Central banks go to crypto. Is that a good idea?

On the third floor of the dark cylindrical tower that is home to the Bank for International Settlements, I was greeted with a sight that made me blink in surprise: white walls.

This may not sound very sensational, so let me explain. BIS is the central bank’s central bank. It is based in Switzerland, one of the world’s famous financial centers. When I’ve visited before, the decor was reassuringly traditional: dark wood paneling, sober chairs, bland colors, dull art. Like most central banks, it projects an aura of timeless stability with marble columns.

But the white walls are one sign that a strange cultural experiment is taking place here. A year ago, BIS launched half a dozen “innovation hubs” that would embrace initiatives in the crypto and cyber world. Most notably, it is helping to create a number of central bank digital currency (CBDC) projects around the world. About 114 countries were exploring CBDCs at the end of 2022, 20 were piloting them and 11 had launched them, according to the Atlantic Council, the international affairs think tank. The Bank of England, which has been mulling a CBDC since late 2021, has just announced that a “digital pound” is likely to be needed in the future.

So, in an attempt to channel Silicon Valley or the closer-to-home fintech hub of Sweden, one corner of BIS has replaced the dark wood paneling with blackboards, glass and soft chairs. As makeovers go, it’s hardly the laid-back Bahamas penthouse that was the headquarters of disgraced FTX founder Sam Bankman-Fried, or the graffiti-covered building in Brooklyn that’s home to ConsenSys, a key player in the ethereum currency. But it’s clear that the new look is part of an effort to break the stuffy image of central banking just a little.

Is this a good idea? The answer from crypto enthusiasts is a clear “no”. After all, most people who are serious about bitcoin or ethereum got involved because they want to overturn existing financial hierarchies, and they believe that central bankers are too old-fashioned to understand the innovative power of digital assets.

Moreover, they fear that the only reason establishment institutions like the BIS are playing with CBDCs now is to crush the private sector tokens that might challenge traditional or “fiat” currency, not by outright banning those challengers, but by stealing their cyber. clothes instead.

The conspirators are partly right. At a recent meeting of central bankers and regulators that I attended at that Basel tower, there was a clear belief, or hope, that CBDCs could displace most private tokens in the future, especially given that cryptoassets like bitcoin have collapsed in value, and scandals such as the one at FTX trigger regulatory work. Indeed, Agustín Carstens, BIS chief, says that recent events mean that “the battle has been won” between crypto and fiat – by central banks.

Maybe. Yet not everyone in these central banking towers thinks it is necessary or sensible to gamble with CBDC. The innovation could lead to banks controlling huge amounts of citizens’ data and undermining the role of commercial lenders. It may not even make payments faster for citizens. A recent report from the House of Lords was so unimpressed that it questioned whether CBDCs were “a solution in search of a problem”, while Tony Yates, a former adviser to the BoE, claims that “the huge undertaking” is simply ” not worth the “costs and risks. Federal Reserve Chairman Jay Powell admits he is “legitimately unsure whether the benefits outweigh the costs or vice versa”.

Not strange. Although these two worlds overlap, tribalism remains a powerful force. Central bankers are trained to move cautiously, value stability and operate within hierarchical power structures. By contrast, the tech entrepreneurs driving the digital asset revolution value “networks”—audience power, not hierarchies—and want to disrupt the establishment by taking bold steps and risks. The two cultures are completely different, they talk past each other, says a central banker who dealt with Facebook when they tried to launch their so-called Libra digital assets project in 2019. That project ultimately failed.

Some are making attempts to bridge the divide. Jeremy Allaire, founder of the Circle Group, which operates a stablecoin (a digital currency that is tied to either fiat money, exchange-traded commodities or another cryptocurrency), says he wants to work with, rather than against, regulators. He even wears a sober shirt and blazer instead of shorts and a disheveled T-shirt like Bankman-Fried. Meanwhile, the BIS is trying to hire staff from the tech world, and some central bankers are taking off their jackets. But mixing the Basel tribe with the tech tribe isn’t going to be smooth sailing, least of all since each thinks it should have the upper hand.

Follow Gillian on Twitter @gilliantett and send her an email at [email protected]

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