The Swiss National Bank and the Cypto Franc

On this blockchain environment a cryptocurrency bound to the Swiss franc controlled by the SNB is envisioned:

“The introduction of Swiss cryptocurrency “Crypto Franc”, bound to the issued fiat Swiss Franc by the Swiss National Bank (SNB), revolutionizing digital payment capabilities. The national blockchain will enable and bring the Swiss industry(s) to the international forefront of the digital age.”

In her speech, Andréa M. Maechler commented on aspects of the proposal:

“A more prominent role for central banks in this end-customer business area is currently a subject of debate, amid calls for ‘digital central bank money for the general public’. The SNB opposes this idea. Digital central bank money for the general public is not necessary to ensure an efficient system for cashless payments. It would deliver few advantages, but would give rise to incalculable risks with regard to financial stability.”

“Which technologies and solutions ultimately prevail on this solid foundation should in principle be left to the market to decide, however. This division of roles between central banks and commercial banks epitomises our current two-tier financial system. It contributes to the stability of the system, while allowing sufficient leeway for innovation.”

Both are for sure valid points – but again perspective matters. If a “Crypto Franc” is seen as a modern form of cash then not a lot would really change. The SNB controls the amount of cash in circulation and it would continue to control the amount of cryptographic cash which could be safely kept and exchanged using a blockchain infrastructure.

Introducing cryptographic cash could have an impact on the financial system as it would allow people to keep their cash safe – within your e-wallet on a blockchain instead of your existing cash account in the bank. With a cash account the client gets a repayment promise by the bank in turn the bank can use the amount from this account for other business (e.g. mainly lending). The value of the repayment promise depends on the trust in the bank while the trust in the Crypto Franc depends on the trust into the currency.

Thus issuing cryptographic cash is not of the interest of the bank when ownership and value is no longer with  the bank but with the individuals. Regardless if a cryptographic currency is introduced, the prevalent systemic risk will continue as long as there is still book money or money created though credit. As the adoption of cryptographic currency increases, it will eventually reduce the systemic risks as commercial banks need to compete for such currency of clients. Clients will need to make an explicit decision when putting Crypto Francs onto an account which means transferring ownership to the bank against a repayment promise. They need to assess the risk(s) whether a bank is able to meet its repayment promise. On the other side the bank can provide return on investment where such transparency would rather de-risk the system invalidating some of the arguments stated by the SNB.

There is an increasing interest by companies and other organizations to create their own form of money. Dr. Edward De Bono suggested years back that companies should consider to issue their own currency using IBM as the example (Towards a digital barter economy?). It was futuristic at the time where he made  this proposal – but today in a digital world it becomes feasible (David Birch – Before Babylon, Beyond Bitcon – from Money that We understand to Money that understand Us ). There seems to be a trend going into this direction which could accelerate with potential huge implications on the existent monetary system.

“The SNB will keep a close watch on developments to ensure that it always remains able to assess their potential impact on the financial system in good time.”

This sounds given the context to passive. The SNB needs to active in the developments to gain the required experience. Observers will typically be late. Being late means becoming defensive and reactive. The SNB in my view should be active and engaged in building the best possible future for Switzerland and its financial system.

The ‘No’ by the SNB feels premature influenced by past paradigm rather than by the current developments and the needs of the future.  One aspect became prevalent from all the statements across the various parties engaged in the thought exchange is the complexity of the topic. It is a complex network problem and requires much more thoughts and discussions. It is key to have these exchanges in a frequent but immediate manner in order to come to conclusions before other organizations/entity(s) may take over and suddenly provide “the” new form of money pushing organizations like the SNB into a reactive rather than proactive  position.