What do international central bankers expect from crypto? And what do they fear about it?

How profoundly will crypto technologies change the monetary and financial system? This question hovered yesterday evening over the hall of the Zurich restaurant Metropol, directly opposite the building of the Swiss National Bank (SNB).

The public event, also streamed via video, bore the rather inconspicuous title «Towards the future monetary system». However, it was remarkable in several other respects.

Trial Balloon

To wit, Thomas Jordan, the outgoing President of the SNB, analyzed the previous experiences with Helvetia III, the SNB's trial balloon for issuing digital central bank money to commercial banks, something that finews.com has previously reported on.

There were also interesting insights from key figures at central banks and international financial institutions who detailed their considerations and tests related to digital currencies, including leading crypto analysts from the Bank of England (BoE), the Bank for International Settlements (BIS), the World Bank, and the International Monetary Fund (IMF).

First Worldwide

In his introductory remarks, the SNB President noted that it had been the first worldwide to issue central bank money in tokenized form on regulated third-party financial market infrastructure when it facilitated the issuance of digital bonds by the cantons of Basel (City), Zurich and the cities of St. Gallen and Lugano.

According to him, the consequences of that step were significant: «It makes tokenized central bank money available for settling commercial transactions on the same third-party platform where the tokenized assets are held.»

Legacy Money

Jordan went on to say that in a conventional financial system, two types of money can be exchanged at any time. Coins, bank notes, and commercial banking sight deposits that are held with the central bank. After that, there are the actual customer deposits held at the commercial banks.

If a bank customer transfers money to another bank account, this transaction runs in Switzerland through SIX's interbank payment system (Swiss Interbank Clearing, SIC), and is ultimately settled via transfers of central bank money between commercial banks’ sight deposits on the balance sheet of the central bank, the SNB President stated.

Based on Crypto

With Helvetia III, the pilot program, the SNB has provided financial institutions with digital central bank money based on crypto for the first time, something they can use to settle the trading of the bonds.

In place of SIX's established SIC payment system, the SIX Digital Exchange (SDX) stepped in, a regulated trading and settlement platform for digital assets, as Jordan explained, which is also operated by SIX.

«Economically and legally equivalent»

According to Jordan, digital central bank money can now «be issued on a third-party platform and used to settle tokenized assets safely and efficiently». And it is «economically and legally equivalent to sight deposits on our balance sheet».

Moreover, banks, payment infrastructure operators, and the SNB are in a position to incorporate the new technology «in their internal processes». And the SNB can «keep control over the issuance of its wholesale CBDC (Central Bank Digital Currency, Ed.) on SDX by technical means and contractual arrangements».

Distinction from «retail»

The SNB President drew a sharp distinction between other forms of digital central bank money that he called «retail CBDC», which the central bank directly provides to end-users. The SNB sees «no need in Switzerland for such digital central bank money for the general public», he maintained.

The central banks of China, the UK, and the wider Eurozone are considering such forms. According to Jordan, that «could fundamentally alter the current monetary system and the role of central banks and commercial banks, with far-reaching consequences for the financial system».

No need in Switzerland

According to the SNB President, there is no need for that, as Swiss consumers have access to a wide range of efficient and innovative payment instruments offered by the private sector without having to resort to crypto, particularly in light of the ongoing modernization of the SIC payment system in the direction of real-time payments something that finews.com has previously reported on. 

Thomas Jordan's closing remarks set the stage for a subsequent panel with Jorge Familiar, vice president and treasurer of the World Bank, Sarah Breeden, deputy governor for financial stability at the Bank of England, Hyun Song Shin, head of research at the Bank for International Settlements, and Dong He, deputy director in of the Monetary and Capital Markets department at the IMF.

What is Bitcoin?

The discussion was moderated by Antoine Martin, the newly appointed head of the SNB Directorate, who took over from Andréa Mächler on January 1, 2024, and who has extensive professional experience at the Federal Reserve Bank in both Kansas City and New York.

The representatives from the IMF, BIS, and World Bank identified various points in time when they became aware of the crypto issue. At the IMF, according to Hyun Song Shin, it was already in 2014 or 2015 when the then Managing Director Christine Lagarde asked her staff, «What is Bitcoin? How does it work?» At the BIS, serious consideration of the matter began in 2019 because of the debate about Libra, the privately issued blockchain competition to central bank money.

Preserving foundations, staying in the game

According to Breeden, central bank money must remain the foundation of our monetary and economic system. Therefore, it is inevitable that central banks consider how they can maintain their function in the face of technological change in the financial system.

The emergence of new, private forms of money, according to the BoE representative, would increase financial stability risk. And Familiar of the World Bank reiterated: «We should stay in the game.»

Tokenisation as a threat?

So, the impression is that current steps are not entirely voluntary. Rather, many apparently see their position being questioned in the face of a «promising technological innovation currently gaining momentum,» namely the «tokenisation of financial assets,» as Thomas Jordan had previously put it in his speech.

Moderator Martin pointed out that currently, more than eighty central banks worldwide are already working on crypto applications.

Distributed Ledgers

The word blockchain was avoided by the panel guests. Instead, they used the overarching term of the Distributed Ledger, which, in contrast to the completely open blockchain technology, also includes self-contained cryptographic computer networks with different degrees of centralization. The panelists outlined various application possibilities for this.

Jorge Familiar of the World Bank sees the greatest potential for his organization in issuing its bonds on a blockchain basis. He also imagines that the blockchain could play a role in ensuring compliance with budget constraints imposed by the development organization on debtor countries.

Simplified International Transfers

BIS representative Hyun Song Shin sees substantial simplifications in international money transfers. These could approximate the simplicity and speed of domestic transfers through smart and internationally coordinated applications of crypto technologies. Today, depending on the countries involved, they undergo a multi-stage and often lengthy process, with the actual transfer being preceded by a notification.

He referred to the recently launched Agorá project within the BIS, which deals with the tokenization of international money transfers. The SNB is also one of the seven central banks involved in this, and an unspecified number of private financial institutions are also involved.

The Innovation Hub of the BIS was already the germ cell for the SNB project Helvetia.

KYC and AML

Furthermore, Hyun Song Shin suggested that in cross-border money transfers, artificial intelligence could play a role in identifying parties (Know your Customer, KYC) and complying with anti-money laundering (AML) regulations.

His counterpart from the IMF added that such simplifications through crypto technologies also come with risks. «We have to be very careful about macroeconomic implications.» Lower barriers to international money transfer could, for example, also mean facilitated capital flight.

Critical questions

There is also the danger of incompatible isolated solutions in individual geographical regions and countries. However, the goal is an even deeper integration of the global money and capital markets through crypto applications. For this, they must necessarily be «supported by financial infrastructure», as IMF representative Dong He further explained.

The meeting of high-profile crypto thinkers made it clear: With Helvetia III, the Swiss National Bank has made a first step. However, in the form of SDX, a suitable digital infrastructure had already been available.

Rugged terrain ahead

There is no lack of additional ambitions for the tokenization of the global financial system on an international level.

But the path to it will be much steeper and more rocky than the one that led to the digital bond issues seen in Switzerland.