Noelle Acheson is a 10-year veteran of company analysis and corporate finance, and a member of CoinDesk’s product team.
The following article originally appeared in CoinDesk Weekly, a custom-curated newsletter delivered every Sunday, exclusively to our subscribers.
A traditionally opaque and conservative sector is becoming more transparent and active in its approach to innovation research – I’m talking about central banks.
Bank of Japan, Bank of England, Bank of Korea, the National Bank of Cambodia, the Reserve Bank of Australia, the Hong Kong Monetary Authority, Bank of China.
I could go on, but you get the picture. All are emerging as early and active on blockchain and DLT. Now, compare this to a few years ago.
Going over CoinDesk articles from 2013 and 2014, you see that most headlines with the words ‘central bank’ in them also included the word ‘warning’. It wasn’t until mid-2015 that attention turned away from the potential threat of cryptocurrencies to the intriguing potential of the underlying technology.
A natural evolution, you say? Perhaps, but with some nuances.
A late start
Commercial bank interest in blockchain technology, by contrast, started much earlier.
Central banks are understandably more conservative – they are public institutions, charged with maintaining the integrity of monetary policy and the banking system, neither of which allows for risk that is difficult to quantify.
However, as the murmur of blockchain interest from the banking sector became a roar, central banks had no choice but to take note.
As part of the oversight of their respective banking sectors, they need to know what constituents are up to, and they need to ensure that no systemic risk can jeopardize the system. In other words, to remain relevant, they need to become familiar with the tech that banks are experimenting with.
The situation brings to mind the words of one of the leaders of the French Revolution who said:
“There go my people. I must find out where they are going so I can lead them.”
Sparks fly
If central banks fall ‘behind the curve’ and lose touch with the banking sector, they cease to be prescriptive. And in a fiat system, that could be deadly.
Also, as bitcoin enthusiasm infiltrates the hallowed halls of economics, the potential threat of currencies that don’t need central banks begins to look more real, as does the intriguing opportunity to rethink the way money works.
Obviously, systemic change is slow and fraught with institutional barriers. Yet central banks are, on the whole, stepping up their innovation game.
Most of the work is being done in silos, although some collaborations with the public sector and with other central banks are underway.
A few weeks ago, the Bank of England and the Federal Bank of Boston caused a stir by being the first central banks to join one of the larger constortia, Hyperledger. More will likely follow suit.
The next step
What central banks need to do, however, is form their own consortium. While each bears a unique combination of structural, economic and geographic considerations, their goals are similar. Much of the central bank work currently being done is repeated behind gilded doors elsewhere.
Collaborating on research and testing, with each other and even including private components of the ecosystem, will advance the work much faster.
It would also mark a turning point in history.
Central banks are always implicitly cooperating to keep the global economy ticking along with relatively stable currencies and trade flows (to paraphrase the band 10cc: “You need a yen to make a dollar”). However, with the exception of regional initiatives, they have not yet formed an association aimed at furthering the development of their own role.
A central bank blockchain consortium would need to do more than test applications. It would need to exchange ideas on the future of the institution itself.
Will new tech allow it to consolidate influence over sprawling economies, reinstating monetary influence and changing the way we see banking? Or will its role end up being usurped by smart contracts and fragmented payment methods that devolve financial independence to end users?
Such debate is inevitable, especially given technological developments underway.
Better, then, to engage in a cooperative fashion, applying a range of experiences and seeking shared solutions. The resulting lessons learned, not to mention successful innovations, will help the central banks jointly bring their respective economies into a new phase of development.
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