Goldman Sachs and other global central banks want in on crypto (GS)

Global central banks may have to issue their own digital currencies sooner than expected now that Facebook has announced its plans to create its own crypto, according to Agustín Carstens, general manager of the Bank of International Settlements (BIS), cited by the Financial Times.

Doing so would enable the public to directly access central bank money — a privilege only private sector lenders have at the moment. Additionally, Goldman Sachs wants to get in on blockchain and is conducting extensive research in tokenization, according to David Solomon, CEO of Goldman Sachs, cited by Bloomberg. It can be assumed that all major financial institutions (FIs) are looking at the potential of tokenization and stablecoins, he added.

Here’s what it means: While there’s still the question of demand for crypto projects, companies can unlock the benefits with the help of other industry players like BIS.

• Big FIs are looking to enhance their operations using tokenized assets.Implementing blockchain solutions can help FIs cut costs and increase operational efficiency. It should be noted, though, that not all banks are in agreement on the advantages of using blockchain for payments.
• And BIS can help central banks realize these projects with its new innovation hubs. The FI will set up innovation hubs in Basel, Singapore, and Hong Kong aimed at improving the global financial system, per Reuters. Moreover, the hubs will provide central banks with insights into technology trends affecting central banking and support them in terms of regulatory requirements and safeguarding financial stability.
• And despite it being unclear whether there’s consumer demand for cryptos, banks need to launch their own digital currencies soon to stave off big tech. There’s no clear evidence yet that there’s demand for such currencies, especially since consumers can use conventional e-wallets from banks and fintechs instead of cryptos, so the value-add isn’t clear. However, as big tech firms begin encroaching on the space, banks should act now to avoid competitors gaining a dominant position.

The bigger picture: Even when banks have developed their own crypto projects, there are still two hurdles to overcome, namely regulation and creating a network effect.

• More players looking to enter the crypto space will force regulators to up their game. There’s already more pressure to regulate the crypto industry thanks to Facebook’s announcement that it’ll be entering the space with Libra and a wealth of influential partners. However, as central banks and the likes of Goldman Sachs get in on crypto as well, there will be greater need for a clear regulatory environment. While regulators have so far been slow and reluctant to regulate cryptos, these developments will force them to take a closer look at the industry to ensure that players don’t pose a risk to financial stability. Solomon expects that there will be an evolution of regulation.
• Additionally, FIs need to focus on achieving a network effect for their blockchain projects to be successful. A network effect is needed to achieve scalability, as it ensures that solutions will reach the clients of a plethora of institutions with large customer bases. Thus, Facebook looking to launch its crypto project with nearly 30 partners will likely increase its chances of success. So, banks that want to launch similar projects would be wise to see if they can join an existing network or team up with other industry players to create a large network.