It’s fair to say there is much education, progress and evaluation to be conducted within the field of CBDCs and digital currencies – so much to unpack that we are still working out the subthemes.
CBDC and digital currency – Valuable assets
Turns out the secret to digital longevity is Knowing Your Sector.
Helpful, then, to listen to an expert panel at Money2020, with a wealth of experience, interesting perspectives and on-the-ground practitioner insights to bust a few myths and focus the mind amid all the noise.
The rolling news continues on a weekly basis: a government consultation is published here, a pilot phase is announced there.
To help separate meaningful developments from PR hype, it is useful to apply some lenses, distinguishing between the retail and wholesale use case, instrument and infrastructure, and user demand Vs. provider supply.
Further to this, all too often, CBDCs, digital currencies and assets, blockchain and tokenisation are all referred to in the same breath, which doesn’t help to elevate the dialogue even though they are intrinsically linked.
Retail Vs. Wholesale, Asset Vs. Platform
In the CBDC space, settlement is still done traditionally, offline. Which may be a disappointment in some ways but is also indicative of serious integration and solid, step-wise movement in a committed direction.
In this sense there is very much a parallel system. It is integrated into the original infrastructure and is a means to serve the various instruments: stable coins, CBDCs, tokens.
And there is a question mark as to whether these all even go on the same infrastructure.
The infrastructure needs to be the priority.
As Dr Alisa DiCaprio, chief economist, R3, said, “systems are [currently] based on paper, and can only be upgraded so many times before they’re completely outdated.
Tokenisation changes the game from upgrading to expanding.” This in turn opens up to different systems, including internationally.
In this way, it becomes clear that the infrastructure is the gamechanger, because although the use cases tend to converge upon the instruments – the assets- it is really the movement of those assets that counts.
It’s the blockchain infrastructure that “is going to finally help us stop using this traditional infrastructure and move forward into a fully digital future, which I think is really exciting,” DiCaprio stressed.
Clear demand for tokenised assets creates clear business cases
One aspect the panel was at pains to point out was that there is actual clear demand for tokenised assets, in particular cash, and the digital movement of money.
Ryan Rugg, head of digital assets, Citi Treasury and Trade Solutions, Citi, said their clients (large multinationals) want this, are actively requesting it, “they are thinking about the future of networks, they want always-on infrastructure, they are asking for it, just-in-time and programmable. Multibank, multi-border liquidity- liquidity at the speed of the internet.”
Frustrated at having huge sums of money pending due to differences in time zones, working hours, banking holidays.
These are serious customers “who will actually leave the bank if someone offers them better liquidity, better hours elsewhere.”
Citi’s tokenised platform built using the ERC token is currently fully live between New York and Singapore and will accommodate, i.e. be fully fungible in the future for tokenised bonds, equities, or other assets, if clients want that.
“It is not just in some virtual, intangible realm of de-fi web3. Not the case at all,” DiCaprio asserted.
One thing to bear in mind, as Anthony Day, head of strategy and marketing, Midnight pointed out, is that there are some businesses that get shut down in this scenario.
Those that trade on currencies, liquidity, providing credit services in those pending time periods.
“So, the entire business needs to address what business it is killing or elements of profit and loss that will be hacked away.”
Clearly it all depends on the entire business model, however, just as clearly, there remains emphatic demand.
Moving away from banking to governments and central banks, what are the assets that are most likely to be tokenised at scale, soonest?
One misnomer to get away from is the automatic perception that it is assets that need to be translated into digital form.
This is a natural mindset, based on the system today but, as DiCaprio pointed out, it becomes very hard to reconcile a physical representation and a digital one.
“Where we’re really seeing [progress] is around tokenising value. How can we take, for example, securities and tokenise those. Away from physical goods and towards value.”
Cash is the main asset for banks to tokenise. Cash is a unique kind of asset, however. Value in a way is built on cash.
The additional problem then is where do you trade it?
And how to support the trading of both physical and digital goods that can’t co-exist on an exchange that is both digital and regular.
Back to the infrastructure dialogue.
Questions beget questions but for this level of wholesale change, as long as the questions become more specific and divided into emerging sub-categories, this is surely the natural and scientific pathway.
Consumer behaviour and economists stem the tide
Regarding CBDCs in particular, there are 80 or so government projects worldwide looking at digitising and tokenising various versions of central bank money and most of it has been developed around the wholesale system for banks and corporates.
“We have no idea how consumers behave around central bank digital currencies, there’s just not enough information.”
The radical turn in the last couple of years or so is towards retail but the cross border instances are more on the wholesale side.
Indeed, SWIFT’s ongoing CBDC sandbox explores cross-border payments in accelerating trade flows, growth in tokenised securities markets and simplifying forex settlement, involving 38 global central and commercial banks.
One interesting use case was around the possibility of a cargo ship’s entry into a port triggering a payment.
And speaking of the SWIFT sandbox and consumer adoption, Paul Darby, delivery lead at engineering consultancy, Roq, said, “We only need to look to Open Banking to realise that consumer adoption is not always straightforward if the process involves behavioural change,” despite there being compelling potential benefits “linked to transparency, financial inclusion as well as reducing the costs of cross-border transactions for individuals and SMEs”.
What slows it even more, according to DiCaprio, are economists.
These are the people asking the toughest questions that are simply very difficult to predict: what if adoption is too fast, or too slow?
How should the infrastructure and rules therefore be designed in such an open economic system when you do not know how it is going to be used and perceived in the market?
Perhaps the clearest advice of all from the panel in terms of getting one’s head around the technology, business and use cases was, quite simply, to “know your sector”.
Deep understanding of one’s sector first and foremost will lead to judicious application of the technology in order to evolve and yield direction and results.
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