ESSA

ESSA

The role of blockchain technology in fiscal and monetary policy


Lemia Bickalo

By

October 19th, 2018


With blockchain technology gaining more and more traction within the mainstream, Lemia Bickalo explores its potentially important role in transforming economies.


ESSA first addressed the nascent technology here, dissecting the hype behind blockchain and then again revisited the implications here, outlining the possibility of central bank-backed cryptocurrency. This article further analyses blockchain technology, the so-called ‘new internet’, in a macroeconomic lens, reviewing the progresses made and the hopes for the future. Blockchain’s potential for streamlining processes has appealed to more than just the private sector. It’s not just firms and cryptocurrency connoisseurs that are capitalising on the new technology; it is being experimented with by governments and central banks too.

 

Fiscal Policy

Whether fiscal policy should be used to dampen business cycles, and if so, to what extent, is a dilemma thoroughly and theoretically discussed in our macroeconomic textbooks. An analysis of course is not complete without acknowledging the ‘lags’ that result from lengthy legislative processes. These lags, in particular ‘decision’ and ‘implementation’ delays, prevent new policies from being implemented in a timely fashion. The former being the time taken for monetary or fiscal authorities to make a decision regarding an economic problem, the latter being the discrepancy in time between when the decision is made and when it is actually implemented. This can be attributed to the vast bureaucracy of government where policy actions need to be carried out by different agencies. You can infer how having a mismatch in information sharing due to no central repository of information, nor a decentral one for that matter, can be inefficient.

Ironically, while the essence of blockchain technology is decentralisation, the oxymoron of a decentralised system of information sharing that is controlled by a central body (government) reflects a likely utilisation of the technology. While security issues arise with respect to public blockchains, a permissioned blockchain allows the benefits of decentralisation, i.e. updated store of records and data sharing, to be limited to specific parties privately. In addition, another promising aspect of blockchain technology is ‘smart contracts’. A smart contract is defined as self-executing code that allows for automatic actions to be taken once predetermined conditions are met (as agreed upon between parties). This would allow for faster execution of some bureaucratic processes that are often spread across multiple databases. For instance, CSIRO’s Data61 outlined the potential of implementing fiscal policy by ‘programmatically’ controlling policies for government expenditure.[1] This is being trialled with the Commonwealth Bank (CBA), where conditions are attached to ‘smart money’ which can only be spent on specific goods and services, by specific individuals at a specific time.[2] In essence, it allows for intricately targeted expenditure. What this means for the implementation of fiscal policy is yet to be seen, but it definitely sets a precedent for increasing the accuracy, and more importantly, the effectiveness of government expenditure.

 

Monetary Policy

What is perhaps more intriguing is what this could possibly mean for monetary policy. If governments can fine-tune their fiscal stimulus, is ‘smart money’ a potential cryptocurrency that could be backed by the central bank? The ‘smart money’ is said to integrate with the New Payments Platform (NPP), an infrastructure that was enforced by the Reserve Bank (RBA) and came into effect this year. It may also give some indication about a potential digital AUD currency that may be created at some point in the future, which is the most realistic application of blockchain for ‘fiat’ currencies. The key thing to note is that blockchain finally solves the issue of double-spending, which is what allows cryptocurrencies to exist. Consequently, in terms of controlling the supply of money, will the sale and purchase of financial assets by central banks utilise blockchain technology? Currently, the Reserve Bank Information and Transfer System (RITS) is used for real-time settlements. If a digital version of the dollar is implemented in the future it will operate alongside the current system, where the digital tokens can be exchanged for central bank deposits when required.[3]

 

An efficient system for an efficient economy

In that case, what happens when financial securities are issued on distributed ledgers? The CBA and the Queensland Treasury Corporation have already created the first government bond using the blockchain smart contract technology.[4]  Citing the technology as enabling ‘more robust issuance processes’ and playing an important role in improving the ‘operational efficiencies’ of debt capital markets.[5] Moreover, the ASX establishment of distributed ledger technology to replace its old system for settlements and clearing further exhibits the efficiency that the technology brings.[6]

While this all sounds and is very promising, uncertainties and technical issues remain. There is no clear answer or method for which the technology can be implemented perfectly. In fact, it’s not the best technology for eliminating all inefficiencies, and the key lies in figuring out which industries, sectors, and processes will benefit from utilising this technology and in which it will be counterproductive. Like the internet, it must be cultivated, refined and tailored to be the solution to problems, instead of creating them. But this all requires trial and error, experimentation and research. We’re getting there.

 

 

[1] CSIRO. (2017, May). Risks and for systems using blockchain and smart contracts. Retrieved from https://www.data61.csiro.au/en/our-work/safety-and-security/secure-systems-and-platforms/blockchain

[2] CSIRO. (2018, October 9). ‘Smart Money’ trial explores potential for blockchain [Press release]. Retrieved from https://www.csiro.au/en/News/News-releases/2018/Smart-Money-trial-explores-potential-for-blockchain

[3] Lowe, P. (2017). An eAUD? Retrieved from https://www.rba.gov.au/speeches/2017/sp-gov-2017-12-13.html

[4] Commonwealth Bank of Australia. (2017, January 25). Commonwealth Bank and QTC create first government bond using blockchain [Press release]. Retrieved from https://www.commbank.com.au/guidance/newsroom/CBA-and-QTC-create-first-government-bond-using-blockchain-201701.html?ei=gsa_newsroom_QTC

[5] Commonwealth Bank of Australia. (2018, August 10). CBA chosen by World Bank to deliver world’s first blockchain bond [Press release]. Retrieved from https://www.commbank.com.au/guidance/newsroom/cba-picked-by-world-bank-to-deliver-world-s-first-standalone-blo0-201808.html

[6] Australian Stock Exchange. (2018, April 27). ASX outlines new features and timetable for DLT system to replace CHESS [Press release]. Retrieved from https://www.asx.com.au/documents/asx-news/asx-chess-replacement-scope-and-implementation-plan.pdf

 

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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