The Swiss National Bank (SNB) has warned that cryptocurrencies whose value is pegged to traditional money could undermine its ability to ensure price stability. This could bring Facebook’s Geneva-based Libra cryptocurrency project into direct conflict with the central bank.
Speaking in Basel on Thursday, SNB chairman Thomas Jordan outlined the central bank’s thinking on digital currencies. So-called stablecoins, which hold reserves of francs, dollars and other currencies in proportion to the amount of tokens issued, are much more likely to succeed as competition to traditional forms of payment, he said.
This is because these pools of traditional currencies should, at least theoretically, prevent the value of such cryptocurrencies from fluctuating wildly.
Jordan saw no problem with stablecoins, backed by Swiss francs, operating within Switzerland. “As long as prices, wages and loans are set in Swiss francs, the SNB can influence incentives for savers and borrowers via its monetary policy and thus ensure price stability over the medium term,” he said.
“However, if stablecoins pegged to foreign currencies were to establish themselves in Switzerland, the effectiveness of our monetary policy could be impaired.”
Jordan did not specifically single out Libra in this respect, but the cryptocurrency plans to launch next year pegged to a basket of different currencies. The project has caused alarm among regulators and politicians around the world. A delegation of US Congress members recently visited Switzerland to share their concerns of Libra destabilising the global monetary system.
Digital Swiss franc?
Swiss think tank Avenir Suisse last month published a study that outlined other ways that Libra could adversely affect the SNB’s monetary policy powers. If Libra employs francs among its baskets of price-stabilising currencies, it could increase demand for the Swiss currency.
“Since Libra and its imitators are primarily bought with foreign currency, [a time of financial crisis] would further increase the pressure on the franc to appreciate,” the report states. This would be a problem for the SNB that already faces a fight to prevent the franc from gaining in strength.
On Thursday, Jordan also raised the possibility of the SNB issuing a digital version of the Swiss franc, but only if it was issued to banks and other financial players rather than the general public.
The Swiss stock exchange has asked the SNB to produce such a stablecoin for its ongoing project to build a new platform for digital assets. Newly-licensed Sygnum bank has its own franc-backed digital token to make payments within its system.
However, Jordan said more research needs to be done to establish whether such a digital currency would work and to evaluate how much real benefit it would bring.
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