Over the past 10 years, there has been a lot of discussion about whether a digital currency like Bitcoin might one day supplant government issued fiat currency. Thus far, this has not happened and there is no sign that existing cryptocurrencies will soon serve that function on such a scale. But is it possible that central banks could issue digital counterparts to existing paper fiat currencies on a network like Bitcoin (today BSV)? In an interview this Monday, David Washburn, the CEO of the Bitcoin research, development, and enterprise solutions firm nChain, said that his company is “in active discussions with several central banks and government agencies around the world…” In any context this would be a noteworthy claim, but on the heels of recent remarks and developments by central bankers it’s even more compelling. Last week, UK Economic and Geopolitical Analysis Steven Guinness published a blog post titled “Bank of England Governor Signals Central Bank Digital Currency is Coming” which synthesizes recent remarks by the the Bank of England’s (BOE) governor Andrew Bailey, a March 2020 BOE discussion paper on Central Bank Digital Currency (CBDC), and the Bank of International Settlements’ (BIS) “Innovation BIS 2025” initiative.
In a Q&A with students last week, BOE Governor Andrew Bailey said the following when asked about digital currency:
“We are looking at the question of, should we create a Bank of England digital currency. We’ll go on looking at it, as it does have huge implications on the nature of payments and society. I think in a few years time, we will be heading toward some sort of digital currency.”
Bailey’s remarks indicate an ongoing process of research into issuing a CBDC and signal the continuation of the BOE”s CBDC research since Bailey took over the position of Governor last March when they released the relevant discussion paper. The discussion paper specifically mentions bitcoin, cryptocurrencies, and distributed ledger technologies.
“Although the term CBDC includes the words ‘digital currency’, CBDC would be something fundamentally different to ‘cryptocurrencies’ (or ‘cryptoassets’), such as Bitcoin. Many cryptoassets are privately issued and not backed by any central party. They are not considered a currency or money because they do not perform the essential functions of money (see Box 1): they are too volatile to be a reliable store of value, they are not widely accepted as a means of exchange, and they are not used as a unit of account (Carney (2018)). Some privately issued cryptoassets, known as ‘stablecoins’, aim to overcome these shortcomings and provide stability of value via some form of backing. Depending on the nature of assets backing the ‘coin’, and how they are held, the stablecoin may be unable to provide stability of value and may come with other risks (as discussed in Chapter 2.4). In contrast, a UK CBDC would be a new risk‑free form of (digital) pound sterling, issued by the central bank, and would therefore perform all the essential functions of money.
However, the technological innovations that made cryptoassets possible have evolved into a broad group of technologies often referred to as Distributed Ledger Technology (DLT). While we do not presume CBDC must be built using DLT (and there is no reason CBDC could not be built using centralised technology), some of the individual component innovations of DLT may be useful when applied to CBDC (these are discussed in Chapter 6).
The distinction of the BOE’s desired CBDC from a cryptocurrency like Bitcoin is key. What the BOE is interested in issuing is a digital counterpart to paper cash and something that would be redeemable for cash. This is something separate from an exclusively digital asset like Bitcoin that is not issued by the central bank. However, the BOE’s explicit openness to using “component innovations of DLT” (despite noting that there is no reason the CBDC must use DLT) presents an opportunity for Bitcoin (BSV).
The last significant point mentioned in Guinness' blog was the Bank of International Settlements’ “BIS Innovation 2025” or “BIS Innovation Hub” initiative. The initiative, as described in the BIS’s 2019 annual report, is actively forming and developing hubs which will focus on integrating and developing technologies affecting central banking. The report specifically mentions and focuses on the issuance of CBDC. Over the past year, the BIS has opened a hub in Switzerland and announced that over the next two years hubs will be opened in both Norway and with the Bank of England, among others. The inclusion of these central banks are part of a broader expansion into Europe and North America which includes a strategic partnership with the US Federal Reserve.
In light of the attention given to CBDC from the BIS and individual BIS innovation hubs like the BOE as well as Washburn’s remarks earlier this week, the question of which central banks nChain is currently in “active discussions” with becomes interesting. In her question to Washburn, the interviewer specifically mentions the Swiss and Norwegian central banks. Is it possible that another of the several mentioned is the BOE which is located less than 3 miles away from nChain’s London offices? If the BOE is explicitly open to leveraging the innovations of existing distributed ledger technologies, the potential certainly exists to issue a government backed currency leveraging the unbounded scalability, near-instant settlement times, and minuscule transaction fees unique to Bitcoin (BSV). Other existing DLT’s would likely fail to meet the BOE’s requirements on these metrics. Additionally, the explicitly anti-government and extralegal aim of many popular DLT projects like BTC would likely dissuade a CBDC being issued on them even if they could perform as efficiently as Bitcoin.
The urgency to move to contactless currencies because of COVID-19 in conjunction with the developments from central banks and organizations like the BIS might expedite the release of CBDC’s. If BSV is able to attract central banks to launch on the Bitcoin network, its Genesis restoration of the original Bitcoin protocol in Q1 of 2020 and emphasis on rapidly scaling the network could prove extremely timely in the end.