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Central banks are beginning to wake up to the threat of cryptocurrencies.

For the longest time, most of these organizations didn’t know about the technology or chose to completely ignore it. The thought appears to have been that adoption was solely through speculation and criminal intentions, leading to a low likelihood of sustainability. Bitcoin and other cryptocurrencies have not only not gone away though, they have actually thrived over the years.

Lately, it seems like a new government bank is issuing a statement on cryptocurrencies almost daily. We were blessed with two new comments yesterday:

1. The Central Bank of Azerbaijan stated that they do not have plans to issue a state-backed digital currency. The first Chairman reiterated a number of popular talking points, including the “great risks” that come with cryptocurrencies and past use in money laundering. These comments follow a previous declaration by the bank’s Chairman that cryptocurrencies were “risky and dangerous.”

2. An executive board member of the European Central Bank said “Bitcoin is the evil spawn of the financial crisis.” He went on to say that “Bitcoin was an extremely clever idea. Sadly, not every clever idea is a good idea.” Additionally, these comments came while the board member was speaking at the Bank of International Settlements (BIS), so he was quick to remind everyone that the head of BIS previously said Bitcoin is “a combination of a bubble, a Ponzi scheme and an environmental disaster.”

These comments came hours after International Monetary Fund CEO Christine Lagarde went on the record saying that every central bank should consider issuing a state-backed digital currency (SBDC). Her reasoning relies on SBDC’s potential to increase payment security, provide greater financial inclusion, and drastically reduce risk by mitigating the negative side effects of bank runs.

While I agree that digital currencies have the potential to accomplish all three goals, the idea of a state-backed digital currency still leaves the door open for human-based, dynamic monetary policy decisions. Most notably, the use of inflation and interest rates to address short term changes in economic environments. Many people see the ability to influence these economic levers as a good thing, but I would argue that there is a dark side that is rarely talked about.

Central bank’s use of inflation has actually been one of the main drivers in a widening inequality gap across the world in the last ~50 years. This paper from the IMF in 1998 describes a number of important issues in detail. Here are a few key takeaways:

• Inflation-adjusted wage contracts — As inflation continues to slowly devalue a currency, the “insiders” are protected because of their ability to secure inflation-adjusted wage contracts (their compensation increases annually to negate effects of inflation). The individuals who are hurt by inflation the most are those who are unable to secure these wage contracts (referred to as the “outsiders” by the IMF).

• Non-wage income — Many insiders are compensated in forms other than currency (ex: stock options), which provide a level of inflation protection that is not enjoyed by outsiders.

• Real asset ownership — Existing wealth can be heavily protected against inflation with the purchase of real assets. These investments can (1) grow faster than the rate of inflation, (2) benefit from an increase in real asset prices because of inflation, and/or (3) are uncorrelated/weakly correlated with inflation. The outsiders are usually less wealthy and therefore have less opportunity to shift their wealth from inflationary currencies to real assets.

These points are important because a state-backed digital currency subject to modern monetary policy decisions is likely to preserve the income inequality effects that exist today. Bitcoin, a decentralized digital currency that is immune to modern monetary policy decisions, is able to level the playing field for the outsiders in a real way.

It is hard to predict how the centralized vs decentralized digital currency wars will play out over the next few decades. However, we should be excited that central banks are having the digital currency conversation. In the end, I fundamentally believe that if people are given two viable options, they will chose the currency that drives the highest individual benefit.

Humans are self-interested. If Bitcoin can deliver on it’s promise to reduce the income inequality presented by inflation, there will come a day where the decentralized digital currency is crowned the global reserve currency. It is still a big “if,” but one that becomes more realistic with each passing day.

-Pomp

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THE RUNDOWN:

Cryptos are ‘evil spawn’ of the crisis for ECB’s Coeure: Benoit Coeure has a bone to pick with Bitcoin. “Bitcoin was an extremely clever idea. Sadly, not every clever idea is a good idea,” the European Central Bank Executive Board member said at the Bank for International Settlements in Basel. Coeure traced cryptocurrencies’ faults to their origins, noting that Satoshi Nakamoto -- the supposed creator of Bitcoin -- mined the first block months after Lehman Brothers collapsed. Read more.

Erik Voorhees, Salt Lending being investigated by SEC: Securities regulators are investigating a company’s $50 million cryptocurrency sale, according to The Wall Street Journal. Salt Lending Holdings Inc, which loans money to people using their cryptocurrency as collateral, received a subpoena from the SEC in February seeking records related to a $50 million digital-token sale it held last year. Read more.

Nvidia gives lackluster forecast on inventory, shares plunge: Nvidia Corp., the biggest maker of chips for computer graphics cards, gave a disappointing sales forecast for the current quarter, showing the lingering loss of demand from the collapse of cryptocurrency mining. The stock dropped more than 16%. Revenue in the fiscal fourth quarter will be $2.7 billion, plus or minus 2 percent, the Santa Clara, California-based company said in a statement. That compares to the average of analysts’ estimates of $3.4 billion. Read more.

Malaysia's CIMB, Ripple partner in cross-border payments: Malaysian lender CIMB Group Holdings Bhd. is signing on to the cross-border payments network run by blockchain technology firm Ripple. Ripple’s technology will be used in CIMB’s SpeedSend remittance product, according to a joint press release. SpeedSend is available in various Southeast Asian markets, including the Philippines, Vietnam and Thailand, according to its website. Read more.

First Initial Coin Offering fraud case ends in guilty plea: The first fraud prosecution involving initial coin offerings ended in a guilty plea when a New York man admitted lying to about 1,000 investors. Maksim Zaslavskiy, 39, told a judge he sought to raise money for two ICOs backed by investments in real estate and diamonds that didn’t exist -- a scam the U.S. called an "old-fashioned fraud dressed in a new-fashioned label." Read more.

How the crypto crackup could get much worse: Cryptocurrency markets, after months of relative calm, are melting down all over again. Bitcoin crashed through its longtime floor of $6,000 and digital tokens of all types fell more than 10% in the past week. The one exception has been so-called stablecoins, virtual currencies designed to maintain a fixed value of $1. In theory, they should be a safe haven from the larger crypto carnage. But will they hold up?Read more.

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