Central Banks Assess Risks of Distributed Ledger Technologies

Three monetary and cryptocurrency analysts discussed the challenges and prospects of digital currencies issued by central banks. This discussion took place on March 7, 2020 at Massachusetts Institute of Technology's officially-sponsored Bitcoin Expo 2020. Those experts discussed distributed ledger technologies (DLT) and how they could improve the current financial system around the world.

The experts also argued that there are a lot of challenges around privacy, scaling and interoperability of blockchain. Sonja Davidovic, who is an economist with the International Monetary Fund (IMF), gave a warning that central banks in most nations should not to rush to implement blockchain systems before they vet the technology. She added that there is a lot of hype and some people might make decisions based on popularity. She said that it happened with blockchain. The result of acting without thinking could be a disaster.

Davidovic added that none of the current distributed systems available today have shown robust privacy or flexibility for operating with each other. She added that central banks have big risks when they implement the technology. This is because the banks usually outsource the development. Those developers could be a weak security link.

Robleh Ali, who is a research scientist at Digital Currency Initiative of MIT, and who is also a past Bank of England official, thinks that digital currencies from central banks ould become hybrid currencies. He thinks that most central banks would want different systems.

Bob Bench, who directs the Fintech research at the Federal Reserve Bank of Boston, stated that cryptocurrencies can't scale up to meet the vast needs of central banks. He pointed out Bitcoin as an interesting option because it is mostly transactions. However, a retail type of central bank currency has such a volume that it could not accept much of a risk from a malfunction.

Although DLTs might work, Bench added that central banks need to closely look at risks. He also said that WeChat and Alipay have big reserves. The People’s Bank of China has used both platforms for about a year with a considerable amount of success with voluminous transactions.