Veteran user experience designer James Zdralek is on a mission to reimagine the way central banks run, using cryptocurrencies.
Part psychologist, part accountant, part industrial engineer, the senior executive in charge of user experience at enterprise software firm SAP has devised a way to merge cryptocurrency with modern financial instruments that could make national currencies appreciate in value.
But in exchange for this brave new world of banking, central banks could risk losing the monetary control they exercise when large-scale problems threaten an economy. More than that, they could undermine their own existence.
Simply put, this new breed of national currencies would be backed by cryptocurrencies that are in turn backed by the actual output of a nation's industries. This network of cryptocurrencies could theoretically result not only in a natural interest rate – reflecting actual market conditions rather than policymakers' wishes – but also built-in stability, Zdralek told CoinDesk.
"Those two things combined, would be much better than bitcoin, much better than fiat currency," he said.
Since completing an early version of his research last year, Zdralek has shopped the idea to central banks at SAP's Executive Central Banking Summit in May and at Sibos in October, and he's now turning his attention to members of academia to further explore the concept.
If successful, Zdralek believes the campaign within SAP's experimental Ideation Center in Canada could eventually result in the end of inflation and the movement of the resulting lost value into the hands of the people who actually spend that money.
"This is a beyond-the-edge concept which is uncomfortable for some people," Zdralek told CoinDesk, adding:
"In my opinion, this is a good warm-up before the big race."
'Simple complexity'
The biggest obstacle Zdralek said he's faced since taking his ideas on the road has been people's difficulty understanding the proposal.
Originally released to the public in October by the SAP Ideation Center, the 44-page paper lays out how users could interact with the seemingly complex system as easily as they swipe a debit card.
"It ends up being the same simple kind of monetary system on the surface," said Zdralek. "But behind the scenes, it's more complex to create a very stable value and natural interest rate."
Such stability relies on underlying "representative currencies" that function similarly to how government currencies like the U.S. dollar used to be redeemable for gold. But instead, the new currency would be backed by assets traded on a blockchain.
By mitigating the role of a central issuer, these currencies would compete for users in an economy driven by blockchain-enabled smart contracts that automatically trade maturing futures forward.
Specifically, Zdralek's work would require three asset types to be embedded into crypto-tokens.
The first type of currency is backed by shares representing the ownership of a factory. The second is backed by the inventory of a company, and would give users a stake in what the report calls the "stored output of that factory."
In Zdralek's concept, central bankers or other currency issuers would then create a third currency backed by a specific kind of future called a prepaid forward contract that aggregates the futures-backed cryptocurrencies.
Zdralek argued that, like with a mutual fund, this third currency could produce an extremely stable value and natural interest rate, growing the economy without the creation of bubbles. In other words, instead of value being degraded by an inflation rate imposed by the central bank, citizens who hold the currency might actually receive a return on its value – or at least would not lose it.
From the original report:
"Adding only the first two types of currency to a blockchain infrastructure would still require a traditional banking industry to facilitate debt, adjust the size of the money supply and to finance new ventures. The third type, futures-back currency, can replace these functions."
Existing interest
While the idea of a central bank willingly adopting a technology that might make some of its services unnecessary might seem far-fetched, already a considerable number of central banks have explored its use.
Among the earliest central banks interested in cryptocurrency and blockchain have been those whose legacy systems have been of concern for fraud and corruption.
The central banks of Ukraine and Venezuela, which have both experienced recent corruption concerns, are among the first such institutions to take steps towards issuing their own cryptocurrencies. And Barbados has already issued a cryptocurrency pegged to its dollar as part of a larger effort to fight concerns the nation is a risk for money laundering.
While larger central banks such as the Bank of England and the Central Bank of Canada have also expressed interest in so-called central bank digital currencies, or CBDCs, they each have recently backed off those efforts to focus on other blockchain use cases.
But Zdralek hopes his concept could have an impact, bringing them back around to the idea.
"Central banks are very measured and slow, but they're not blind," Zdralek told CoinDesk. "So, they are doing their research, they're looking at how things are going to change, and they're going to take a measured pace at it."
He added:
"But it's definitely a thing where change is coming."
Ending inflation
While such an evolution would certainly affect the way central banks do business, the potential benefits extend all the way down to the way normal people invest.
At the highest level, potential benefits of a futures-backed cryptocurrency include a central bank including saving money on the cost of issuing a currency and a smaller targeted inflation rate, according to Dong He, the deputy director of the International Monetary Fund.
Speaking at the Central Bank Summit on Blockchain, hosted by blockchain startup Ripple in November, he described the potential risks and benefits to a crowd that included central bankers from as far away as Brazil, Canada, Europe, Japan and Hong Kong.
"The balance of benefits and costs surely needs further study," he said.
But to Zdralek, there's a much simpler reason for central banks to adopt: the costs of inflation, even among the stablest economies in the world. While the problem of money losing value over time is not new, Zdralek believes he's finally discovered a way to end it with blockchain technology.
In interview, Zdralek posited that the return rate resulting from his idea for a futures-backed cryptocurrency could not only help stabilize inflation, but actually increase the value of the retirement savings for those who can't afford an investment advisor.
While people in their 60s now may be able to retire comfortably with a million dollars in savings, Zdralek said that won't always be the case. And instead of waiting for someone else to fix the problem, he believes a smarter currency could do it.
"A million dollars is going to be poverty level in the long term of things," he said, concluding:
"That's where a stable currency with a natural interest rate and a natural type of inflation can help."