The Future of Money is Now Visible: What Does It Mean for You?
- Future of Finance
- Dec 6, 2023
- 40 min read
Updated: Jul 23
The architecture of the future of money is becoming visible. While cryptocurrencies such as Bitcoin and stablecoins such as USDT continue to inhabit a separate universe (though one which causes occasional perturbations in traditional financial and money markets, as in 2022, when the collapse of algorithmic stablecoins and cryptocurrency lenders and exchanges had some impact on regulated markets) it is the work of international regulators and the experiments conducted by central banks, commercial banks and financial market infrastructures that are really shaping the future of digital money. That future will, it is now clear, will be based primarily on inter-operating Central Bank Digital Currencies (CBDCs) and some combination of carefully designed and closely regulated tokenised deposits and stablecoins. Future of Finance Co-founder Dominic Hobson chaired a discussion of the issues with panellists Jack Fletcher from R3, Matthew Osborne from the Bank of England and Mathias Studach from SDX.
Key Insights
Although no Central bank Digital Currency (CBDC) has been issued since July 2022 interest at central banks remain high and both the Bank for International Settlements (BIS) survey, national developments (the Swiss National Bank has a wholesale CBDC project live now) and technology vendors all indicate that further CBDC issues are imminent.
Tokenised deposits are already exchangeable between account-holders at the same bank, and the obstacles to making them tradeable between account-holders at different banks through inter-bank payment systems (and without forfeiting deposit insurance or customer due diligence checks) are being addressed.
Stablecoins are being brought within the regulatory perimeter at the global level (in the work led by the Financial Stability Board (FSB) and in local implementations (the Bank of England, for example, recently proposed that stablecoins used by systemically important payment systems – rapidly scaling, latter day equivalents of Libra/Diem are the obvious target – must be backed by deposits at the central bank only).
Preserving the “singleness” of money – ensuring that all forms of a currency are exchangeable for each other at par – has emerged as an important test of the viability of all forms of digital money, not least because it is a distinctive benefit of the present system.
One of the drivers of progress in the digitisation of money is the demand for digital cash to support the settlement of digital assets, which financial market infrastructures are supporting through a variety of issuance and settlement experiments.
Work on using CBDCs to make cross-border payments faster, cheaper and more transparent is progressing, through Project mBridge, supported by the BIS, the Hong Kong Monetary Authority, the Central Bank of the United Arab Emirates, the People’s Bank of China and Bank of Thailand.
Persistent reports (including from the BIS) of unresolved issues with the technologies that underpin digital money – namely, problems of scalability, speed, security and resilience – fail to recognise the different technical demands made by different types of digital money.
Concerns about the risk of CBDCs and stablecoins undermining the deposit funding of and lending capacity of commercial banks and increasing the risk of a flight to safety in a stressed market, are no longer a high priority – caps on holdings are the preferred mitigant, but bank counter-offers, such as interest-bearing accounts, are another – but have not disappeared.
The CBDCs issued already have struggled to secure adoption by potential users, partly because of concerns about privacy, and ensuring that a CBDC in issue is actually taken up and used by consumers and businesses has emerged has a major influence over the design of new CBDCs.
The volatility of cryptocurrencies, the close correlation between stablecoins and cryptocurrencies, and the virtues of tokenised deposits (such as issuance by regulated banks, issuer liability, fungibility with deposits and useability on existing infrastructure) put tokenised deposits in pole position to be the commercial bank money complement to CBDCs.
Interoperability between different forms of money requires interoperability between different technology platforms (especially currently siloed blockchain platforms) which host digital monies, and technology vendors are creating a variety of solutions (shared protocols, bridges, technical and processing standards) to this challenge.
Models and prototypes for a “unified” set of programmable platforms for digital money (as outlined by the BIS) are emerging in the shape of the Regulated Liability Network (RLN), the International Monetary Fund (IMF) XP platform and the Monetary Authority of Singapore global Layer 1 project.
Transcript
00:19 Dominic Hobson: Hello, everybody, and welcome to our webinar, “The Future of Money.” I’m Dominic Hobson, co-founder of Future of Finance. Money, of course, is already digital and its future is set to be even more digital. The case for evermore digital money is strong on the wholesale side. Digital money promises banks very large savings in capital and liquidity costs. And once reliable forms of cash are available on chain, the tokenisation of assets – importantly, not the tokenisation of asset-backed tokens – will take off. For consumers, one in five purchases worldwide is already taking place online. Retail ecommerce is growing at annual compound rate of 8% a year, towards US$8 trillion in 2026, worldwide. That growing volume of ecommerce transactions is creating an appetite for new, cheaper, faster and more transparent forms of online payment. There is also, of course, a very long term secular shift underway from a Web 2.0 Internet characterised by closed platforms owned by centralised big tech firms creating value by monetising the data of their customers, to a Web 3.0 Internet, which will be characterised by open platforms owned by users, creating value by trading peer-to-peer. These developments are already accelerating the demand for reliable forms of digital money transferable between networks on the Internet, whether they Are rival computer games, Decentralised Apps (DApps) on blockchain networks or wholesale value transfer networks whose future growth depends upon interoperability between those networks. We have this summer seen two major financial institutions servicing retail customers, namely PayPal and Visa, adopt stablecoins issued by third parties. But at most major financial institutions, there is, I think, a growing conviction that digital money must in the end, be built not on stablecoins, but on central bank digital currencies (CBDCs). That work is in hand – has been in hand for quite a long time. The bank for International Settlements reported this summer on lessons learned from no less than a dozen CBDC experiments in which its innovation centres had taken part with various banks and central banks and market infrastructures around the world. 