Central banks aren’t running scared of bitcoin but they want to keep control, says former Bank of England digital guru

• Central banks are increasingly interested in creating digital currencies as the use of cash falls.
• But central banks aren’t threatened by bitcoin, says former Bank of England advisor Huw van Steenis.
• The top banker spoke to Insider and punctured some central bank digital currency myths.
• Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

In some ways, central bankers are like the “bitcoin bros” who have sent cryptocurrencies soaring in 2021, although they might not like to think it.

While crypto fans have taken to Twitter to shout about their gains, there’s been a quieter – but no less important – surge in interest in digital currencies in the hushed offices of the world’s central banks.

The Bank of England is weighing up launching a “Britcoin”; China is racing ahead with trials of its digital yuan; and European Central Bankers are giving speech after speech on central bank digital currencies, or CBDCs. The Federal Reserve is taking things more slowly but has enlisted MIT researchers to explore the issue.

Huw van Steenis was formerly a top advisor to the governor of the Bank of England and is now senior advisor to the CEO of Swiss banking giant UBS.

A well-known figure in the City of London, he wrote the Bank of England’s 2019 future of finance report, which looked hard at the outlook for payments and the pros and cons of central bank digital currencies.

Van Steenis is clear-eyed about CBDCs, arguing that they sometimes seem like “a solution in search of a problem.” But he told Insider they are definitely about central banks keeping control of money.

A CBDC would be a digital version of banknotes and coins, letting people hold and make payments in central bank money. At the moment, the digital money people use every day is created by commercial banks and held in accounts or on pre-paid cards.

Central bankers are watching cryptocurrencies closely

Some analysts have argued that central banks have been spurred to action by the crypto boom, and fears that bitcoin could become a global payments system. Bank of America researchers posited in March that CBDCs could be “kryptonite for crypto.”

Van Steenis thinks differently. “Approximately 95% of the money in most Western markets is not actually central bank money, but it’s money held in the bank in deposits in electronic format,” he says. “The world is already one in which [central banks] play a pivotal role, but they don’t dominate.”

The real issue is ensuring the stability of the financial system, van Steenis says, and that means keeping an eye on cryptocurrencies.

Yet the crypto world is still tiny relative to the amount of money in bank deposits, he says. “So I don’t think they’re running scared on bitcoin. But what they want to know is, is there an innovation they need to adapt and borrow from.”

The key concerns are dwindling cash use and tech-firm dominance

A major worry for central bankers is that, as the use of cash dwindles, private payment systems are becoming increasingly crucial and could shake the global financial system if they fail.

“If you think about the pandemic, it’s probably fast-forwarded the shift away from cash to digital by about three to five years,” van Steenis says. “No central banker ever wants to feel they might lose control of their currency.”

A CBDC would ensure everyone has access to a risk-free payment system, proponents argue, and would make transactions safer and more efficient. Just like going directly to the airline for your plane tickets online is faster and easier than going to see a travel agent.

Many central banks around the world are also asking themselves whether they want huge US technology companies like Visa, Mastercard and PayPal to dominate their national payments systems, van Steenis says.

Another common argument is that Western central banks are racing to keep up with China’s advanced CBDC project, which they say could threaten the dollar’s dominance.

But van Steenis is skeptical. “I just don’t see the geopolitical angle is what’s driving it,” he says. “If you ask the Swedes what’s driving the e-krona, it’s much more about a reduction in cash and inclusion and their responsibility to provide to society, than it is because they’re trying to keep up with friends around the world.”

CBDCs could eat the banking sector’s lunch

Whatever’s pushing it forward, the creation of central bank digital currencies looks set to throw up a number of problems to accompany the benefits.

One concern for bankers is that the technology might eat the financial sector’s lunch. The technical term is “disintermediation” – the idea that giving people access to CBDCs could stop them from needing banks at all.

Van Steenis, who knows Wall Street and the City well, says CBDCs must be created with a two-tier system in which people continue to hold accounts at banks and payment firms.

Yet, he says there are other risks. “What happens when we think about money being moved from country A to country B? Do you then allow your monetary base to be sent to a foreign bank? In which case, how do you regulate them? Do you lose control of your monetary policy?”

Crypto community can innovate while central banks are cautious

These sorts of issues mean central banks and the governments that ultimately control them will be very cautious about building CBDCs, says van Steenis. Countries will need to debate their pros and cons in a process that might take years, he added.

Fed Chair Jerome Powell said in March that the central bank would “move with great care and transparency” and wouldn’t proceed without support from Congress.

That opens the door for others to innovate, van Steenis says, not least those in the crypto world who are developing stablecoins and attractive financial networks.

He says: “Actually, I think the crypto community does have a real window of opportunity to help define a future whilst the central banks are cautiously, but studiously, trying to progress what they do.”