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CLSA’s Cochran: central banks likely to issue crypto

Analyst Shaun Cochran explains why sovereign digital currencies are likely to become a reality, and what they’d replace.



Earlier this month, DigFin reported that Chinese bank regulators have backed away from issuing a digital version of the renminbi, suggesting a smaller country may be better suited to pioneer such a move – a version of which perhaps could emerge from Saudi Arabia, as we also reported.

Shaun Cochran, global head of thematic research at Hong Kong-based investment bank CLSA, says it is likely that a central bank will take up the cudgel.

Speaking at a blockchain conference, Cochran says the prospect of a sovereign crypto-currency looks tantalizing to central bankers and other authorities: they would be able to track every transaction using the token, tag these, and tax the underlying activities. “Governments would love that,” he said.

But the market has yet to decide what’s the best structure for sovereign crypto or whether they’re a good idea.

For example, if a central bank issues sovereign digital money, does that mean that any resident can use it – and have the legal right to hold it and transact with it? As we reported in the case of PBoC, Cochran notes that this implies citizens would require a direct account with the issuing central bank.

One possible ramification could be to crowd out funding for commercial banks in times of panic.

Cochran cites the 2008 global financial crisis. As Lehman Brothers fell, Cochran was at CLSA’s Korea office. “I remember sitting in the boardroom, discussing which bank we should put our deposits in. Would we be confident the money will be there tomorrow?”

If a GFC took place in a country with a digital sovereign currency, the populace would reasonably decide that the safest – perhaps the only – bank to hold their money would be the central bank. Which means there’d be a crypto run on every other bank, collapsing the system.

Therefore, he expects a sovereign currency will be wholesale, with the token only available to licensed banks. But this creates new questions about other aspects of the emerging industry of digital assets.

Implications of a sovereign digital currency
For one thing, a sovereign digital currency makes redundant the need for utility tokens, which today are those you buy to access a company or network’s services or rewards.

“A wholesale crypto-currency would provide a simple, central means of settlement for all members in the system,” Cochran said.

This also obliterates the business case for stablecoins, which either rely on a store of fiat currency (such as Tether) or rely on mathematics-based means of maintaining semi- or un-collateralized backing, in order to peg the coin’s value to an underlying asset such as the dollar or the dollar price of gold. (See our story on stablecoins and how they work.)

(Cochran, by the way, suggests Tether and other stablecoins could be targets for short-selling: the coin’s price is meant to never stray far from being valued at US$1 – or whatever – per token, so there’s no upside, but they are at risk of their value falling to zero. He’s more bullish on Circle, a U.S. issuer of a partly collateralized stablecoin, because of its institutional framework and backing.)

All of these stablecoins create uncertainty as to whether the collateral is there or if the math works in periods of stress; stablecoins are all unproven. A sovereign digital currency has no such existential questions. Its issuance would also facilitate mainstream uptake of digital money and blockchain-backed services, by removing the volatility of existing crypto-currencies.

Given these benefits, Cochran says it’s more likely than not that a central bank will issue a digital version of its currency. But that’s not the end of the story: Cochran expects the private sector will continue to innovate, while governments will be cautious around digital money’s potential to accidentally blow up the financial system; Cochran predicts a central bank will digitize its currency, but he doesn’t say when.

He cites Australia Stock Exchange’s push to replace its post-trade infrastructure with a blockchain, among other private-sector initiatives to build a tokenized economy in advance of public institutions.

Cochran isn’t sure which will emerge first, though: ASX and the like solving blockchain problems with regulatory blessing; or public organizations laying their own foundations that legitimize the space for commerce.

“ASX should feel they have this locked up,” Cochran said, but it’s taking a long time to get a critical mass of traction among other players (a point made in DigFin’s coverage of ASX’s project earlier this year). “It’s a race.”

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