Sweden's Very Own Bitcoin. What Could Possibly Go Wrong?

The finance industry’s attitude to automation and technical innovation resembles the old song lyric: “Everybody wants to go to heaven, but nobody wants to die.”

Bank executives love to warn of robots replacing humans across the industry, but basic IT management often seems beyond them. The blockchain and digital currencies are the future, they tell us, but no-one seems quite sure what to do with them or whether they really want them.

So it’s unsurprising that central banks have decided to take up the crypto-running — or are at least promising to. Guardians of monetary policy from Sweden to the U.K. have raised the idea of issuing digital currency. And it’s starting to unnerve private bankers who, it turns out, quite like the way things work today.

While a publicly available e-pound or e-krona would help draw support away from stateless cryptocurrencies such as Bitcoin, bank CEOs know it might also stop customers depositing funds with their own firms. That’s certainly the fear in Sweden, where bankers are lobbying against the central bank’s idea of wading into the retail market with its own digital money. For Swedish financiers, it would be just another potential suck on their business to sit alongside Bitcoin and the emerging rivalry from big Silicon Valley firms.

Crypto Panic

Bitcoin’s price has cooled this year but policymakers are still grappling with what to make of digital money

Source: Bloomberg

Still, they may be worrying about nothing. There’s little to suggest that central bankers will be any better at radical change than the lenders they oversee.

The first question is deciding what a digital currency would actually solve. Sweden’s chief preoccupation seems to be that its citizens are falling out of love with notes and coins, preferring instead to use cards or electronic payments. But if people are already happy to pay this way, and are shunning cash, why bother coming up with a digital alternative to cash? It might rein in the power of the banks a little, but it will also be a monumental technical feat to devise an e-currency that’s as handy as notes and coins. And all that for a small minority of cash-lovers.

Cash Never

Sweden’s use of cash payments in the retail sector as a proportion of overall payments

Source: Riksbank

The second problem is deciding whether this is worth the risk to financial stability. If a sovereign digital currency is successful, what does it look like at a time of crisis? Will customers flee banks and take refuge in digital assets? That’s a pretty nightmarish prospect for a central banker, given the risk of a credit crunch and heavy financial losses. The Bank for International Settlements has warned of such “digital bank runs” and urged careful consideration before launching projects.

The final difficulty would be central banks becoming more like banks — with all the regulation and risk that entails. They would need more departments, more staff and more resources to combat money laundering and cyber-attacks. A public digital currency would need branches or information centers. It might require a whole new approach to tracking and taxing citizens. Seeing central bankers cope with all this might be a source of schadenfreude for the banks, who’ve been grumbling about compliance for years. But it would be an operational and financial nightmare for all those involved.

Everybody wants a more efficient banking system that protects the public. But pinning your hopes on central bankers is a fool’s game.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net

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