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Morgan Stanley: Digital Currencies Can Avert Financial Crisis

  • Urvashi Verma
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    Cryptocurrencies can facilitate implementation of monetary policy through deeper negative interest rates, Morgan Stanley says.


Morgan Stanley: Digital Currencies Can Avert Financial Crisis

Cryptocurrencies and Bitcoin could help central banks to avert a financial crisis in the future, according to a report released by Morgan Stanley.

Digital currencies could enable central banks to take interest rates into deeper negative territory to prevent financial breakdown, the report says.

While central banks have remained critical of digital currencies and the long-term imposition of negative interest rates, they may serve as a boon during times of crisis.

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Sheena Shah, a strategist at Morgan Stanley, said in an interview with Business Insider that a monetary system which is 100 percent digital could enable deeper negative interest cuts by traditional banks which in the past have been capped at -0.5 percent.  

Shah says:

“Freely circulating paper notes and coins (cash) limits the ability of the central banks to force negative deposit rates. A digital version of cash could theoretically allow negative deposit rates to be charged on all money in circulation within any economy.”

During times of financial crisis central banks often impose monetary policy with negative interest rates to boost economic growth. In the 2017 financial crisis, the European Union, Sweden, Japan, and Denmark all imposed negative interest rates, according to data collected by Macrobond Morgan Stanley.

Experts say that digital currencies could facilitate the implementation of negative interest rates as monetary policy far better than the existing fiat currency because it’s not possible to account for cash existing outside of the banking infrastructure.

Sheena Shah added:

“Central banks would then have to go direct to currency users to implement monetary policy, reducing leverage in the system significantly and cutting GDP growth.”

Cover image via u.today
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About the author

Urvashi Verma is a Chicago-based reporter who writes about the convergence of technology and business. She is interested in fintech, digital currencies, blockchain and currency markets. Urvashi formerly worked with the Times of Israel covering Israel's booming tech industry including Start-Up Nation, venture capital investment, and crowd-funding platforms.

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