Not long ago, you would have been hard-pressed to find a central banker who’d pay you anything more than lip service about cryptocurrencies. Today, cryptocurrency is being discussed by central banks across the world and, at time of press, its cumulative market capitalization is nearly $150 billion. Although new users are still discovering crypto every day, nothing may spur its mass adoption like endorsement by central banks. If that happens, the digital revolution might gain an unprecedented new level of traction in our everyday lives.
Given their market cap, cryptocurrencies collectively rank just behind the top fifty richest companies in the world. When viewing this metric from inside the ecosystem, it is a source of shared excitement and a reason to keep believing in crypto. But when viewed from the outside, many still see cryptocurrency as a mere blip on the global financial radar. But that small blip has grown substantially since the start of 2017 when a massive upturn took total market capitalization for cryptocurrencies from around $15 billion in January to over $170 billion in September. The sizeable gains in the crypto market this year might be part of the reason why more and more central banks are beginning to comment on the phenomenon.
Why Central Banks Care About Crypto
Since central banks operate in the space between finance and government, their decisions have a large sphere of influence. This influence stems from the historical role of central banks to act as wardens of money. The dawn of cryptocurrency did little to rile the institutions and, until recently, central bank officials were certain that the fledgling and volatile cryptocurrency market would remain relatively incubated from fiat’s $5 trillion a day traditional currency markets. This isn’t to say that directors of central banks are waiting for the day when the cryptocurrency market cap will surpass fiat. Central bankers know the same fundamental truth about crypto as the rest us, which is that cryptocurrency doesn’t need to compete with the traditional financial system. The blockchain technology underpinning crypto skirts around the entire global financial apparatus. Thus, central banks aren’t threatened so much by the approach of crypto market capitalization relative to fiat as they might be about how the blockchain undermines third-party institutions – like themselves.
Moreover, central banks are gradually making changes to their organizational structures in the wake of the 2008 financial crisis. Prior to the crash, central banks were mostly known for operating behind closed doors and out of view of the public. However, after being thrust into the international spotlight in 2008, central banks have borne the brunt of public outcry for greater transparency and accountability, even to the point of being vilified. In order to recast their leadership role, central banks might turn to crypto out of jurisdictional competition, to enhance their public standing and restore trust. With cryptocurrency, central banks could accomplish this while simultaneously bolstering their own core business efficiency in areas like cash management, cash production or destruction, overall monetary security, and monetary controls.
How Central Banks Might Adopt Crypto
Contrary to the narrative of central banks being secretive and slow to act, adoption of cryptocurrency could expand their influence and enhance their reputational capital. By providing a new medium for transacting, financial services could reach populations where people have been disenfranchised by geographical or socio-economic isolation. In order to restore trust through transparency and standing as a top-tier, highly efficient institution, a central bank might adopt a cryptocurrency. There are primarily three ways central banks could do it: buy in, mine, or create their own.
Buying in and mining are basically the same thing at the level a central bank operates at. Surely, there would be pros and cons to each method; buying in, for example, would take from supply already in circulation. The primary takeaway from either of these scenarios wouldn’t necessarily be how a central bank is acquiring an established cryptocurrency. It would rather be that a central bank is acquiring a preexisting crypto. The decision by a central bank to affirm the crypto status quo by choosing to use a well-known cryptocurrency, like Ether or bitcoin, would undulate through the financial system and change the entire game overnight. This, however, isn’t very likely.
It remains unclear how currency valuations and their associated interest rates would react to adding deflationary cryptocurrencies to fiat markets, as our entire financial system is based on inflationary economic principals.
If a central bank is seeking to improve a struggling economy, it may be more inclined to purchase or mine an established crypto as a way of injecting value into their markets. Those with stronger national currencies may instead elect to create their own national crypto in order to maintain greater control over their economies, as well as enjoy the technical safeguards they could implement into any crypto they create. This could ultimately lead to one-to-one pairing and the “cryptofication” of fiat.
Creating a nationally backed cryptocurrency could afford a central bank the ability to adjust its specific crypto’s interest rate, an important part of how central banks affect fiat markets today. Aside from creating money, this is a power that gives them an overarching influence. If the power of central banks to alter the nuances of commerce and government through monetary policy is ever combined with the new avenues for creating, capturing, and exchanging value afforded by cryptocurrencies, new paradigms for living and working may begin to emerge. To better understand what this means, and how close we are to that potential moment, ETHNews took stock of the comments from over thirty central banks with regards to cryptocurrency. The following is a list, in no particular order, that ETHNews believes to be indicative of the general direction specific central banks are moving in with respect to cryptocurrency.
Central Banks On Crypto
“We are undertaking a multi-year research programme into the implications of a central bank, like the Bank of England, issuing a digital currency. We first raised the possibility of a central bank-issued digital currency in our research agenda in February 2015. We have since released a more detailed selection of research questions on the topic. We welcome continued engagement from the wider central banking and academic community to shape our research in this emerging field.”
