Inflation to crypto: MAS and other central bank execs on the future of financial services

At the Point Zero Forum held earlier this week, Ravi Menon, Managing Director of the Monetary Authority of Singapore was invited to speak on the future of financial services as a panelist.

Other panelists included Agustin Carstens, General Manager of the Bank of International Settlements, as well as Thomas J Jordan, Chairman of the Governing Board at the Swiss National Bank.

The discussion focused on several key topics, including the current macroeconomic landscape and its causes, the role of cryptocurrencies in national economies going forward, as well as how blockchain technology can be helpful to governments in dealing with national or global concerns.

What is the state of the global economy, and how did we get here?

A major point of agreement among all three panellists was on the paradigm shift in the global economy that has taken place in the last few years. 

The onset of the pandemic had initially resulted in many concerns about low inflation, and both monetary and fiscal policies were intended to deal with it. In contrast, central banks today are battling high inflation and considering measures that will bring inflation down.

Agustin Carstens, General Manager at the Bank of International Settlements, provided some context: “Two and a half years back, the concern was about bringing inflation up to target, and concerns about how circular forces would keep inflation down. The main concern then was Covid, since it resulted in a sharp decrease in economic activity. But a quick recovery and rapid fiscal response to the end of that crisis meant that inflation has spiked quite markedly.”

“There is a debate about how to deal with transitory shocks, about which shocks are transitory, and which ones are persistent. There are now concerns that inflation is too high, and that without forceful monetary policy action, hyperinflation might become a reality.”

As such, all three panellists were concerned with preventing price-wage spirals, alongside other possible ripple effects of increased prices.

In explaining the goal of central bank monetary policy in the modern world, Ravi Menon, Managing Director of MAS, explained that “the objective is not to filter off inflation, but to prevent secondary effects of that inflation.” 

However, both Agustin and Ravi said that while inflation can be reduced, it will still likely stay at a higher level than before.

The role of crypto in national economies

Of course, the panellists also addressed the elephant in the room, with regards to the future of cryptocurrencies in national economies. To start it off, Ravi noted dryly that “we are gathered to celebrate the crypto economy, when actually there’s a bloodbath going on”.

The irony was not lost on the other panellists either, with both Thomas and Agustin criticising the market hype that has been surrounding the crypto economy as of late.

In particular, Agustin provided scathing condemnation, accusing cryptocurrencies of being unable to guarantee the value of their own tokens.

“A big issue right now is with stablecoins. Why do we need to underline ‘stable’? Because the company itself doesn’t assure the value of currency. Traditionally, that has been super important. So why do we have to go through the whole process of inventing another currency when we already have one?” he questioned.

Addressing the recent high profile crashes of crypto companies, Agustin argued that these companies “cannot defy gravity”, and that at some point they have to face the music. 

What this means is that companies have to follow financial principles. Many of these bankruptcies have to do with them ignoring these principles. These are adequate capitalisation, adequate liquidity management, and adequate leverage management.

If something goes even slightly wrong, the probability of crashing is extremely high. A lot of crypto has been evolving without regulation, and actually in a way to defy regulation. But regulations exist because they are built on lessons from the past.

Thomas for his part agreed, albeit in a more muted way. He appealed that fiat currencies are still strong assets, especially among developed countries where confidence in national fiat currencies are still high.

That being said, he still agreed with the idea that the markets had perhaps run slightly amok, and that regulation of these new coins was needed. 

“We should not be afraid of stablecoins, but we should regulate it in a very similar way as we regulate bank currency. There should be no confusion as to what a Swiss Franc, a US Dollar, or a Singapore Dollar is. These units of accounts are still valuable assets. We believe in being open to technological innovation, but we cannot be biased.”

What’s next for crypto?

Despite their criticism, the regulators still believe that cryptocurrency and blockchain technology can have productive uses. 

In fact, Ravi suggests that this is one of the key uses of cryptocurrency and blockchain technology — to create a more sustainable green economy.

“Climate change is the mother of all supply shocks, and it will make the supply disruptions from Ukraine look like a walk in the park. But technology can play a big part because I think we need a revolution in green fintech. We’ve got to apply that to solve the sustainability problem.”

Thomas also agreed that a transition to a more sustainable economy was required, but cautioned that this might take a significant amount of time. “We should ensure the green transition, but we cannot retreat financing immediately from all sectors, so the transition is complex.”

In addition, Ravi pointed out that these emerging technologies could indeed help to alleviate inflation by reducing costs and improving efficiency in some industries.

A perfect storm seems to be brewing across many sectors in the world — none more so than the crypto ecosystem, where the storm has already made landfall.

Inflation, global instability, and lukewarm support from regulators has indeed made it difficult for many in the cryptocurrency business world. But according to these regulators, this is for good reason — the hype and market prices are unreasonable, and should be allowed to fall, and energies in the crypto world should be redirected towards more productive ends, such as transitioning economies towards greener means of production.

Featured Image Credit: Screengrab by Vulcan Post