Central Banking of the future: Can Central Banks adopt digital currencies for the conduct of monetary policy?

Posted on Posted in Analyses

By Dragan Vitorovic, Senior Researcher KEDISA

We live in days of BitCoin euphoria. On Monday, 11th December, Wall Street started trading with Bitcoin futures, and the most famous cryptocurrency reached the value of more than 15 thousand Euros. [1] Cryptocurrencies have become a part of an everyday discourse but signals coming from central banks are mixed and without the proposed consensus on cryptocurrency treatment.

While some monetary authorities are considering developing their own digital currency for internal purposes (Dutch), others are openly criticizing the use of digital currency and publish papers that explain in very substantial and precise manner why cryptocurrency is not yet to be included in the monetary policy tools. [2] In the era of FinTech expansion, diverse payment platforms and differing understandings on the nature of money, the common public can hardly follow incremental, but significant changes, especially in postindustrial economies. Trend movements anchored in the generational shifts, changes in preferences and use of technology are also splitting the society – people are starting to live in parallel worlds, due to technological and sociopolitical interplays. [3]

Given the strategic importance of money and its historical background, modifications in money standards often lead to the long-term consequences, supported by relatively slow and effective redesign of the geopolitical landscape. Unlike Central Banks, structured around their mandate, commercial banks are making sharp and bold tactical solutions with the cryptocurrencies as the main exploratory tool [1].

Why is this happening?

Central Banks managed to navigate through the crisis with the relative dose of success. According to Mr. El-Erian, economic advisor at Allianz, central banks stepped in and took the responsibility, when other institutions were unable and unwilling to do so. The established institutional concept has ended, including the dynamics of political system behavior and it was enough for central banks to come to the spotlight, establishing the “era of New Normal” [4]. However, that also reinvigorated the old debate on the mandate of monetary institutions. During the crisis, voices arguing that the monetary policy strategy may be reframed towards the dual mandate (including both the aggregate growth and the inflation target as the ultimate goals), instead of inflation-targeting only, had become louder. [5] Further, the adoption of unorthodox (even experimental) policies on CBs behalf opened the space for speculating that cryptocurrencies and Blockchain should be inseparable part of monetary policy strategy in not so distant future [6].

Two solid arguments why cryptocurrencies are still beyond the mainstream thought of monetary policy can be attributed to the mentality of central bankers’ community and communication dimension. Namely, central bankers have crisis mentality, which is very difficult to change (if at all) which reflects the high level of conservative personality. Additionally, given the enormous level of power vested in a central bank, governors and directors should be master communicators, which is often a double-edged sword. The recent example was Mr. Draghi’s “whatever it takes”, often quoted as bold and necessary move at the decisive moment. Given the structural notion, volatility and relative unpredictability of cryptocurrency, communication process would probably be too challenging and potentially confusing. [4]

As in case of every institution, despite living in the era of New Normal, the introduction of changes is slow, sometimes highly sophisticated and difficult to observe at first, even to experienced policymakers.  In this sense, central banking is resembling systemic geopolitical movements. Although Central Banking principles are still relatively young, monetary institutions are very much traditional (or, for that matter, had been very traditional) and present inseparable part of the state institutional design. [5] The introduction of cryptocurrencies and Distributed Ledger Technology (DLT) in the conduct of monetary policy would be too radical policy move.
Which Central Banks are so far addressing the issue?

It would be possible to mention several Central Banks and state entities that had officially announced, in one form or another, their stances on cryptocurrency. Without deep-dive in the technical considerations that can be found in the research papers analyzing Blockchain, Distributed Ledger Technology,  cryptocurrency and development in tech-arena, here are outlined positions of Central Banks that can represent highly industrialized countries, (England, Germany, and Switzerland), ECB and BIS (as the supra-governmental institution), Estonia (as a country with the comparative technological advantage), China and India (demographic giants with high geopolitical importance) and Serbia (EU candidate with vibrant and developing tech scene). The common characteristic of official reports is that monetary institution had shown the tremendous level of technological proficiency on institutional behalf, extensively exploring various dimensions of cryptocurrency uses.

The central bank of central banks, Bank for International Settlements, offered the insight that Central Banks should not stand aside. Instead, CBs should carefully evaluate cryptocurrency developments and modalities for possible implementation. Certainly, given their internal rules and discretion principles, they can develop a policy around cryptocurrencies. The report by Bech and Garrat, which dates from this September 2017 (and in a case of Bitcoin that may sound like a distant past now), presents the insight how it would be possible to provide the digital alternative to cash. [6] [7]

Swiss National Bank – the president of SNB, Mr. Thomas Jordan in his speech from 2014 outlined Swiss monetary history, insisting on the monetary order and sound money “as the fundamental pillar of society”. He further argued that the state money is still attaining the safest possible dimension for the uninterrupted functioning of society. [7] Switzerland is having a high rate of cryptocurrency adoption and through the risk-managing intermediary, it is possible to pay fees at the Lucerne University of Applied Sciences in Bitcoins. [8][9]

Bundesbank – while Distributed Ledger Technology (DLT) has promising benefits in terms of payment, especially beyond European currency area (this is one of the reasons why Bundesbank is cooperating with the Deutsche Stock Exchange, in the development of payment system prototype which uses DLT), digital central bank money is an unrealistic proposal, after considering every possible aspect.  This is the stance of top officials from German central bank. [9] [10]

National Bank of Serbia – Bitcoin is highly speculative currency, with five times less transactions globally than is the case with the number of conventional transactions within Serbian payment system, according to the Serbian governor. [11] Currently there is one Bitcoin ATM and at least two restaurants in Belgrade that accept payment in Bitcoins. [12]

ECB – The President of ECB, Mr. Mario Draghi, stated that it is too early to consider the regulation of virtual currencies. This was announced in October. The research paper from ECB outlined Blockchain as very promising technology that is still in the early phase to be considered for the central banking purposes. [13]

China – wide adoption of cryptocurrency was swiftly exchanged for official rejection and clearly stated expectations that Bitcoin will cease to exist, according to the deputy governor of the People’s Bank of China [14]. Officials claim that their policy prescription was effective and delivered in a timely manner.

