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You are here: Home / News / Banking relies on trust and Blockchain helps central banks trust one another
Blockchain

Banking relies on trust and Blockchain helps central banks trust one another

June 24, 2019 by Ali Raza

Among all the talk from mainstream financial institutions that cryptocurrencies are at odds with the monetary policy on a national level, blockchain has emerged as a functional solution to many problems. These problems have been brought about by increasing globalization, which has in turn brought about a severe need for currency swaps.

2008’s massive recession, a watershed moment

What the Great Recession of 2008 showed the world was that innovation was needed to break out of the nation-by-nation monetary policy. It also showed both the strengths and weaknesses of the current (at the time) state of the global economy.

One mechanism that came out of the biggest problems at the time was the rise of currency swaps. These are open lines where central banks agree to swap currencies between each other to help alleviate problems in their jurisdictions. The Chiang Mai Initiative was initiated due to the Asian Financial Crisis sometime before the Great Global Recession, but it was only after 2008 that currency swaps became a big deal across the globe.

The Fed extended swap lines with the ECB and the Swiss National Bank, and it would eventually extend the same lines to all the G10 countries. The G10 central banks are all trusted central banks and extending swap lines to them was not as big of a problem for the Fed as it would be for others. It was only when the Fed’s hand was forced that it needed to extend the swap lines to countries outside the G10 that the issue of trust became a real problem.

Swap lines were extended to Brazil, Mexico, South Korea, and Singapore, and there were fears about instability in those regions having a knock-on effect on the American economy. When 2013 rolled around, the Fed decided to keep the swap lines it had opened during the crisis open indefinitely. However, one thing needs to be noted with currency swaps – that they are a political tool. Central banks often resort to keeping collateral for partner banks that they do not fully trust.

Blockchain can be the solution to trust issues between central banks

There is now talk of using blockchain technology to oversee currency swaps between central banks – and this idea has been talked about before. One of the critical factors of blockchain is that it is trustless. You don’t need to trust the other party when making a transfer of value due to the blockchain itself having mechanisms to handle trust issues.

In fact, there is a pilot program being devised right now so that currency swap can be done in the future between central banks. During a policy speech, the Bank of Canada stated that blockchain solutions would enable central banks around the world to save over 20 billion US dollars worth of fees a year in back office costs if blockchain was correctly applied. They also mentioned that a blockchain would allow funds to flow quicker and help in times of crisis.

The key here is a tacit admission by central banks and monetary authorities that Bitcoin and blockchain have solved a problem that they have had for years. It can only be good for the global economy once central banks start using this technology to become more efficient.

Disclaimer: The presented information is subjected to market condition and may include the very own opinion of the author. Please do your ‘very own’ market research before making any investment in cryptocurrencies. Neither the writer nor the publication (TronWeekly.com) holds any responsibility for your financial loss.

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Filed Under: News, Opinion Tagged With: Banks, Bitcoin (BTC), Blockchain

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