93% of the 86 central banks that responded to the annual BIS survey on CBDCs said they’re working one, and 18% of them expect to issue one soon. That’s roughly 15 central banks about to issue a CBDC. Yet we’re still waiting for our first CBDC in a major reserve currency. There are still just four CBDCs in existence and no new ones at all since JAM-DEX was launched in Jamaica in the summer of last year. Stablecoins, invented to solve the lack of on chain cash in the cryptocurrency markets are the efforts of PayPal and Visa notwithstanding, being more or less, in my opinion, regulated out of existence. The Bank of England, for example, explained in its recently published discussion paper on stablecoins that stablecoins used in systemic payment systems must be backed 100% by deposits at the central bank. In fact, when it comes to non-systemic commercial bank digital money as a whole, central banks, to my way of thinking, manifestly prefer tokenised deposits over stablecoins. Yet tokenised deposits so far remain largely the preserve of the customers of a single bank. So here we are, 30 years after the launch of the first CBDC – I wonder how many of us can re remember what that is? – and nearly 15 years after the launch of the first cryptocurrency, ten years after the launch of the first stablecoin, and four years after the launch of the first tokenised deposit, the future of digital money remains more open than ever, but arguably also more uncertain than ever. Or is it? Increasingly, I don’t think so. I see central banks steadily converging on the combination which most closely resembles the status quo of central bank reserves plus commercial bank deposits, namely CBDCs plus tokenised deposits. But I know a lot less about all of this than our panellists, each of whom has probably forgotten more about this subject than I ever knew, and they may well disagree wholeheartedly with what I’ve just said. They are, in no particular order Jack Fletcher, who is head of Policy and Government Relations, Digital Currencies at R3, where he leads R3’s strategic relationships with central banks and regulators on CBDCs and privately issued currencies, a capacity in which he manages the relationships and contributes to thought, leadership and policy development. Matthew Osborne is senior manager for payments policy at the Bank of England, where he leads the team responsible for developing the Bank of England’s new regulatory regime for systemic coins and other payments innovations, including digital currencies. Matthias Studach is a member of the executive board of SIX Digital Exchange (SDX), the fully regulated digital assets exchange and central securities depository of SIX, the Swiss Stock Exchange, which has been working of late with the Swiss National Bank on integrating CBDCs into the settlement process. We were hoping to be joined by Gilbert Verdian, the CEO at Quant, which is dedicated to making blockchain protocols and traditional systems interoperable, but unfortunately he has an emergency, which means he cannot be here. Of course, we send Gilbert our best wishes. Now, in addition to our panellists, we do of course also have you, our audience, and it may well be that you too disagree with the vision of the future of digital money I outlined a few moments ago. If you do, or even if you don’t, do please get involved this afternoon. You can submit questions and comments throughout this webinar by using the Q&A functionality on the screen. And rest assured, I will not be saving those up to the end, but I will endeavour to get our panellists to address them as we go along. But I’d like to kick our discussion off by asking our panellists if they think that we are now at a tipping point in our slow progression towards fully digital money. After all, there are multiple underlying forces driving the case for change. As I began to prepare for this webinar, I found I was able to come up with a long list of what might be called secular factors, 13 or 14 of them in all. But a lot of them felt rather tired to me. They felt like things we’ve been talking about since our very first webinar on digital money, way back in July 2020. I’m thinking of things like programmability financial inclusion – although that was of course and has been a big factor in the earlier CBDC – things like the need for more competition in financial markets, above all, the need to prevent the disintermediation and disruption of how banks fund themselves. Things like more vectoral, if you like, conduct of monetary policy, because central banks would have a clearer idea of the velocity of money; they can programme money to reach particular groups and so on. And of course, also just simply the fear of something worse than the current fiat currency system if private sector actors start to develop all sorts of different money. I see also some cyclical factors at work these days. There is clearly pressure in a rising interest rate environment from established banks to cut the costs of capital and the cost of liquidity. On top of that, we have the looming T+1 deadline of May 2024 in the United States, which has, I think, on the one hand, delayed interest in blockchain-based solutions, but on the other hand probably increased interest. After all, a DTCC project, its Project ION, indicated blockchain can actually support T+0 settlement. But, more importantly, beyond the stale and the cyclical I see some genuinely new factors at work here. There seems to me to be an increasingly urgent institutional need for on chain money to support the growth of these tokenised asset markets at scale. There is a growing public appetite for fully digital fiat currency, driven, I think, by that increasing volume of ecommerce transactions I referred to a minute ago. Obviously, physical cash is completely useless in online transactions. We’re also seeing mobile phones replace point of sale devices and so on. But above all, last year we saw the failure, I think, of a certain type of stablecoin, the algorithmic stablecoins, to provide any form of reliable on chain money, and that has had some effect on asset backed stablecoins as well. All the events in the cryptocurrency markets last year – FTX, Celsius, Voyager and so on, events in which crypto exchanges and crypto lenders actually fell over – has proved that contagion from the cryptocurrency markets to the regulated public money markets is not a fiction, but can to some extent happen and threatens financial stability. That in turn has interested central banks and other regulators in increasing investor protection from events like that. Lastly, I’d mention a new concept which has come into being: the singleness of money. In other words, the interchangeability of all forms of public and private money has become a major talking point in recent months. So I’d like to put to our panellists this: Has the argument for digital money moved on? Are we now closer to that tipping point to something actually happening than we ere even a year ago? Matthew, could I put that question to you first?
