Over the last 12 to 18 months we have been seeing glimpses here and there of central banks dabbling in blockchain technology. It turns out that what we have been seeing is not a rare thing. A recent report from the World Economic Forum indicates there are no fewer than 44 central banks around the world already pursuing blockchain. So where are they going with it?

It wouldn't be appropriate to say all 44 are looking to issue digital currencies. Some are, others are not. Some of the banks are looking at blockchain as a way to serve unbanked and underbanked consumers. Others are looking at it as a means of a more efficient state payment system while still others are hoping to use blockchain to facilitate payments between commercial banks.

The most interesting aspect to all of this is that the technology experts at each of these central banks have come to the conclusion that blockchain has something to offer. That can only be good for cryptocurrency in the long run. More widespread adoption of blockchain in the financial sector will likely lead to gradual improvements over time, making crypto stronger 10 years from now than it is today.

Issuing digital fiat

It is helpful to look at the possibilities in order to better understand where central banks are going with blockchain. The obvious place to start is the idea of digital fiat. This is the first thing people think about when they hear central banks dabbling in blockchain. This stands to reason, given that blockchain was birthed from the development of Bitcoin.

We already know there are some national governments actively pursuing digital fiat. At least one, Venezuela, has already issued an official state token known as the 'petro'. Petro is backed by the nation's oil assets and can now be used for all sorts of payments there. And while it is completely separate from the nation's fiat (the bolivar) Venezuela's government actually treats it as replacement thereof.

The thinking is that governments and central banks will eventually start issuing digital fiat simply because it is more efficient and secure than printing bills and minting coins. Any such decision would result in the issuance of a stablecoin rather than a pure crypto. But from the standpoint of governments and central banks, it is all semantics anyway.

What are the advantages of a digital fiat? For starters, it would create a more unified payment system within a given country. That would facilitate extremely easy digital payments across both the public and private sectors. It would also save the government and central bank the expense of dealing with hard currency. Transition everything to digital and the costs of maintaining the money supply fall dramatically.

Serving the underbanked

According to the World Economic Forum, Cambodia's central bank is pursuing blockchain for a purpose that goes above and beyond digital fiat. They are trying to come up with a better system for serving the nation's underbanked. Their decision makes sense when you understand the day-to-day economy in Cambodia.

A large percentage of consumers in Cambodia are either underbanked or completely unbanked. It doesn't help that the country's national banking system is both inefficient and not up to speed with modern technology. This leaves many consumers with few options for paying for things.

Apparently, many Cambodian consumers use one of several different electronic payment systems. But those payment systems do not work well together. So there are common instances of consumers and businesses not being able to transact because their payment systems are incompatible.

Few Cambodians have bank accounts either. A subsequent lack of cash makes bartering almost a necessity, and that's very difficult to do electronically. The hope is that blockchain can create a unified payment system for Cambodian businesses and consumers.

Cambodia's central bank is so serious about this that they are not going to spend time on a pilot program. Sources say that once their blockchain payment system is ready to go, they are going to go all-in all at once.

Improving credit and debit card transactions

The Bank of France is among those 44 countries looking into blockchain. In fact, they have had a blockchain system for Single Euro Payments Area (SEPA) Credit Identifiers in place since 2017. It seems to be working quite well at this point. Through the use of a distributed ledger and smart contracts, the Ethereum-based system is improving credit and debit card transactions in France.

For the record, a credit identifier is a mechanism that identifies a merchant accepting payment via direct debit or credit card on the SEPA network. Any merchant who wants to accept such payments has to have a credit identifier recognized by the Bank of France. That's because the country's central bank is the vehicle through which settlements occur.

Replacing legacy credit identifiers with blockchain and smart contracts allows for a much more efficient system. Transactions confirm more quickly, funds are transferred more quickly, and everything is more secure and robust.

If you live in France and have used your debit card at any time within last year to make a casino deposit so you could play slots, the transaction was run through the blockchain system. Making your deposit triggered a series of smart contracts that facilitated the transfer of funds from your bank account to the casino's. Without even knowing it you have participated in the blockchain economy.

Facilitating bank-to-bank payments

The World Economic Forum points to bank-to-bank payments as another possible use for blockchain. Their report suggests that at least some central banks are pursuing that goal. They are tokenizing inter-bank settlements and executing payments with the use of smart contracts.

What does all this mean? Well, consider what takes place every time you get paid by your employer. Let's assume that you get paid weekly by way of direct deposit. Every Friday the pay you earned from the week before shows up in your bank account without you having to do a thing.

In order for all of this to work, your employer or its payroll company initiates a direct deposit transaction to cover your pay. Your employer's bank receives instructions and then proceeds to digitally transfer money from the employer's account to yours. That money doesn't go directly from bank to bank, though. Instead, it goes from your employer's bank, through the central bank, and then on to your bank for deposit into your account.

The central bank acts as a clearinghouse to facilitate settlements between commercial banks. The system now in place works well enough, but a number of central banks think it can be made better with the use of blockchain and smart contracts.

Facilitating state payments

Among all the potential uses of blockchain by central banks, the most intriguing of all is that of facilitating state payments. By 'state' payments we mean things like tax payments and government-imposed fines and penalties. Facilitating such payments through blockchain could make government accounting a lot more efficient. It could also make it more accountable.

The one hang-up here is tokenization. In other words, how do central banks facilitate state payments via blockchain without using some sort of token? It can't be done. But world governments do not recognize cryptocurrencies as legal tender. So in many countries, government organizations cannot accept cryptocurrency payments straight up.

In the U.S., the state of Ohio recently rolled out a payment system that allows some local tax payments to be made with cryptocurrency. However, the state treasury cannot accept crypto directly. So they arranged to work with a payment processor who accepts Bitcoin payments, immediately converts those payments into fiat, then transfers the money to the state treasury.

The system obviously works in Ohio. But it is a cumbersome system with inefficiencies that really negate many of the benefits of being able to make state payments with crypto. The thing central banks are working on is finding a way to alleviate the need for a third-party payment processor and conversion from crypto to fiat.

Eventually all digital

Right now the 44 countries mentioned in the World Economic Forum report are mostly in the initial stages of developing their blockchain projects. However, it doesn't take a whole lot of insider knowledge to figure out where all of this is going. And where is it going? To an all-digital economy.

It may not occur in the next 5 to 10 years, but an all-digital economy is coming at some point. Blockchain, smart contracts, and digital tokens have proven themselves as more than adequate to take the place of fiat. The technology is already such that central banks do not have to continue relying on printing paper bills and minting coins. They know that, it is just that they are resistant to change.

At some point there will be no more bills and coins. At some point there will be a unified electronic payment system that puts every consumer in a given country on a level playing field. There is no reason to believe that those national payment systems will not someday be superseded by a global payment system.