State-backed cryptocurrencies are key to the adoption of blockchain technology, according to an executive at investment banking group Citi.

In an exclusive interview with CoinDesk, the bank's recently appointed head of core cash management for Asia-Pacific, Morgan McKenney, positioned its new CitiConnect blockchain project within a larger context – one in which the ultimate success of distributed ledger technology depends on the advent of fiat currencies issued on a blockchain.

According to McKenney, every payment method has an environment in which it's best suited, and to fully unlock the project's potential – and any number of blockchain environments – cryptocurrency is the most suitable payment method.

But in spite of current limits that have been placed on the $187 billion bank's research into the technology, she explained how atomic swaps could be further empowered if any number of cryptoassets could be purchased with a blockchain-based fiat currency.

McKenney explained:

While cryptocurrencies have so far only been issued via decentralized blockchain protocols and in private corporate pre-sales, she argued that a central bank issuance would not only enhance the liquidity of new assets, but also give rise to entirely new markets.

For example, Citi's CitiConnect looks to simplify the buying and selling of private market assets, but using a cryptocurrency in such a transaction could allow blockchain to fulfill its potential by bringing liquidity to a "broader range of assets," according to McKenney.

And these new markets will come into existence only if the right mechanisms, like state-backed cryptocurrencies, are created.

"If you believe that more assets will eventually be captured and contained in blockchain systems, and therefore you would want to exchange them, sell them, buy them, you need a mechanism of payment that works in that ecosystem," McKenney said.

For example, currently, ownership records of private market securities and other assets are largely held by lawyers and trusted third parties, requiring the presence of middlemen to conduct trades.

As part of Citi's work to modernize that process, the bank partnered with both Nasdaq and blockchain startup Chain to launch CitiConnect, which McKenney described as a "bridge to the blockchain horizon."

The platform is designed to connect existing financial rails with blockchain so that some of the efficiencies of using Chain's distributed ledger technology can be achieved using state-backed fiat currency.

Should state governments even issue traditional currencies on a blockchain they would supercharge the technology, she said, enablling instantaneous swaps with other crypto-assets issued on a blockchain.

In spite of having managed an index that shows the "readiness" of 90 countries to accept "digital money," Citi itself has so far restricted its exploration to areas that don't involve cryptocurrencies.

In addition to looking at other potential collaboration opportunities for its CitiConnect platform, the bank has invested in Chain, Digital Asset Holdings and Axoni – all three of which offer blockchain solutions that don't include a native cryptocurrency.

While McKenney said Citi is "not exploring cryptocurrency outside of state-backed digital money" at this time, she left the door open for possible related projects in the future, concluding:

Disclosure: CoinDesk is a subsidiary of Digital Currency Group, which has an ownership stake in Axoni and Chain.

Morgan McKenney image via CoinDesk archive