The flow of information on the Swiss National Bank’s digital franc project has run dry in past months, dominated as they were by reports about the corona-virus and the fight against the economic outfall. This will change again for sure.

The Swiss National Bank (SNB) isn’t currently going to show its cards on the development and introduction of a digital currency for the financial market. The feasibility study on the launch of an e-franc is part of the BIS innovation hub founded with the SNB in Basel last year. The SNB told finews.com that it was too early to say something concrete on the progress of the project and promised to inform the general public in a not too distant future.

The reasons why the SNB is seemingly open for a digital currency for a limited number of users but not for ordinary citizens has been the focus of stories featured by finews.com.

No-Risk Approach to E-Franc

One main factor was the use and purpose of cash, popular as it still is in Switzerland. The government at the end of 2019 wrote in an answer to a parliamentary request that the access to financial services in Switzerland was adequate and the use of cash broadly accepted.

Be this as it is, official Switzerland doesn’t feel an urgent need to take the risks it identified with the introduction of a digital franc. The SNB believes that such a tool might increase demand from abroad for the franc in case of crisis, boosting the value of the franc unduly. Offering a digital franc would also jeopardize the two-tier banking system of the country because citizens could then open a franc account with the SNB, which it doesn’t believe to be in its mandate.

Online Powerplay

The changes that corona has brought along may however spur faster and more profound change. Cash may remain a means of keeping money in safe storage in times of crisis, but it has also lost some of its allure, according to banks.

Maybe even more profound is the shift in consumption to online channels, first prompted by the lockdown itself, but later also as a function of the sense of insecurity surrounding the transmission in public space. Corona has boosted the business of the likes of Amazon and has led to job losses, for instance at Swiss high street chain Manor. Many goods, and in particular the non-perishables, have ceased to be readily available in stores, not least because they were in less demand.

This has helped online retailers gain market share and the might to introduce alternative forms of payment systems. Which of course was why the attention was huge when Facebook presented its project Libra.

Potential Disruption

A payment system that could draw its data from both communications platforms and the online trading firms would have a potential to disrupt existing financial flows. The attention of central banks and countries was a given with the enormous power that Facebook acquired. Of course, the projects are not at a final stage yet, but the potential suffices to get the people in power to give it a closer look.

After the initial resounding «No» from the relevant authorities, Libra’s promoters refined their project, which is based on a basket of global currencies.

However, for monetary authorities of emerging markets, the project would be much more challenging because it might end their ability to enforce the monetary policy. They are familiar with this threat that regularly occurs in times of hyperinflation.

Give It Ten Years...

But the challenge seems to go beyond those countries. Dirk Niepelt, an economics professor at the University of Bern and head of the SNB study center in Gerzensee, told finews.com that Switzerland in ten years' time will have its own digital currency, and not just for selected firms in the financial market. He sees a number of advantages with the introduction of an e-franc, not least of them concerns the too-big-to-fail issue.

With a digital currency introduced and held by the general public, bank crises would become less threatening as a bank collapse would have less potential to impair the payment system. This in turn would get the too-big-to-fail problem issue to become less prevalent and the government could thus ease its tight rules.

A Political Project

But, Niepelt said, that the impetus for such an e-franc would have to come from political circles. The fundamental reorganization of the financial system isn’t part of the central bank’s remit and would forcibly involve the government’s implication. Introducing such as radical new system is risky and would propel the central bank into a new role. The job as a central bank would become more transparent and fuel the discussions about the use of central bank profits.

«The status quo is no option anymore,» said Niepelt. «Monetary authorities are careful to maintain their control over payment systems and the financial market as well as the attractiveness of their currency.»