09:48 Matthew Osborne: Thank you very much, Dominic, and thanks for having me on the panel today. It’s a real pleasure to be here. I’m not sure I’d actually sort of call a tipping point at the moment. I don’t think … that’s probably not my job as a central banker. We tend to respond to trends rather than calling a change in the market. But look, I think there is a great deal of progress being made in the digital currency space at the moment. And let me talk about some of the main ones that we’re interested in. So I think we’ve seen an increased interest in tokenisation of real world securities, as you mentioned, Dominic. And we’ve actually got our own digital securities sandbox here at the Bank of England, and we’ve also seen tokenised deposits take off as well. So J.P. Morgan, for example, was one of the first banks out of the gate developing their own solution there. But we’ve seen other banks get involved in that space too, including Société Générale. So generally, what are these tokenised deposits? They are a tokenised representation of the traditional deposit relationship, including the account that a customer has at the bank. And in some cases they might also be tradable. So they might actually be able to change hands beyond the original account holder as well, which raises some important implications for regulation. We’ve also seen a lot of development in the blockchain space, with a number of actors trying to come up with concepts for ledgers that may be able to host some of these new tokenised instruments, such as the Regulated Liability Network, the International Monetary Fund (IMF)’s XP platform, and most recently, the announcement by the Monetary Authority of Singapore of their global Layer One project. And then the other trends I’d mention are CBDCs, first of all. So as you mentioned, Dominic, there is great interest amongst central banks globally in issuing CBDCs, including the Bank of England, which issued a consultation paper earlier this year on its own digital pound project, which stated that a CBDC is likely to be needed in the UK. And then finally, let mention stablecoins as well. So the Bank of England published a paper three weeks ago setting out a regulatory framework for stablecoins in the UK. Now, I think it’s worth saying that a lot of this work, particularly the attention from central banks and from regulators, actually stems from Facebook’s project a few years ago to issue a stablecoin then called Libra, later Diem. It was originally intended to be a multi-currency stablecoin. Later they reined in their ambitions and turned it into a single currency proposal. But ultimately the proposal fell by the wayside, which we understand to have been because of regulatory barriers. But the important point here is that that proposal really made central banks and regulators around the world sit up and take notice of this space and I think catalysed a lot of the work that’s been going on since then, both the interest in regulating stablecoins but also in potentially issuing CBDCs to
o.
12:57 Dominic Hobson: Thank you, Matthew. Jack, perhaps I could come to you next. Do you think we’re at a tipping point? Is something dramatic about to happen in the world of digital money?
13:08 Jack Fletcher: Unlike Matthew, I guess I’m not constrained about these things, but I think tipping point might not necessarily be quite the right phrase. I think what we’re seeing is a continued and prudent development of the space because, frankly, the kind of entities that we’re involved with and that we support with our software are regulated entities operating in regulated markets. And, frankly, the benefits of moving fast and breaking things aren’t there. There are real consequences to moving fast and breaking things, but I think there are real signs of maturity and development within the broad ecosystem. And I guess I pull in the development of digital assets as much as settlement tokens, whether it’s CBDC or privately issued currencies together, because there’s a lot of complementarity between those things and they kind of galvanise one another’s developments. So if we think about in the digital asset space, it was only a couple of months ago that the World Bank issued some bonds on the Euroclear system. I think that’s a good indicator of where they and others see the space moving, the advantages of doing so, and really kind of hoping to galvanise that marketplace as such that it can become a full lifecycle space. I think when we think of … You mentioned earlier project ION from the DTCC in the US. That’s a project that we’re involved with that operates on [R3] Corda. There are obviously Financial Market Infrastructures (FMIs) that are seeing the benefits of Distributed Ledger Technology (DLT) – that’s to say, instant or near instantaneous settlement, a greater reduction in risk in the general processes, and a confidence that scalability is well within hand. In the kind of CBDC space, we’re involved in a project in the United Arab Emirates (UAE), I think one of the largest of its kind, which is examining not only retail CBDC, domestic wholesale CBDC, but also thinking about and with plans to utilise the M-Bridge project that’s come out of the Hong Kong Monetary Authority (HKMA), Bank for International Settlements (BIS) hub, for cross-border activities. And that’s one of the first projects that I’ve certainly seen that is looking quite aggressively and confidently at what the future world looks like and thinking about what infrastructure is needed to not only kind of operate, but perhaps gain advantage in that world and provide an infrastructure from a public sector point of view that allows the private sector to flourish and to grow. So there’s lots of good stuff happening. And when I think of the earliest projects that we were involved within CBDC – such as the 2017 Project Jasper with the Bank of Canada – in many respects it was a very simple set of things we were trying to prove, really examining what the benefits of DLT were within that kind of infrastructure and CBDC was almost an afterthought. We needed something to trade and tokenised central bank money was the best thing to do there. We’ve moved an awfully long way from that. And the involvement of central bankers, not only on the tech side, but on the kind of policy side and examination, the marketplace, generally speaking, being involved, seeing interest, contributing, is all part of the development cycle and I don’t think we’re far off from seeing … You mentioned that there are only four live cases. I suspect that in the next few years we’ll see that number increase quite rapidly and even more countries come out with roadmaps for future development where they explicitly say a bit like the Bank of England has to some degree with a roadmap, a bit like the European Central Bank (ECB) has to some degree with a roadmap, saying, if we go forward, this is the pace at which we intend to move. And I think that will become a far more common sight that we see.
17:05 Dominic Hobson: Thanks Jack and I’ll come back to the CBDC question in particular in a second. We’re starting to get our first comments in and I’ll deal with those. But first I’d like to give Mathias a chance to come back to us on this. In particular, we’ve touched on the need for the tokenisation markets to have a reliable form of currency on chain. There you are, you’re running one of the world’s best known digital asset marketplaces. How important is this? And do you think we’re on the cusp of an exciting new development?
17:39: Mathias Studach: Definitely. And hi everyone and thanks for having me here today. I want to start … I mean there have been lots said and I can only echo what Matthew and Jack said in terms of the incredible developments we have seen over the last decade and there is clearly progress. Are we at a tipping point? And that’s to the question, Jack. I would say if we focus now on Switzerland or if I focus on Switzerland and what we have achieved so far or what we are actually aiming to achieve as of tomorrow, having the first real wholesale CBDC pilot live on a regulated FMI, I think we are at a tipping point because it’s gradually moving towards production and towards launch. So we are working together with the Swiss National Bank (SNB) on a project which is called Helvetia, which is now the phase three, and is focusing on issuing for a time-limited period real wholesale CBDC on the DLT-enabled infrastructure, allowing digital assets or digital bonds to be settled at the primary market settlement. I think that is huge achievement and then a step forward demonstrating that this is working on scale and on production environment. In regards of the importance, I think I couldn’t stress that more because having a riskless settlement asset available on a – I can’t say on a systemic relevant infrastructure – but on an FMI infrastructure is a key prerequisite. First of all, from a business perspective, because it’s the baseline to compete with the traditional infrastructures. If we don’t have this ability to settle in a riskless asset, it can’t run at scale. And then, from that perspective, I think it’s a necessity to further grow the entire digital asset ecosystem.
