Blockchain Revolution

part of a distributed network?
Central bankers everywhere are exploring these questions. Carolyn Wilkins,
deputy governor of the Bank of Canada and a central banking veteran, told us, “We
are confident in our paradigm right now, but we understand many paradigms have a
shelf life: they’re going to work well for a number of years and then things are going
to start to go wrong. You can fix it at the margin first, but eventually you just need to
switch to something else.” She believes the blockchain could be that something else.
“It’s hard not to be fascinated by something so transformative. This technology is

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being used in ways that have implications for central banking that span all the
functions that we have,” she said.
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Ben Bernanke, former chair of the Fed, said in 2013 that blockchain technology
could “promote a faster, more secure, and more efficient payment system.”
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Today,
both the Fed and the Bank of England (and likely other central bankers who have not
been as vocal) have teams dedicated to this technology.
To understand why central banks are so interested, let’s first address what central
banks do. Broadly speaking, these august institutions perform three roles. First, they
manage monetary policy by setting interest rates and controlling the money supply
and in exceptional circumstances by injecting capital directly into the system. Second,
they attempt to maintain financial stability. This means they act as the banker for
government and for the banks in the financial system; they are the lender of last
resort. Finally, central banks often share the responsibility with other government
entities of regulating and monitoring the financial system, particularly the activities of
banks that deal with savings and loans to average consumers.
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Invariably, all of these
roles are intertwined and codependent.
Let’s start with financial stability. “As a central bank, our role is as a liquidity
provider of last resort. We do that in Canadian dollars. Therefore, Canadian dollars
are important as a source of liquidity for the Canadian financial system,” Wilkins said.
What if transactions are in another currency like bitcoin? “Our ability to provide
lender of last resort services would be limited.”
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The solution? Central banks could
simply begin holding reserves in bitcoin, as they do in other currencies, and assets
such as gold. They could also require financial institutions to hold reserves at the
central bank in these nonstate currencies. These holdings would enable a central bank
to perform their monetary role in both fiat and cryptocurrencies. Sounds prudent,
right?
When considering financial stability relative to monetary policy, Wilkins said,
“The implications [for monetary policy] of electronic money depend on how it’s
denominated.” She suggested in a recent speech that “e-money,” as she called it, could
be denominated by a government in a national currency or as a cryptocurrency.
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A
digital currency denominated in Canadian dollars would be easy to manage, she said.
If anything, it would help a central bank to respond more quickly. Most likely, we will
see a combination of the two: central banks will hold and manage alternative
blockchain-based currencies as they do foreign reserves and will explore converting
fiat currency to so-called e-money through a blockchain-based ledger. This new world
will look a lot different.
What about central banks as regulators and watchdogs? They have considerable
regulatory power in their respective countries, but they do not operate in silos. They

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coordinate and collaborate with other central banks and with global institutions like
the Financial Stability Board, the Bank for International Settlements, the International
Monetary Fund, the World Bank, and others. We need stronger global coordination to
address blockchain issues. Today, central bankers are asking important questions.
Carolyn Wilkins said, “It’s easy to say that regulation should be proportionate to the
problem, but what is the problem? And what are the innovations that we want?”
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These are great questions that we could address more effectively in an inclusive
environment.
Bretton Woods is a good model. How about a second meeting of the minds, not
conducted in smoky rooms behind closed doors, but in an open forum where various
stakeholders, including the private sector, the technology community, and governance
institutions could participate? Wilkins said, “The Bank of Canada works with other
central banks on understanding this technology and what it means. We’ve had
conferences that invited a variety of central banks and academics and people from the
private sector.”
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Indeed, the story of central banks reveals a bigger issue: governments often lack
the know-how to respond in a fast-changing world. Central bankers certainly have
views that matter profoundly to this discussion, but they should look to other
stakeholders in the network and other central banks globally to share ideas,
collaborate on substantive leadership issues, and move the agenda forward.