Gatekeepers of Order
Imagining The Role of Central Banks In A Decentralized, Blockchain Based World
The worst enemy of life, freedom and the common decencies is total anarchy; their second worst enemy is total efficiency. — Aldous Huxley
Over the ages, money has shifted forms but not it’s functions as a store of value and as a medium of exchange. The slowing global economy has accelerated the search for outsize returns resulting in speculative trading in Bitcoin and other cryptocurrencies.
Christine Lagarde, Managing Director of the International Monetary Fund (IMF) in a speech on September 29, 2017 provided further legitimacy to digital currencies by imagining a future where Central Banks have to deal with regulating crypto currencies. In the short to medium term, at least, the possibility of digital currencies coexisting with cards, digital wallets, Apple Pay, Samsung Pay and cash is easy to conceive of. How then will Central Banks change in the face of disruptive experiments such as Bitcoin that fall between complete anarchy and absolute efficiency. This article explores the evolving role of central banks and imagines what the central banks of the future would look like.
A Random Walk Down Memory Lane
The earliest model of central banks that modern central banks follow is the one belonging to ‘The Old Lady of Threadneedle Street’ also known as the Bank of England (BoE). The BoE was established in 1694 to buy government debt and keep the economy afloat during the nine years war with France. It is widely recognized as the precursor of modern central banking. However, the history of central banking predates the BoE with the establishment of the Amsterdam Wisselbank (Bank of Amsterdam) in 1609 and the Swedish Riksbank in 1668.
It is interesting to note that while modern central banks deal in fiat currencies, the banks of the early 18th and 19th century were based on a gold standard. The historic Bretton Woods agreement in 1944 resulted in the creation of a gold exchange standard where the value of a country’s currency was tied to gold. As per Investopedia, a country that uses the gold standard sets a fixed price for gold…