10 Reasons Why Central Banks Will Miss
the Cryptocurrency Renaissance

Eugéne Etsebeth is an ex-central banker, formerly employed as a technologist at the South African Reserve Bank from 2013-2017, he chaired the virtual currency and distributed ledger working group and was technology lead for virtual currencies. Eugéne now heads up a business unit at Sybrin focusing on assisting central banks with digital transformation.

blog 21 August 2017

The decentralisation that took hold in communications, like the internet, and those that are influencing manufacturing, such as solar and 3D printing, are playing out in the area of finance (cryptocurrencies and ICO’s). Power and control are moving into the hands of the individual – and away from nation-states.

Central banks are key to enable nation-states to maintain their monopolies over the issuance of notes and coin, sovereign bond issuance (along with treasury) and the price of money. Communications and manufacturing are not the focus of central banks, yet the advent of cryptocurrencies and initial coin offerings (ICO’s) fall predominantly in the realm of central banks.

While central banks solely issued legal tender, miners and algorithms now control the issuance of tokens – the money supply. Whereas previously banks were licensed to store, send and spend currency, now wallet providers and exchanges allow the same features.

The currency renaissance has arrived and central banks are studying cryptocurrencies and related phenomena, though some central banks are more avant-garde than others; Singapore has been investigating the notion of using distributed ledger technologies to settle cross-border transactions in real time and the Bank of England has experimented with Ripple. As part of the currency renaissance, central banks are investigating building their own versions of central bank-issued digital currency (CBDC), yet central banks are not well equipped to deal with the currency renaissance. Here is a list of reasons why central banks may miss the next currency renaissance:

  1. Workforce of the past

    Central banks need to attract and retain fresh talent that will enable them to deal with the new openness and transparency demands as well as digital transformation and the increasingly complex global world.

  2. Slow decision-making due to bureaucracy and hierarchy

    Decision-making in central banks is like wading through treacle, often decisions take months because of various layers of hierarchy. Working groups need to compile voluminous and detailed documents that need to be reviewed and signed by all parties before it can proceed to the heads of departments or the deputy governors.

  3. Too few technologists and innovators

    Academics, economists and big-picture thinkers excel in central banks. The academics ponder on conceptual issues, while the economists make interpretations from data, whereas the policy makers and regulators mull over the cause and effect of promulgating laws. The technologists are generally not part of the discussion when it comes to policy and economic decisions for currency.

  4. Fear of experimentation

    Although some central banks are engaging in experimentation, there is a fear of going from proof-of-concept to pilot phase because a central bank may not make an error, as it may turn out to be a reputation buster – and reputation is the cornerstone of central banks. There is also some trepidation that the early regulation of cryptocurrencies, and associated new technologies, may legitimise their adoption.

  5. Territorial and silo-thinking

    Central banks are similar to conglomerates in that they have a number of different and distinct departments that require diverse skills and outputs. These differences make it difficult to approach a new technology and economic tour de force like cryptocurrencies, because it doesn’t fit neatly into any one of the industrial-style conglomerate domains. To highlight the conglomerate type nature of central banks, the core departments and skill sets are listed below:

    • Research – mainly economists who produce statistics based reports and input into repo-rate decisions
    • Bank supervision – mainly supervisors and regulators who manage banking licenses and audit
    • National payments – a combination of regulators for payments and technical resources running the RTGS system
    • Financial markets – front, middle and back office currency and bond traders
    • Currency management – manufacturing and logistical planners
  6. Buy versus build approach

    Most central banks do not have substantial software development capability, Therefore the approach for a new project will be to buy the technology. There is an acute shortage of central bankers who can explain or use Merkle trees.

  7. Status quo

    A large portion of central bankers are career central bankers, so the desire and ability to change is not incentivised. Change is often considered a threat to staff, and threats are met with jelly-like stickiness to the status quo.

  8. Incumbent relationships

    Banks are licensed to operate by central banks, giving them the ability to create money from customer deposits. The central bank asks the banks to protect depositor’s hard-earned money and to serve as many customers as it can i.e. financial inclusion. The task of banks is therefore to service the nation’s citizens at the behest of the central bank. These relationships and licenses are expensive to buy and will not easily be changed to include new members.

  9. Inter-governmental coordination

    Just as the departments within central banks tend to be siloed, so too are the intergovernmental departments that look at currency matters. They cover treasury, financial intelligence (KYC), financial services conduct authority, central bank, tax revenue, and secret service units. Each of these units may have different Acts and regulations that overlap cryptocurrencies and ICO’s.

  10. International coordination

    Internationally the nation-state must get guidance from a multitude of organisations like the G20 or G7, International Monetary Fund (IMF), Bank of International Settlements (BIS), Financial Action Task Force (FATF), and INTERPOL. International coordination often requires prolonged diplomacy and mismatched agendas.

These ten reasons why central banks will miss the next currency renaissance, are possibly insurmountable. However, the decentralisation forces that are at play will conceivably allow only a small number of forward thinking (and acting) central banks to maintain monetary competiveness with the burgeoning cryptocurrencies and ICO’s that have reared their decentralised heads.

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