Elites rarely welcome upstarts. So when financiers and policymakers recently gathered in Davos for the World Economic Forum meeting, crypto schadenfreude was in the mountain air.
Earlier this year, when crypto was booming, numerous digital assets companies booked space on the Davos promenade to advertise their power and brands. But just beforehand, the terra and luna stablecoins collapsed, and the price of tokens such as bitcoin tumbled.
Cue establishment chatter about a “crypto winter” — and general sneering about digital Ponzi schemes. But amid the sniping, investors should have taken note of another important — if less discussed — theme in the digital asset debate: namely that the world’s big central banks are becoming more interested in using distributed ledger technology, or blockchains, themselves.
This is not because they like the retail central bank digital currencies that normally grab headlines. Yes, the mighty People’s Bank of China is testing this, along with some smaller emerging market countries, including Jamaica. The European Central Bank is pondering it too, as François Villeroy de Galhau, the French central bank governor told Davos.
However, most western central bankers are wary of creating retail CBDC — ie letting citizens hold digital central bank cash — because they fear the implications of being responsible for their data and/or dislike the idea of disintermediating commercial banks. The crash of terra has also reduced any sense of urgency. So, too, the fact that mobile payments are making it increasingly easy, fast and efficient for citizens to use fuddy-duddy fiat currency.
But what is sparking establishment interest is using CBDC for wholesale cross-border payments, to move funds between financial institutions and central banks. “We believe in wholesale [CBDC] and we have run nine experiments [with these],” de Galhau told the WEF, noting that although “retail CBDC is where the public interest is”, this misses the point.
Or as Ravi Menon of the Monetary Authority of Singapore, which has been experimenting with CBDC for seven years, recently told an important central bank meeting in Zurich: “We are barking up the wrong tree with retail CBDCs. The tree we should be barking up is wholesale cross-border CBDCs.”
This might not be what most politicians or ordinary citizens want to hear, given the arcane inner workings of wholesale markets. But it matters, since the shift in emphasis is driven by two key factors.
One is a recognition that current cross-border payment systems are achingly slow; so much so that Roberto Campos Neto, the Brazilian central bank governor, recently told an IMF meeting — only partly in jest — that it has been faster to move money from São Paulo to London by boarding a plane with bags of cash than using official bank channels.
However, if central banks “scale up [wholesale CBDC] and achieve atomic settlement you can make cross payments at close to zero cost and the benefits are huge”, as Menon said in Zurich. Or as Kristalina Georgieva, head of the IMF, told Davos: “CBDC are not yet internationalised, but this is where the opportunity is.” There is, in other words, a genuine use case.
The second attraction is cultural: a wholesale CBDC can be organised by a club of central bank technocrats without needing much debate with politicians, or voters.
This does not make it easy to create wholesale CBDCs on a large scale. Far from it. The technology hurdles remain daunting. Wholesale CBDCs may also require central banks to cede a little sovereignty since using distributed digital ledgers means they no longer control fiat currencies in the traditional manner. That requires mutual trust.
However, the central banking tribe that convenes around the Bank for International Settlements in Basel does generally trust each other — and more than their own domestic politicians. More than a dozen cross-border wholesale CBDC experiments have occurred, not just with the French and Singaporean central banks, but countries such as Switzerland, South Africa, Thailand, China and the United Arab Emirates.
It is not clear (yet) whether these can scale up. One key block, as Georgieva stressed in the Zurich and Davos meetings, is that there is still no “interoperability” between these separate pilots. But if this does emerge — ie scaleable systems are created — there would be further interesting implications.
One is that future historians might conclude that the most significant long-term consequence of distributed ledger technologies for finance was not bitcoin and other cryptocurrencies. Instead, it lay in deeply dull corners of banking, like wholesale payments.
They might also decide that while distributed ledgers were presented as a tool that could rip power away from establishment institutions, this innovation actually reconsolidated them in some ways. The Davos elite is usurping the dream.
Of course, bitcoin maximalists would retort that this is precisely why CBDCs are a bad (if not unworkable) idea; their assumption is that central banks cannot continue to hoard monetary power. Maybe so. But the real moral of all these discussions is that “blockchain” can mean a multitude of different — and sometimes contradictory — things.
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