Central banks going crypto. Is it a good idea?

On the third floor of the dark cylindrical tower that is home to the Bank for International Settlements, I was faced with a sight that made me blink in surprise: white walls.

This may not sound very startling, so let me explain. The BIS is the central bankers’ central bank. It’s based in Switzerland, one of the world’s renowned financial centres. When I’ve visited previously, its decor was reassuringly traditional: dark wood panelling, sober chairs, bland colours, dull art. Like most central banks, it projects an aura of timeless, marble-pillared stability.

But the white walls are one sign that a curious cultural experiment is taking place here. A year ago, the BIS launched half a dozen “innovation hubs” that would embrace initiatives in the crypto and cyber worlds. Most notably, it is helping to create a string of central bank digital currency (CBDC) projects across the globe. About 114 countries were exploring CBDCs at the end of 2022, 20 were piloting them and 11 had launched them according to the Atlantic Council, the international affairs think-tank. The Bank of England, which has been mulling a CBDC since late 2021, has just announced that a “digital pound” is likely to be needed in the future.

So, in a bid to channel Silicon Valley or the closer-to-home fintech hub of Sweden, one corner of the BIS has replaced the dark wood panelling with whiteboards, glass and soft chairs. As makeovers go, it’s hardly the laid-back Bahamas penthouse that was the HQ of disgraced FTX founder Sam Bankman-Fried, or the graffiti-covered building in Brooklyn that is home to ConsenSys, a key player in the ethereum currency. But it’s clear the new look is part of an effort to break the stuffy image of central banking just a little.

Is this a good idea? The answer from crypto aficionados is an emphatic “no”. After all, most of those who are serious about bitcoin or ethereum got involved because they want to overturn existing financial hierarchies, and they believe that central bankers are too old-fashioned to understand the innovative power of digital assets.

Moreover, they fear that the only reason establishment institutions such as the BIS are playing with CBDCs now is to crush the private-sector tokens that might challenge traditional or “fiat” currency, not with an outright ban on those challengers but by stealing their cyber clothes instead.

The conspiracists are partly right. At a recent meeting of central bankers and regulators that I attended in that Basel tower, there was a clear belief, or hope, that CBDCs could displace most private tokens in the future, particularly given that crypto assets such as bitcoin have collapsed in value, and scandals such as the one at FTX are sparking a regulatory crackdown. Indeed, Agustín Carstens, BIS head, says recent events mean that the “battle has been won” between crypto and fiat — by central banks.

Maybe so. Yet not everyone inside those central bank towers thinks it’s necessary or sensible to play with CBDCs. The innovation could leave the banks controlling vast quantities of citizens’ data and undermine the role of commercial lenders. It may not even produce faster payments for citizens. A recent report from the House of Lords was so unimpressed that it asked whether CBDCs were “a solution in search of a problem”, while Tony Yates, a former adviser to the BoE, argues that “the huge undertaking” is simply “not worth” the costs and risks. Jay Powell, chair of the Federal Reserve, admits that he is “legitimately undecided on whether the benefits outweigh the costs or vice versa”.

No wonder. Even as these two worlds overlap, tribalism remains a powerful force. Central bankers are trained to move carefully, valuing stability and operating within hierarchical power structures. By contrast, the tech entrepreneurs driving the digital assets revolution value “networks” — crowd power, not hierarchies — and want to disrupt the establishment by taking bold steps and risks. The two cultures are completely different, they talk past each other,” says one central banker who dealt with Facebook when it tried to launch its so-called Libra digital assets project in 2019. That project ultimately failed.

Some are making attempts to bridge the divide. Jeremy Allaire, founder of the Circle group, which runs a stablecoin (a digital currency that is pegged to either fiat money, exchange-traded commodities or another cryptocurrency), says he wants to work with, rather than against, regulators. He even sports a sober shirt and blazer rather than shorts and a dishevelled T-shirt like Bankman-Fried. Meanwhile, the BIS is trying to hire employees from the tech world, and some central bankers are taking off their jackets. But mixing the Basel tribe with the tech tribe is not going to be plain sailing, least of all since each believes that it should have the upper hand.

Follow Gillian on Twitter @gilliantett and email her at [email protected]

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