An unsuspecting visitor walking into the halls of Suvretta House in mid-January could have been forgiven for doing a double take. There, within touching distance of the Alpine peaks of St Moritz, stood the Winklevoss twins of Facebook fame, the Swiss-Brazilian billionaire Jorge Lemann accompanied by Richard Schäli, a teenage fund manager, and a group of central bankers.
The draw was the three-day Crypto Finance Conference. With the names of regulators past and present up in lights on the bill, everyone wanted to know what they were doing about so-called central bank digital currencies.
Hester Peirce, a commissioner at the Securities and Exchange Commission, the US regulator, captured the mood. “I think this is a little bit of an inevitable trend towards digitising currencies,” she said.
The first digital currency emerged in 2009 with the creation of bitcoin. Invented by the mysterious Satoshi Nakamoto, bitcoin was designed as a new kind of money for the internet. Because it is underpinned by blockchain technology, which relies on networks of participants to process transactions, bitcoin is considered a “decentralised” currency. It is, in other words, the antithesis of a monetary system governed by a central bank.
A decade on from bitcoin’s creation, a centralised version of cryptocurrency – issued and administered by the same state agencies that manage our monetary supply today – is suddenly all the rage among crypto-enthusiasts, fintech companies and regulators.
But a look beyond the bold statements suggests that, not for the first time, the crypto-hype is premature. What some characterise as a race, or even a “Cold War”, to digitise currencies is unlikely to yield results any time soon.
Olaf Ransome, chief commercial officer at the bank-backed blockchain business Fnality International, said: “We are pleased that the dialogue is intensifying, although we don’t expect any short-term changes to policy.”
On 21 January, less than a week after the conference in St Moritz, the Bank of England joined a new working group of seven central banks exploring the potential of state-administered digital currencies in their home markets. The group also counts the European Central Bank and the Bank for International Settlements among its ranks.
People familiar with the group said that it is a forum for early-stage discussion. Another person close to the Bank of England’s plans told Financial News: “It would be wrong to think that [joining the new working group] somehow indicates that we are a long way along developing something, or that it’s imminent.”
Even in Switzerland, where cryptocurrency and blockchain businesses are thriving, the national CBDC project has faced technical and strategic setbacks.
Originally set for 2019, Reuters reported on 23 September that the launch date had been pushed back to the end of this year. That too may prove overly ambitious.
Thomas Moser, an alternate member of the governing board at the Swiss National Bank, said: “You know how it is with IT projects. That’s the target and it’s quite steep, but we are working very hard on it.”
Another key aspect of the supposed CBDC arms race is that not all participants are running in the same direction. Some envisage a central bank-issued currency for use by ordinary people when paying for goods and services; some are concerned only with interbank systems; while others imagine something closer to what the Swiss are working on
Moser explained: “[The e-franc] will be a real CBDC, but only for this infrastructure. It will not be generally available, certainly not to households but even not to all banks. It will only be for that Swiss exchange.”
He added that the Cold War comparisons, though not entirely wrong, are “a bit over the top”.
This is hardly surprising in a sector overflowing with hyperbole. On stage in St Moritz, the Winklevoss twins, who run the cryptocurrency exchange Gemini, warned that gold will become abundant once people figure out how to mine it from asteroids, and advised central bankers to stock up on bitcoin instead.
Western countries are not alone in the pursuit of digital currencies. Their biggest competition comes from China, where the People’s Bank of China has been investigating CBDCs since setting up the Institute of Digital Money in 2017.
Christopher Giancarlo, who was chair of the Commodity Futures Trading Commission in the US under both former president Barack Obama and President Donald Trump, announced a new think-tank to lobby for the creation of a digital dollar on 16 January.
In an interview with FN, he said: “I think that the dollar’s long-term viability, if it remains an analogue currency in a digital marketplace, is undermined.”
It is hard to say exactly how far along the digital yuan initiative is. On 10 January, industry news site CoinDesk reported that the project had taken “a great leap forward”, citing a statement by the PBC.
