We have seen many attempts to develop a cryptocurrency, but in the end almost all of them fail because they are aimed at making profits, says Agustin Carstens, head of the central bank.
Agustín Carstens, president of the Bank for International Settlements (BIS), often called the bank of central banks, is visiting the BIS Innovation Hub Nordic in Stockholm this week, along with central bank governors from Norway, Sweden, Denmark and Iceland.
The main topic is the development of digital central bank money (DSP). The background is the use of cash in a free fall, accelerated by the Corona pandemic, and fears of competition from private cryptocurrencies after a sharp rise in interest in recent years.
We have seen many attempts to develop cryptocurrency, but in the end, almost all of them fail because they are aimed at making a profit, says Karstens, in an interview with E24.
So, they take short cuts here and there, and end up with very inefficient currencies called currencies that don’t fulfill the real role of money, which is to be a good medium of value preservation and a good medium of exchange. Which is why almost everyone ends up as targets for speculation, he continues.
Is cryptocurrency a threat to the banking system or central banks?
– If you look through history, then the money of the Central Bank was the main force of the modern financial system, and the most important contribution was precisely the trust in such money.
Carstens adds that there is a lot of fluctuation (fluctuation) in the values of different cryptocurrencies, and in some cases there are fundamental weaknesses in terms of security.
What is important is how to ensure that they retain their value. The technology itself doesn’t provide value, you need all the institutional agreements, which only central banks provide, he says.
The head of the BIS adds that many are attracted to new technology and love the idea of decentralized money that is not produced by a central authority such as a central bank.
But we also saw that decentralization was largely fictitious, because it is ultimately those who provide the operational platforms who decide the rules of the game.
Ultimately, new technology creates products that are difficult to develop. We are left with cryptocurrencies here, but most of all they play a role as objects of speculation.
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An alternative to cryptocurrency?
Do you think digital central bank money will be an attractive alternative to cryptocurrency?
– I think so. Central banks have a mandate by law and institutional power to issue money specifically in a way that maintains its value over time, and serves as a good medium of exchange.
Carstens emphasizes that the DSP builds on the existing strong foundation upon which the current financial system is built.
– It is not an experiment to see if it works or not. It’s already clear that it works, so without weakening the foundation, the idea is to add better technology to meet the needs of society, he continues.
A survey of 81 of the world’s central banks under the auspices of the Bank for International Settlements, shows that ninety percent of the world’s central banks are now exploring digital central bank money and more than half are in the process of developing or conducting concrete trials.
Here at home, Norges Bank recently began beta testing of its DSP technology solutions, which will run for a while until the summer of 2023. However, it will take several years of development and possibly a change in law before it becomes a reality in Norway.
– Is there a need to accelerate this development?
It’s better to take things slow and get right. The authorities cannot allow the system to be hacked, or not allow all people to access it. If you’re going to repeat what cash does today, that’s a pretty big process.
– There is no room for error. There are hundreds of cryptocurrencies that come and go every year, but we don’t have the luxury of developing something that might not work, we have to be the best in the class.
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Aim for seamless payments across countries
Seamless cross-border payments, which is one of the advantages of cryptocurrency, is an important driver in working with DSP.
Issuing a DSP is a national decision, but from a global perspective, it is essential that it be based on some basic principles that allow an individual to solve today’s challenges with cross-border international payments and national currencies, says Karstens.
He compares it to telephone companies that choose different technologies and investments in their home countries, but with the help of effective international agreements it is as easy to call abroad as it is locally.
– And that’s what we want to achieve in payment systems as well.
One of the challenges facing DSPs is competition with private banks.
The idea is to complement other available payment systems, including those of private banks. If the cash disappears, the idea is that people should be able to get an alternative left over from the central bank.
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– Will this be able to compete for banks?
– We believe that this will be a win-win situation with the participation of commercial banks, and it is desirable with a large participation of them. It’s the same with cash today, if you want cash you have to go to the bank and not to the central bank.
– If private banks do most of the work, that’s fine for us.
Karstens also points out that banks will be able to take advantage of the infrastructure that has been created in connection with DSP, and thus will be able to add value to the banking sector.
– There will be new “railroads” that will contribute to the modernization of the various payment systems, so in some cases it may mean competition with banks, but I think it is limited, and we have ways to deal with it. On the other hand, there is huge potential for building public-private synergies, he says.
– What is the optimal DSP ratio?
Central banks can control supply, but we can’t necessarily control demand, it depends on the people who want to use it, says Karstens.
DSP has also raised other privacy challenges.
We should give as much anonymity as possible, but the degree of our anonymity is not up to the central bank, it’s a political discussion that every country should have, says Karstens.
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