At a time when reserve banks across the globe are increasingly focusing on their digital currency initiatives, Switzerland’s apparent lack of interest in seriously looking into central bank digital currencies (CBDCs) might make the leading European economy less competitive. This, according to a recent analysis and report from the Swiss Bankers Association (SBA).
In a discussion shared recently, the SBA looks at the ongoing global development of virtual currencies and highlights both the opportunities and challenges that CBDCs might pose for the Swiss banking sector.
The paper from the SBA notes that since the Swiss financial and payment systems already work quite well, there may be less pressure to take quick action when it comes to providing a CBDC.
The paper’s authors argue that the short-term benefits of not looking into issuing a virtual currency might include avoiding potential risks for local banks, but it might not be a great idea to avoid CBDC research and possible implementation in the future.
The paper states that it may be presumed that in the absence of an innovative means of payment, the digitalization of the Swiss economy and related business models may proceed more slowly. The paper adds that outdated, legacy systems for payment transactions might not work well with the fast-evolving digital economy. Interoperability with foreign digital markets might become a challenge, the SBA’s research study noted.
Then there’s also the potential risk that if Switzerland doesn’t offer a CBDC, the nation’s consumers might start using virtual currencies or e-money issued by other jurisdictions. This may lead to serious systemic and monetary policy risks because of the loss of currency sovereignty, the paper’s authors argue.
The research study also mentions that digital forms of money come with risks and challenges for banking institutions. For instance, the widespread use of stablecoins such as (yet to be launched) Diem, formerly Libra, may reduce banks’ roles to simple providers or even replace them completely.
If digital or e-money becomes more widely adopted, then it may result in large-scale, system-wide displacement of deposits created by commercial banking institutions, the paper notes. A bank run from current bank deposits to CBDC balances may jeopardize financial stability, the paper adds.
Programmable virtual currency might also lead to privacy and political issues. For instance, if there is a digital currency offered by a foreign issuer and it becomes popular, then the issuer may have the ability to track all transactions and exclude certain groups from using it. This information and the possibility of exclusion might be exploited or abused in the form of political pressure on nations.
Therefore, a move to provide a CBDC might have consequences that extend beyond just monetary and economic policy implications and is a strategic challenge for nation States, the paper states. The SBA wants to encourage authorities and the global business community to adopt a serious position on CBDCs, asking the general public to “drive the opinion-forming process.”
The publication of the SBA paper came after the SNB reveals that the reserve bank has no concrete plan or roadmap for issuing a CBDC in Swiss markets (neither retail nor wholesale).
Carlos Lenz, Chief Economist at SNB, has said there’s no pressing need for a digital Swiss franc for now, because our existing payments system works quite well. Lenz added that there’s no risk for the Swiss franc being replaced by other major world currencies.
Lenz confirmed that they have focused on discussions around this topic at the time when the Euro was introduced. He pointed out that that had also been concerns or fear that payments could be made mainly in Euros, which has not happened.
It’s worth noting that Switzerland has been looking into the feasibility of issuing CBDCs. Project Helvetia, led by the SNB, financial infrastructure provider SIX and the Bank for International Settlements (BIS) Innovation Hub Swiss Centre, confirmed last year that they had completed studies on the settlement of tokenized assets via a CBDC on a distributed ledger technology (DLT) network.
Last month, SNB, Banque de France, and the BIS Innovation Hub revealed they had performed an experiment with a wholesale CBDC for international settlement.