It’s 2022, and it’s no longer a secret that central banks across the globe have taken into account the rise of cryptocurrencies and blockchain technology. A number of banks are keen to experiment with distributed ledger technology (DLT) in the coming years, while others are in the midst of testing blockchain-based trials
For now, authorities are placing emphasis that blockchain technology is still in its infancy, for policymakers to jump to conclusions in regards to regulating the digital currencies. Despite the lack of regulatory clarity, financial institutions are starting to look ahead of the prospective technical barriers and scopes, with plans to support the industry through a series of strategic investments paired with building and exploring industrial regulation.
Financial Institutions and governments have come forward, stating that it’s a ‘’national interest’’ to study the implications of blockchain technology.
The idea behind this is to determine the range of prospective applications that the nascent technology has to possibly offer. Over time, legal frameworks will be rolled out as regulatory bodies seek to draft new laws to regulate Cryptoccurencies around the world.
The sheer fact that some central banks are considering the idea of issuing a national digital currency through the implementation of DLT as a universal payment system or data storage network has left many baffled, questioning the motive behind such a decision.
Let’s bring up a few examples of financial institutions that are giving DLT a go:
• Saudi Arabia – On 15th September 2018, the Saudi Arabian Monetary authority announced a strategic partnership with Ripple ~ a project that looks to establish a real-time gross settlement system, currency exchange and remittance network. Whilst Saudi Arabia’s Central Bank is not planning to adopt Blockchain or test pilot a national digital currency, it instead has encouraged two regional banks to use xCurrent – an enterprise solution that helps banks process cross border payments with end-to-end tracking.
• United Kingdom – The Bank of England has successfully conducted a proof of concept with Ripple back in 2017. The BoE plans to revamp the system that underpins traditional British banking by utilizing blockchain to improve its real-time gross settlement system. The central bank has announced a release proof-of-concept, signaling that UK authorities are softening their stance on blockchain – this serves as clear indicating that the Bank of England is interested in Blockchain and perhaps may use technology once the initial testing phase is complete.
• South Korea – The Bank of Korea has been committed to pilot testing and experimenting with Blockchain technology as of 2018. South Korea’s central bank has requested the program be coordinated with Blocko, the private company behind Aergo ~ an open-source project designed for enterprises keen to deploy an independent hybrid blockchains. Whilst Blocko is a private company who owns the rights to the proprietary software ‘’Coinstack’’; the public chain, Aergo, is being utilized to develop decentralized commercial dApps & services, tailored specifically to the needs of businesses in a B2B angle. South Korea’s central bank is now utilizing Coinstack’s technology and is working alongside Blocko to test pilot blockchain-based micropayments, a move signaling that South Korea could be exploring more decentralized solutions. To date, there are a number of conglomerates and banks that continue to invest in startups such as Aergo, cementing South Korea place as a global blockchain leader
• Singapore – Project UBIN is a Singaporean-led initiative to digitize the country’s national currency and to determine the feasibility of blockchain for the clearing & settlement of securities. The monetary authority of Singapore is keen on considering the idea of issuing out the Singaporean Dollar on a distributed ledger. By issuing a digital national currency, financial institutions will be able to carry out simultaneous exchange and settlement using a tokenized asset that is recognized by Singapore’s central bank.
As of the end of Q1 2019, authorities are getting more acquainted with the trends of the crypto industry as a whole, aware of the issues that seem to plague the industry, emphasizing that scalability, anonymity, & protection pose as legitimate issues that impede mainstream adoption.
The BIS Survey
A survey carried out by the Bank of International Settlements made headlines in 2019 as the report indicates that central Banks are openly studying digitized currencies.
The survey disclosed that financial regulators are conducting a series of theoretical studies on the feasibility of issuing out central bank digital currency.
Based on the findings, more central banks are planning to issue digital currencies within the next ten years, the survey notes that whatever forms the digital currencies are coming in, they’re not likely to be approved, vastly, any time from now.
An estimated 70% of central banks showed that they’re committed to studying the implications of developing a national backed digital currency. When compared to the previous year, there was a mere 5% increase of central banks in favor of issuing a CBDC in 2018. Nevertheless, the majority of central banks are sitting on the fence and have not caught a ”Crypto Fever” or aren’t looking into “going blockchain”’ any time soon.
From making several observations, one can pinpoint that financial institutions who have expressed little to no interest in blockchain technology tend to originate from smaller jurisdictions – that have yet to comment & recognize the opportunities of this new digital asset.
Apparently, 31% of the central banks are set to be active in pilot testing a Central Bank Digital Currency ‘’CBDC’’ with the intention of issuing a public national digital currency. Further, 13% are planning to use blockchain-based platform to approve settlements of securities and to conduct inter-bank payments.
What’s interesting is that roughly 56% of central banks are working on both the wholesale and public CBDC. It’s worth noting that reserve banks are going after both public and wholesale digital currencies to capitalize on factors such as payment protection and effectiveness, ensuring that the benefits outweigh the risk.
Still, the survey showed that all around the world, reserves banks are independently working to develop a proof-of-concept. Only a handful of financial institutions are set to be partnering with one another through research-sharing. The whole idea of collaborating is to better understand how DLT can be applied; for various use-cases such as digitization of securities or cross border settlements or settlement. Project Stella is an example of such joint work, an initiative proposed between the Bank of Japan and European Central Bank, that looks to study the feasibility of using DLT as a form of payments system.
As for the legal authorization needed to approve the regulation of CBDC, roughly 25% of the reserve banks claim they’re on their way to achieving it and the remaining 40% are in doubt of getting it.
To wrap things up, financial institutions will not be in a hurry towards acquiring a CBDC, as there is no rush to adopt blockchain at this very moment. However, there are now over five major central banks that are evaluating Blockchain test pilots. It’s apparent that a majority of banks do not believe that the benefits will possibly outweigh the cost. Though only time will tell if central banks will adopt blockchain and find substantial economic use for such technology. Until then, we’ve got to keep testing.
