Sharply Divergent Views on Blockchain and Cryptocurrencies

In the last week there have been several articles on blockchain, Bitcoin, and cryptocurrencies with some interesting and novel thoughts, but also some widely difffering points of view.

The Economist, March 15th - A primer on blockchain-based versions of central-bank money

The Economist discusses the role of central banks in issuing digital currency and cites a report published by the Bank for International Settlements (BIS) that offers guidance on central-bank digital currencies (CBDCs). The report makes a distinction between public use of CBDCs (with a central bank account open to anyone), and CBDCs available only to commercial banks. The BIS report is cautious on public use of CBDCs given potential gyrations in money and payments markets, and implication for monetary and fiscal policy. The larger concern though is directed at private crypto-currencies which are labeled as “speculative gambles.”

Financial Times, March 15th – Finance chief of Visa attacks bitcoin ‘bubble’

In a Financial Times interview, Vasant Prabhu, Visa’s CFO takes a dim view of bitcoin and talks of its use by “every crook and dirty politician.” While Visa is running blockchain trials for cross-border corporate payments, the CFO voices concerns around bitcoin’s price volatility and regulatory issues. However, he does concede that “it’s early days and we’ll watch it very closely.”

Financial Times, March 18th – Mastercard keeps options open on cryptocurrencies

Mastercard wants to handle regulated central bank issued non-anonymous digital currency and in general appears to take a more open stance on cryptocurrencies. It is running a small scale cryptocurrency pilot in Japan and Singapore that allows for “cash out” of bitcoin to a card without taking any exposure on price. Effective regulation is the key for Mastercard. According to Ari Sarkar co-president of Mastercard’s Asia Pacific region, “If governments look to create national digital currency we’d be very happy to look at those in a more favourable way.”

Financial Times, March 18th – Central banks are right to consider the merits of digital cash

Writing for the Financial Times, Reza Moghadam, vice-chairman for sovereign and official institutions at Morgan Stanley makes a case for central bank issuance of digital currency. He believes that price volatility could be addressed by central banks issuing a digital version of cash. He further advocates for allowing the public to open accounts at the central bank and for the central bank to handle payments. In essence central banks would take over payments from banks – banks would handle credit. Additionally, he puts forth the notion of a “central bank coin” that resides on a blockchain and issued against a bank’s cash and reserves at the central bank. If the central bank were to exchange coin, cash and reserves at par it would address price volatility. The central theme here is about adding stability to the cryptocurrency market and driving down the cost of payment processing.

Our Fearless Take

There is merit to the idea of central bank issued digital currencies – in fact, some countries are already exploring options. It would bring much needed regulatory order, manage price volatility, and over time accelerate the use of digital cash.

Having the public open digital checking accounts at central banks is not a practical solution. Banks would be loath to lose customers to the central bank just as they would be unwilling to give up the payments business. Further, there would be serious privacy and ‘big brother’ issues if the government started to manage checking accounts and payments.

We’ve moved passed the Silk Road days and while cryptocurrencies have the potential for nefarious uses, in the present context they have become more speculative assets than instruments of value exchange. The question really is about smart use of regulatory policy to drive effective use cases. How can cryptocurrencies make the payments markets more efficient?

Regulation is critical. Governments need to take a more active stance on creating the right infrastructure. There continues to be a lot of hedging – at the most recent G-20 meeting, government officials admitted that digital currencies have potential financial stability implications but decided to delay any steps on cryptocurrency to July.

Blockchain technology is evolving. There are issues with scalability, processing speed, immutability, etc. Despite multiple ongoing pilots and proof of concepts within the financial services and payments industry, meaningful commercialization is five plus years out. By all accounts some combination of blockchain and cryptocurrency could radically transform the existing payments infrastructure and create new pools of economic opportunity.