The blind spots of cryptocurrencies

Will cryptocurrencies such as Bitcoin become the future currency that is widely used for payment? Because blockchain technology can verify the exchange of money without intermediaries such as financial institutions to verify the authenticity.

Will cryptocurrencies such as bitcoin become the most widely used currency of the future? Because blockchain technology can verify the exchange of money without intermediaries such as financial institutions to verify the authenticity. and has high security Since blockchain technology prevents data theft (hack), digital payments no longer have to be made through financial institutions. However, changing currencies is not easy and has limitations and disadvantages as follows.

1. Payments in more than one currency create costs and uncertainties for Thais, namely: As long as more than one currency is used in the country. All Thai people are exposed to currency fluctuations. It is no different from exporters or importers who have unstable income each day. Because the baht can fluctuate, it is not conducive to economic growth. compared to if everyone in the country spends in the same currency

2. The case will cause the volatility of the currency exchange to disappear. Must make everyone in the country turn to the same currency, for example, everyone must turn to Bitcoin. This is not possible for two main reasons.

(1) Bitcoin mechanics cannot make everyone the same wealth when changing currencies because more people buy and switch to Bitcoin. The price of bitcoins will go up. Causing people to buy later will have to buy at a high price, so the last buyer, even with a large amount of baht, will receive very little Bitcoin and may become poor immediately. It can be seen that if changing the currency There needs to be a mechanism that ensures everyone’s wealth stays the same before and after the transition in order to be fair to all.

(2) If everyone uses the same currency like Bitcoin There must be no remaining baht in the system. This is unattainable because Bitcoin trading is an exchange of money between two parties. If one party brings baht to buy bitcoins Sellers of bitcoins get baht instead. The baht is still in the system anyway. And sellers who now hold more baht will want to spend in baht. After all, it’s not possible to get everyone to spend in just one currency.

These two limitations make it very difficult to convert currency to bitcoin. Only a central bank or state can address both restrictions. This is similar to what the European Central Bank did when its member countries switched to the euro in 2002, keeping the euro exchange rate constant with the euro. local country currency This means that the European Central Bank can distribute the euro without limits to keep its value stable. And when the people exchanged money, they destroyed the local currency and left it in the system. make member countries spend in euro currency

3. Stable cryptocurrencies (stable coins) can answer the question or not. Stable coins come in many forms, both with backed and non-backed assets. which at least should be able to maintain wealth if the currency can be fixed at a fixed price, the answer is Stabilizing the currency is not easy. Because the founder of the new currency cannot print any other currency besides his own currency. Therefore, there is a risk of liquidity problems, that is, there is not enough money in other currencies to exchange back. causing the risk of not being able to freeze the currency

In addition to the credibility of the currency The interest rate is The main factors that will cause problems in liquidity management of stable coins are as follows:

(1) In the case that the stable coin does not give interest rates When global interest rates are near zero, it’s fine. because it is considered that there is no interest rate as well But if central banks around the world raise interest rates People wouldn’t want to keep their money in stable coins and when interest rates rose. The more money will be withdrawn from the stable coin until it can cause liquidity problems and cannot freeze the currency.

(2) On the other hand, in the case of stable coin, it attracts people by offering high interest rates. Randomly risking liquidity problems as well, because every 1 coin that comes in is converted to 1 stable coin. When exchanging money back, outgoing will have to pay more than 1 coin because they have to pay interest as well. When the outbound is greater than the inbound, if there is a redemption parade or an attack on the currency. It risks not being able to freeze the currency. In fact In the past, central banks around the world, including Thailand, had a problem of fixing the currency. It is no surprise then that we witnessed a crisis of faith in stablecoins at the beginning of May, where TerraUSD was unable to hold its value. And it has almost zero value for a few days.

4. Thai people will lose monetary policy tools to take care of the economy if they can actually change their currency. This is because central banks cannot control the money supply or liquidity of cryptocurrencies. Therefore, the direction of monetary policy cannot be determined. in that case The interest rate will follow the market mechanism. which has and is likely to destabilize the economy Because interest rates are high when the economy is bad. due to having to compensate for higher risks And interest rates are low when the economy is good because the risk is low. Such dynamics will cause a volatile economic cycle, that is, the uptrend is growing hot. The downward contraction was severe. until there may be a crisis

It can be seen that just having technology that can exchange money without a financial intermediary. This does not mean that we will be able to create a new currency to replace the old one. By ignoring the understanding of the working mechanism of the economic and financial system, limitations and disadvantages that people need to know. To determine for yourself whether cryptocurrencies can really be the currency of the future. Or is it just a form of money speculation that is no different from gambling?

Dr. Sara Chuenchoksan Macroeconomic Department

This article is a personal opinion. which is not necessarily consistent with the opinions of the Bank of Thailand

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