How is Bitcoin affecting global financial markets, especially in regards to capital controls and monetary policy?

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Question: 

Bitcoin, a cryptocurrency notable for facilitating decentralized, peer-to-peer transactions, has caused controversy among some economists for its ability to allow unrestricted capital markets. Given that some countries rely on capital controls to restrict excesses of capital from flowing out of the country, does Bitcoin threaten the stability of these systems, and should it be regulated? Or have capital controls been rendered ineffective in the 21st century globalist economy?

Answer: 

Bitcoin itself doesn't affect global financial markets very much now. It has been used with some unlawful activities such as purchasing drug and money laundering. It certainly can be and have been used to violate capital regulation law in some countries but at least now it is still not a big problem. Compared to the huge amount of capital and money flow, money trying to violate regulation by using Bitcoin is still very little. And it is not that hard for governments to track Bitcoin related money flow now. What's more, the total volume of Bitcoin is still not big enough to affect big economies such as the US and China. It may have potential to threat financial markets in the future without regulation but at least now it hasn't.

Blockchain technology, however, may have huge effect on financial markets. It can be used to solve inefficiency of global payments, help trade finance and make smart contract. For example, cross border remittance of $500 often takes more than two days with around 5% cost. Now some fintech companies, big traditional financial institutions and even incumbent payment system SWIFT are using blockchain technology to reduce cost and increase efficiency and are making big progress. Although Bitcoin may not change the whole financial market, blockchain technology behind Bitcoin has the chance to change the world. We don't know if in the future it can break the capital restrictions in some countries or cause some instability of financial markets but it is also possible to have positive effect on financial markets. Governments should prevent the negative effect by regulation and encourage the positive innovation. As the communique from G20 finance ministers and central bank governors summit says "We acknowledge that technological innovation, including that underlying crypto-assets, has the potential to improve the efficiency and inclusiveness of the financial system and the economy more broadly. Crypto- assets do, however, raise issues with respect to consumer and investor protection, market integrity, tax evasion, money laundering and terrorist financing. Crypto-assets lack the key attributes of sovereign currencies. At some point they could have financial stability implications. We commit to implement the FATF standards as they apply to crypto-assets, look forward to the FATF review of those standards, and call on the FATF to advance global implementation. We call on international standard-setting bodies (SSBs) to continue their monitoring of crypto-assets and their risks, according to their mandates, and assess multilateral responses as needed."

 

Answered by:
Sicheng He
Graduate Student
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Last updated on March 26, 2018