What Does Blockchain Mean for Central Banks?

What Does Blockchain Mean for Central Banks?

Andréa M. Maechler, member of the Governing Board of the Swiss National Bank, is closely involved in the future of the Swiss financial market infrastructure. This includes the implications of new technologies. Project Helvetia, for example, is looking at the use of central bank money in transactions involving tokenized assets.

Image credit: Louis Rafael Rosenthal/Risk.net

Digital exchanges like the SDX by SIX want to enable trading of tokenized assets on the basis of distributed ledger technology (DLT). What implications would this have for the Swiss National Bank (SNB)?

Financial market infrastructure is the heart of our financial system in a sense. It’s where payments and securities transactions in Switzerland’s financial sector get settled. And the SNB conducts its monetary policy operations via this infrastructure. It’s therefore absolutely essential for us to ensure that the financial market infrastructure is secure, efficient, and fit for the future.

New DLT-based systems could fundamentally alter large parts of today’s financial market infrastructure. Of course, it remains to be seen to what extent this technology will actually lead to the efficiency gains hoped for by the financial industry. But it’s important for us at the central bank to already have a commanding understanding of the implications of this technological transformation.

To examine the implications, the SNB joined forces with the Bank for International Settlements’ (BIS) Innovation Hub and SIX. What makes Project Helvetia special?

Project Helvetia is part of the BIS Innovation Hub Swiss Center, which is run jointly by the BIS and the SNB. Under this project, we are grappling with the fundamental question of how money – particularly central-bank money – can be integrated into a DLT infrastructure. This, first and foremost, is about building a bridge between existing infrastructure and a new world in which transactions can be settled in real time around the clock.

We are addressing this challenge by conducting a series of experiments. Project Helvetia has a big advantage in that we are able to carry out these experiments on infrastructures that are already well developed. For instance, we are using the test environments of the Swiss Interbank Clearing (SIC) system and the SDX platform. Our experiments are thus technologically much closer to reality than previous ones were.

The BIS Innovation Hub enables a new form of cooperation. It allows us to work more in depth on select projects. Technology specialists, lawyers, economists, and experts on financial market infrastructure are working closely with each other on Project Helvetia. The collaboration across many different academic disciplines is a key factor to success for Project Helvetia, in my view.

The first stage of Project Helvetia studied two different ways in which central-bank money could be used to settle transactions involving tokenized assets. How do the two ways differ from each other?

On one hand, we investigated issuing a central-bank digital currency on the DLT-based infrastructure of the SDX. This type of money is called a wholesale central-bank digital currency, wholesale CBDC for short, because it is restricted to specific designated financial market actors. On the other hand, we also examined the possibility of simply linking the SDX to the Swiss Interbank Clearing (SIC) system without issuing a central-bank digital currency.

Our experiments revealed that the cash-side settlement of transactions involving digital assets can successfully be executed both ways in principle. The first approach, via the issuance of wholesale CBDC, is more innovative and encompassing because it facilitates the execution of smart contracts, for example. But this approach also harbors many operational and strategic challenges. The second approach, via system linkage, is closer to the status quo and would thus be easier to implement, but it might mean having to forgo prime advantages of the new technology. The important thing in any case is the proof that DLT-based transactions can be settled securely with central-bank money.

What’s next for Project Helvetia?

In the second stage of Project Helvetia, we want to investigate how DLT infrastructures that operate around the clock and settle transactions in real time can be linked with the core banking systems of the SNB and commercial banks. Doing that will enable us to analyze the present world and the new world of DLT from an end-to-end perspective. The second stage of the project is also aimed at gathering knowledge about what options central banks have for integrating the cash side into a DLT-based financial market infrastructure. Here, too, the advantages and drawbacks of a central-bank digital currency versus the aforementioned linkage to the SIC system will be examined.

The SNB, in collaboration with six other central banks and the BIS, also spoke out about retail CBDCs in a report published in October 2020. Is this topic regaining momentum?

The report that you brought up describes core attributes of a central-bank digital currency for the general public, or a retail CBDC for short. In contrast to a wholesale CBDC accessible only to designated financial market actors, a retail CBDC would also give households and businesses access to a central-bank digital currency. Central-bank money today is available to the general public only in the form of cash. 

A widely available central-bank digital currency could have far-reaching consequences for the entire financial system. If bank customers, for example, were to convert their deposits into a retail CBDC on a large scale, this would completely change the traditional banking business model. So, the SNB needs to keep a close eye on international developments and to discuss them with other central banks. But one shouldn’t equate our active involvement with a declaration of intent to introduce a retail CBDC.

Our experiments are technologically much closer to reality than previous ones were.

Andréa M. Maechler, Swiss National Bank

What other issues regarding financial market infrastructure are keeping you busy at the moment?

The SNB is working intensively on constantly further developing the cashless payment transactions system. It is already eminently reliable, secure, and efficient in Switzerland, but the world is going through radical change. The rapid pace of change is also exerting an impact on financial market infrastructure: New technologies, new competitors, and new customer needs have pushed payment transactions into the spotlight.

The SNB is thus engaged in a strategic dialogue with SIX and other players in the private sector over how to bring cashless payment transactions in Switzerland into sync with the “new normal.” Here, I would like to mention the SIC5 project, under which the SNB and SIX are jointly creating the requisite infrastructure for processing instant payments to enable payments in real time around the clock. I am convinced that instant payments will become an integral part of the “new normal.”

You have built an international career, and you observe the action on financial markets around the world every day as a member of the SNB’s governing board. Hand on your heart, is the Swiss financial industry moving fast enough in embracing new technologies?

Many companies and universities in Switzerland are making key contributions to researching and developing new technologies like DLT. The DLT-based SDX digital exchange is also a world premiere. Moreover, Switzerland is well on the way to establishing the necessary underlying legal and regulatory framework. But in my view, it’s the concerted cooperation of the entire fintech ecosystem that above all makes Switzerland a dynamic and attractive business location, and not just from a DLT standpoint.

To maintain and further nurture this dynamism, it’s essential to create sufficient space for innovation while contributing to ensuring the stability of our existing systems. Active dialogue and close, constructive cooperation between market participants, regulators, and the central bank are firmly ingrained in Switzerland. We should also build future systems on those pillars. The SNB is all-in, and looks forward to continuing to help shape this cooperation in the future.