19:38 Dominic Hobson: Thanks, Mathias. Now, while you mentioned the wholesale CBDC project that you’re working on with the Swiss National Bank, Henry Raschen has asked a question here – and don’t worry, Jason Webb and Mike Halsall – I haven’t forgotten your questions- but Henry Raschen has asked this question. What is the current thinking on who should be allowed to own a CBDC? If it’s made available to non-financial companies and retail consumers how great is the danger of both vastly increasing the size of central bank balance sheets and crowding out clearing banks? Now, Matthew, I think I’m right to say that the Bank of England has a view that the CBDC will be a retail CBDC rather than a wholesale one. What would your answer be for Henry Raschen’s question? Who should own this thing?
20:25 Matthew Osborne: So we have put out a proposal that our digital pound should be for retail use only. And that’s really because in the UK, we have an existing upgrade of our wholesale settlement infrastructure, the Real Time Gross Settlement (RTGS) system, which is seeking to deliver a lot of the same sort of benefits and use cases that a wholesale CBDC would deliver. So we’re talking about things like synchronisation, the programmability of transactions, et cetera. So we sort of already have work in that area which is seeking to deliver that. But at the same time, I think we are working with international partners on wholesale CBDC projects, and many central banks around the world are pursuing those.
21:15 Dominic Hobson: I’ve got an awkward question for you from Manuel Wendell here. I don’t know whether you’ve seen it yet, Matthew, but he says he’s recently joined the BIS Conference about securing the future monetary system. And there was some discussion about quantum safety. And I assume, Manuel, you’re referring here to quantum computing cracking various cryptographic codes which protect the integrity of money. He says, as I understand central banks are not taking enough notice of this issue, which developments do you see to ensure quantum safety of future digital monetary systems? So, Matthew, can you address that? Are central banks lying awake at night worrying about quantum computing going to wreck all their best laid plans?
21:57 Matthew Osborne: So we are certainly aware of the threat and we’ve been doing some work internally to understand quantum computing. The idea, as I understand it, is that the powerful computers will be able to break through the cryptographic protections we have today. So things like banks, stablecoins, crypto ledgers, blockchains would all be potentially vulnerable to attacks from these. But from what I understand, the protections, the mitigants, are evolving at the same time. So it is very much something that we’re looking at as an organisation.
22:36 Dominic Hobson: I don’t know whether you want to dispose of the second part of his question here about trust. Past monetary systems built on precious metals, gold coins, gold reserves – I don’t know whether you’re a gold bug, as they used to be called, Manuel – but he is raising a question here about trust in a totally digital monetary system. And I guess this is what the central banks are talking about when they talk about the singleness of money. Consumers, businesses, have to trust this money. What would be your answer to him? How do you ensure trust in a totally digital monetary system?
23:09 Matthew Osborne: Well, I think it’s been some time since the monetary system was built on precious metals. So the trust in money really rests on the idea that it’s a promise of the State. So it’s the State, it’s the central bank that stands behind the money that we all use. Now, of course, most of the money that circulates in our economy is actually issued by commercial banks. So it’s a promise of a private company. But those banks are regulated by central banks, by regulators, they’re held to very strict prudential standards. They’re also required to hold reserves at the central bank, which are a promise of the State. So they are to some extent backed by that promise of the state. We also have other protections in place to ensure confidence in the value of those deposits in banks, such as deposit guarantee schemes and resolution regimes. But it’s very true that the singleness of money is a concept that seems to be sort of having its time in the sun at the moment, although it’s been around for some time. And there’s a lot of interest in how new types of digital money might be able to meet the same standard of singleness as commercial bank money and central bank money have in the past. So how can we make sure that they have a stable value that they’re convertible for each other, for example? And so we’ve been doing a lot of thinking about that in the stablecoin space, for example. And the recent regulatory regime that we’ve published sets out regulatory requirements to make sure that protections are equivalent to those that apply to banks today. So that will include, for example, a requirement that stablecoins could be redeemed at par value into commercial bank money in a timely fashion on demand. And to make sure that’s the case, that stablecoins would need to be fully backed by deposits at the central bank. So in other words, they would be fully backed by central bank money, by that promise of the state in order to secure the singleness of money.
25:17 Dominic Hobson: Okay, I’m going to come back to stablecoins. We’ve had a couple of questions on that. But before we leave central bank digital currencies, I’d like to ask Jack first. I was very struck when I read the BIS report they published this summer about the experiments they’d conducted with various central banks, market infrastructures that I referred to in my opening remarks. And it indicated there were still problems with the technology, problems of scalability, problems of speed, problems of security. The point some extent which Manuel Wendell was raising there. I don’t know how valid those technological, technical problems that the BIS referred to still are, whether they’re being solved or not. What’s the state of play, Jack?
