Architecting The Future of Digital Assets in Banking

As major financial institutions continue wading into the digital waters of the future of currency, they’re faced with questions that crypto, in many ways, has never really had to answer. What makes digital assets a currency?  What makes stablecoins stable?

Stablecoins are an increasingly important plank in the cryptosystem – greasing the wheels of the system and providing an easier method to move value around between tokens and exchanges in the broader universe of cryptocurrencies – a critical role in a highly fragmented marketplace. How could such coins be of use to a CBDC project — and what are the major risks? CBDC is a type of digital liability of a central bank and is widely available to the general public.

All of this made up the general topic for expert panelists at a recent session at the 2022 Chicago Payments Symposium.

“Central banks are concerned about having more efficient markets, be they retail payments markets or wholesale payment markets,” said Tony Richards, Retired Head of Payments Policy, Reserve Bank of Australia. “And if wholesale stablecoins are a new way of providing a safe settlement asset, then I think that in general central banks will embrace that.

Central banks haven’t had much of a problem with the concept of money or stored values, so they shouldn’t have problems with retail stablecoins that are similar to stored value. Richards noted that financial stability is the main concern for central banks, and added:

“We’ve got to make sure stablecoins really are stable if they’re going to be used as money, particularly for high-value transactions, but even in the day-to-day transactions of households, then it’s really important that they’d be stable, that they fully enact.”

It’s a critical check – and one that many things currently labeled as stablecoins can’t pass.

“We’re calling many things stablecoins that are not stable,” said Austin Campbell, Head of Portfolio Management, Paxos.  “And as a crunchy old fixed-income person who help put things back together after 2008, we’ve thought things were stable before and they’ve broken.  And ironically, in many ways crypto is just speed-running the history of finance, right?  They’re making many of the same mistakes we’ve already made.

Stablecoins will likely continue to be an important piece on a meta-layer of the payments market – particularly for international transactions between markets – whatever shape those coins end up taking. For CBDCs, though, the solution is much less clear – and in some cases, it may not even involve a blockchain.

According to Richards, if we want to achieve really short processing times for transactions and high volumes, the blockchain isn’t the way to go. Because of this, retail CBDC should veer away from blockchains. He said:

“We’re discovering that there’s not quite as much decentralization as we thought there was supposedly in the world of DeFi. There are just new forms of intermediaries that rely on our signal articles, things like that.”

For now, it’s still largely a thought experiment — while most experts agree we are moving towards a digital future, the time for CBDCs may still be years or even decades off. But in these early stages, these are the kinds of questions that will largely shape the infrastructure for the future.

What is the role of public money in society? That’s a question put forth by Dinesh Shah, Director of Fintech Research, Bank of Canada. While that role is still playing out, it’s an important thing to consider because people should be able to trust their financial institutions and have safe assets without jumping through hoops. Universal access matters.

Shah added, “For many central banks, this idea of universal accessibility of CBDC, it’s actually some kind of first-order thought, right? It’s designed. So regardless of circumstances — have a bank account, don’t have a bank account, have a smartphone, don’t live in remote regions, in Canada, in lots of remote regions that are not well served.”

However, those types of circumstances are difficult to incentivize the private sector to fill, according to Shah. Because of that, there is a gap and we should present and support the right for people to have access to and ownership of their economic affairs.



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