Digital currency offers nothing new to banks, says Bank of Finland economist

Central bank digital currencies have no business on decentralized ledgers, and offer banks nothing that they don’t already have at their disposal, according to a senior economist who advises the Bank of Finland.

Digital payments already exist, and several large economies, such as China, are swiftly becoming cashless societies. Other e-money issuers, such as PayPal, AliPay, Revolut, Transferwise, and M-Pesa, already work well, and don’t require central banks.

“So it's really important, when we talk about CBDC [central bank digital currency], to ask whether we actually need something from the central bank that is currently missing in the payments market,” Aleksi Grym, head of the Digital Central Bank process in the Financial Stability and Statistics Department at the Bank of Finland, told Decrypt. And blockchain, said Grym, isn’t the answer.

A blockchain network would be slow, poorly scalable, have latency issues, and would be complicated to govern, he argued in a post on LinkedIn on Monday. “Because you have a centralized issuer, it really doesn't make sense to then decentralize the record keeping,” he said.

Central banks are better off using a regular database—the sort that central banks and payments companies have been using for decades. “It's just much easier and more efficient for a bank to keep its ledger behind a firewall and let nobody near it,” he wrote in his post. 

Eighty percent of the world’s central banks are researching digital currencies, according to a survey of central banks that represent 90 percent of the world’s economy published by the Bank of International Settlements last month. But digital currencies don’t have to use a blockchain.

But Cambodia’s CBDC, which its central bank has been piloting since July, does. Makoto Takemiya, co-founder of Soramitsu, the vendor that created the blockchain platform for Cambodia’s CBDC, told Decrypt he found Grym’s position “too negative on blockchain,” and argued that a blockchain-enabled CBDC makes sense in Cambodia.

“Okay, blockchain is slow,” he said, but for everyday transactions, “it’s fast enough.” Transactions took two or three seconds, “which is fine if you’re buying a cup of coffee,” and, in any case, “much faster than human transactions,” like paying in cash. 

Grym’s perspective is also “a bit strict,” according to Takemiya. Cambodia’s system isn’t entirely decentralized—the government controls all the nodes—but the “business logic” is, he said. Each user has his or her own public and private key on their device, and the central bank can’t steal anyone’s money.

A system that minimizes trust is important: Takemiya said people have lost trust in the Cambodian banking system following sudden bank closures and scandals. A CBDC could help build trust in the country’s banking system, creating a financially inclusive society.

Grym acknowledged there might be “certain benefits” in issuing a CBDC on a centralized ledger, the sort that most central banks seem to be considering. But central banks around the world will eventually come to the same conclusion, he said: It doesn’t make sense to decentralize.

“Not all of them may have come to this conclusion yet, but, in my view, that will be the inevitable conclusion,” said Grym.

The economist doesn’t think that the European Central Bank—the bank that controls the euro—will issue a CBDC any time soon either. No plans have advanced beyond research, and, since most matters relating to the euro have to be agreed by all 19 central banks within the system, “The ECB is not really in the driver’s seat,” he said. 

Gregory Klumov, CEO of the biggest blockchain-based euro on the market, EURS, agrees: A digital euro “will be provided by private companies, self-regulated or licensed going forward,” he told Decrypt, not central banks. 

He predicts that a “CBDC euro" would be either a wholesale euro that only banks can touch, or a derivative on the euro like e-money or EURS, that’s held by a central bank-owned account in an E-money institution.

But both Klumov and Grym also agree on another thing: existing regulation for digital money, much of which relies on the two-decades-old E-money directive, is outdated. Klumov thinks a new kind of money requires a “fresh look,” and must be updated to incorporate “the opportunity that modern technologies provide, including [distributed ledger technologies] in particular.”

Grym agreed: “It needs to be updated, definitely,” he said. But before we rush onto the blockchain, he thinks we ought to be thankful for what we have. “I would be a bit more forgiving—at least we have e-money regulation in place,” he said.