The role of central banks in climate matters does merit some discussion. Some of it is political, as evidenced by the 47 lawmakers who petitioned Fed Chair Jerome Powell to avoid climate stress tests and stay out of NGFS. Some skepticism is principled: Why should climate risk be in the scope of bank stress testing, but not other global risks like pandemics or trade relations? Why use monetary policy to nudge investments when direct measures like carbon taxes are more effective? But the financial industry is clearly moving toward consensus that climate is an appropriate consideration in financial regulation.
One of the upside stories of 2020 was the resilience of the financial sector during the stress of Covid-19 shutdowns. Risk management practices established after the Global Financial Crisis left the industry ready for that idiosyncratic event. Preparing for the foreseeable risk of climate change will similarly help keep the financial sector working well, and generate some green in the process.
Lacking Currency
The presentation was going very well. Questions related to the pandemic, the Biden economic program, and U.S./China relations had all been handled adroitly. But then, someone asked about bitcoin. Maintaining poise was difficult from that point on.
Cryptocurrency curiosity peaked in early 2018, when one bitcoin was worth more than $20,000. By the end of that year, bitcoin had lost 75% of its value and the volume of inquiries we fielded about it dropped commensurately. Things remained fairly quiet until last fall, when the price of a bitcoin began an ascent that crested recently at more than $40,000. And the questions returned.
Our answers on the topic have not changed over the past three years. We share them here, in the hope that we can move on from bitcoin questions once and for all. We are skeptical about the current collection of cryptocurrencies, and here’s why:
• The values of the leading virtual currencies are very volatile. To be fair, the values of the dollar, euro and yen fluctuate every day in the foreign exchange markets, but not nearly to the same degree. The purchasing power of the top cryptocurrencies is highly uncertain, making them poor mediums of exchange.
• There is no clear ownership or control of the supply of cryptocurrencies, which leaves them vulnerable to debasement. Further, cybertheft is not uncommon; bitcoin wallets have been hacked frequently.
The Technology Used By Bitcoin Has Promise, But The Currency Is Of Dubious Value
• Bitcoin transactions are anonymous, making them ideal for illicit activity like ransomware. International law enforcement is working toward curtailing this channel.
• The penetration of e-commerce has diminished the need for currency of any kind. Frictions in transacting are dropping naturally, diminishing the need for cryptocurrencies.
• Bitcoin is one of more than 5,000 cryptocurrencies. Competition is keen, making it hard for individual products to establish primacy. And central banks may one day enter the fray with products whose credibility will give them an immediate advantage.
• There is no evidence that cryptocurrencies serve as a hedge against inflation.
The blockchain technology that underlies cryptocurrencies is of substantial value, and is already being applied productively to transactions in goods and securities. But to us, bitcoin and its brethren are of very questionable value.
Carl R. Tannenbaum is executive vice president and chief economist at Northern Trust. Ryan James Boyle is vice president and senior economist at Northern Trust. Vaibhav Tandon is second vice president and an economist Northern Trust.