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Tales from the Crypto: Central banks join forces to asses potential for national digital currencies

A look at some of the recent major events and movements in crypto markets and the wider blockchain industry

Bank of Canada - Tales from the Crypto: Central banks join forces to asses potential for national digital currencies

With the Bank of England about to see a changing of the guard as Mark Carney prepares to vacate the governor’s chair for former FCA head Andrew Bailey, one of the things to land on the desk of the new central bank boss will be the possibility of a ‘digital pound’.

In a release last week, the European Central Bank (ECB) announced that it had joined forces with the Bank of England, the Bank of Canada, the Bank of Japan, the Swiss National Bank, the Bank for International Settlements and Sweden’s Sveriges Riksbank to “assess potential cases for a central bank digital currency (CBDC) in their home jurisdictions”.

With online banking and card payments quickly outstripping notes and coins as the dominant way most transactions are conducted, central banks are increasingly searching for ways to ensure that a decline of cash in circulation does not place pressure on the overall money supply, potentially causing issues for inflation and the ability of the payments system to respond in a crisis.

There are also concerns that digital payments concentrate too much power into the hands of a small group of payments providers, who in effect conduct almost all transactions in the country.

Sweden is currently grappling with a sharp decline in cash use as more and more of its citizens opt for electronic payments, with card transactions making up 58% of all payments as opposed to just 6% which were made in cash.

To get around this, the Riksbank is researching a government-backed digital currency, known as the eKrona, which will serve a digital version of the legal tender.

The bank said in a report in October 2018 that the digital equivalent of a domestic currency will “give the general public access to a digital complement to cash, where the state would guarantee the value of the money”, as well as easing the payment system’s reliance on private payment firms.

However, a digital version of a fiver is unlikely to spell the end for physical cash, with some jurisdictions such as New York, San Francisco and Philadelphia all banning cashless businesses in an effort to protect spenders that may be unable or unwilling to use electronic payments such as the elderly or disabled.

Is Bitcoin heading for another surge?

After hitting an 18-month higher of around US$12,600 in July 2019, the price of Bitcoin shrank back in the final months of the year to around US$7,180 on 31 December.

However, the value of the original cryptocurrency appears to be gathering steam again, having risen around 30% since the start of 2020 to just shy of US$9,360 as of nearly afternoon trading on Thursday.

There has been a “notable increase” in interest for Bitcoin since the start of the new year, says Marcus Swanepoel, chief executive of Bitcoin storage and exchange operator Luno, with futures contracts for the cryptocurrency having increased by 1,625% compared to the 2019 average.

He added that while trading levels were still small, increased involvement from institutional investors was “off-setting retail speculation and helping define a true market value [for Bitcoin]”.

“Volatility in the main altcoins is going to be a fact of life until we see greater trading volumes, however as regulation is introduced and more people use digital currencies as a better way of exchanging value, cryptocurrency will become part of day-to-day financial transactions”, Swanepoel said.

Before all that, the upcoming ‘halving’ is a significant event that is likely to cause a big move in prices and heap more attention on the daddy of digital coins.

World’s largest blockchain ecosystem scheduled to launch in Dubai

Looking away from crypto and toward the underlying blockchain technology, an agreement signed on the sidelines of the glittery Davos summit last week has laid the groundwork for what is supposedly the world’s largest “ecosystem” for cryptographic, blockchain and distributed ledger technologies, to be more snappily known as Crypto Valley.

The scheme, part of a strategic partnership between the state-backed Dubai Multi Commodities Centre (DMCC) and Swiss venture capital firm CV VC, is proposing to set up the ‘ecosystem’ in the heart of Dubai’s business district to provide “a variety of services including incubation for early-stage startups, co-working facilities, innovation services for corporate clients, blockchain and entrepreneurship training, education, events, mentoring and funding”.

Crypto Valley forms part of the United Arab Emirate’s blockchain strategy, which is aiming to shift 50% of the government’s transactions onto the platform by 2021 in an effort to speed up document and transaction processing in the global trade hub.

The Arab nation is hoping the strategy will help it save around £2.3bn a year in transaction and paperwork processing costs as it looks to cement its role as a global trade hub.

Given the renewed focus on UK trade post-Brexit, such a scheme could end up on Boris Johnson’s desk in the coming months.

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