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Cryptocurrencies and states

A change of attitude?

While states have always expressed a negative view on cryptocurrencies, stemming from the potential threats to monetary sovereignty and financial stability, it seems now that this attitude is changing, even if at a slow pace. After making bitcoin legal tender, El Salvador is ready to issue its first bitcoin-denominated government bond (even if it has decided to postpone the issuance because of the instabilities caused by the war in Ukraine). Cryptocurrencies have gained popularity in emerging market economies in recent years, with an acceleration after the Covid-19 crisis, and especially in countries with volatile currencies. For an analysis of this phenomenon, we suggest to read the last BIS Quarterly Review.

 But this change is not confined to emerging countries: Switzerland's city of Lugano announced a project, created in partnership with Tether, that will allow Lugano residents to pay taxes, tickets, public services and students tuition fees with the cryptocurrencies Bitcoin, Tether and LVGA token (the stablecoin based on the Swiss franc). Similarly, in the US, Florida Governor Ron DeSantis said he is taking steps to enable firms to pay taxes in cryptocurrencies and the city councilors of Austin in Texas approved a study to investigate the feasibility of accepting tax payments via bitcoin or other cryptocurrencies.

These last initiatives promoted by American states and cities are not isolated. On 9 March 2022, US President Biden issued an executive order aimed at regulating the cryptocurrencies industry (here you can find the whole text). The order will be implemented by executive actions coordinated by the Assistant to the President for National Security Affairs (APNSA) and the Assistant to the President for Economic Policy (APEP). The principal policy objectives indicated are:

(i) consumers, investors, and business protection, connected in particular to protection for sensitive financial data;

(ii) protection of global financial stability and mitigation of systemic risk;

(iii) mitigation of illicit finance and national security risks,  “including money laundering, cybercrime and ransomware, narcotics and human trafficking, and terrorism and proliferation financing”;

(iv) reinforcement of U.S leadership in the global financial system, “including through the responsible development of payment innovations and digital assets”;

(v) promotion of access to safe and affordable financial services, “particularly for those Americans underserved by the traditional banking system, including by making investments and domestic and cross-border funds transfers and payments cheaper, faster, and safer,  and by promoting greater and more cost-efficient access to financial products and services”;

(vi) support to “technological advances that promote responsible development and use of digital assets”.

Point (iv) and (v) are particularly relevant, because they signal a substantive change of attitude by the US government towards cryptocurrencies, which are presented as a means to improve the domestic and international financial and payment system and, even more importantly, to reinforce the US leadership in the global financial system, even if a strong regulatory framework is deemed necessary to address their threats to consumer protection, financial stability and crime and security risks (and the document explicitly states that existing financial regulation, though applied when possible in line with the principle “same business, same risks, same rules”, is insufficient to tackle the “new and unique uses and functions that digital assets can facilitate”). Therefore, it is not surprising that the stock prices of crypto-related companies have jumped, as the broader market reacted positively to the executive order. The jump involved, among others, crypto exchanges like Coinbase, blockhain-related ETFs and cryptocurrencies mining companies.

In Europe, the European Parliament approved a five-year pilot program to test Stock and bond issuance, trading and settlement via blockchain technology.

CBDC projects go on

However, policymakers around the world are still working on the route of the issuance of a central bank digital currency (CBDC), which should in theory counteract the growth of private digital currencies and the threats associated with this growth. China, which is at the forefront in this field, will soon approve the third batch of localities set to launch trials of its digital yuan currency. In Latin America, the Central Bank of Brazil has chosen nine partners to help develop a digital real, Brazil's CBDC. Interestingly, among the partners are crypto exchange Mercado Bitcoin, Santander Brasil, Itaú Unibanco and Aave, a decentralized finance (DeFi) platform. Venezuela, going one step further, decided to 50% peg its minimum wage to the national petro cryptocurrency. Also the United States, which initially showed little interest to CBDC, is now rushing to recover the time lost: in the same executive order cited above, president Biden ordered government agencies, including the Federal Reserve, to develop a CBDC proposal within 180 days. Biden wrote that “My Administration places the highest urgency on research and development efforts into the potential design and deployment options of a United States CBDC.” A recent policy paper on CBDC, produced by Markus Brunnermeier and Jean Pierre Landau and commissioned by the Econ Committe of the European Parliament, can be found here. Finally, policymakers are also going on in exploring the potential of CBDC projects at the international level, to tackle the flaws of the present international monetary and payment system. In this respect, The Bank for International Settlements has completed an experimental CBDC platform pilot for international settlement, called "Project Dunbar", with the central banks of Australia, Malaysia, Singapore and South Africa. The project has been developed to facilitate direct cross-border transactions between financial institutions using multiple currencies connected across multiple central banks.