"At a global level, there is an urgent need for regulatory clarity given the growth of the market," said Daniel Heller, Visiting Fellow at the Peterson Institute for International Economics and previously head of financial stability at the Swiss National Bank.
Speaking on behalf of the Central Bank of the Russian Federation, deputy governor Olga Skorobogatova, said, "Regulators of all countries agree that it’s time to develop national cryptocurrencies, this is the future. Every country will decide on specific time frames. After our pilot projects we will understand what system we could use in our case for our national currency."
The Bank of Finland authored a discussion paper with academics from Columbia University highlighting the pros and cons of cryptocurrency implementation. The paper described the economic system behind cryptocurrency as “revolutionary.”
Tested “DNBCoin,” a prototype national crypto in 2015.
According to a senior official from the Reserve Bank of India, the central bank is examining a cryptocurrency alternative to the rupee. Speaking at the India FinTech Day conference, executive director Sudarshan Sen simultaneously conveyed concerns about non-fiat cryptocurrencies, like bitcoin.
Governor of the Austrian Central Bank, Ewald Nowotny, warned users about the speculative nature of virtual currency. Nowotny also serves as a member of the governing council of the European Central Bank (ECB).
Project Ubin placed “a tokenized form of the Singapore Dollar (SGD) on a DLT.”
The use of banknotes and coins is declining in Swedish society. At the same time, virtual currencies and payment methods are undergoing rapid technological development. The Riksbank will now investigate whether kronor need to be issued in electronic form.
Venezuela has begun to explore the possibility of deploying a state-backed cryptocurrency as a strategy to improve its ailing economy.
Though the PBoC has been cracking down on token offerings and crypto trading, it has done trials with prototype national crypto and also funds the Chinese Digital Currency Research Institute.
The ECB is currently debating the possibility of implementing legal restrictions for cryptocurrencies.
Financial Action Task Force Governor Jerome Powell said in March that the US central bank is not considering a digital currency, due to “significant policy issues”
The Central Bank of Canada recently demonstrated prototype DLT wholesale payment systems that handle clearing and settling simultaneously. Despite making advances with “Project Jasper,” Canada is waiting for the technology to mature.
The Central Bank of Samoa has cautioned its citizens about scams utilizing cryptocurrencies.
The Central Bank of Barbados authored a case study analyzing adding cryptocurrencies to the island’s portfolio of international reserve currencies.
The Albanian Cnetral Bank has cautioned its citizens about some of the financial risks associated with cryptocurrencies.
The Bank of Namibia announced that it considers the spending of cryptocurrency within the nation to be illegal.
Following cautious considerations, the Central Bank of Nigeria has commenced arrangements to introduce its own digital currency.
The governor of Bank Negara Malaysia announced the central bank’s intention to issue cryptocurrencies guidelines.
Seeking to study distributed ledger technology, the Central Bank of Brazil tested prototypes for an Alternative System for Transactions Settlement on Ethereum-based BlockApps and Quorum, as well as on HyperLedger, Fabric, and Corda.
Nestor Espenilla Jr., governor of BSP, stated, “We see a rapid increase in the trajectory [of virtual currency]. It is coming from a small base but increasing. That is why we decided to require [the exchanges] to register.” Espenilla added that the exchanges are locally based but have international roots.
Central Bank of the UAE Governor, Mubarak Rashid al-Mansouri said of his bank’s guidance, “The core objective of this framework is to facilitate robust adoption of digital payments across the UAE in a secure manner whilst promoting the highest levels of consumer protection and financial stability.”
In his statement, Churiy references the diverse cryptocurrency regulatory schemes currently employed by the European Union, Israel, Japan, Australia, Canada, and the People’s Bank of China. He notes that discordant regulatory schemes around the world have made it difficult to give bitcoin a definite status in Ukraine. The FSC’s meeting should generate needed dialogue, if not a resolution.
The so-called “bank for central banks” has released a paper highlighting some of the potential advantages and risks that central banks might face, should they move to issue their own cryptocurrencies.
Christine Lagarde, IMF’s managing director, stated, "The special drawing right, invented a few decades ago, might have a future interesting life if we include a digital dimension and some new technologies with it,” particularly when existing networks are threatened. On the coupling of digital currencies and the SDR, Lagarde stated, "If the two were to come together, the digital acceleration and facilitation and the geopolitical situation, that would be propitious to relying on an alternative basket of currencies," adding that, rather than becoming a substitute for national currencies, "we would need the two together."
Should cryptocurrencies be included in the portfolio of international reserves held by central banks? Can the price of a cryptocurrency be stabilized by adding the legitimacy of central banks to what makes cryptos valuable? What creates the pressure that translates into actionable progress? These questions and more will likely be answered sooner than later as central banks weigh the merits of defining the era of cryptocurrency before it gets too big for them to effect.