Monica Singer is the South Africa lead at ConsenSys, a US-based blockchain software technology company

I am concerned that central banks are so worried about protecting commercial banks that they don’t realise that the risk of inaction is greater than that of embracing innovation. The real risk comes from private companies that are in the process of issuing payment mechanisms that might entice depositors to never again have to use a legacy bank as they exist today.

A shift to the use of private digital currency or “stablecoins”—currency collateralised by fiat, cryptocurrencies, gold,  an algorithm or combination of financial instruments—could result in less use of fiat currency (currency issued by a central bank). Once this takes place, central banks will lose their ability to affect monetary policy and all their supply and distribution controls of the fiat currency will be thrown out the window. 

In addition to projects such as Libra, driven by Facebook, and Apple Pay, other major players including Google and Amazon want to come into this space and provide quasi-financial products. With Alipay and WeChat in China, people have slowly but surely stopped using cash. The Central Bank of China will soon release its version of a retail CBDC, allowing it to keep track of all transactions with unclear privacy protections.

Users should be wary of private coin issuers and how they will be managing transaction data. Do users realise that the private coin issuers will have to risk-manage the fluctuation in value of their collateralised positions? Do users of these coins realise that the issuers could suffer losses and that they might not be covered by traditional safety nets such as deposit insurance or central banks as lenders of last resort? Will users once again rely on auditors and regulators to ensure that the collateral backing these private coins is in fact in place? 

Many private coin issuers say they want to reach the 1.7 billion unbanked. Is this not the responsibility of central banks around the world? By partnering with financial technology (fintech) companies and legacy banks that have gone digital, central banks can provide the financial access and flexibility that global citizens need. It was announced last year that the United Arab Emirates’ Central Bank is working to establish its own fintech office, complementing the important strides already being taken by the UAE Central Bank and individual banks within the UAE’s financial sector. 

PROTECTING CITIZENS

In this time of pandemic, citizens should not have to stand in a line, without social distancing, to wait for their social grant or pension funds. If an economic crisis requires that the government financially support its citizens in the form of helicopter money (money deposited by the government into the citizens’ accounts), citizens should not have to wait for government-issued cheques to arrive via post, which then have to be deposited into a bank account when the banks’ working hours permit. Blockchain technology enables these payments to be facilitated electronically in real-time, directly into the e-wallet of the citizens. No more waiting or standing in a queue or walking to a bank to be paid by the government. No one should ever have to visit a brick and mortar bank branch and wait to be served again.

In many countries, the dependence on cash puts undue pressure on citizens who have no option but to risk carrying physical money and being robbed; not to mention a range of other threats surrounding cash usage such as ATM bombings and hijackings. Some companies have to transfer cash from various depots to the retailer to protect their holdings. These threats should motivate central banks to go digital and reduce citizens’ dependency on cash. 

The technology exists to protect citizens in their money management. A highly programmable and interoperable blockchain like Ethereum can be adapted to the various needs of financial institutions and citizens in different nations, while still meeting global standards that ensure compatibility between different countries’ CBDC solutions. If we consider the likes of the GCC region and consider its high proportion of global yearly remittances we can see how these cross-border payment needs can be revolutionised by real-time, low cost blockchain technology. While this is positive for the GCC, it would also contribute to the growth of the Middle East and North Africa (Mena), a region which predicts a fintech market high of $2.5 billion in the next two years.

FUTURE OF MONEY

Central banks have an opportunity to keep pace with technological change and enable this evolution towards the future of money. With Covid-19 and the risk that banknotes could be infected, digital payment solutions are increasingly top of mind and what citizens want. Recognizing this in its response to the pandemic, the Saudi Arabian Monetary Authority (SAMA) used blockchain technology to distribute a substantial portion of its $13.3 billion injection into the banking sector. Millennials and younger generations will only be attracted to digital solutions that are transparent, immutable, real-time, low cost, under their control, available 24/7/365, and interoperable with other digital financial instruments like cryptocurrencies, security tokens and utility tokens.

Central banks should look to the UAE which has seen many successful blockchain-based banking projects in recent years. Etisalat Digital’s launch of UAE Trade Connect (UTC) in June 2019 which applies blockchain as a verification layer to detect fraud in invoice financing. Emirates NBD leveraged blockchain to develop a wire fraud prevention system in March 2018. In 2019, Abu Dhabi Commercial Bank (ADCB) was the first bank in the UAE to run an end-to-end blockchain trade finance transaction with full document automation.I challenge central banks to let go of their fear. When I think of central banks, commercial banks, and the system of fractional banking they currently have in operation, I’m reminded of Marshall Goldsmith’s saying: “What got you here won’t get you there.” 

The time is now for central banks to embrace innovation so they have a say in the future of money. If the conservative nature of central banks prevents them from taking this leap forward, then let us work with the private coin issuers, properly regulated, who are ready and able to provide the functionality the world needs and wants.