26:04 Jack Fletcher: Well, I think it’s difficult for the BIS to provide a statement that kind of is broad enough and deep enough in this area, I think. So that sort of actually is a fair reflection of the entire range of software vendors and what they can offer. So I certainly know on our side we’re lucky that some of the examples we’ve used already today that Mathias represents an organisation, SDX, who use Corda. Project Helvetia with the Swiss central bank is again using Corda by virtue of SDX. Scalability demands are reflective of what your use cases are. The demands of a retail system are far different, as a broad point, to a wholesale system and a wholesale system is by no means a trivial exercise. A retail system obviously depends upon, actually, where is it that those transactions are taking place? What, actually, are we calling the point of transaction that the DLT system needs to reconcile? Is that every transaction? Is that every time you buy a coffee or actually is it a slightly higher level, and therefore the demands upon the system are different. And when we’re thinking about this is one of the things the Bank of England talks about within its model is whether a CBDC is there for system resiliency. System resiliency is a really interesting angle on a lot of what we’re seeing discussion around CBDC. It sort of implies two things at the same time. One of which is to say we won’t be using it that often. But when we do use it, we do require it to be able to deal with the system. We do require it to be able to deal with payday demands and other such activities and then things like offline capabilities. I think from our perspective, we’re not concerned about the tech. We don’t think the tech is the more complicated bit here. We think that, with one or two exceptions, offline being perhaps a good example, where we think that the real sort of work continues to be done on CBDC is the kind of fundamentals at a retail layer of, what is it there to do? I noticed one of the questions in the chat box sort of talking about the risks of well, if CBDC is wildly successful and it disintermediates deposits and all this money shifts away and we see a central bank with a highly expanding balance sheet, that is a problem that actually most central banks that are thinking about but are not necessarily top of mind concerned about. Nigeria is an example of a country that has issued a CBDC that’s seen like 0.2% adoption. The issue of adoption is not trivial, and I think when we think about what actually are the benefits of issuing a currency in your marketplace, and a CBDC, what are the challenges that’s there to address, and then how do you design its characteristics accordingly, is still a pretty open question in lots of places. There is an open discussion in the US, the UK, in the ECB and other areas about the privacy mechanisms within a CBDC retail layer. As it currently stands, CBDC would look a lot like a banking-like privacy environment. And that is for a lot of really good reasons, most of which are kind of contained within on a global level, the Financial Action Taskforce (FATF) guidelines which say that you need to retain this data, you need to make it disclosable as a wallet service provider. And so when we’re thinking about actually we want CBDC to be the new form of cash, it has cash-like privacy traits, then there appears to be a bit of a clash there, frankly, with what the current guidance is. And if actually what we want to aspire to is a cash-like replacement, a complement in the near term and a replacement in the long term, then the policy issues are actually probably a bit more of a stumbling block. And that’s if we’re thinking about how we gain adoption because central banks are having to think about not only what they build, but actually whether people will adopt it and having to be product designers at the same time, which is quite the challenge. So on a tech level, actually, I think we’re confident that we’ll meet the needs and the demands, but I think we don’t know necessarily yet what all of those demands will be.
30:47 Dominic Hobson: It’s a valuable point about the slow take-up of the e-Naira. I think the Sand Dollar has also struggled to get much attention. We’re halfway through our time now. I’d like to talk a little bit about stablecoins and we’ve had a few questions on this. Jason Webb picked me up very early on telling me that the USDT [Tether] market cap is now reaching all-time highs, despite all the negativity about it. I should perhaps have been a bit more specific in what I said about them being regulated out of existence. I think there’s a definite preference on the part of central banks that stablecoins should be issued by banks rather than by other entities. Paul Amery also raises USDT. He says, why have the authorities been so slow to crack down on Tether? And certainly it has had its regulatory difficulties in the past. It’s the classic non-bank stablecoin. We’ve also seen … I think Ian Hunt raised a question about, yeah, algorithmic stablecoins are now beyond the pale. I think that’s right, they are definitely dead. I’m not sure, Ian, whether this is a facetious point you’re making here. But you say stablecoins function by throttling supply and demand to achieve stability. That’s seen as dodgy and unreliable, but isn’t that exactly the same thing that fiat currencies like the British pound, the US dollar and the Euro do on the same basis? So I think the real question here, and maybe, Mathias, you could kick us off here, we’re trying to identify, I think, what is the optimal form of private commercial bank money, if you like, to accompany the CBDC layer. And the choice really boils down to, given that cryptocurrencies are too volatile to ever fulfil that role, the choice boils down to stablecoins or tokenised deposits. What do you think stablecoins need to make them viable as a form of commercial bank money or even just private money?
32:54 Mathias Studach: That’s a good question. I would tackle it from a slightly different or start from a slightly different side. I think, I believe the demand for stablecoins is highly correlated with the valuation of cryptocurrencies, with the volumes, and we have seen highs and that’s highly correlated. And in my view, I believe in the absence of any alternative going forward, stablecoins will meet the need, I mean, to settle cryptocurrencies and as a kind of a mechanism to park crypto in a stable way. So as long as we don’t see or don’t have alternatives in place, stablecoins, in my view, will exist. And then there is one driving factor, I think, yes, regulation. But in my view, regulation should not stop innovation. So, from that perspective, I don’t believe it’s wise to immediately forbid or stop stablecoins. There is a convergence of cryptocurrency and stablecoins more into the regulated space, and I think that’s the right direction. So letting room for innovation and letting the new ecosystem build out, in my view, in the long run, there is the availability of CBDC. I think that’s going to be coupled with tokenised deposits. I believe that’s the major use case. I don’t believe that stablecoins will completely disappear, but likely not the use case they fulfil today. They might be used for smaller, for example, loyalty-related stablecoins. So that’s how I see the world evolving in the space of stablecoins.
34:48 Dominic Hobson: You may not be able to answer this, Mathias, but has, in your discussions with the Swiss National Bank, has the idea of the central bank in some way supporting stablecoins come up? And my thought process here is that the difficulty with them is they’re not very good at maintaining par value, particularly in stressed markets, but at the same time they tend to be backed by cash deposits, by treasury bills, by assets which are on the whole eligible at central banks. And I wondered if there’s a case here for central banks to conduct open market operations if you’d like to support stablecoins. Has that been part of your discussions at the Swiss National Bank, or am I smoking again?
35:27 Mathias Studach: Yeah, not particularly, but I think there are two things which I can mention which are ongoing in Switzerland. One is the Swiss Banking Association, which is representing all Swiss banks in Switzerland – Swiss banks in Switzerland – and they have recently published a paper, a white paper about deposits. And to me, or in my mind exactly that concept would actually fill a need we see in the marketplace when it comes to settle digital assets. There are also private projects which focus more on retail stablecoins, which then in the end are backed with funds which are stable and audited. So I believe, yes, there is an opportunity that these stablecoins, depending on the use case, can evolve in future. There haven’t been any concrete discussions I can reveal here.
