The chief economist of the Bank of Singapore said that private cryptocurrencies are unlikely to replace fiat currencies as money, but may take a share in the market for reliable assets such as gold.
Cryptocurrencies could replace gold as an electronic store of value once the key issues of trust, volatility, regulatory acceptance and reputational risks are addressed, according to a Bank of Singapore Policy Brief. Once these weaknesses are addressed, digital currencies can also be used in investor portfolios as a potential safe haven for diversification.
“First, investors need reliable institutions to store digital currencies. Second, liquidity needs to be significantly improved to reduce volatility to an acceptable level, ”said Mansoor Mohi-uddin, Chief Economist at the Bank of Singapore.
According to a recent statement by the private Swiss bank Lombard Odier, small market volumes are causing cryptocurrencies to volatility, which is one of the biggest obstacles to their adoption in real transactions. Mohi-uddin said:
“Bitcoin is very volatile – over the past year it has risen from $ 4,000 to over $ 40,000 and then dropped to $ 30,000. Bitcoin also correlates with stocks and other risky assets rather than being traded as a safe asset. With the financial crisis, cryptocurrencies are more likely to be sold by investors during a market crash, as happened at the start of the pandemic in March 2020. ”
However, greater involvement of institutional investors, such as asset managers with longer-term investment horizons, can help increase liquidity and reduce volatility. Ultimately, this will lead to the fact that the price movement will be more determined by fundamental factors than by speculation, the Bank of Singapore said in a policy note.
According to the regulator, the popularity of digital currencies among young people is partly due to convenience. Bitcoin and other cryptocurrencies are easy to store in digital wallets, while precious metals often need to be stored in secure physical locations and are not easy to use for day-to-day transactions. However, it is easier for scammers to steal crypto assets. There are also reputational risks as digital currencies are widely used by criminals.
“Governments need to curb criminal activity in order to reduce the reputational risks of owning digital money,” Mohi-uddin said.
According to him, the volatility of cryptocurrencies makes them ineffective as money. Due to the limited supply of cryptocurrencies, they cannot foster economic activity, and governments are unlikely to put up with direct challenges to monetary sovereignty – several central banks are already developing their own digital currencies using blockchain.
“Governments are very wary of any technology that could potentially crowd out national currencies. This will reduce the ability of politicians to issue money during economic crises, ”said Mohi-uddin.
Recall that in December, the Singapore authorities launched the Singapore Blockchain Innovation Program, under which it is planned to develop the blockchain ecosystem in the city.