The Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution in Washington, DC welcomed a well-known panel of experts to discuss how central banks are grappling with the unique challenges – and opportunities – posed by digital currencies.
Eswar Prasad, senior fellow in global economy and development at Brookings and the Tolani senior professor of trade policy at Cornell University, helped generate some of the initial momentum for the panel by publishing a related report in conjunction with the event. He was joined onstage by three central bank heads – Agustín Carstens, general manager of the Bank of International Settlements (BIS, cheekily referred to by Hutchins Center Director David Wessel as the bank that gets paid to worry if central bankers are worrying enough); Stefan Ingves, governor of Sweden's Sveriges Riksbank; and Urjit Patel, governor of the Reserve Bank of India. Rana Foroohar of the Financial Times moderated the discussion.
Originally founded in 1916 as the Institute for Government Research, the Brookings Institution has emerged as one of the most prestigious think tanks of the last hundred years, conducting research and education efforts in economics, foreign policy, and governance. Many of its expert members go on to hold influential office positions in governments around the world. As such, Brookings was an ideal forum for the panel of central bankers to discuss how digital currencies are affecting their practices and spheres of influence.
As the panel unfolded, valuable insights into how central bankers are understanding the burgeoning cryptospace could be gleaned as much from what they neglected to say as from what they actually did.
A Static Status Quo
The first question was fielded to Carstens, who was asked to describe the innovative history of central banks and how that history affects the way they approach digital currency.
Carstens explained how "digital currencies were started in central banks many decades ago" and briefly summarized how monetary payment systems have been "built through centuries," before arriving at the thesis of his answer: "Civilization has come hand in hand with the innovation of money … Suddenly, we have a new form of technology. Can we expect that that new technology will substitute for all these centuries of creating good practices that, in a way, generates the trust that society has on the currency we know today? … My answer is, with [absolute] certainty, 'no.' Technology doesn't substitute [the] learning process."
Indicative of the BIS mandate to oversee central banks and help ensure financial stability, Carstens' response toed the line, justifying the institutions' existence as a trusted issuer of money and controller of exchange rates. While Carstens was correct in acknowledging the applicable value of lessons learned from history and experience, he omitted the ability of cryptoeconomic systems to embody those historical lessons, representing them as laws hardcoded into a network.
In such a theoretical network, where a sovereign-backed digital currency would be maintained and exchanged on a distributed ledger, the trust that exists today between people and their banks could be replaced by trust in code.
By omitting the principle of immutability, which is fundamental to the cryptocurrency revolution, central bankers are perhaps risking their future credibility by endorsing too much of the past. While it is probably safe to assume that people who don't trust each other can benefit from using a "trusted third party," it might be overly ambitious to assume that people's trust in banks is static and unchanging. If anything, central banks have already exhausted a significant portion of the trust placed in them.
As frontline gatekeepers of financial stability, central banks cannot afford to underestimate the potential for disruption as people begin to render their monetary trust elsewhere. For many people around the world, the realm of banking is already abstract, just as their understanding of digital technologies is. The psychological jump in people's minds from trusting abstract banks to trusting abstract computer programs may be shorter and more rapidly approaching than entities like the BIS believe it to be.
The advent of FinTech has already caused commercial banks to rethink their products and services, and many providers are adopting new technologies like distributed ledgers and blockchains to streamline business and create new value. If commercial financial institutions have already begun to shift their business models into the digital arena, central bankers shouldn't bet too hard on people's trust in traditional banking to continue propping up their existence.
The Need for Legal Frameworks
Continuing into the early afternoon, the panel moved through several tangential topics, all of which seemed to be laying a foundational understanding for how central bank digital currencies (CBDCs) might emerge relative to other possibilities, including government-issued cryptocurrencies, e-money, and digital fiat currency (DFC).
Following Carstens' foray into the early trust discussion, Ingves brought energy into the middle of the event, shedding light on another essential aspect of the larger issue facing central banks that might be pondering digital currency: the legal aspect. "When you think about new technologies, no new technology can produce money by itself. Actually, the real issue is that money is about a combination of a legal framework and a technical framework. And without the legal aspects of how you define money, you really don't have money, you have assets."
Ingves' point about a lack of legal frameworks perhaps encompassed the overarching predicament central bankers find themselves in when it comes to digital currencies. Without common regulatory standards, central bankers cannot evolve. Complicating the issue, the standards needed must be internationally accepted. According to Ingves, for bankers to be able to incrementally transition the entire global financial system, regulators and lawyers will likely have to lead the way.
The Digital Currency/Digital Identity Frontier
Perhaps the most interesting moment of the prestigious event transpired late in the afternoon when one attendee asked, "How core is solving identity to expanding digital currency or solving some of the frictions in our existing system, and how do you foresee an identity world that's based on a national or – in the US's case – subnational system working or integrating in a global financial system?"
Seated in his chair, Prasad quickly thumbed his nose twice, like a boxer watching a fight from outside the ring.
It was Patel who responded: "The national identity program in India was motivated by none of these considerations. However, these considerations could help to liberate its use ... It is digital. It is biometric. It is centralized and set up by a government-sponsored entity." He admitted that he didn't know what "technology or programming" was being utilized or if a blockchain was even employed architecturally as part of it.
He continued: "It very soon became important for the government's social expenditure program, that the money goes to the right person in the right bank account. So concurrently, while the national identity system was rolled out, the government had a program called JDY, which was essentially opening up a basic account for all households in India. That is now in the process of getting seeded by the national identity numbers and the biometric data. In a way, these are the collateral benefits when you do put in place a cutting-edge system like this. In the future, there will be many more uses."
Patel abruptly changed the subject. There were ten more minutes of banter, people headed for the exits, and the issue of CBDCs was swept under the rug for another time – when the real cleaning has to be done.
One must wonder, after listening to this panel, whether the cryptocurrency ecosystem is missing a chance to radically break with traditional finance in favor of waiting for eventual regulation and adoption. If cryptocurrency is to eventually realize its potential as a peer-to-peer medium of exchange, perhaps we would all be better off trusting the transparency of a blockchain over the "invisible hand" of central banks.