Morgan Stanley – Cryptos Could Be Useful To Manage Financial Crisis

Morgan Stanley, in a study of cryptocurrencies for practical uses, has stated that central banks could use them to implement deeper negative rates in case of another financial crisis. It is a well-known fact that Central banks control liquidity by altering the interest rates. However, paper notes and coins make it impossible to enforce negative deposit rates in totality. In a cryptocurrency based system, central banks will be able to enforce negative interest rates with greater effect.

The study was conducted by a team of analysts led by Sheena Shah. While identifying several possible use cases for Central banks, Shah stated that the research was “not intended to suggest where we think a digital fiat currency could be implemented or all the reasons why.”

To protect financial institutions and consumers, during the recent financial crisis, the central banks of several countries, including Denmark, Japan, and Sweden had cut interest rates aggressively into the negative territory. The Swiss National Bank still maintains a negative interest rate of 0.75%. However, pushing interest rates deeper into the negative territory with reasonable positive impact on the economy is quite difficult as currencies circulate in the form of paper notes and coins. Shah and her team are of the opinion that “Theoretically, a monetary system that is 100% digital may enable deeper negative rates.” Such a possibility may appeal a few central banks.

UBS Investment bank had argued in late 2017 that central banks may have to implement a negative interest rate of up to 5% during the next financial crisis and this is close to impossible with traditional financial tools. However, the availability of cryptocurrencies issued by central banks could make negative interest rate of 5% a reality. Having said that Morgan Stanley has warned that “deep and long-standing negative rates eventually are problematic for banks.”

Shah and her team has also cautioned that

“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.”

Some of the central banks have already started their work to introduce digital currencies. In Sweden, the Riksbank is actively engaged in the creation of a government backed eKrona.

However, not everyone is optimistic about cryptocurrencies. Jens Weidmann, the head of Germany’s Bundesbank had warned last year that cryptocurrencies such as Bitcoin could make financial crisis much worse and devastating. Weidmann believes the creation of government backed cryptocurrencies may increase the risk of bank failure in future crisis.