Witnessing the hair-raising ascents of the value of Bitcoin and other cryptocurrencies, the world's central bankers are rightfully wringing their hands about how deal with them. Attitudes range from benign neglect to strict regulation to an all-out ban. A bubble? Quite possibly. Some critics like to compare it to Holland's 17th-century tulip craze.
Officials are still wondering whether these digital currencies will be a flash in the pan or lead us to a brave new world — an "Internet of Value," with a completely new framework for monetary policymakers. The Bank for International Settlements, the Swiss-based regulator for the world's central banks, says there is a lot of confusion about what these new currencies are.
"What's more relevant to us than Bitcoin is the technology behind it," said Carl-Ludwig Thiele, an executive board member of the Bundesbank, Germany's central bank. "We're in discussions here with central banks from a large number of countries about our experiences," he said. Mr. Thiele, who oversees payment transactions, said that cryptocurrencies' underlying blockchain technology is particularly interesting. Bundesbank operates the Target2 clearing system for Europe's central banks, one of the world's largest transaction systems.
Last year, Bundesbank set up its own blockchain pilot project with German stock-exchange operator Deutsche Börse aimed at understanding how the technology works. Blockchain is a distributed, digital ledger that records secure transactions, called blocks. Each new transaction is proofed, checked and added to a chain of all past transactions, maintained by many independent computers. This requires significant computer power, so the computers working to confirm the chain are rewarded for their “mining” efforts with digital coins, such as Bitcoin or Ether.
Results of the pilot project so far have been mixed. "The functionality is good, but we have doubts about the efficiency," said Mr. Thiele. Experts believe the blockchain technology is 90 percent less efficient than centralized payments systems, he explained.
Confusion reigns among central bankers about exactly what cryptocurrencies are.
The Bank of England briefly mulled creating its own version of Bitcoin before canceling the project, fearing an adverse impact on the financial system. Estonia is also mulling a cryptocurrency, for reasons not entirely clear. But Sweden's central bank, the Riksbank, is considering launching an "e-krona" cryptocurrency to complement cash. Stefan Ingves, president of the Riksbank, said that digital currencies affect all areas of central banking operations and cannot be ignored. Sweden may be a perfect testing ground for digital currency, as its citizens are already accustomed to whipping out their debit cards for the tiniest of daily transactions.
There are four options for proceeding. The first is for central banks to offer a kind of digital cash which, like Bitcoin, would be kept in virtual wallets with transaction details recorded in a decentralized blockchain database.
The technical issues and huge energy consumption associated with cryptocurrency stem, at least in part, to its decentralized nature. Digital cash issued by a central bank would avoid such problems by using a centrally managed, non-public blockchain.
Officials say it all comes down to whether the public wants this kind of cash, and whether it can be provided at a reasonable cost. Conditions in open-minded Sweden are favorable, as physical notes and coins are rarely used. But question remains whether the mass adoption of digital cash would threaten banks' deposit business.
The second option would to introduce an actual physical currency. But Mario Draghi, head of the European Central Bank, poured cold water on this idea. "The currency of the euro zone is the euro," he said flatly.
The third option would be to create a type of functional currency with a limited sphere of influence, say, so actors within the banking world could process securities transactions. Some central bankers, such as ECB director Benoît Coeuré, have made it clear they're interested in the idea.
A final option involves using blockchain for the central banks' internal purposes, a scenario the Bundesbank is particularly interested in.
The public might take to the advantages of using cryptocurrencies, as it allows fast payments without bank accounts or credit cards. Or the Bitcoin hype may die down, leaving in its wake a new class of encrypted software tools.
Cryptocurrencies may also prove a perfect temporary fix for national emergencies. A country whose monetary system has collapsed could attempt a fresh start by using electronic money, for example. A textbook example of this is Venezuela, where the government last week unveiled a cryptocurrency pegged to oil prices. Russia's president, Vladimir Putin, is reportedly a fan of cryptocurrencies, which may have to do less with blockchain and more with circumventing the official international banking system and US trade sanctions.
Felix Holtermann is an editor at Handelsblatt’s finance desk, while Frank Wiebe covers finance policy from New York. Jeremy Gray is an editor for Handelsblatt Global. To contact the authors: [email protected], [email protected], [email protected]