The Swiss-based bank for the world's central banks has argued that there's a lot to gain if they offer decentralised cryptocurrency to consumers.
In a report published Sunday, the Bank for International Settlements (BIS) stopped short of an official policy recommendation, but admitted that there were clear privacy advantages of peer-to-peer transaction systems in central banks.
"I think a couple of central banks would recoil," said Cambridge University economist Garrick Hileman, who is studying distributed ledger systems in public banking in collaboration with the Financial Stability Board and others*. "The fact that they're even talking about it is quite significant."
Discussions of digital currency are particularly important in places such as Sweden, he said, because of the decline of cash. In some countries, it can take months to open a bank account, and if there are no vendors that allow cash transactions, it can make life very difficult.
As the BIS report freely admitted, decentralised cryptocurrency is an especially attractive form of digital currency. "The peer-to-peer element of the new technology has the potential to provide anonymity features that are similar to those of cash but in digital form," it said.
The report was referring to the pseudonymised addresses offered by platforms such as Bitcoin (although the addresses are public and transactions can be traced, so identity isn't truly safe from data science [PDF], Hileman said).
Offering a digital cryptocurrency to consumers "would be quite a radical departure from where discussion has been to date," Hileman said.
Central banks – which could be concerned that if there was a crisis, consumers would drop cash for numbers in a computer – currently only offer digital currency to commercial banks such as HSBC and Barclays. They're discussing whether to expand this option to consumers, Hileman said, but cryptocurrency might be too difficult.
First, it's not clear that consumers are clamouring for a privacy-preserving digital currency, he said. Then, central banks are concerned about not being able to monitor fraudulent activity.
Bob Swarup, who leads the investment risk advisory firm Camdor Global in London and is the author of Money Mania, told The Register, "It's kind of ironic that you'd have central banks with cryptocurrency," given the anti-establishment beginnings of Bitcoin.
He said that one thing the central banks would have to keep in mind is that there are regulations and geo-sociopolitical trends that could affect the adoption of digital currencies, such as internet restrictions (remember how China banned initial coin offerings?)
"The voters drive the rules, not economists," he said. A public outcry could cause politicians to change laws.
Ultimately, the BIS admits: "If third-party anonymity is not of sufficient importance to the public, then many of the alleged benefits of retail [central bank cryptocurrencies] can be achieved by giving broad access to accounts at the central bank."
It says banks are going to have to think carefully before making the decision to offer digital cash – and some risks (such as cyber resilience of central bank cryptocurrencies) – can be "hard to assess." ®
*The BIS sits on the Financial Stability Board's decision-making plenary and contractually provides it services and staff, although under Swiss law it is legally separate. Hileman's research does receive no-strings-attached funding from financial institutions such as VISA and EY (Ernst & Young), but he said he does not receive funding directly from FSB or the BIS.