Blockchain or distributed ledger technology (DLT) possesses recognised potential for the finance, and especially banking industry. While many top bankers descry Bitcoin, they understand that blockchain could open new doors to ways of doing business, and upset the bank applecart.

Banks, however, have kept quiet about an even bigger threat. That could come from their own ‘lenders of last resort’ – the central banks. Consider the following scenario. A central bank issues its own cryptocurrency based on a central bank blockchain. This would allow users to keep their digital money with the central bank itself. Such a system would see transactions, large and small, executed almost instantly.

This might eliminate the need for retail banks, thereby removing the spectre of failing domestic and global systemically important banks.

Traditional banks and blockchains

Conventional banking is investigating blockchain with gusto. There area myriad of proofs of concept, from retail banking through commercial banking and onto wholesale banking. For example, take trade finance and the following initiatives:

A different variety comes with the major credit card issuers. Visa, AmEx and Mastercard are all planning ways to exploit DLT in the future. Plus there is the SWIFT blockchain PoC with its many participating financial institutions.

And these are for starters.

Central banks and blockchains

The interest in blockchain from central banks has come in many forms. there are some who decline interest while others espouse it. The BIS has prepared an ingenious method (the ‘money flower’) for analysing and organising different cryptocurrency and related initiatives.

But the meat lies in whether central banks will pursue their own blockchains and/or cryptocurrencies. It would seem that the Federal Reserve, Bank of Canada, Bank of England and Dutch Central Bank lead the way – which is interesting because all four represent ‘major’ currencies. Yet none have committed yet to a central bank cryptocurrency or even blockchain. There is all to play for.

What does this mean

A central bank issued cryptocurrency could conceivably eliminate the need for retail banks. This would give many bank supervisors the satisfaction of removing the spectre of failing domestic and global systemically important banks.

But think on a step further. To start with different central banks might issue a local cryptocurrency denominated as ‘crypto-dollars, crypto-euros, crypto-yen or whetever. Those central banks would, presumably, offer some mechanism to make exchanges between each other (and each other’s crypto-currencies). But that might open a Pandora’s box whereby holders of ‘weak’ crypto-currencies would over time migrate to ‘strong’ cryptocurrencies, and eventually to one crypto-currency.

Should either of these occur there would be a distinct risk that, for all but the ‘strong’ cryptocurrencies, the Euro paradox would reoccur. Countries would no longer have full national control of their economies. They would enjoy the openness and efficiency of crypto-currencies but lose, for example, the national capability to set interest rates and thereby control inflation and prices.

When you start attempting to sort through the pros and cons, no conclusion is simple. This subject is a brain teaser for a generation. And something to ruminate on for 2018.


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