Could The Morgan Stanley Crypto Prevent The Next Financial Crisis?

A new report from strategists with Morgan Stanley is drawing attention to the flexibility digital cryptocurrencies can give to central banks. That flexibility, the report argues, could help central banks respond and adapt to future financial crises. Morgan Stanley crypto researchers highlighted how blockchain technologies would give central banks unprecedented latitude to reduce and even set negative interests rates. And that, in turn, could help to mitigate the worse impacts of a serious financial downturn.

Morgan Stanley Crypto Report Says Blockchain Could Mitigate Impact of Future Financial Crises

Sheenah Shah is a chief strategist for banking giant Morgan Stanley. She and a team of researchers recently released a report that identifies key areas in which a central bank might opt to use digital currencies.

Cryptocurrencies can offer a number of benefits for financial institutions now and into the future. One of the core benefits is crypto’s total transparency. Thanks to blockchain, transactions using digital currencies are transparent and immutable. Another core benefit for central banks is the potential for increased efficiency and lower costs.

Combined, both benefits would allow central banks like Morgan Stanley to drive interest rates lower and further into negative territory if needed. Non-digital currencies, on the other hand, limits banks’ ability to force negative interests rates in the event of a financial crisis.

“A digital version of cash could theoretically allow negative deposit rates to be charged on all money in circulation within an economy,” Shah’s team found.

Cryptocurrencies Could Deepen Negative Interest Rates

When the last financial crisis hit the Eurozone, several central banks across Europe cut interest rates below zero in 2014. Japan followed suit in 2016, shocking global markets by putting rates in the red. By the summer of that year, more than 500 million people across a quarter of the global economy were living with negative rates.

Negative interest rates are last-ditch efforts to jumpstart a failing economy. By paying borrowers and charging depositors, negative rates spur lending and inflation. The policy is unorthodox and only came to be as a result of 2008’s crash. In other words, financial experts see negative rate policies as an act of desperation. Indeed, they effectively signal that all traditional options have failed.

But where traditional monetary tools have failed, Morgan Stanley crypto researchers think digital currency could succeed. Negative interest rates present a series of compounding problems for banks when used long-term. But central banks can only set rates so low with traditional tools. And this requires them to keep rates in the red longer to spur economic recovery.

Digital currencies, however, could enable certain lenders to deepen negative interest rates to previously unimaginable levels. And that could mean that negative rate policies wouldn’t need to be in effect for long periods. Just long enough to mitigate the worse consequences of a sudden market crash.