Crypto Rumbles Central Bank Sovereignty

The private sector has long driven innovation on digital currencies but as fintech’s plans became more powerful, central banks sprang to attention. Their main concern? Keeping monetary policy in their purview.

The most tantalizing tales in cryptocurrencies this year weren’t written by Libra or bitcoin, but by national or supranational projects like the digital euro. While investors raced to get in on bitcoin’s record-smashing highs, the government projects warrant a closer look.

What central banks are trying to do is replace the storage carrier of money with a new one – cloud instead of long-play (LP), so to speak. The aim is to kill several birds with one stone.

The first is to stave off a private sector-led attack on central bank sovereignty. The second is enabling efficiencies in the financial system, and the third is to lay a foundation for seamless oversight of monetary transactions.

Taken in turn: a central bank ensures financial stability while overseeing systemically-relevant market infrastructure. To hand over a central instrument in its arsenal is to jeopardize its own mandate. Replacing a country’s own currency with another – which frequently happens in unstable countries, where dollars effectively become the leading currency – is a good example, or when a privately-controlled alternative takes over for reasons of efficiency.

Admittedly, crypto is far from this scenario, but the thought experiment is a worthwhile one. We need to assume that multinational companies like Amazon or Alibaba will in future control and executive an enormous portion of private consumption: they own the value chain, from manufacturer to end consumer. They are intimately familiar with customer needs and aren’t shy about cultivating the data with the help of artificial intelligence.

The next logical step in cementing this position is to introduce their own currency. This would dramatically simplify the purchasing process as well as create a vast common currency area spanning producer, commercial dealer, suppliers, to consumers.

None of this is a problem as long as employees are paid in U.S. dollars, euros, or krona and use a major currency to buy a trading one. But if they are, for example, partly paid in Amazonas or Alibabas, central banks cede part of their authority to the private sector. The initial hostile official response to Libra is the logical consequence of this.

The Swiss central bank’s «Project Helvetia» as part of the BIS’ innovation hub sidesteps the first question in favor of tackling the second, central digital revolution issue. Traditional banks are still grappling with the conversion to digital banking: continually under siege from newer upstarts without any historical baggage and far zippier organizations.

The Swiss National Bank’s digital franc is meant to enable efficiency gains and simplify monetary transactions. This is a much more defensive strategy than other central banks have elected – notably the European Central Bank, Sweden’s Riksbank, or the People’s Bank of China – but the pragmatic approach fits the Swiss system of thinking well.

In lockstep with infrastructure provider SIX, which belongs to the banks, genuine and measurable advances would represent a great step towards a digital future. The Swiss stock exchange operator plans to go live with its digital asset trading venue, SDX, next year. A digital Swiss franc would suit the SNB’s financial intermediaries perfectly.

Switzerland is hardly ready for the third and conclusive step: a digital version of cash is being actively discussed elsewhere (namely in Sweden and China). Some aspects of digital money – efficiency versus cash and crucially, the traceability of transactions – are too tempting to resist.

Of course, all types of criminals could be disrupted in their activities with such a step. But the accompanying supervision of citizens contradicts Switzerland’s understanding of government and privacy – and should be rejected. The complete replacement of cash in Europe and the U.S. isn’t on the horizon either for the same reasons, even if digital money eventually will find a niche besides paper.

Despite the rapid advancement of the topic in recent months, we’re still at the dawn of developments. 2021 is sure to bring promising new developments, and the ECB is likely to devote considerable resources to rolling out a digital euro (or ultimately spike the project).

In Switzerland, SDX and «Project Helvetia» are poised to take their next steps. The U.S. has been noticeably absent in the discussion, though January’s change in administration may mark a new tack in digital assets.