The Bank of Canada has become the latest central bank to weigh up the consequences of creating its own cryptocurrency. Researchers from the bank explored the idea in a newly released paper, which ultimately reached the conclusion that many of the commonly stated motivations are “plausible” but not compelling, and that some attributes might be “problematic”.
While the Bank of Canada was not sold on the idea, there is a definite sense that the prospect of a central bank cryptocurrency is picking up pace. The Bank of England, the People’s Bank of China and the Federal Reserve are among those that are dedicating serious research to the concept. The lead researcher at the People’s Bank of China recently expressed his impatience over the matter, saying that it is “crucial” for the bank to speed up its development and issuance of a digital currency. Japan, Sweden and Estonia have all announced that they have come far enough to be trialling the technology.
Japan, Sweden and Estonia have all announced that they have come far enough to be trialling cryptocurrency technology
Placed against headlines of extravagant new highs in bitcoin valuation, this kind of development is often framed as an attempt by central bankers to jump in on a craze, as if Fedcoin, ECBcoin, eKrona or J-coin would simply be a new competitor to bitcoin and Etherium. Alternatively, the development is also seen as an attempt by central banks to step in to stop bitcoin from taking over the market. But the idea of a central bank cryptocurrency would be a very different experiment. The Bank of England’s underground blog speculated that a central bank currency could spell the “end of monetary policy as we know it”.
Possible implications include the option for central bankers to introduce negative rates of interest directly to the real economy. It would also rewire the government’s control and oversight of the money supply, making hour-by-hour, or even minute-by-minute, macro policy adjustments a genuine possibility. It might also prompt depositors to give up on their banks en masse and switch to the central bank, which would entirely break down the business model of traditional banks. Some believe it could open the door for a full-reserve banking system like that proposed by Milton Friedman in the 1930s. This is one decision where it makes sense to step back from the hype and play it safe.