Do you know what a central bank is and why can they see the blockchain as a threat? by Karupanocitizen

It is very likely that you have an account in a commercial bank right now, that not only offers you the peace of mind of having a place to protect and keep your money safe, but it also allows you to access the financial benefits that only this type of Organizations can offer you, but did you know that banks also need an entity that gives them financial security? Right? Well, stay here because we are going to learn what it is about.

This is not an article more full of technicalities and elaborate words that in the end end up leaving us more confused than at the beginning, I want us to understand together how a central bank works, what is its purpose, how it intervenes in the economic development of a country and why Last (not least) because the blockchain could pose a threat to them.

The financial market: buying and selling currencies

Money, like any other commodity, needs a market in which it can be traded. On the one hand, we have companies and individuals interested in obtaining money or financing (credits) to start their investment projects and, on the other, we have those who are capable of providing said "merchandise", that is, the banks. Like all merchants, banks will seek to buy money at the lowest possible “price” to “sell” it for a higher price, this difference is known as “financial spread” (it is the banks' profit), while at the price of the money is known as: "financial interest" or simply interest.

Now, what role do central banks play in this financial market? Well, simply, they are the ones who manufacture (sometimes literally) the money that is sold by commercial banks, they are also the ones who establish the rules of the market game financial and control its performance through their secret weapon: monetary policy.

Financial = money, pending with that term.

"Little financial manipulator"

Among many others, the main purpose of a central bank is to keep the financial exchange between commercial banks and individuals under control, why? You may wonder. They do this because the movement of money within the economy of a country has a direct impact on its economic development ... ahh of course! I had not mentioned it to you, but central banks are not private, they are a government entity (Is everything starting to make sense?).

To "manipulate" the financial exchange, central banks use a series of techniques and strategies known as monetary policy, which is nothing more than tax measures exercised by the said government institution to maintain the stability of the currency, either by affecting the price of money (interest) or the quantity of money in circulation.

The big brother ...

One of the things that characterize a strong economy is the stability of its currency because it allows you to make investments in the future without the fear that the money invested will maintain its value and not generate long-term losses. For this to happen, banks must guarantee a balanced proportion of circulating money, a lot of liquidity (money in circulation) increases inflation (increase in the price of other goods), and very little prevents the development of investment projects and economic development.

To maintain equilibrium, banks set and control the interest rate, as well as the issuance of paper money. When they need the money supply to increase (the money that banks offer on loan), central banks lower interest rates (they make money cheaper to buy and sell) and increase monetary circulation, if it is not done well generates inflation. On the other hand, to curb said inflation, central banks do the opposite, that is, they increase interest rates and restrict money in circulation.

Cryptocurrencies, “the black sheep” of the financial family

As you can imagine, the power of central banks resides precisely in the ability of the State (or the government of a country) to regulate the exchange value of a given currency through monetary policy, that is, by controlling the issuance and regulating the supply and demand of money, central banks can manipulate the value of their currency at will (except macro-economic problems).

The problem with cryptocurrencies is that they are capable of fulfilling the functions of the store of value and commercial exchange of fiat or conventional currencies, but due to their decentralized and governance nature, they escape state regulations and controls, in other words: they are impossible to be manipulated by different governments. Losing

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