On the high and lows of cryptocurrencies
by Tze Yeen Liew
Aware of the mass adoption of cryptocurrencies, central banks around the world (a whopping 70%) have been considering the merits of adopting a central bank digital currency (CBDC); which is ironic given that the bitcoin was initially conceived with the tall order of subverting central banks. A spate of publicized discussions by central banks about the feasibility of digital currencies have dominated headlines since 2017: the Reserve Bank of India, Central Bank of Canada, Bank of Korea, the US Federal Reserve System, the Bank of Sweden, the Swiss National Bank, the governments of Kazakhstan and Japan, and even the Bank for International Settlements — widely considered to be the central bank of central banks, have all examined the macroeconomic implications of CBDCs within the context of their local financial systems.
Although most of the central banks mentioned still view CBDCs as a pipe dream, the idea is steadily gaining traction given there are speed, cost and re-conciliatory benefits to be reaped from replacing electronic cash with blockchain based digital currencies. The two latest banks to chip in their thoughts are the Bank of England and Norges Bank (the Central Bank of Norway), who have taken different approaches to exploring the topic — although the implications of the technology are at best, hypothetical and non definitive.
Drawing on both UK and US central bank data, the Bank of England recently issued a pedagogical paper constructing 3 theoretical econometric models to examine whether central bank digital currencies (CBDCs) should be used as an interchangeable asset in lieu of existing bank reserves. It also explores the suitability of CBDCs as an interbank settlement medium and a retail payment medium.
In contrast, Norges Bank released a hypothetical case study on the impacts of digital currencies accepted as legal tender in the economic and regulatory context of Norway. It proposes possible conceptual frameworks that could be adopted by Norges Bank, and undertakes several cost benefit analyses to determine the best use of central bank digital currencies in the present day; whether as a payment instrument or a value storage instrument. Unlike the BoE’s paper, the case study serves as a qualitative assessment of CBDC’s –seeing that cash usage is now at the lowest point in Norwegian history.
Both central banks have prefaced their papers with a disclaimer that they have no concrete plans to instate central bank currencies, whether presently or in the distant future. However, they intend for the papers to be a resource for additional discussion and hopes that stakeholders can build on their findings.
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Although the release of these papers by central banks lends some gravitas to the upward trajectory of cryptocurrency adoption, it is noteworthy that all of them have chosen to refer to their iteration of cryptocurrencies as CBDC, and nearly all of the central banks in existence have announced that none of them will be issuing CDBCs in the next three years. One can infer it may be to distance itself from the negative clout surrounding cryptocurrencies, the ramifications of which are all antithetical to the operational characteristics of a central bank (volatile, fraudulent, speculative, money laundering, illegitimacy etc.). The more concrete answer to it, if we take these white papers at face value, is the sheer complexity of mobilising the infrastructure required to implement cryptocurrency at the scale that is needed.
But the biggest conundrum of all is conceptual and strikes at the core of cryptocurrency: Is cryptocurrency, which ultimately is a network of decentralised, unregulated blockchain ledgers, still considered cryptocurrency when the ‘permissionless’ element is taken away by a bank that choose when and what to issue?
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