Eugéne Etsebeth is an ex-central banker who was employed as a technologist at the South African Reserve Bank from 2013 to 2017. During his time at the reserve bank, he notably chaired the virtual currency and distributed ledger working group.
In this opinion piece, Etsebeth outlines why he believes central banks won’t be able to adapt to innovations in cryptocurrency, arguing they simply aren’t set up to compete with sea changes in technology.
It’s a familiar trend, one that happened in communications (internet), and that is now playing out in energy (solar), manufacturing (3D printing) and finance (cryptocurrency) – power and control are moving into the hands of the individual and away from nation states.
This has huge implications for central banks, which today enable nation states to maintain their monopolies over the issuance of notes, coins and sovereign bonds. While communications and manufacturing are not their focus, cryptocurrencies and initial coin offerings (ICOs) fall predominantly in the realm of central banks.
In these systems, central banks don’t issue legal tender. Rather, miners and algorithms now control the issuance of tokens – effectively, 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, though some central banks are more open to change 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. Central banks are even looking to build their own versions of central bank-issued digital currency (CBDC).
Even still, central banks are not well equipped to deal with the cryptocurrency renaissance.
In fact, there are 10 good reasons why most central banks will find cryptocurrencies insurmountable. Sure, a small number of forward-thinking (and acting) central banks will maintain monetary competiveness with the burgeoning cryptocurrencies and ICOs that have reared their decentralized heads.
Still, most will succumb to a mix of the following issues:
1. Workforce of the past
Central banks will 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
Decision-making in central banks is like wading through treacle – decisions take months because of numerous layers of hierarchy.
Working groups need to compile voluminous and detailed documents that need to be reviewed and signed by all parties before they 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 and the economists make interpretations from data, whereas the policy makers and regulators mull over the cause and effect of promulgating laws.
However, 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.
This is natural, should a central bank make an error, 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 legitimize their adoption.
5. Territorial and siloed 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 cryptocurrency, 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:
- Bank supervision: mainly supervisors and regulators who manage banking licenses and audit
- Currency management: manufacturing and logistical planners
- Financial markets: front, middle and back office currency and bond traders
- National payments: a combination of regulators for payments and technical resources running the RTGS system
- Research: mainly economists who produce statistics based reports and input into repo-rate decisions.
6. Buy versus build approach
Most central banks do not have substantial software development capability. Therefore any new project will have to buy its technology. There is an acute shortage of central bankers who can explain or use Merkle trees.
7. Stuck in the status quo
A large portion of central bankers are career central bankers, so the desire and ability to change are 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. maximizing financial inclusion. The task of banks is therefore to service a 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 ICOs.
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.
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