28 March 2018

OMFIF: Central banks must adapt to blockchain

Last week, OMFIF and the Czech National Bank organised a seminar on private cryptocurrencies, central bank digital currencies, distributed ledger technology and the digital economy. Representatives from the public and private sectors agreed that distributed ledger or blockchain technology is only in its first generation.

It is important to distinguish between concerns surrounding private cryptocurrencies and optimism regarding the underlying blockchain technology. From instant settlements to reducing counterparty risks, private and public sector organisations realise the potential benefits of blockchain. But there are problems with the current generation, which need to be addressed before the technology can be used more widely. Blockchain needs to overcome its scalability problem if it is to replace real-time gross settlements – the Bitcoin blockchain can only process 7 transactions per second, whereas Visa processes 2,000 transactions per second.

Problems like these are not insurmountable and blockchain has evolved beyond the experimental phase into implementation. Central banks must address three key issues before the technology enters its next iteration.

First, central banks should dedicate more resources to understanding which internal operations and systems will benefit from blockchain.

Second, central banks must weigh the implications for financial stability and monetary policy of issuing their own digital currencies.

Third, central banks play a crucial role as regulators and should mitigate risks while encouraging innovation.

At this stage, central banks should shape regulation that is technologically neutral, so it does not favour one provider over another and reduce competition in the market. Although the first generation of blockchain companies and start-ups were born out of regulatory arbitrage, the private sector now recognises that regulation is necessary if the next generation of the technology is to achieve its full potential.

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