A recent report from Morgan Stanley’s research team revealed an interesting use case for cryptocurrency. In the mentioned report, researchers claim that central banks could use cryptocurrency to aggressively cut future interest rates, which would help lessen and even completely remove any serious effects of a future financial crisis.
In their examination, the team lead by Sheena Shah, Morgan Stanley’s financial strategist, came to a conclusion that crypto would allow central banks to impose financial policies directly on the monetary supply, instead of having to go through intermediary financial institutions. Such a move would enable the bank to implement historically large negative interest rates and more effectively govern the financial system.
During the last financial crisis which happened in 2008, banks hacked interest rates aggressively to protect the lending/borrowing industry. A couple of countries had their banks slash the rates into negative, reaching up to -0.5%. Stanley Morgan team focused on this aspect and determined that a digital currency could help create even deeper negative rates, which would keep the economy going through tough financial times.
“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,” a quote from the report says.
A report from UBS investment bank predicts that during the next financial crisis, interest rates will need to go down as low as -5% to mitigate the negative effects. A monetary policy going directly through the money supply would enable the implementation of such interest rates.
“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,” Morgan Stanley researchers added.
Notably, this presumes that the bank will create its own cryptocurrency and that people living in the country will use the currency during the time of crisis. In reality, plenty of things could go wrong here. People might decide to move their wealth elsewhere, for example in a decentralized cryptocurrency like Bitcoin, especially if they hear about negative interest rates being implemented on their native currency. A negative rate means that people are effectively paying to hold a cryptocurrency, which reduces their wealth. If more people decided to switch to Bitcoin, the economy would suffer a massive loss of capital that would exacerbate the effects of the crisis even further, predicts the head of Germany’s Bundesbank, Jens Weidmann.