South Africa’s FirstRand Bank has released a new paper that explores the critical role of central banks in unlocking the true potential of blockchain technology.

Titled “The Advent of Crypto Banking”, the paper has been written by the Foundery blockchain team at FirstRand Bank Limited. The authors believe that the greatest benefits of blockchain in banking will only be reaped once central banks issue their own currencies onto a blockchain. They said that by migrating the predominant form of money in an economy to central bank issued crypto currencies (CBCCs) on a sovereign blockchain, a central bank could observe in real time the transactions in an economy to better understand the velocity of money, and to gauge the health of the economy on a daily or even hourly basis.

The paper defines sovereign blockchains as the blockchains that are established for a common currency area (usually a nation) under the jurisdiction of a single central bank.

“Once such a sovereign blockchain is created with a CBCC, other financial instruments such as bonds, equities, derivatives and even land and car registries could migrate to the same sovereign blockchain. This would allow the central bank to conceivably see the creation of all commercial bank assets in an economy in real-time, including the categorisation of those assets”, it said. 

The paper said that such a system could enhance anti-money laundering initiatives, revolutionize tax collection and allow the “codification of money”. The authors believe that establishing a sovereign blockchain with CBCC would benefit an economy by reducing settlement times and costs for a banking industry.

It added that an economy’s payment system could eventually be replaced with a sovereign blockchain performing the role of a Real-Time Gross Settlement (RTGS) system.

“We believe central banks will embrace CBCCs as a new form of money as it will significantly enhance their ability to understand their economies, reduce systemic risks, and facilitate more effective transmission of monetary policy throughout the economy. A remarkable outcome of the issuance of a CBCC on a sovereign blockchain would be the elimination of bank runs – a feat that cannot be overestimated for financial systems. A more stable banking system can be envisioned, discarding some of the dangers of a fractional reserve system without sacrificing its benefits”, it said.