Blockchain Shouldn’t Be an Enemy to the U.S. Federal Reserve

Despite most central banks being reluctant to turn to blockchain technology, major institutions such as the U.S. Federal Reserve should figure out the implications of such distributed ledger technologies and how to adapt to them, economist Eswar Prasad argued in a Financial Times article on January 1, 2019.

Blockchain Could Transform the World of Finance

Blockchain has had its best year to date, with companies both large and small racing to find the best use for the technology. Eswar Prasad, a Cornell University professor, emphasized the importance of blockchain in a Financial Times article on January 1, 2019, saying that it has the potential to transform the worlds of finance and central Banking.

He argued that central banks, including the U.S. Federal Reserve, should figure out the implications of blockchain and how to adapt to them, as they could change the way their monetary policy is run and ensure financial stability.

Blockchain could, in theory, solve the problem of central banks’ inefficiencies. The technology could make verifying different stages of a transaction faster and reduce fees for domestic payments. International transactions could be shortened from days to minutes, and a group of banks could settle transactions without having to go through a central bank.

The Case for Blockchain in Central Banks

However, a cold switch to blockchain would leave central banks with a diminished role, Prasad argued, as the technology would make it harder for them to monitor and control both domestic and cross-border financial transactions.

To combat this, some central banks, such as those in Singapore and Sweden, have put in place plans to issue digital versions of their national currencies to retain their role in the country’s payment systems, The Financial Times wrote.

Being cheaper and easier to use would make these national cryptocurrencies appealing to the masses, while the reduced costs associated with its production and ease of monitoring would make it viable for central banks to use them.

“The Fed and other central banks should embrace new financial technologies to build on that trust and use them to make financial markets more efficient and stable,” the Financial Times wrote, adding that major institutions need to innovate and adapt to changing financial technologies.

Prasad did raise the question of how financial market stress would affect the decentralized verification mechanisms imposed by central banks and implied that the technology still needed a lot of work before it could be fully implemented.