Nowotny Worries Central Banks Could Be Scapegoats In Bitcoin Collapse

Nobody should blame Ewald Nowotny. Over the last six months, the governor of the Austrian Central Bank, who also serves as a member of the ECB’s Governing Council, has continuously raised the alarm about cryptocurrency.

In May 2017, he compared the bitcoin craze to the 17th century’s Tulip Mania, when pretty flowers briefly traded for the same value as Amsterdam townhouses. In the throes of bitcoin’s meteoric rise, Nowotny has urged caution toward the digital “object of speculation,” but his pleas have seemingly fallen on deaf ears.

As bitcoin surpassed $9,000, Nowotny once again expressed his concerns to Reuters.

“The problem with bitcoin is that it could easily blow up and central banks could then be accused of not doing anything,” said Nowotny. “So we’re trying to understand whether bank activity in relation to cryptocurrency trading needs to be better regulated.”

If the much-talked-about bitcoin bubble bursts, would exchanges become insolvent? Could they take any banks down with them? Would ruined cryptocurrency traders pray for a bailout à la AIG?

It’s unclear how Nowotny framed his latest remark, but a little over a week ago, he queried whether “legislators or central banks should intervene.”

There’s certainly a range of options at the ECB’s disposal. Intervention could be as basic as educating consumers about the risks of cryptocurrency speculation, or it might entail sweeping legal action (as with China’s complete ban on token offerings).

For now, the eurozone’s bank has been relatively nonchalant about the alleged threat of cryptocurrency. Last week, ECB president Mario Draghi brushed aside concerns while addressing the European Parliament’s Economic and Monetary Affairs Committee. “We think that all this is pretty limited,” he said. “It’s not yet something that could constitute a risk for central banks.”

As bitcoin grows – and other cryptocurrencies ride its coattails – the ramifications of a collapse expand as well. Central bankers can’t just hide under their blankets and hope that bitcoin goes away. Examining the degree to which cryptocurrency has embedded itself into the conventional financial system is a vital task that will require collaboration and patience. Even if central bankers believe that issuance mechanisms do not threaten to wrest control of monetary policy, cryptocurrency volatility may impact traditional financial activity.

To offer another reading of the so-called bubble “blowing up,” what if bitcoin becomes a dominant force in the global economy? Perhaps the digital asset could achieve widespread adoption and usage. In this scenario, central bankers would still be caught out – but this time, for their failure to innovate with digital money.

Regardless of your interpretation, the questions raised by Nowotny’s remarks are manifold. Central banks must walk a thin line between appropriate regulation and economic advancement.