Little support for SNB’s stance on digital currencies

The payment system is changing, with the number of cashless transactions growing fast. On top of this, trends such as Economy 4.0 and smart contracts mean that payments will soon be executed automatically in a fraction of a second. There is also a growing need for secure settlement in relation to digital assets.

Switzerland must take these developments into account if it is to remain a leading player. Luckily, instant payments will soon become a reality in this country. Many banks will be required to comply with the SIC5 standard from August 2024. This joint project by the Swiss National Bank (SNB) and SIX is aimed at creating an internationally unrivalled payment experience for business and the population at large and creating a basis for novel business models. This is to be welcomed, but there is far more that can be done in technological terms.

Spotlight on CBDC

The key factor is demand for digital means of payment that offer new functions, and central banks and technology firms alike are working hard to develop these. Following the hype over cryptocurrencies like Bitcoin and the reaction to Facebook launching its Libra project (both the company and the currency have since been renamed), one abbreviation is now on everyone’s lips: CBDC. It stands for central bank digital currency, it is on every central bank’s agenda, and three currency blocs already have one. China’s e-CNY is still in its pilot phase, but it already has 140 million users, and everyone attending the Winter Olympics will be able to use it from this week.

Among other things, CBDCs offer central banks a way to preserve their monetary sovereignty, increase efficiency in international payments, meet the needs of the digital economy, and give the general public easier access to the financial system.

In the midst of this global upheaval, the Federal Council and the SNB stand alone in their reluctance to join the fray. Both have stressed that they see no need for the SNB to issue a “digital franc” for the broader public. While they acknowledge the need for innovation in payments, they believe that it should come from the private sector. The SNB is thus reinforcing the familiar two-tier banking system in which it serves as the “bankers’ bank”, while the commercial banks serve the general public.

Who has the SNB’s back?

As convinced as they are that their firmly held views are right, the Swiss authorities would prefer not to be totally isolated on the world stage in this respect. They saw the US Federal Reserve Bank (Fed) as their most likely source of support after Christopher Waller, a member of the Fed’s Board of Governors, referred to CBDCs in a speech last summer as “a solution in search of a problem”. If efficiency is the problem, he argued, it should be solved by the private sector and not the State. In response to criticism of the cost of payment transactions, he noted that the Fed’s purpose is not to regulate prices. As regards safeguarding monetary sovereignty, meanwhile, he expressed the view that the spread of USD-based stablecoins would see to that.

The Fed’s support failed to materialise for quite some time. A discussion paper on the subject was published two weeks ago – after a delay of several months. The decidedly dry text restricts itself to listing pros and cons of CBDCs for the general public that are already very well known. It raises the question as to why such a fundamentally significant paper lacks any clear message and has taken so long to appear. Could the Fed be quietly attempting to shirk responsibility for making the call to give up on CBDC once and for all, or is internal wrangling to blame?

The race is already on

Anyone who takes the Fed’s hesitancy, the European Central Bank’s currently sluggish progress or the SNB’s reluctance as a sign of stagnation in digital currencies could not be more wrong. A number of retail and wholesale projects on the part of central banks are surging ahead, as the Chinese example cited above shows.

There has also been considerable momentum of late in stablecoin initiatives. However, the exponential growth seen in recent years has come to an abrupt halt over the past few weeks, prompting some to wonder whether the big names like Tether and others might in fact be “unstable coins”. Various critics around the world were spurred on by doubts over the ability of tokens issued by unregulated companies and not fully backed by reserve currency to deliver the promised stability in the long term.

The idea of a private-sector stablecoin that is as stable as a national currency but lacks the disadvantages of CBDCs is thus gaining acceptance. A Japanese consortium recently published a white paper setting out its vision for a digital currency that fits this description, which it plans to launch as soon as the end of this year.

What Switzerland needs

Innovative business models in the payment services and digital securities businesses demand stable means of payment with special functionality. In the world’s most innovative country, we can expect more and more applications to be found for these. We would therefore be well advised to consider how we would like them to be designed.