Arm wrestling over the control of money
The Swiss National Bank (SNB) is doing its best to keep up with the fast-evolving world of cryptocurrencies and decentralised finance.
Switzerland’s central bank has again showcased the capabilities of its fledgling digital franc – an example of a central bank digital currency (CBDC).
The SNB has revealed that last month it clubbed together with the Bank of France and mainstream financial companies to pull off a cross-border trade using CBDCs on a distributed ledger technology (DLT) platform.
“Project JuraExternal link” was has been declared a success. Central bank issued digital francs and euros were traded between Swiss and French counterparties on the Swiss SDX Digital Exchange.
Why the fuss? Because it’s widely acknowledged that trading across different countries is still inefficient in the digital age.
“Existing arrangements are often slow, expensive, potentially risky and complex as they involve numerous intermediaries and financial market infrastructures,” the Project Jura participants said in a joint statement.
Even the established doyens of finance admit that DLT systems (of which blockchain is one example) can make money flow faster around the world and with less risk.
It’s also an (unspoken) acknowledgement that the legacy financial infrastructure needs to meet the challenge posed by new forms of digital money.
Decentralised finance (Defi) may be in its infancy (and frequently troubled by technical bugs and scams), but it’s also making a point that trading is possible without the traditional financial infrastructure.
Blockchains have created their own payment systems by issuing indigenous cryptocurrencies to settle trades in an instant.
Central banks, led by the Bank for International Settlements (BIS), have recognized the need to fight back through CBDCs. The main argument is that issuing digital money through a central bank is the only way to make DLT-based finance safe and socially acceptable.
Having called out cryptocurrencies as volatile vehicles for greed and fraud, BIS is now taking a dig at Defi. In its latest reportExternal link, BIS labels Defi a dangerous “illusion” that can only lead to trouble. Its researchers maintain that no reliable trading system can exist without some form of semi-centralised body that sets the rules.
The arm wrestle over money looks set to continue between central banks and purveyors of decentralisation, who remain confident that cryptocurrencies have become too popular to be bulldozed aside.
Both the Swiss and French central banks refuse to say when they will start issuing live CBDCs beyond the boundaries of experiments like Jura. The SNB is adamant that such digital money would, in any case, be confined to institutional players, like the Swiss stock exchange, rather than issuing it to the general public.
Other countries, notably China, appear to have more ambitious and fast-paced strategies for CBDCs, which look likely to be distributed to the person on the street.
The SNB is also anxious that it does not fall into a trap of its own making. Controlling the supply of Swiss francs might become problematic if demand for CBDCs becomes too rapacious.
In short, monetary policy could conceivably fall victim to the success of CBDCs.
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