- Central banks are increasingly interested in creating digital currencies as the use of liquidity declines.
- But central banks are not threatened by bitcoin, says former Bank of England adviser Huw van Steenis.
- The main banker spoke with Insider and broke some myths about the central bank’s digital currency.
- Sign up here to receive our daily newsletter, 10 things before the opening bell.
In some ways, central bankers are like the “bitcoin bros” that blew up cryptocurrencies in 2021, although they might not like to think so.
As crypto fans have taken to Twitter to shout about their gains, there has been a quieter – but no less significant – surge in interest in digital currencies in the hushed offices of central banks around the world. .
The Bank of England is considering launching a “Britcoin”; China is ahead with the testing of its digital yuan; and European central bankers give word after word on central bank digital currencies, or CBDCs. The Federal Reserve is taking things more slowly but has hired researchers at MIT to explore the issue.
Huw van Steenis was previously Senior Advisor to the Governor of the Bank of England and is now Senior Advisor to the CEO of Swiss banking giant UBS.
Well known figure of the City of London, he wrote the Bank of England 2019 future of finance report, who carefully considered the payment outlook and the pros and cons of central bank digital currencies.
Van Steenis is lucid about CBDCs, arguing that they sometimes appear to be “a solution in search of a problem”. But he told Insider it was definitely central banks keeping control of money.
A CBDC would be a digital version of banknotes and coins, allowing people to hold and make payments in central bank money. Today, the digital currency that people use on a daily basis is created by commercial banks and held in accounts or prepaid cards.
Central bankers keep a close eye on cryptocurrencies
Some analysts have argued that central banks have been prompted to act by the cryptocurrency boom and fear that bitcoin will become a global payment system. Bank of America researchers postulated in March that CBDCs could be “kryptonite for cryptography.”
Van Steenis thinks differently. “About 95% of the money in most Western markets is not actually central bank money, but it is money held in the bank as deposits in electronic format,” says he. “The world is already the one in which [central banks] play a central role, but they do not dominate. “
The real problem is ensuring the stability of the financial system, says van Steenis, and that means keeping an eye on cryptocurrencies.
Yet the world of crypto is still tiny compared to the amount of money in bank deposits, he says. “So I don’t think they’re afraid of bitcoin. But what they want to know is that there is an innovation that they have to adapt and borrow.”
The main concerns are the decrease in the use of cash and the dominance of technology companies
One of the main concerns of central bankers is that, as the use of cash declines, private payment systems become increasingly crucial and could undermine the global financial system if they fail.
“If you think of the pandemic, it probably sped up the shift from cash to digital by about three to five years,” van Steenis says. “No central banker ever wants to feel like they are losing control of their currency.”
A CBDC would ensure everyone has access to a risk-free payment system, say the promoters, and make transactions safer and more efficient. Just like going directly to the airline for your airline tickets online is faster and easier than going to a travel agent.
Many central banks around the world are also wondering if they want big U.S. tech companies like Visa, Mastercard and PayPal to dominate their domestic payment systems, van Steenis says.
Another common argument is that Western central banks are rushing to follow China’s advanced CBDC scheme, which they say could threaten dollar dominance.
But van Steenis is skeptical. “I just don’t see that the geopolitical angle is what drives it,” he says. “If you ask the Swedes what drives e-krona, it is much more about reducing money, inclusion and their responsibility to provide to society, than because they are trying to stay with friends all over the world. “
CBDCs could eat banking sector lunch
Either way, the creation of central bank digital currencies looks set to pose a number of challenges to accompany the benefits.
One of the concerns of bankers is that technology could eat the lunch of the financial sector. The technical term is “disintermediation” – the idea that giving people access to CBDCs could prevent them from needing banks at all.
Van Steenis, who knows Wall Street and the city well, says CBDCs need to be created with a two-tier system in which people continue to hold accounts at banks and payment companies.
Still, he says there are other risks. “What happens when we think about transferring money from country A to country B? Do you then allow your money base to be sent to a foreign bank? In which case, how do you regulate them? ? Are you losing control of your monetary policy? “
Crypto community can innovate while central banks are cautious
These kinds of issues mean central banks and the governments that ultimately control them will be very careful in building CBDCs, van Steenis says. Countries will have to debate their pros and cons in a process that could take years, he added.
Fed Chairman Jerome Powell said in March that the central bank would “act with great care and transparency” and would not proceed without congressional support.
This opens the door for others to innovate, says van Steenis, especially those in the crypto world who are developing attractive coins and financial networks.
He says, “In fact, I think the crypto community has a real window of opportunity to help define a future as central banks try cautiously, but studiously, to advance what they are doing.”