Monetary Policy Process
“Monetary policy is to orient economic activity by regularizing the money supply “
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The increased use of cryptocurrencies could have profound consequences for the financial system as well as the conduct and effectiveness of monetary policy. Demonetization has important consequences for all monetary and economic aggregates.
In his book “The Curse of Cash” published in September 2016, economist K. Rogoff writes: “Liquidity stimulates the growth of the underground economy rather than that of the official economy”. He adds: “I am not in favor of a society without cash, which would neither be feasible nor desirable at the present time. However, a society without cash would be fairer and more secure ”.
On the other hand, in a recent IMF study in 2017, the impact is major at the level of monetary policy, thus the Bundesbank, in a 2014 study, estimates that reducing the costs of transformation would allow a gain of 2 to 3% of the GDP in Germany. The effects are however more structuring in monetary matters. As long as there is the possibility of having an electronic wallet [15].
However, complete demonetization presents risks for the control of monetary aggregates on the one hand and for financial and monetary stability on the other. The central bank is unable to control interest rates.
On the demand side, the public prefers to use cryptocurrency issued by the private sector rather than the primary currency issued by a public organization for privacy reasons.
The supply of cryptocurrency in particular by the private sector is inflexible in relation to the money supply circulating in the economy. The widespread use of cryptocurrencies despite their unsatisfactory characteristics compared to legal currencies. The question then arises: why is this currency incapable of playing the roles of medium of exchange, unit of account and store of value – because the supply of this currency is inelastic – is chosen?
Monetary policy instruments
Monetary policy instruments are of two kinds: reserve requirements and interest rate instruments such as open market operations which serve to signal the stance of monetary policy.
Financial innovations, the rise of international financial markets and the transformation of forms of money, which have called into question the dominant conceptions of monetary policy. All this forced the monetary authorities to adopt new provisions to control the issuance of the cryptocurrency and its management in order to conduct an effective monetary policy [12].
Demonetization and monetary policy, the case of Sweden: among the world’s leading cryptocurrency economies; we cite Sweden, with a drop in liquidity of more than 50%, and this since 2010. This has enabled the Swedish state to fight against tax evasion and corruption. This particularly reflects monetary policy in a remarkable way.
The Riksbank (the Swedish central bank) has set up its central digital currency called “E-Krona”.
The Riksbank considers the lack of cash as a threat to the payment system, this criterion was taken into consideration when preparing the E-Korna cryptocurrency.
In fact, this risk manifests itself because money creation by the private sector outside the cycle of the Swedish central bank generates a risk of finding itself in monopoly situations led by private suppliers, which is passed on to the costs by the bank. Swedish central. Following. The central bank fears in such a situation of losing control of the currency and therefore of the effectiveness of monetary policy.
The Riksbank took the decision to make a gradual transition and introduce a core cryptocurrency with the aim of increasing its ability to manage the money supply and ensure the stability of the payment system and maintain its role as a bank. banks. In this context, a new dematerialized version of the currency was tested by the Riksbank, with the aim of ensuring the sustainability and resilience of payment systems.
The E-Korna, which is in the technical and legislative study phase, will be the object of a design so as to take the form of electronic money and this by proposing to the public to open accounts at the central bank which allows them to exchange legal tender in central currency via an exchange rate set by the central bank, and in a separation of these two forms of currency, or by issuing a central cryptocurrency by the Riksbank on an electronic wallet while maintaining the anonymity of transactions. Anonymity is only guaranteed for transactions below a certain threshold (currently at 250 euros) which is set by the central bank.
Thus, E-Korna can either take the form of electronic money at the central bank or of course the form of cryptocurrency in an electronic wallet. Whether in the first or second case, transactions take place on a distribution ledger managed by the Riksbank connecting private payment service providers, end users and all. Anonymity is only guaranteed for transactions below a certain threshold (currently at 250 euros) which is set by the central bank. Thus, E-Korna can either take the form of electronic money at the central bank or of course the form of cryptocurrency in an electronic wallet.
Whether in the first or second case, transactions take place on a distribution ledger managed by the Riksbank connecting private payment service providers, end users and all. Anonymity is only guaranteed for transactions below a certain threshold (currently at 250 euros) which is set by the central bank. Thus, E-Korna can either take the form of electronic money at the central bank or of course the form of cryptocurrency in an electronic wallet. Whether in the first or second case, transactions take place on a distribution ledger managed by the Riksbank connecting private payment service providers, end users and all.
In order to ensure a valid business model, the Bank of Canada consulted with payment service providers and merchants. Finally, and in order to prevent the illicit use of this currency, the Bank of Canada consulted various public bodies to discuss how to reconcile considerations of confidentiality and anonymity of transactions.
In conclusion, demonetization is now a challenge for monetary authorities, it presents an opportunity to further improve the effectiveness of monetary policy, but this must be done taking into account the enormous risks associated with the stability of the financial system, as well as the mechanisms by which these activities are carried out, the reduction of these risks associated with payment systems necessarily requires the deployment of encrypted central money and better control of its issuance, within a regulatory and legislative framework that is well defined, ensuring a good climate of competitiveness but above all a high level of security and guarantee for the entire system and its stakeholders.
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