Support for state-backed digital currencies is growing amongst an unlikely group - bankers. We at FlashFX welcome this shift in thinking from an industry that has historically dismissed the viability of cryptocurrencies and blockchain technology.
The change in perception of financial institutions towards the regulation of digital currencies has been largely driven by concerns related to financial stability in the wake of cryptocurrencies like Bitcoin.
“I don’t think governments are going to take lightly other people coming in and potentially disrupting their abilities around data, around tax collection, around money laundering, around know-your- customer,” Citigroup CEO Michael Corbat said in an interview to Bloomberg in early November. Other prominent CEOs, including JPMorgan Chase & Co.’s Jamie Dimon, have also expressed their skepticism that authorities will continue to allow cryptocurrencies to exist without regulatory oversight. “Governments like to control their money supply”.
In an interview with the Financial Times this week, UBS Chairman Alex Weber urged central banks to be more open to creating a digital version of their currencies. If central banks could change the way they viewed digital coins, as an opportunity rather than a threat, they could “probably provide non-account related payment services in a cheaper and more economic way”.
FlashFX has been making the case for government involvement with explorations around a state- backed cryptocurrencies for some time, but for reasons different to the banks. Although Ripple faces less scrutiny than other digital payment networks, we stand to benefit from the legitimisation of all of other cryptocurrencies in the marketplace. We believe that the participation of key stakeholders like central banks in this process would help build trust and grow the blockchain and digital currencies industry.
In practice, a virtual currency backed by a central-bank would use the same distributed ledger technology as blockchain to clear and settle financial transactions. The idea is that “coins” used for transactions would be backed by cash held in accounts at the Central Bank. The process has the potential to reduce transaction costs by streamlining complex clearing and settlement systems, improve monitoring of financial flows and strengthen the central-banks’s control of the money supply.
Central banks from Singapore to Sweden have been actively exploring the viability of issuing their own digital currency.
In January 2017 the People’s Bank of China (PBoC) instructed a research group it established to look into digital currencies and other blockchain applications to “set up a more explicit strategic target for launching a digital currency..... and aim for an early launch of the central banks’ digital currency.”
In Japan, a group of big-name banks - with the backing of that country’s central bank and regulators - reportedly began working on a digital currency to launch in time for the 2020 Tokyo Olympics. The new J-Coin would be exchanged at a one-to-one rate to the Japanese yen.
In Europe, Sweden’s Riksbank currently has a so-called Ekrona project underway to determine whether it should supply digital central bank money to the general public. The project is expected to be finalised in late 2019.
FlashFX has been at the forefront of the FinTech community in Australia pressing the case for a new Digital Australian Dollar - the DAD - which would be pegged to the physical Australian dollar. As Australia’s first company to be granted a financial services license to move money internationally using blockchain technology we fully understand the importance of public and government confidence in the system. As I recently noted in an interview with the Business Insider, “A government-endorsed digital Australian dollar has the potential to lead to increased trust and certainty, particularly to grow the digital currency marketplace.”
While support for government-backed virtual currencies is certainly growing, uncertainty remains. What seems clear, though, is that governments recognise the potential in the underlying technology of cryptocurrencies. While the timing is relatively unknown, the trajectory seems clear - it is only a matter of time before state-regulated digital currencies become a staple in consumer life.
At FlashFX, we will be watching this space closely.