Will central banks invest in digital currencies?

A quarter of those surveyed by us believe so.

22 Oct 2019

According to the most recent UBS survey, a quarter of respondents believe that digital currencies will be an eligible asset class among leading central banks at some point in the future. This is quite remarkable considering that this is a relatively  new asset class as discussed above.

However, a number of steps have to be taken before such a basket of digital currencies could be created:

  1. A number of leading economies would have to issue their own digital currencies, and local laws and regulations would have to be changed to a varying degree for that.
  2. Next, in order to be truly effective, the currency would have to establish itself in payment, but ultimately also investment processes. The large-scale issuance of liquid sovereign or corporate debt denominated in such SHCs would therefore stand rather at the end of a long process.

Only at this point central banks could consider the Synthetic Hegemonic Currency (SHC)  not only as part of their FX reserves but as part of their investment portfolio.

At that stage, FX reserve and asset allocation frameworks would have to be revised thoroughly. In particular central banks with large gold holdings would be confronted with the decision what to make with these 'legacy' holdings.

The crypto-world will certainly experience substantial further developments, and quite a few of them have the potential to have far-reaching consequences for the role of central banks not only as regulators but also as investors. At some point in time, malicious computer programs could have their own wallets, paying for services like DDoS attacks while collecting ransom all at once and completely anonymously.

Ultimately, new forms of corporations might develop based on this concept; think Uber without management, all run by a program that spreads globally from city to city not unlike a computer virus, paying people willing to loan an item and  charging the users, all autonomously via the wallet of the 'crypto company'. The proceeds of such (legal or illegal) activities would be paid in a potentially untraceable cryptocurrency to the holders of tokens which could be bought on regulated exchanges or on the dark web.

Should regulators including central banks ignore cryptocurrencies for too long, they might be forced to act the latest when taxable business transactions and ultimately stored wealth itself would more and more disappear from the regulated financial sector, affecting the role of central banks as guardians of financial stability. The technology also has the potential to shift investment processes and participation in business ventures into a more or less unregulated area, limiting access for central banks from a regulatory perspective, but also in their role as investors.

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