Programmable money as a public good? SBA stepping up efforts

“Digital money […] offers a potentially significant, social and economic added value. The question is therefore not whether, but only when and in what form it will be introduced and widely used.” This is a quote from the discussion paper published by the SBA a year ago. Since then, it has become increasingly clear what form widely used digital money is set to take. Algorithm-based cryptocurrencies remain highly volatile, making them unpopular with regulators and unsuitable for day-to-day payment needs. We have seen stablecoins that are backed by assets with real value but not regulated failing to live up to their promise in times of crisis. Digital central bank currencies for the general public, meanwhile, are a monetary policy hot potato and give rise to stability risks. The future thus belongs to digital currencies issued by regulated providers, such as tokenised book money from banks, or special-purpose currencies, e.g. those used within trading systems for settlement purposes.

Policy leaning towards regulated stablecoins

The Financial Stability Board (FSB) regards unregulated, global stablecoins and crypto-asset markets generally as a potential risk to the stability of the global financial system. Given their steadily growing capitalisation, structural weaknesses and increasing links to the traditional financial system, they could reach a point where they represent a threat. The FSB is working together with standards authorities to develop regulation and supervision for stablecoins. It is also analysing the impact of the rapidly developing topic of decentralised finance (DeFi), in which stablecoins play a key role.

Future regulation is likely to focus on the requirement for issuers of widely available stablecoins to be regulated and appropriately supervised so the value of the underlying assets can be preserved in a transparent manner. This is the only way to ensure that a broad cross-section of users can be protected against fluctuations in the value of digital means of payment, which will promote acceptance and swift take-up. Centralised crypto exchanges and providers of hosted wallet services should also be more strictly regulated.

One of the most striking examples of the stability risks posed by unregulated stablecoins was the collapse of TerraUSD at the start of May 2022. Confidence in the currency, which promised parity with the US dollar, was eroded in a matter of minutes, sending shockwaves throughout the world of digital assets. This reignited financial supervisory authorities’ concerns over the growing risks to traditional markets from the stablecoin industry, which is becoming ever more integrated into conventional payment and banking systems.

Cryptocurrencies not delivering on promises

In addition to stablecoins, algorithm-based cryptocurrencies have also seen their value plummet of late. Even big names such as Bitcoin have thus far failed to establish themselves as broadly used means of payment, and people at the very highest level are now dismissing them as unviable stores of value. European Central Bank (ECB) President Christine Lagarde went so far as to say that they are “worth nothing”.

Her colleague on the Governing Council Fabio Panetta acknowledges that there is growing demand for decentralised means of payment with new functionality and that, if central banks and supervised intermediaries do not satisfy this demand, others will. He is thus championing the ECB’s project for a digital euro, which is currently still in the exploratory phase.

He believes that a three-year realisation phase could begin at the end of 2023. This will serve to develop and test the technical solutions and business agreements needed for the digital euro, which could then be made available in early 2027 at the earliest.

What is Switzerland doing?

Given the fast-growing demand for digital currencies, the Federal Council and the Swiss National Bank (SNB) were relatively quick to address the subject. They rapidly concluded that there is no need for the SNB to issue a “digital franc” for the broader public at present. However, being without a digital national currency that is accessible to everyone and offers special functionality could put Switzerland at a considerable disadvantage sooner or later.

Indeed, we noted in our own opinion piece back in January that innovative business models in the payment services and digital securities businesses demand stable means of payment with special functionality, so we would be well advised to consider how we would like these to be designed for Switzerland.

The idea of a private stablecoin issued by a supervised intermediary is gaining acceptance both among the authorities and in the industry for two reasons: it offers stability without the disadvantages of a central bank digital currency, and unregulated digital currencies scarcely have a chance of being accepted and widely used for general payment needs due to a lack of trust.

With this in mind, the SBA is currently focusing on options for digital money and the best way to design it. If it is to have a future, it must be stable relative to the franc, freely convertible, as open as possible and usable for a broad cross-section of the population. The banking industry is looking into the question of whether and how it should be involved in developing programmable money as a public good, which has an important role to play in the future of the Swiss economy.