One panel at the Crypto Finance Conference in St Moritz featured Andy Qi Ge, a managing partner at the investment firm Diligence Capital. Earlier in this career, Qi Ge worked as a regulator at the Legislative Affairs Office of the State Council of the People’s Republic of China. On the panel, he said that his presence at the conference – as opposed to that of a sitting regulator – was telling.
“Now it’s classified, it’s confidential. This also means that, according to my experience, that it’s serious,” he said.
Canada, Denmark, Norway, Singapore and Sweden, to name just a few, have also begun analysing digital alternatives to their own currencies.
Perhaps as great a source of anxiety for central banks is the potential launch of Libra, a new kind of digital currency controlled by a group of private companies including Facebook, which was officially unveiled on 18 June, 2019. Facebook and its allies’ vision is to create a so-called “stablecoin” linked to a basket of low-risk assets. Regulators were unenthusiastic about the idea.
Christian Noyer, governor of the Bank of France from 2003 to 2015, told FN: “There was a reaction of ministers of finance and central banks that money is something too important and too serious to leave it in private hands.”
Noyer is an independent director of the software start-up Setl, which sells blockchain solutions built for financial markets, asset management and payments.
Zeeshan Feroz, UK lead for the cryptocurrency exchange Coinbase, a member of the Libra Association, agrees with Noyer that Libra “certainly made a difference and had an impact” on the mindset of central bankers.
Perhaps the hyperbole surrounding CBDCs is simply an acknowledgement of how ponderous most governments are likely to be when responding to the dual threat of Libra and the digital yuan. If the US does not act quickly, Giancarlo fears the dominance of the dollar as a global reserve currency – a status he believes has been a “net good” for society – is at stake.
Do central banks need blockchain?
Within the crypto community, Giancarlo has earned the affectionate nickname “Crypto Dad”. The SEC’s Peirce is known as “Crypto Mom”. Peirce’s assessment of how the US regulator handles innovation might explain why some feel the need to agitate. “I think [crypto and blockchain] is really an interesting case study for seeing how we do handle innovation, and unfortunately I don’t think that we’re passing the test with flying colours right now. So we have work to do on that,” she said.
Then there is the immense task of creating a viable CBDC. Doing his bit for the Cold War narrative, Giancarlo likened the undertaking to the space race.
“Just like the space programme generated a lot of commercial enterprises and spin-offs, I imagine the digitisation of the dollar – smart people will find opportunities in that,” he said.
A waning in the dollar’s power could affect the US’s ability to exact sanctions. A fully formed digital dollar, on the other hand, could make US sanctions all the more effective.
“Digitisation of the dollar allows the dollar to be used with scalpel-like precision rather than saw-like precision,” said Giancarlo. Similarly, he described how a digital dollar could allow the government to grant welfare cheques with spending rules programmed into them.
All this evokes visions of total surveillance by a state capable of monitoring its citizens’ every move. Not surprisingly, Giancarlo thinks this risk is far more pronounced for users of a digital yuan than a digital dollar.
There are a multitude of other risks stemming from the creation of CBDCs.
Noyer warned, for example, that the need to convert money into cash is a “natural break” to guard against bank runs – but that central bank-managed accounts filled with digital currency “could facilitate bank runs and be a threat to financial stability” unless limits are applied to how much money can be held in such accounts. These considerations are part of the reason Noyer thinks consumer CBDCs are a more distant reality than projects involving “only a few correspondents”.
Nor should it be assumed that CBDCs are the heir apparent to cash.
A paper published by the International Monetary Fund in March 2019 stated: “The level and trend in cash use in a country will influence the demand for CBDC. While access to digital currency will be more convenient than traveling to an ATM, it only makes CBDC like a bank debit card – not better.”
Put another way, CBDCs will only materialise where they can meaningfully improve on existing systems.
As the Swiss National Bank’s Moser told FN: “A central bank doesn’t need a blockchain. I mean, it’s a central bank!”
The much-hyped race, at this stage, does not seem to be to fully launch a CBDC – but to determine whether it is worth trying to. And even then, the only thing that is new here is the technology.
“Currencies have competed against each other since the beginning of time and I imagine they will continue to compete against each other till the end of time,” said Giancarlo.
To contact the author of this story with feedback or news, email Ryan Weeks