Morgan Stanley: Why Cryptocurrencies Could Change How Banks Deal With Financial Crises

According to a new report that has been released by Morgan Stanley, central banks could use cryptocurrencies to massively cut interest rates in the future, which would reduce the impact of future financial crises. The team at Morgan Stanley, which is being led by strategist Sheena Shah has looked at many areas where central banks could use cryptocurrencies, although, we should add, they were all too keen to stress that the results of their research were not suggesting that cryptocurrencies were in any way likely to surpass traditional fiat currency. The research uncovered a lot, but one of the most surprising areas of potential application is in the area of monetary policy, where it has been argued that cryptocurrencies could allow central banks to take interest rates into deeper negative territory should they need to in the event of a major financial crisis. When we last experienced a financial crisis, central banks ended up hugely cutting interest rates to protect the consumers and lenders from the major impacts that were felt, but this sent a number of central banks into negative territory, which still remain in some states. Shah and her team believe that this is where cryptocurrencies could help, saying;

“Theoretically, a monetary system that is 100% digital may enable deeper negative rates. This appeals to certain central banks…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.”

Using cryptocurrencies in this way could be a major reassurance for central banks, with worries that major economies could drop as low as 5%. Using digital currencies could provide an outlet for this possibility though. Of course, we would be silly to think that there are no downsides to this idea. Speaking of these, Morgan Stanley said;

“…deep and long-standing negative rates eventually are problematic for banks…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.”

Interest in cryptocurrencies among central banks have increased over the last year, with many countries even considering setting up their own cryptocurrency. Sadly though, this is not the same for all central banks. In fact, Jens Weidmann, who is the head of Germany’s Bundesbank has completely opposite views to Morgan Stanley, with the view that digital currencies could actually make a financial crisis in the future even more devastating. He went on to say that central banks will create their own digital currencies to reassure members of the community that their currencies are safe and stable, but this could inadvertently actually increase the risk of bank runs in future crises.