With developments in decentralized finance and private digital currencies like Bitcoin, stablecoins and other cryptocurrencies already well under way, it’s easy to look at central banks and legacy institutions as slow-moving monoliths in the world of traditional payments systems.
“Reconciling innovation, and stability, seems to be an oxymoron,” said François Villeroy de Galhau, governor of the Bank of France, at the BIS Innovation Summit 2021 earlier today.
These words were later echoed by John C. Williams, president of the Federal Reserve Bank of New York, when he said, “For some, the concepts of central banking and innovation, may seem like an oxymoron.”
But for the many central bankers at this week’s virtual summit hosted by the Bank for International Settlements, it is clear that they don’t want to be left behind. As the world turns increasingly cashless, central banks are preparing for a payments revolution of their own — and to take back control.
Central bank digital currencies (CBDCs) represent the digital form of fiat currency with the capabilities of blockchain-based tokens. Once CBDCs are fully developed and launched, could they make decentralized solutions to finance, like Bitcoin and other cryptocurrency redundant?
Central banks working together
In a BIS summit session titled, “The Governors: what does central bank innovation mean to you?” — the question was put to the governors of the BIS member central banks. It is a question the leaders of these institutions have given a lot of thought to, and they have a plan in action.
In June 2020, the board of the Bank for International Settlements announced the expansion of the BIS Innovation Hub, which aims to establish new hub centers across Europe and in North America in cooperation with member central banks.
Over the next two years, the BIS will open innovation centers in collaboration with the Bank of Canada (Toronto), the Bank of England (London), the European Central Bank/Eurosystem (Frankfurt and Paris) and four Nordic central banks (Danmarks Nationalbank, the Central Bank of Iceland, the Central Bank of Norway and Sveriges Riksbank) in Stockholm. The BIS will also form a strategic partnership with the Federal Reserve System (New York).
“Innovation is global, and to benefit from innovation […] we must collaborate with all the central banks that really enables this, it acts as a forum for discussion and cooperation amongst central banks and the financial community,” said Andrew Bailey, governor of Bank of England. “The creation of innovation hubs, is a great example of the international public sector supporting financial innovation.”
Within this cooperation, the messages and goals of each of the central bank leaders were similar: the need to collaborate with each other as well as the private sector to champion innovation, disruptive technologies and new forms of finance — to maintain global financial stability, above all.
“The ongoing technological revolution is rapidly transforming our economies and financial system. Central banks need to keep with the rapid pace of innovation, if they are to ensure that money remains sound payments, efficient, and the financial system stable,” said Christine Lagarde, president of European Central Bank. “An important part of this effort is the worldwide engagement with central bank digital currencies.”
See related article: Fed Chair Powell calls Bitcoin ‘speculative,’ says US not in CBDC rush
While not a new subject in the world of blockchain-related technologies, the goal to explore or develop central bank digital currencies (CBDCs) was directly referenced by the majority of the central bank leaders who were featured as speakers today and is clearly viewed as a top priority, among the world’s legacy institutions, for the future of global finance.
CBDCs and why they matter
Despite being similar to cryptocurrencies like Bitcoin, a central bank-backed digital currency is more of a reaction to than an embrace of cryptocurrency.
Central banks are wary of cryptocurrencies due to their ability to circumvent capital controls. In fact, one of the major motivations for the creation of a CBDC was Facebook’s plans to develop its own digital currency, Libra — now renamed Diem — which could position Facebook, a private company with over 2 billion users, to wield enough financial power to challenge most central banks.
The prospect of private companies taking control of the money supply is a concept that doesn’t sit well with many outside of the central banking system either. As Microsoft Corp. President Brad Smith said at a BIS session only a day earlier on March 24, “The money supply almost uniquely needs to be managed by an entity that is responsible to the public and thinks really only about the public interest, and that means governments.”
CBDCs are a blockchain-based alternative to private cryptocurrencies that would allow governments to maintain control over the production and supply of money as well as to prepare for the seemingly inevitable future of a cashless society. CBDCs also would allow sovereign currencies to perform with the safety, speed and transparency of cryptocurrencies on the global stage.
“When society becomes more digital and cash is not used all that much anymore, then that requires that we have to innovate new ways to present, money,” said Stefan Ingves, governor of Sveriges Riksbank, “Just as we realized how inefficient it was to transact with copper plates in the very old days, now we have to look forward and start introducing money in a digital form, that is transaction efficient.”