36:26 Dominic Hobson: Matthew, I assume that’s kind of non-issue for you, because the Bank of England’s position here is know if you’re going to be used in a systemically important payment system, you need to be invested in central bank deposits and nothing else. But there’s going to be presumably even in the Bank of England’s vision of stablecoins, other types of stablecoin which are not systemically important. And your view would be the central bank should have nothing to do with those and they’re just out there on their own and it’s not going to support them unless they become systemically important, I suppose.
36:59 Matthew Osborne: Well, certainly supporting the stablecoin sector isn’t something we do as a central bank today. And as you say, if a stablecoin is systemically important, we would offer deposit accounts to it. It would be required to be fully banked with deposits with us. So there’s no role for open market operations because there isn’t any liquidity risk there in the backing assets. I mean, as you say, there would be non-systemic stablecoins too. And in the Financial Conduct Authority (FCA)’s regime here in the UK, those coins will be required to hold a narrow range of liquid assets, including short-dated government debt and cash deposits at banks. But I won’t comment at this stage on whether or not the Bank of England would offer facilities to those.
37:43 Dominic Hobson: Matthew, that requirement to be invested in central bank deposits does presumably narrow the range of issuers as well. I don’t know the answer to this question, but who can have an account at the central bank? It’s presumably a pretty narrow range of regulated entities, is it not?
37:58 Matthew Osborne: Yeah. So it’s important to say here that the only stablecoins that would be admitted into the bank’s regulatory regime are those that are widely used for payments. And as we said in our Discussion Paper (DP), we actually think that none of the stablecoins that are in existence today would actually meet that bar. As Mathias was alluding to earlier, they’re actually sort of mainly used in the crypto industry today and the crypto industry itself isn’t considered large enough or interconnected enough to be a risk to financial stability. Hence today there aren’t any stablecoins that would fit into our remit. But we do see the possibility of stablecoins arising, for example, issued by big techs or big payment companies, which could potentially scale up very rapidly and be used widely for payment. So it’s those stablecoins that would be most likely to fall under our remit. And then the idea is, if they were in our remit, if they were recognised as systemic stablecoins, then they would be granted access to a deposit account with the Bank of England.
39:00 Dominic Hobson: While I have your attention, Matthew, could you deal with a question Ben Bowman has raised about Quant? Gilbert Verdian, who was going to be with us today, his company, which I think is working with the Bank of England. He asks where Quant have been most useful in your exploratory efforts. And there’s a subsidiary question here for Jack as well, how Quant’s involvement in the operating system for CBDCs is evolving. Are you able to tell us a bit, Matthew, about how you’re working with Quant in your efforts?
39:33 Matthew Osborne: So I think I’ll have to pass on that one, actually, Dominic, because I work on the stablecoin side. We actually haven’t worked with Quant, so I’d have to ask my CBDC colleagues about that.
39:40 Dominic Hobson: Okay, so, Ben, I’m afraid we can’t answer your question and unfortunately Gilbert isn’t here to address it either. So sorry, for once we’ve drawn a blank. Jason Webb asks a question. Can we please expand on how retail banks would survive with a retail CBDC? His thought process is less deposits means less lending. This is our old friend, CBDC is displacing bank funding. What’s happened to that issue? And I’m sure Jack and Mathias have views on this, but Matthew, why don’t you go first?
40:09 Matthew Osborne: Yeah, absolutely happy to help on that. There’s a risk, which we identified in our discussion paper two years ago now, in 2021, that banks could experience large rapid outflows as a result of new forms of digital money. And that, by the way, covers both CBDCs and stablecoins, particularly if they’re seen as a sort of safe haven for people’s deposits in a banking stress. You could see those rapid outflows, and that has the potential to destabilise not only the banking sector, but also money markets, which a number of financial firms depend on, and which the Bank of England itself depends on for implementing monetary policy. So there are risks there both to financial stability and monetary stability. And it’s for that reason that we’ve proposed that both CBDCs and systemic stablecoins that are in our remit would be subject to limits on individual holdings to essentially cap the aggregate size of those outflows from banks into CBDCs or stablecoins.
See also Jack Fletcher at 43.04-45.54 and 45.54 to 51.25
41:12 Dominic Hobson: Jack, are you able to comment on Ben Bowman? The point Ben Bowman raises here about the operating system of CBDCs, how it’s evolving or not?
41:22 Jack Fletcher: Not with specific to Quant. I think where we’re seeing … R3 has a software, Corda, that is used to date over somewhere between a dozen and two dozen different CBDC projects and stablecoin or tokenised deposit type projects. To not be entirely party political, I would say that the other set of operating models or vendors that we see in that space are those with … the likes of Hyperledger Besu. That’s one of the reasons why we announced in the summer that were setting up something called Harmonia, which was an interoperability project between Corda and Ethereum Virtual Machine (EVM) projects. In the summer, HQLAx and Fnality performed a Proof of Concept (PoC) with their respective infrastructures, so connected a Corda infrastructure to a Besu infrastructure and did a DVP transaction on that. And that’s the kind of stuff that we see happening, which is to say there isn’t really going to be a one ledger that rules the world. Interoperability is tremendously important. On a kind of business side, it removes the fear of vendor lock-in and on a kind of global positive side, it prevents sort of silos being … forming and not being able to really kind of move money between the different systems. I think, to comment a little bit on the disintermediation question, where the work that we’re doing with different central banks disintermediation is a concern. If you look at some of the academic literature that’s examined this, the range of disintermediation is quite marked, but it sort of goes from nought point something to about 10%, depending on your various different calculations and how you come up with this sort of stuff. I think when we think about that risk, we think about how you might mitigate it. And holding levels and transaction levels are one way. The other discussion that’s often had, and it revolves around that singleness of money, is whether you leverage the programmability of CBDC to impact interest rates and have an interest bearing CBDC. And actually whether you say, right, well, we’re not going to have an interest bearing CBDC. What that means in effect, is that if you’re a kind of and this is, I guess, where real life hits, if you’re a rational actor and you have a choice of where you store your value, is it in your CBDC account that gives you zero? Is it in our current world, is it in your deposit account that gives you 3% or whatever? Or is it through some other sort of holding or structure? It doesn’t point to you putting all your money in CBDC now. That’s kind of dependent upon all the sorts of other things. But when I think about CBDC, I think about it with regards to use cases. And if we think about it, actually, if I was using my CBDC infrastructure to perhaps I want to make remittance payments. I’m currently in New York. Perhaps I want to send some money to my sister. Perhaps that is an example where I would shift money from a deposit account into a CBDC account and make that transaction quicker and with less expense. So for that sort of reasoning, I don’t necessarily see the disintermediation being grand, although that’s where the story lies right now. And what the future exactly holds is somewhat difficult to see. But I think that’s one of the reasons why we’re seeing a much stronger uptick in the kinds of [RLM] projects and regulated projects or tokenised deposit projects. Because the banks recognise that actually, if there is a new kind of infrastructure available, a new kind of payments infrastructure that allows for new types of payments, then the best thing to do is to make sure you’re not kind of outgunned in that world and they’re able to offer services that match or exceed what the central bank might offer via a CBDC.
