We speak about central banks a lot when we talk about economics, and even when we talk about cryptocurrencies. We’re explaining everything you need to know about central banks today.
So what is a central bank?
Central banks produce and distribute money and credit for a nation (or, in some cases, a group of nations like the EU). Most central banks are designed to be completely independent and separate from the government. The person in charge of central banks are generally not elected, however, they are normally appointed by the government. Which we know is a little contradictory, but you get the point.
Central banks in different countries have varying roles, but generally, there are three overarching responsibilities of central banks:
- Control and manipulate the national supply of money. This typically looks like printing more money and setting interest rates (remember that explainer?);
- Regulate a nation’s banks by setting requirements forhow much money a bank needs to properly function (known as ‘capital requirements’), as well as other requirements;
- Being the last resort or emergency lender to distressed normal banks, government, or other institutions.
Let’s take Australia for example.
The Reserve Bank of Australia (RBA) — the Australian central bank — does not function like a typical bank like Commonwealth Bank or NAB. It’s an institution that is responsible for the stability of our currency (the Australian Dollar) and a thriving economy. The way they do this is through monetary policy.
Another central bank you might have heard of is the U.S. Federal Reserve or “The Fed”. You need to know about “The Fed” because the U.S. Dollar is the global reserve currency, meaning it’s sort of like the currency of the world. It’s pretty important.
Everything we just spoke about above is known as the fiat system or fiat currency. You may have heard the word fiat when people are speaking about Bitcoin or cryptocurrencies. We’ll explain fiat in more detail another time.
Why are central banks controversial?
This is where the cryptocurrency community comes in — cryptocurrencies are often thought of as an alternative to central banks and the fiat system. When you hear people speaking about decentralisation in the crypto world, they are essentially pushing back on the consolidated control held by a central bank. Is it starting to make sense now?
Cryptocurrency traders enjoy having their wealth outside the realm of central banks, who might print money and devalue the currency if they think it’s needed.
Moreover, some cryptocurrencies — we’ll use Bitcoin as an example — have a fixed total supply of Bitcoin in circulation, which will be 21 million Bitcoin. There’s no central bank that can ever make more Bitcoin. Additionally, Bitcoin has a known inflation schedule, meaning people who hold Bitcoin know what the supply of Bitcoin will look like for years to come. Compare this to central banks, where the supply of money is constantly changing depending on the economy, political situations, unforeseen global crises, and inflation itself. Bitcoin holders take issue with the idea of one person or group making important decisions about monetary supply.
And that’s central banks!