the world enjoy a user friendly, low transaction fee, unmatchable payment system!!

References:

1- ECB. (2012). Virtual Currency Schemes. Frankfurt: European Central Bank.
2- Plassaras, N. (2013). Regulating Digital Currencies: Bringing Bitcoin within the Reach of the IMF. Journal of International Law, 14, 377.
3- Winston Moore & Jeremy Stephen (2015). Should Cryptocurrencies be included in the Portfolio of International Reserves held by the Central Bank of Barbados?

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