45:54 Dominic Hobson: Now, we’re into our final quarter here and I want to talk a little bit about interoperability on which we have a couple of questions. But before we do, I’d like to focus on tokenised deposits because they will obviously be affected by interoperability. The view I expressed at the outside at the outset is that tokenised deposits are going to be much more popular than stablecoins. They’re going to be the natural commercial private money counterpart to CBDCs. Why? Because they remain a liability of the issuer, unlike stablecoins which are reliant on the underlying assets, the reserves they have. And that means that tokenised deposits will on the whole be issued by banks and those banks will be subject to the capital and liquidity ratios and the regulation by central banks that are in place already to support the deposit liabilities of those banks. They don’t – talking about disintermediation – they don’t threaten the funding of the banks either. They’re fully fungible, of course, with those non-tokenised deposits. Above all, transfers can be settled through the existing infrastructure. You can simply debit and credit the accounts at regulated banks and settle them in central bank money. In other words, they don’t overthrow the system. It seems that they can interoperate very successfully with CBDCs. So I’m wondering if you agree that I’m right and Matthias, maybe you could address this first. Am I right to think tokenised deposits are going to become the private counterpart to central bank digital currencies?
47:25 Mathias Studach: In my view of the world of the future, or the future of money, definitely yes. I believe that we’re going to see these two-tier systems because I don’t believe it makes sense that we as end customers do have the choice between having an account with the central bank and having account with the retail bank because the retail bank is fulfilling functions within the financial ecosystem. From that perspective I don’t think there is a demand to create these bank runs to more secure havens like a central bank. I think that the challenge is from a design perspective how to design such a setup that in the end these tokens are technically fungible. They are fungible from the risk perspective which plays a role and I think that’s going to be very interesting and at least to my understanding we haven’t seen much in that space in the past and I think there is a lot of … a great area of further research and innovation going forward to actually create a well-designed tokenised deposit coin.
48:36 Dominic Hobson: Matthew, an unfair question, since you’re the stablecoin guy at the Bank of England, but are tokenised deposits, am I right to think they’re probably the technique which central banks would favour?
48:47 Matthew Osborne: I wouldn’t say that, Dominic. I mean, we’ve published a regulatory statement for stablecoins because it’s our judgement that you could have a non-bank, payments focused instrument in this space as well. But we do see a lot of developments in the tokenised deposit space and we actually put out some guidance for bank CEOs on issuing tokenised deposits recently. But there are a few issues there which are worth raising. And the first one I think is important is that while a tokenised deposit could simply be a tokenised representation of the traditional account relationship, so it’s essentially a deposit from a legal and economic point of view, it’s just been tokenised. We might still consider the behaviour of that deposit might be different. So due to its programmable nature, for example, or the ability to trade it, you might actually see higher outflows in those deposits than you would in traditional deposits. So from a prudential point of view, we would need to consider that. Then I think there’s a question which Mathias was alluding to, which is how you would transact a tokenised deposit. If you have two customers at the same bank, obviously that’s not an issue. But if you have two people with accounts at different banks, then you might have a situation where you’re using your tokenised deposit to make a payment. And actually, an interbank payment system is being used to sort of cancel or destroy one of those tokenised deposits and then create a new deposit at the new bank, which is how deposits work today. Or are we going to see the evolution of new ledgers for hosting tokenised deposits and this is partly what the Regulated Liability Network is aiming to do. The final issue I think I’d mention is there is a significant challenge around tokenised deposits that can be traded between individuals. So what am I talking about here? It’s some sort of token that’s backed by a deposit at Bank A, but which can subsequently change hands in a secondary market and could end up in the hands of somebody that doesn’t have an account, actually doesn’t have a relationship, with Bank A at all. So what does that mean in practice? And there were some really important challenges there from a regulatory point of view. So if we actually don’t know, or the bank doesn’t know who’s holding that coin, how could deposit insurance work? How would the Financial Services Compensation Scheme (FSCS), which is the UK’s deposit insurance scheme, how could they know who to pay out to in the event that the bank fails? How does it work from an Anti-Money Laundering (ALM), a Know Your Client (KYC), point of view? So some real challenges, but it’s an area that we’re open to hearing more.
51:25 Dominic Hobson: So it sounds like we haven’t really done enough work on tokenised deposits yet to be confident they are the future. Now, I said I’d mention interoperability, and it matters because we’ve talked about these three – at least three – different forms of money: stablecoins, CBDCs and tokenised deposits. If we are to preserve that singleness of money, if we are to make them convenient for businesses and consumers to use, how are these different forms of money going to interoperate? Not just interoperate with each other, but interoperate across different platforms, Decentralised Finance (DeFi) platforms, traditional platforms, new blockchain based platforms in both the wholesale and the retail sectors. And three people who are listening have brought this up in their different ways. Mike Halsall asked very early on, how can digital commons, particularly standardisation, accelerate DeFi? So do standards play some part in achieving interoperability? Alexia asked, what are the challenges in achieving the interoperability when the DApps are on two different networks? Again, a different way of saying, how do you move value between different blockchain protocols? And he asked again, what are those interoperability challenges? So what is the answer to that question? Jack, you must have been thinking about this a lot in your work at R3, about how you knit together different networks, different forms of money. Is there a clear answer to that question now? Is it standards or is it something else?
