Central banks go crypto

Cryptocurrencies have come a long way since their early associations with libertarian aversion to government surveillance. Discussion, if not yet concrete application, of digital currencies has permeated banks and other financial institutions, writes Richard Schwartz

By Jon Watkins

During a conference session earlier this week on emerging markets, for example, Jean-Michel Godeffroy, a Paris-based consultant and formerly director-general of the European Central Bank, introduced an interesting question from the floor. Why, he asked, was the Brazilian central bank focusing on promoting mobile access to payment services rather than exploring the option of the central bank issuing its own digital currency.

Godeffroy suggested that there were two options for a central bank to engage with digital currency. One was for all users to have an account at the central bank or, perhaps more practically, banks could act as safekeepers of digital currency assets in the same way as central securities depositories (CSDs) now do.

Advisor to Banco Central do Brasil, Breno Lobo, responded that levels of security for blockchain-based initiatives were not yet sufficient for central banks to steam ahead in that direction.

Nevertheless, the Committee on Payments and Market Infrastructures and the Markets Committee of the Bank for International Settlements (BIS) has analysed central bank digital currencies (CBDCs) and their potential implicartions for payment systems, monetary policy implementation and transmission as well as for the structure and stability of the financial system.

In a recent report, it identified a number of design choices for a CBDC, including breadth of access; degree of anonymity; operational availability and interest-bearing characteristics. Two main CBDC variants were analysed, similar to Godeffroy’s two options: a wholesale variant with access limited to a predefined group of users, and a general purpose widely accessible variant. Any steps towards the possible launch of a CBDC should be subject to careful and thorough consideration, said the BIS.

“More generally, central banks and other authorities should continue their broad monitoring of digital innovations, keep reviewing how their own operations could be affected and continue to engage with each other closely. This includes monitoring the emergence of private digital tokens that are neither the liability of any individual or institution nor backed by any authority.” At this time, however, the report said the general judgment is that volatile valuations, and inadequate investor and consumer protection, made digital currencies “unsafe to rely on as a common means of payment, a stable store of value or a unit of account”.

The issue was discussed in greater depth yesterday in a panel session on national digital currencies. One of the panellists, Jesse Lund, vice-president, IBM Blockchain and Digital Currencies, takes a more forthright position than the BIS. “It’s time to start getting serious about digital currencies. Banks who aren’t already planning for the impact of transformational innovation have a very tough road ahead,” he commented ahead of the panel.

Cryptocurrencies with more stable characteristics are beginning to emerge and establish themselves as viable alternatives to fiat currency, he insisted.

“National digital currencies can be a positive for banks,” he suggested. “In Sweden, where the incumbent payment processors control the majority of the market, Riksbank, the world’s oldest central bank, announced its intention to create a national digital currency to promote competition and further enhance the national payments system.

“National digital currencies could offer operational efficiencies to banks, as well as improved user experience along with new market opportunities through such innovations as stable coins, enabling banks to issue credit and inject liquidity into new blockchain-based transactional networks, creating new revenue streams for themselves in the process,” said Lund. “This ongoing shift could potentially reshape the competitive payments landscape.”