Central bank

What does the Central Bank of Iceland do?

The bank is governed by Act No. 92/2019 on the Central Bank of Iceland. Its main objective is price stability, and it also has to promote financial stability. Its main tasks are:

• Issuing notes and coins. Only the Central Bank may issue banknotes and coins.
• Interest rates. The bank's Monetary Policy Committee sets the policy ratePolicy rateThe Central Bank's interest rate that other rates in Iceland follow. The bank calls it its key rate and moves it to keep inflation in check. to keep InflationInflationA general rise in prices over time, which means each króna buys less than before. close to the 2.5% target.
• Financial supervision. Since 2020, financial supervision has been part of the Central Bank. Among other things, it licenses and supervises crypto-asset service providers.
• Foreign exchange reserves. The bank holds reserves in foreign currencies to deal with shocks.
• Lender of last resort. In a crisis, the bank can lend to banks to stop them from failing.

Central banks and the money supply

Central banks have a big influence on the money supplyMoney supplyThe total amount of money in circulation in an economy, such as notes, coins and bank deposits. It is measured in groups called M1, M2 and M3.. They do this mainly through interest rates, but in crises also by buying bonds on a large scale, which creates new money. The central banks of the United States and Europe did this after the 2008 financial crisis and again during the 2020 pandemic.

Central banks and bitcoin

Bitcoin was designed as a monetary system without a central bank. Its genesis block, from 3 January 2009, refers to a front-page story in The Times about the British Chancellor being on the brink of a second bailout for the banks. Bitcoin's supply follows fixed rules, and nobody can increase it by decision.

Critics and central banks point out that a central bank can respond to crises, for example by cutting rates and lending to banks, while bitcoin's supply responds to nothing. Bitcoin's supporters reply that this is exactly its main strength: nobody can erode its value by printing more. Some central banks are working on their own digital currencies, known as CBDCsCentral bank digital currency (CBDC)Digital money issued directly by a central bank, the electronic equivalent of banknotes and coins..