Blockchain in Banking: Why Central Banks Mull Over Digital Currency?



Central banks now are exploring blockchain for use in financial services.

The potential of blockchain technology is not clandestine in industries across the globe. As a distributed ledger technology, it securely records information in decentralized networks, thwarting fraud in exchange-related businesses. Many central banks are exploring blockchain to manage financial stability and monetary policy. When compared with conventional financial services, the technology enables faster transactions through peer-to-peer (P2P) cross-border transfers with a digital currency. Countries like the UK, Russia, Canada, Australia and others are already assessing how they can leverage their own digital currencies and make the most out of their blockchain implementation.

In a Bank for International Settlements (BIS) report, at least 40 central banks around the world are considering to experiment with central bank digital currency (CBDC). In the last few years, it has lured much interest within the central banking community for its capability to address long-standing challenges such as financial inclusion, payment efficiency, payment systems and cyber resilience.


How Central Banks are Experimenting with Blockchain?

Central banks play the most critical roles in the development of the global economy and financial stability. One of the significant role central banks have to play is to conduct monetary policy to meet price stability and manage economic instabilities. Since the late 1980s, inflation targeting has emerged as the leading framework for monetary policy. Central banks in Canada, the euro area, the UK, New Zealand, and other countries have brought an explicit inflation target. They are also making a rapid shift from targeting a monetary aggregate to an inflation-targeting framework.

In addition to these, many central banks are experimenting with blockchain applications to introduce digital currencies. For instance, CBDC, a central bank-issued digital currency that is operated and settled in a P2P and decentralized manner and is generally available for consumer use. On the other side, wholesale CBDC is only available for commercial banks and clearing houses for use in the wholesale interbank market. Central banks in South Africa, Canada, Japan, Thailand, Saudi Arabia, Singapore and Cambodia are currently researching with whole CBDC.

Central banks are also exploring blockchain for rapid interbank clearing and settlement of securities for cash. The technology can be used in a primary or backup domestic interbank payment and settlement system to provide safety and continuity from threats, such as technical or network failure, natural disasters, and cybercrime, among others. It can create alternative systems for information and data sharing between or within both public and private sector institutions.