In the absence of flexible supply mechanisms, unbacked cryptos are incapable of effectively responding to temporary fluctuations in demand and thus fail to stabilise their value. Similarly, bitcoin’s limited supply – at 21 million coins – means that it does not offer protection against the risk of structural deflation. 18. Di Casola, P., Habib, M. and Tercero-Lucas, D. (2023), “Global and local drivers of Bitcoin trading vis-à-vis fiat currencies”, ECB Working Paper Series, forthcoming. 19. The industry’s trend towards centralisation is clear. Since 2015 approximately 75% of the actual bitcoin volume has been associated with exchanges or exchange-like entities, including online wallets, over-thecounter (OTC) desks and large institutional traders. See Makarov and Schoar (2022), op. cit. 20. Staking is the foundation of the proof-of-stake consensus mechanism, which entails individuals locking up their assets (native coins) on a blockchain to secure the protocol. The stake acts as a form of collateral to ensure that validators, who are responsible for verifying and appending the blockchain, act in a manner that is in line with the protocol's rules. See Oderbolz, N., Marosvölgyi, B. and Hafner, M. (2023), “The Economics of Crypto Staking”,. Swiss Economics Blog, 1 March. 21. They back their value with securities, commodities, as well as fiat money. Interestingly and inevitably, major stablecoin issuers – such as Tether or Circle – adopt centralised organisational structures, directly contradicting the initial ideas as laid down in Satoshi Nakamoto’s white paper.
BIS Review 77/2008  3  This could not have been more important. It has made innovation in central banks’ liquidity provision imperative during the turmoil. And, when we regain peacetime, reforms will be needed to avoid a recurrence of this problem. Open-market operations (or auctions) against wider collateral, and the Bank’s Special Liquidity Scheme launched on 21 April, should both be seen in that light. Such measures need to be constructed so that they do not interfere with the implementation of monetary policy, which depends on the central bank’s net supply of reserves matching demand in the economy so as to stabilise (risk free, or secured) overnight money market interest rates broadly in line with the policy rate. The monetary part of central banks’ market operations is simply the injection of reserves. The other characteristics – counterparties, maturity, collateral etc – are essentially nonmonetary interventions. In most circumstances, central banks want to make them as neutral as possible, so as not to interfere with relative asset prices in the economy. When markets break down, however, central banks may need to calibrate their interventions to contain the spillovers to the economy. Thus the SLS is designed to underpin the liquidity of the banking system, and so confidence in the system as a whole. Taming the credit cycle But can we, the authorities, do more to avoid the system getting into such a fragile state in the first place? We really must consider how to do that.