Currencies, money and digital tokens
Thomas Jordan, Chairman of the Governing Board
30th anniversary of the WWZ and VBÖ, University of Basel, Basel, 05.09.2019
Digitalisation in the financial sector, and innovations affecting currency and money in particular, are of considerable interest to central banks. Digital 'token money', which has recently emerged as a type of money alongside cash and book money, is one such innovation.
The public's understanding of digital token money has been heavily influenced by cryptocurrencies like Bitcoin. However, cryptocurrencies and cryptocurrency-based tokens are of only limited use as payment instruments, stores of value and units of account because they are subject to major fluctuations. Crypto tokens do not possess the characteristics of 'good' money, which is typically stable over time, is broadly accepted, and enables efficient payments. Given these parameters, it seems unlikely that crypto tokens will be widely used as money in Switzerland.
The picture may be different for stable coins. These are also privately issued digital tokens, however they are pegged to official currencies or backed by stable assets in an effort to minimise fluctuations in value. Thus, in principle, this form of money has the potential to achieve broader acceptance than crypto tokens. For this reason, stable coins will need to be rigorously analysed and classified from a regulatory and monetary policy perspective. The benchmark for assessing utility, efficiency, reliability and security is set by the existing systems and the regulations governing comparable activities. Only once there is competition on equal terms will it become clear whether stable coins can be a useful and efficient complement to today's cash and book money.
As well as the private sector, public institutions such as central banks could also issue digital token money. Essentially, there are two potential areas of application: One, all households and companies could be given access to tokens. Or, two, tokens could be made available only to commercial banks and other financial market participants, just like sight deposits at the central bank today.
In Switzerland, granting all households and companies access to digital central bank money, whether in the form of Swiss franc tokens or sight deposits, would involve risks. Furthermore, cashless payments in Switzerland are already reliable, secure and efficient and the system is continuously being updated and refined. The SNB therefore takes a critical view of all households and companies gaining access to digital central bank money.
The introduction of a state-issued digital token exclusively for financial market participants requires in-depth analysis. If security tokens become established in the financial sector, this will raise the question of whether state-issued digital token money will also be needed as a means of payment for the new financial market infrastructures. The SNB is following developments closely and is actively involved in the debate, not least through its future participation in the BIS Innovation Hub.