Blockchain Revolution

CENTRAL BANKS IN A DECENTRALIZED ECONOMY
Finance may be the second-oldest profession, but central banking is a relatively
modern phenomenon. The U.S. Federal Reserve (the Fed), the world’s most powerful
central bank, celebrated its centennial in 2013.
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Central banks, in their relatively
short history, have gone through multiple reincarnations, the last one a big shift from
the gold standard to a floating-rate system of fiat currencies. Because digital
currencies challenge the role of central banks in an economy, we might expect central
bankers to oppose blockchain technology. However, over the years, these bankers
have shown a willingness to innovate. The Fed pioneered electronic clearing of funds
by championing the Automated Clearing House (ACH) system when all checks were
settled and cleared manually. Like central banks elsewhere, the Fed has savored
experimentation. It has embraced unorthodox and untested policies, most famously
(or infamously) the quantitative easing program in the wake of the 2008 financial
crisis, when it used newly minted money to buy financial assets such as government
bonds at an unprecedented scale.
Not surprisingly, central bankers have been forward thinking in understanding
blockchain technology’s importance to their respective economies. There are two
reasons for this leadership. First, this technology represents a powerful new tool for
improving financial services, potentially disrupting many financial institutions and
enhancing the performance of central banks in the global economy.
Second, and this is the big one, blockchain raises existential questions for central
banks. How do they perform their role effectively in a global market with one or
many cryptocurrencies outside their control? After all, monetary policy is a key lever
in a central banker’s toolbox to manage the economy, particularly in times of crisis.
What happens when that currency is not issued by a government but exists globally as