Central bankers are belatedly scrambling to adapt to new digital reality. Photo / 123RF
Central bankers are belatedly scrambling to adapt to new digital reality. Photo / 123RF
COMMENT:
Can a pinstripe suit be combined with a hoodie? That might sound like an unlikely fashion dilemma. But it also reflects a policy question hanging over central banks.
In decades past, central bankers ruled the financial system by projecting an image that seemed unchanging, conservative and sober. Think marblepillars and sensible suits (pinstripe or otherwise).
Last year, however, the central banking community received a shocking challenge: Facebook, the tech group with a freewheeling, hoodie-wearing culture, announced plans to launch a global digital currency project called Libra.
We have seen breakthroughs in this area before. China's digital-payment and cryptocurrency plans are growing explosively fast. Countries such as Kenya have been using digital payments for a long time, while bitcoin has been a fixture in western finance for several years.
Yet the Libra idea is so ambitious that it not only threatens to disrupt private banks but could potentially challenge some of the functions — and oversight — of central banks as well.
The issue is made doubly difficult for central banks (and intriguing for amateur anthropologists) because it is not just a story of high finance. It also involves a culture clash between the systems employed by central-bank "suits" on one side and freewheeling "hoodies" on the other.
When Mark Zuckerberg, the founder of Facebook, outlined his plans for Libra last year, he seemed to imply that he wanted to create a "stablecoin", or digital token, backed by a basket of currencies, run by a large consortium of (mostly) financial groups.
Such projects already exist on a tiny scale. But Facebook's vision seemed so massive and global that it threatened to create a channel for international finance, partly outside central bank control.
Zuckerberg never defined what assets might sit in this basket, however, or how it might be regulated (or not). Now, after months of debate, central bankers say the concept will only work if Facebook either backs the coin with vast reserves of money (which would be posted at a central bank) and/or submits to banking regulation.
Agustín Carstens, head of the Bank for International Settlements (BIS), which acts like the central bank for central banks, told me at a recent conference at Princeton University: "Libra has good ideas behind it but it has to evolve in such a way that it can conform with regulation."
But he conceded that "events [with Libra] have been a wake-up call [for central banks]. We central bankers were in a comfort zone, but [Libra] showed we needed to change. So, there has been a lot of consulting and debate with Facebook, and ourselves."
Last year Facebook announced plans to launch a global digital currency project called Libra. Photo / Getty Images
Where this frenzy of "consulting" leaves Libra is still unclear. Nobody knows if Facebook will accept this type of central-bank control; indeed, the contours of the plan are still so vague that some observers suspect Libra may yet wither away or be eclipsed by digital rivals.
(An alternative initiative being developed by Gary Cohn, the former Goldman Sachs luminary and Trump adviser, aims to use encrypted phones to create a digital payment network that would adhere to existing bank regulation.)
Either way, central bankers are — belatedly — scrambling to adapt to the new realities. At next week's annual conference of the World Economic Forum in Davos, for example, there will be a blitz of meetings between financial regulators and tech companies to talk about cryptocurrencies. Meanwhile, the BIS is creating "innovation hubs" in Zurich and Singapore, and may yet replicate this in Silicon Valley as well.
"We are trying to avoid being surprised by innovation, as we were with bitcoin and Libra," says Carstens. Central banks are also trying to hire more tech experts. The officials who handle payment systems in central banks typically have a knowledge base that is "70-80 per cent finance and 20 per cent tech": Carstens says the goal is to reverse this.
Will this help to close the knowledge — and culture — gap between the two sides? One big problem dogging these initiatives is that central bankers are (in)famously wary of change. But, as Alan Blinder, former vice-chairman of the board of governors of the US Federal Reserve, pointed out to Carstens at Princeton, "there is a high likelihood that the hoodie culture doesn't want to cross that line" either.
As Blinder notes, the tech entrepreneurs "see their business model as [tapping into] the segment of the population which doesn't trust pinstripe culture".
Indeed, the raison d'être of the bitcoin project, and many other forms of fintech, is a dislike of existing financial structures, including the hierarchies embedded in central banks.
It will be fascinating to see what transpires in the coming months, just as it will be to watch innovation hubs try to forge an unlikely hybrid of hoodies and suits. Maybe it could also start a fashion trend.
For the sake of a smooth transition in global finance, let's hope they succeed.
