Cryptocurrency and central banks: A currency revolution?
Once the currency of criminals and bandits, central banks are now looking into cryptocurrency. What different strategies are these countries undertaking? And is it a good idea? Briony Richter writes
New currency developments have, throughout time, been associated with suspicion. The same can now be said of cryptocurrencies like Bitcoin. The thought of cryptocurrency issued by central banks may sound unrealistic but it’s an area many are exploring. Will it make or break them?
With the birth of Bitcoin in 2009, the concept of digital currencies rose to its prominence. The following years saw the rise of cryptos like Bitcoin become a global phenomenon.
That led to more discussions from central banks around the world on how to keep up with the hype and whether or not to embrace it or block it.
Debates on the legitimacy and security of cryptocurrency never end. Big banks have the power to crush the notion of using cryptocurrency. What action will they take?
The central banks exploring crypto
There are some central banks that are looking into how cryptocurrency could fit into their platforms. The most innovative and enticing part of a cryptocurrency like Bitcoin, is the technology behind it. The distributed ledger technology, or blockchain, offers a way of being secure about the journey of a transaction without the need of a bank as an arbitrator. Basically, it cuts out the middle man.
The Bank for International Settlements (BIS), warns central banks of the damage Bitcoin could do to the stability of the financial sector, but that hasn’t stopped some venturing into the space.
Sweden always pops up when it comes to cashless technology and the launch of the Swedish eKrona might not be too far off. However, according to the governor of Riksbank, Stefan Ingves, banks should always be expected to handle physical cash.
“350 years ago we replaced large copper coins with notes. Notes could now be replaced with electronic notes and coins.
“We're thinking about it. But if you're releasing electronic money it can be divided in a different way than notes. We wouldn't use an electronic 100 kronor note if we're buying something for 98 kronor. Nor would we use two kronor in electronic change. It would work just as well with a 98 kronor note.
“It's reasonable for banks to be expected to handle money. You should be able to deposit money in the form of notes. You should be able to take out money. A ban on cash goes against the public perception of what money is and what banks do.”
Ingves predicts that a Swedish digital eKrona is about 3 or 4 years away. In that time, the central bank has to weigh up the risks and decide if it is worth the instability.
In February 2018, Saudi Arabias’ central bank signed a landmark deal with US-based fintech Ripple. A first of its kind programme, the deal is aimed at enabling banks in the kingdom to settle payments using blockchain technology.
Most of the regulators in the Gulf have expressed their criticism of using such volatile and untested technology. However, the central bank and Ripple both agree that by harnessing the technology, Saudi banks will conduct faster, cheaper and more transparent cross-border transactions.
In December 2017, the UAE Central Bank governor, Mubarak Rashed al-Mansouri spoke about the Saudi Central Bank working with the UAE Central Bank to issue a digital currency that would be accepted in cross-border transactions between the two countries.
One of the most sought after advantages of using cryptocurrency technology is that it has the ability to increase efficiency and reduce settlement costs.
Curaçao and Sint Maarten
The Central Bank of Caribbean islands Curaçao and Sint Maarten is exploring the possibility of a digital currency.
Centrale Bank van Curaçao en Sint Maarten (CBCS) signed a Memorandum of Understanding (MoU) with Barbados-based fintech company, Bitt at the beginning of August 2018.
Wanting to delve deeper into the workings behind digital currency, the MoU is to explore the feasibility of the CBCS issuing a digital Curaçao and Sint Maarten guilder. A digital currency that will be able to support digital payments within the monetary union of Curaçao and Sint Maarten.
Leila Matroos-Lasten, acting president of the CBCS, commented: “The central bank is determined to address its challenges proactively by exploring the latest technology available. For example, to reduce the level of cash usage within the monetary union, and to facilitate more secure, more AML and KYC compliant, and more efficient financial transactions within and between Curaçao and Sint Maarten.”
The continuing interest in cryptocurrency from certain central banks marks a transformational shift in the perception of what money is and in what form we can have it in. However, Bitcoin has proved to be extremely volatile and so it’s not surprising that the fear of monetary instability has reappeared. Whether an advocate or supporter, cryptocurrency is here to stay.