India –  follows the similar line as in China’s example. The Indian Central Bank issued warning on potential hidden risks and detrimental consequences when investing in Virtual Currencies, on the December 5th.  [15]

Estonia – this small country proposed the design of state cryptocurrency, and was willing to “print” it. ECB stepped in and overruled such policy move. [16]

Bank of England blog- despite not being the official notion of the bank, this blog offers interesting policy analysis and prescriptions, and is written by professionals and experts. They are arguing that cryptocurrencies and Blockchain can lead to radical adjustment of monetary policy conduct. Additionally, this would be the direct challenge of banking system’s essence, which may lead towards a full-fledged change of system. While scenarios presented in this post sound simple, they are having tremendous background implications. [17] The Bank of England has somewhat positive tone on cryptocurrency use in monetary policy strategy, also in official terms.

Finally, the top official from Federal Reserve, Randal Quarles, said on the first of December that “digital currencies like bitcoin could pose a threat to financial stability as they gain wider use”. As can be expected, Wall Street already moved toward Bitcoin, seeing in it an alternative asset bearing much more risk.  [18]

Instead of conclusion

It is likely that Blockchain and Bitcoin will be widely adopted in relatively close future, although it is unclear what forms this adoption may take. Like any other technology and/or currency, both Blockchain and Bitcoin are highly political and have significant philosophical and ideological background. In this brief overview, due to simplification, Bitcoin is used as the leading example, given the current state of affairs. People more familiar with this phenomenon would, besides criticism, have in mind other cryptocurrencies and their underlying differences that may display different dynamics than the case with Bitcoin. Despite not immediately linked to geopolitical and geostrategic power shifts and adjustments, the power which money projects is opaquer and less observable than is the case with the direct military and/or political conflicts. Therefore, it would be unwise to exclude the adverse scenario where Bitcoin value crashes, reshaping in result the cryptocurrency investing environment.

While it can hardly be expected that digital currencies per se will be the instruments of monetary policy very soon, they have been established as an asset class, stretching the concepts of neutrality and anonymity of money a bit. As for Bitcoin, Financial Times published the article titled – “Bitcoin: an investment mania for fake news era”. In anticipating the future, fake news combined with the Artificial Intelligence will be powerful weapons, but more about it will be presented in the next report.


[1] Rob Urban et al. (2017) Bitcoin Futures Deliver Wild Ride as Debut Brings Rally, Halts. Bloomberg [online]. Available from:  [12 December 2017] [2] Coindesk. Swiss Public University Begins Accepting Bitcoin. online. Available from: [9th December 2017] [3] Aidan Saggers and Chiranjit Chakraborty (2017) Bitesize: Flourishing FinTech. Bank Underground. Available from: [10th December 2017] [4] The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse [YouTube video] Available from:  [11th December 2017] [5] Mishkin, F. (2011) Monetary Policy Strategy. 2nd Edition.

[6] Sauer, S. (2007) Discretion rather than Rules? When is discretionary policy-making better than the timeless perspective? ECB Working Papers No. 717. January 2007. Available from: [10th December 2017] [7] Bech, M. and Garrat, R. (2017) Central bank cryptocurrencies. BIS Reports. September 2017. Available from [1th December 2017] [8] Thomas J. Jordan (2014) Sound money – a fundamental pillar of our society. Ustertag SNB Speeches. Available from: [10th December 2017] [9] Carl-Ludwig Thiele, Member of the Executive Board of the Deutsche Bundesbank. From Bitcoin to digital central bank money – still a long way to go. Speech, Keynote at the OMFIF roundtable discussion. London.  Available from: [10 December 2017] [10] Bundesbank Monthly report Monthly Report: Bundesbank sees benefits in blockchain technology. Frankfurt. Available from: [5 December 2017] [11] Nova Ekonomija Portal. Nova Ekonomija online. In Serbian. Available from: [11th December 2017] [12] Mondo Portal. Mondo Portal Online. In Serbian Available from: [12 th December 2017] [13] South China Morning Post. European Central Bank warns about speculative frenzy surrounding bitcoin.  Available from: [4 December 2017] [14] Quartz . China’s central bank believes bitcoin will die. Quartz online. Available from [6 December 2017] [15] Quartz. After China, India’s central bank warns: Beware of bitcoin. Quartz online.  Available from [7th December 2017] [16] Reuters Online. ECB’s Draghi rejects Estonia’s virtual currency idea.  Available from [5th December 2017] [17] Marilyne Tolle (2016) Central bank digital currency: the end of monetary policy as we know it?. Bank Underground. Available from:  [10th December 2017] [18] South China Morning Post. Bitcoin a threat to financial stability, says US Fed official. Available from: [4 December 2017]