All central banks may have to consider crypto-currencies – BIS

BIS economists examine the case of central banks issuing own digital currency in both the retail and wholesale landscape
currency-mechanism

Central banks may eventually have to decide whether issuing a central bank crypto-currency (CBCC) would “make sense”, the Bank for International Settlements says.

In the BIS’s latest review, researchers Morten Linnemann Bech and Rodney Garratt discuss how a CBCC could fit in with the current payment infrastructure.

Retail CBCCs, where depositors draw on digital central bank liabilities, are effectively different in only one respect from giving the public access to central bank accounts, the authors say.

“The main benefit that a consumer-facing retail CBCC would offer, over the provision of public access to (centralised) central bank accounts, is that the former would have the potential to provide the anonymity of cash,” the authors argue. Anonymous digital currency is something the Bank of England has opposed in the past.

The emergence of bitcoin and its underlying technology has piqued the markets’ interest with its potential to make payments faster, more efficient and more transparent.

As a result, financial institutions have begun investing heavily in distributed ledger technology projects which seek to provide new financial services as well as deliver old ones more efficiently.

Earlier last year, several central banks announced they were experimenting with DLT and the prospect of issuing their own digital or crypto-currencies.

Wholesale vs retail

One of the most obvious use cases, and likely early adopters of this new technology, has come from the Sveriges Riksbank’s DLT project. In Sweden, the demand for cash has dropped considerably over the past decade with a number of retailers now not accepting cash. Some bank branches have also started to no longer disburse or collect cash.

The Riksbank embarked upon a project to determine the viability of an electronic currency, called an ekrona, for retail payments. “No decision has yet been taken in terms of technology. Hence, the ekrona is located on the border between deposited currency accounts and retail CBCCs,” Bech and Garratt say in the BIS study.

Another development in the retail sphere has been Fedcoin, an idea presented by the economist JP Koning. His project has not been endorsed by the US central bank.

Fedcoin would result in the Federal Reserve creating its own crypto-currency. “The currency could be converted both ways at par with the US dollar and conversion would be managed by the Federal Reserve banks,” Bech and Garratt say.

Unlike bitcoin, where the supply is predetermined, the supply of Fedcoin would increase or decrease depending on demand from consumers, much like cash does currently. It would, therefore, become a further component of the monetary base.

The authors point out Fedcoin would not represent a “competing, private ‘outside money’” but would instead be an alternative form of sovereign currency.

However, one of the biggest developments has been on the wholesale side in the form of the Bank of Canada’s Project Jasper. “While CBCCs for retail payments remain at the conceptual stage, some central banks have completed proofs of concept for DLT-based applications,” Bech and Garratt say.

CADcoin, which was devised by the team working on Project Jasper, is an example of a wholesale CBCC. In the CADcoin concept, the Bank of Canada would select a group of banks which would have access to the digital asset. As a result, in the pilot project, CADcoin functioned more like a deposit receipt than digital currencies already in circulation, such as bitcoin.

“Jasper … chose a digital depository receipt (DDR) approach. A DDR is a claim on central bank reserves held in a segregated account against which the central bank issues digital tokens on the distributed ledger,” Bech and Garratt explain.

In Jasper simulations, the digital tokens are created at the beginning of the day and redeemed at the end. Project Jasper also implements a liquidity-saving mechanism on the DLT platform.

Jasper shows central bank money can be transferred on a distributed ledger in real time, in realistic volumes and with a liquidity-saving mechanism, the authors say.

Digital future

But despite these developments, none of the central banks currently updating or replacing existing wholesale payment systems are considering the adoption of DLT. Both the Bank of Canada and Bank of England have deemed the technology not yet mature enough to fit all their requirements.

“As it stands, cash is the only means by which the public can hold central bank money. If someone wishes to digitise that holding, he/she has to convert the central bank liability into a commercial bank liability by depositing the cash in a bank,” Bech and Garratt say.

Bech and Garratt argue that whether or not central banks choose to provide a digital version of cash, they will all at some point have to consider whether DLT should become part of their operating framework.

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