ETH professors present eFranc proposal at webinar

The policy proposal, outlined in a paper by Gersbach and Wattenhofer and discussed in the media sets out a possible path for the development of a Swiss e-currency for use by both financial market actors and the general public. Gersbach and Wattenhofer conceive of the eFranc as a non-interest-bearing currency created by the Swiss National Bank (SNB) that is obtained by commercial banks against eligible collateral or banknotes. After a longer introductory period, the eFranc suggested would allow for the free conversion of bank deposits and notes to eFrancs and vice versa.

The context

Gersbach and Wattenhofer’s proposal comes at a time when a trend towards less use of cash is compounded by concerns about the use of physical currency due to the COVID-19 pandemic. While a number of national banks, such as Sveriges Riksbank – whose Governor, Stefan Ingves, was on the panel at the webinar – are working on developing state-managed e-currencies for the public, the SNB is currently only considering a digital currency for use by the financial market actors.

Competition from Big Tech

The webinar also touched on privatised competition to national e-currencies from Big Tech, exemplified by Facebook’s Libra project, which was unveiled in 2019. Axel Weber, the Chairman of UBS, said that his bank has no interest in seeing state currencies replaced with private e-currencies, and Hélène Rey of the London Business School drew attention to the fact that private companies only need to take shareholders’ profits into account, while central banks are bound by considerations of the public good.

The proposal

The eFranc would be safe and default-free. It would be solely controlled by the SNB, which would maintain the stability of Swiss currency during the transition from physical to digital currency. An eFranc would reduce the costs of printing, storing, distributing and protecting physical notes. The proposal prioritises high levels of anonymity. It would continue to limit the scope of regular nominal interest rates, and would allow for a secure parallel payment infrastructure that continues to function if the present one defaults. Finally, “smart contracts” would permit the automatic execution of contract clauses. The currency would operate on a two-tier system, with a base layer made up of a permissioned asynchronous blockchain and a top layer providing a peer-to-peer payment network. Gersbach and Wattenhofer stress that the public can use traditional physical banknotes as long as it wishes.

A necessary step

While Gersbach and Wattenhofer note that it would take time to establish a functioning blockchain infrastructure and that step-by-step integration into the current monetary system would be necessary to ensure continued financial stability, they maintain that the development of the eFranc is a necessary step to ensure that the Swiss monetary system is at the cutting edge of technological and economic development in the 21st century. As Ingves said during the ETH Risk Center’s webinar, “you cannot turn back the clock”.