Burkhard Balz ©Frank Rumpenhorst

Balz: build confidence in blockchain networks

Bundesbank Executive Board member Burkhard Balz says that more needs to be done to build confidence in blockchain networks. This technology provides the building blocks for crypto tokens like bitcoin, and it facilitates peer-to-peer transactions in digital assets, doing away with intermediaries. “But what I think these distributed ledger technologies are lacking is the confidence-building aspect that can forge stability and transparency,” Mr Balz said at an event in Frankfurt am Main. For one thing, he said, it is not always clear what role which participant is playing when a transaction is processed in the bitcoin network.

Permissioned networks might be one way forward, Mr Balz observed. In this type of blockchain network, the operator keeps the network running smoothly and grants access to authorised participants. The operator is responsible for operational workflows, and all the network’s members can be clearly identified. Permissioned networks are one way of eliminating the confidence problem for participants and supervisors, Mr Balz argued.

Prototype confirms potential

Mr Balz also used his speech to report on the potential offered by the blockchain prototype developed by the Bundesbank in conjunction with Deutsche Börse. This innovative prototype is designed to provide the technical functionality for the settlement of securities on a delivery-versus-payment basis in exchange for centrally issued digital tokens, as well as transfers of either tokens or securities only. In addition, it is capable of settling basic corporate actions such as coupon payments on securities and the redemption of maturing securities. The project reaffirms the technology’s potential, Mr Balz reported, but it also shows how much groundwork still needs to be done to reap the full rewards. In the Bundesbank’s view, blockchain technology offers insufficient benefits to be used in pan-European payment operations, but it does hold promise for processing payment transactions across currency areas, Mr Balz told his audience. “Securities settlement and the provision of collateral are other areas where I see cost-cutting potential in blockchain technology,” he said.

Private crypto tokens a niche phenomenon

Mr Balz then turned his attention to the relevance of privately created crypto tokens, explaining that since bitcoin got the ball rolling back in 2009, a further 2,000 crypto tokens have reportedly been added to the market. “Transparency surrounding privately created crypto tokens and the areas in which they are used generally leaves a lot to be desired,” he warned, citing this as the reason why many tokens deserve to be regarded more as niche phenomena. “Crypto tokens fluctuate strongly in value, making them far from ideal for performing the functions of money. They are not suitable as a store of value or as a unit of account, nor can they be relied on as a means of payment,” Mr Balz stated, adding that crypto tokens also come off worse than the euro and the US dollar in terms of liquidity. There is one major reason why the prices of tokens have been soaring, and that is because they have been used as a speculative asset, he argued, noting that “the Bundesbank warned early on about the risks involved in these highly volatile investments”.