World's central banks launch new campaign against cryptocurrencies

Recent moves by China to crack down oncryptocurrencieshave been devastating to those who jumped on the bitcoin bandwagon this spring after a new buying frenzy had sent the digital units soaring to record highs.

And a report out Wednesdayfrom the Bank for International Settlements (BIS), a Switzerland-based financial institution often described as "the central bankers' central bank," may mean the worries of digital coin holders are not yetover.

Owned by the Bank of Canada, the Federal Reserve and the rest, the internationally respected financial institution hinted it may launcha renewed challenge, declaring that crypto worksagainst the public good.

Long-time crypto holders are still in the money, and those who sold nearthe top of the market are likely thrilled. But in markets, for every sale, there has to be a buyer and on Tuesday, those whobackedBTC as bitcoin is known to tradersnear its $63,000 U.S., peaklost more than half their investmentsas it fell below $30,000 U.S.

Owners of others, such as Dogecoin, the cryptocurrency that started as a joke, suffered even more in percentage terms.

Forced sale as markets fall

The damage wasworse for those who bought on margin, the process where investors borrow from their brokerto invest, but are required by lenders to pay back part of what they owe if the value of their stake falls below a certain level. Suchinvestors are forced to sell into a falling market unless they can cover their loans with new money.

That means for every dollar of your own money you invest, you can buy $100 worth of securities. That kind of leverage is stunningly lucrative when markets are going up, but in the recent plunge, margin traderslosttheir shirts. While brokerages in Canada don't offer those kinds of margins, in a global market everyone suffers the consequences.

Despite its latest reverses, crypto, and especially the most famous example, bitcoin, has shown that it may be down but not out, bouncing back above $34,000 US after grazing $29,000on Tuesday.

Bitcoin also has had some successes. Earlier this month, El Salvador, which already uses the U.S. dollar as its currency, was also the first countryto declarethe cryptocurrencyas legal tender.

"The government will guarantee the convertibility to the exact value in dollars at the moment of the transaction,"said the country's president, Nayib Bukele, after the legislation passed.

Central bank digital alternative

The announcement came just in time for the latest bitcoin plunge, prompting jokes about the idea thatSalvadorians who negotiatedsalary deals at BTC$60,000, may have regretted doing so ifthey were being paidthe day it fell below $30,000.Volatility has always been one of bitcoin's problemsas a unit of exchange.

"Innovations such as cryptocurrencies, stablecoins and the walled garden ecosystems of big techs all tend to work against the public good element that underpins the payment system," declaredthe BIS report in its conclusions. Walled garden systems are a bit like Canadian Tire money effectively, chits that you can only spend in-house.

What is cryptocurrency?

5 years ago

Duration 2:31

Cryptocurrency is big business, but for many not in the tech sphere, it's still a big unknown. Here are answers to some questions you might have.

Central bank-issued digital money, called CBDCs for shortan area where China has become a world leaderwas first seriously mooted after Facebook proposed its own stablecoin, Libra,in 2019. Unlike cryptocurrencies, which can rise and fall unpredictably,the value of CBDCs are known. And unlike stablecoins, they can be spent anywhere as legal tender.

As describedWednesday byBIS research director and Korean economist Hyun Song Shin,central bank-issued digital coins would have many of the advantages of crypto without the disadvantages.

Cutting out the intermediaries

They also would eliminate the role of an intermediarywhen you transfer money.

"You could pay someone just as you would by handing over cash, but do it digitally using your smartphone," said Shin in a video presentation Tuesday. "CBDCs are a claim on the central bank, which means the payment is certain and final without leaving things to intermediaries to complete the transaction."

"They can also protect privacy while maintaining the integrity of the payment system and law enforcement," said Shin.

Of course some of the people who trade or use bitcoin and other cyrptocurrencies might not see those things as advantages. Since the digital tokensdon't produce anything of value, making money in crypto speculation depends not on a stable price but on the idea that the sky's the limit and that bitcoin and its ilk will keep rising tofuture mountain tops.

Bitcoin trading, like the Gamestop phenomenon, has become part of a kind of rebel financial movementpowered by Reddit. Market traditionalists have scoffed, but just this week the rebels had another win as GameStop, a company expected by conventional traders to go bankrupt, managed to launch a billion-dollar IPO, while a hedge fund that bet against it shut itself down.

Similarly, crushing crypto trading may not be easy. China has shown that by cracking down on the bitcoin miners who effectively power the digital coins' system of accounting, and by forcing its own banks to stop facilitating crypto use, strong government action has the clout to slow, if not defeat the use of cryptocurrencies.

The BIS report hints at going after crypto for its wasteful energy use in a climate change world. Last month, global banking regulatorsalso recommended putting restrictions on holding things like bitcoin as capital, discouraging theiruse in banking.

But if central banks want to maintain their exclusive power over money, they may have to do something a little harsher thanwhat is contained in this week's report.Offering a functional alternative, no matter how good, is unlikely tobe enough.

Follow Don on Twitter @don_pittis