52:57 Jack Fletcher: Yeah, it’s a good question, and I guess there are a number of ways of looking at it. One of which is, I guess, what’s the ideal world? What’s the world if we all … if one person could move every counterparty and design a perfect system? And what’s the possible reality of working in a global way with different actors, working at different paces, with different motivations, with different desires, with different use cases? I think one of the insights that we have as a company is that we anticipated that there would be far more take-up of DLT under the premise that it would be used as a way of connecting separate networks together under one sort of unified or coordinated activity. The reality of the situation is that hasn’t been the case, and that those that have sought to adopt DLT have sought to do quite specific things and to govern themselves in a specific way as such that they can carry out those activities according to whatever regulation or according to how those systems operate. So that, in some respects, creates that sort of silo stuff. And then, okay, so let’s say that your asset network now wants to speak to a settlement layer. We saw some of this work being done quite publicly through the publications in the summer by the ECB on how they think wholesale CBDC will work, where it kind of posed the question of, well, in some respects it was, how do we do settlement? Do we do it through trigger systems with the existing RTGS? Do we do it through a stablecoin type arrangement? Do we do it through wholesale CBDC? How do we get to that journey? How does it work? That’s similarly the story of Helvetia too. The answer to some of that is that it can be technological, can be the use of bridges, can be the use of shared protocols and networks. It can also be a question of governance and as you say, standards, not only technical, but in terms of business thinking and operations. I think what we fall back on though is what are the main criteria here? And the main criteria are really the promise of DLT, which is to say how can we orchestrate separate, non-trusting networks and coordinate activity between them? And in this sense, if we’re wanting to make a transaction between two networks that are distrusting, which I use in a kind of abstract sense, how do we perform an atomic swap? So in the likes of Project Jura we did with the Swiss and the French central banks, we set up separate systems and we set up technical Hashed Timelock Contract (HTLC) type solutions to mean that you can orchestrate settlement across or trades across different networks. Now that’s a possible solution. And that’s work that in that example was done Corda to Corda with different networks. And as I talked about earlier, we’ve begun work in the Harmonia Project with EVM-Corda transactions and I think that will be the future. It’s solving those sorts of problems. But I don’t envisage a world whereby we would have the whole world on one infrastructure.
56:36 Dominic Hobson: That’s a very good point to stop you on. We’ve only got a couple of minutes left. I’m sorry. We could talk about this for ages. But I’d like to give everyone a chance to address that very point. But Ian Hunt brings it up in a way. He says how are we going to deliver spendability in CBDC stablecoins and tokenised deposits? We want them spendable on ledger as conversion in and out of conventional fiat currency bleeds away the benefit. In other words, we want everything on chain, if you like. And the BIS published a very interesting paper on this, referring to a unified or single programmable platform where these different forms of money are basically being moved around on blockchains. Is that a vision of the future? My last question to each of you is that a vision of the future, which is credible? Mathias, why don’t you go first?
57:18 Mathias Studach: In my view, the vision of the future is going to be a combination of public permissioned, of public and even of private networks. I believe, when we talk next time, interoperability will be the big topic because in the end it’s a network effect. Yes, I also dream of one having one underlying network. But I believe there will be different networks, not that many as today, and interoperability will be a key element, but it’s not as today. It’s not immobilisation and reissuance. It needs to be real interoperability technically which makes global markets much more efficient.
57:56 Dominic Hobson: Thanks, Mathias. Matthew, I know you’ve got a hard stop at 3.00 pm. So why don’t you go next? This single, unified interoperable – it’s not just a single platform – it’s going to be linked up platforms so things can generally move freely and seamlessly between them. Is that a plausible vision of the future of money’s, operating infrastructure, if you like.
58:16: Matthew Osborne: I think I’d say, as to whether it’s sort of technically achievable, I’ll leave that to others. But I think we mentioned the singleness of money earlier and it’s absolutely critical for central banks that people have the ability to move smoothly and without loss between different forms of money. That’s absolutely crucial for financial and monetary stability. So, for example, for stablecoins, you need to be able to redeem them into commercial bank money at any time. I think that’s really, really important. And as all these different forms of money emerge, it will be necessary to find ways to allow people to do that. On the sort of spendability question that Ian had posed, I think we are seeing more of this as the market evolves and matures. And I’d point to Visa in particular, who’ve been doing some really interesting work in this area. So they had a first stage pilot that saw sort of settlement. Well, it made it easier for people to spend cryptocurrencies, but actually settlement took place in commercial bank money, whereas the most recent pilot they’re running actually sees settlement on the Solana Blockchain using USDC as stablecoin. So that’s quite an interesting evolution and I think we’ll see more of that.
59:33 Dominic Hobson: Jack, it falls to you to have the last word. A single unified or federated programmable platform in which all money has become seamlessly interchangeable. Is that a plausible vision from where you’re sitting?
59:46 Jack Fletcher: I think it’s the kind of vision that we should be aiming towards now, when future is infinite and extends forever. So perhaps we can achieve it at some point, but I think there’ll be lots of steps before we get to that point. But when we’re thinking about how easy it is now to send messages to one another globally, we can do so via email instantly, kind of without geographic borders. It would be nice to get to a situation whereby we can send money in that way too, and that will require that sort of level of coordination.
01:00:22 Dominic Hobson: And sadly, with that, we must draw our discussion to a close. I sometimes feel we’ve only scarcely begun and are just scratching the surface here, but we will be coming back to this. I’d like to thank our panellists, Jack Fletcher from R3, Matthew Osborne from the Bank of England and Mathias Studach from SDX. And thank you also to you, members of the audience, for your many thoughtful questions and comments here at Future of Finance. We’re taking a break now for Christmas, but we’ll be back in the New Year with what I think will be a refreshing take on the prospect for the tokenisation of securities. Until then, thank you and goodbye from the four of us.
