Thomas Jordan, Chairman of the Governing Board of SNB, discussed the pros and cons of the issuance of digital token money by private players and central banks. He highlighted that a variety of interesting potential uses exist for digital tokens, including the privately issued digital tokens in the form of stablecoins and the state-issued digital token money for financial market participants. While presenting the SNB stance on digital forms of money, including views on the Facebook-affiliated Libra, he outlined the regulatory and financial stability challenges posed by digital money, thus explaining why SNB remains critical about the idea of broad access to digital central bank money.
Mr. Jordan highlighted that it is important that to understand the characteristics and implications of these various tokens, as they could influence the SNB mandate. He pointed out that crypto tokens are more like speculative investment instruments than "good" money in terms of their characteristics. Users typically describe money as "good" if it has a stable value 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; however, the picture may be different for stablecoins. He added that Libra and the Swiss franc stablecoin represent only a small part of the spectrum of possible stablecoins. While discussing the privately issued digital tokens, he highlighted that the Facebook-affiliated Libra can be classified as a stablecoin, as its value is supposed to be kept stable against a basket of official currencies. However, there is no guarantee that Libra will be converted—proportionally and at any time—into the currencies in the basket. Libra is thus its own unit of account and a private currency.
He opines that stablecoins hold greater promise for widespread deployment as a payment instrument and store of value than the crypto tokens. This is why it is important to analyze and classify stablecoins rigorously from a regulatory and monetary policy perspective, said Mr. Jordan. On the regulatory front, it is essential to have clarity about the economic function of stablecoins. Stablecoins may have the characteristics of a bank deposit or a privately issued banknote. This would be the case for the Swiss franc stablecoin, were it to be used widely for cashless payments or as a store of value, as it would effectively become a substitute for Swiss franc bank deposits. The issuers of such Swiss franc stablecoins would take on functions similar to those of a bank—all the more so if they were to use the funds collected to finance risky, long-term projects and engage in maturity transformation. If the economic function of stablecoins is comparable to that of bank deposits, their issuers should have to play by the same rules as banks.
The principle of regulating by activity rather than by technology (same business, same risks, same rules) must apply here. However, not all stablecoins are directly comparable with bank deposits, particularly if a token is used more for investment purposes. Certain stablecoins could, therefore, conceivably be issued without the issuer holding a banking license. FINMA already classifies tokens according to their function and the regulatory treatment is different for each category. Whether or not a banking license is required, stablecoin issuers must abide by certain regulations, just like any other financial market participant. These range from investor and data protection to rules on combating money laundering and terrorism financing. Thus, stablecoins present many regulatory challenges, which in turn require close cooperation between various authorities. This is particularly true of cross-border projects like Libra.
Finally, Mr. Jordan stated that SNB remains critical about the idea of broad access to digital central bank money. This is because "broad access to digital central bank money would call the existing two-tier banking system into question." Instead of being the "banker to the banks, as it is today," SNB would act like a commercial bank, thus taking on the role played by the private sector. Broad access to digital central bank money could also pose a threat to financial stability. Switching over from bank deposits to digital central bank money is easier than changing to physical banknotes. In a crisis situation, this could increase the risk of a bank run. Thus, the implementation of this proposal would have far-reaching consequences not just for banks, but also for the entire financial system. These fundamental concerns would argue against opening up access to digital central bank money to all households and companies. Furthermore, cashless payments in Switzerland are already reliable, secure, and efficient and the system is continuously being updated and refined. So from that standpoint, too, access to digital central bank money for all households and companies, whether in the form of Swiss franc tokens or sight deposits, would bring virtually no advantages. He emphasized that SNB is closely following the developments in this area and is actively involved in the debate, not least through its future participation in the BIS Innovation Hub.
Related Link: Speech
Keywords: Europe, Switzerland, Banking, Securities, Digital Token Money, Stablecoins, Crypto Assets, Financial Stability, Libra, Digital Currency, Fintech, Regtech, SNB
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