Morgan Stanley researchers have published a new report and pointed out that central banks around the globe can use government-backed cryptocurrencies when it comes the time to tackle possible economic crises.
It is emphasized that central banks can use cryptographic funds especially in the interest field, which explains the benefits of government-supported cryptocurrencies to the central bank.
According to the Morgan Stanley researchers, a central bank can draw up negative interest rates by applying interest rates policies directly to money rather than intermediaries like financial institutions, thanks to cryptocurrency.
The report by the research team led by strategist Sheena Shah states:
“Theoretically, a monetary system that is 100% digital may enable deeper negative rates, this appeals to certain central banks.“
Since central banks do not apply certain policies directly to the money supply, they rather use intermediaries like financial institutions. However, according to Shah and her team, the central bank of a country with a digital economy can apply the interest policy at the exact same time as the current money supply in the circulation. The report says:
“Freely circulating paper notes and coins (cash) limits the ability of the central banks to force negative deposit rates. A digital version of cash could theoretically allow negative deposit rates to be charged on all money in circulation within any economy… Central banks would then have to go direct to currency users to implement monetary policy, reducing leverage in the system significantly and cutting GDP growth.”
Such digital economy can really bring serious power to the central bank, but people can switch to a decentralized cryptocurrencies as an alternative to cash money, since no cash will be used in that monetary system, so it will not be a secure ‘port’.
Once people start hearing similar rumors that the central bank will start to apply negative interest, they could turn to decentralized cryptocurrencies in fear of losing their wealth. This decision is, of course, largely dependent on how volatile the assets are (on a price basis).