CBDCs: The Elephant in the Room | European Blockchain Convention

[Music] hello okay this is working perfect good afternoon everyone and thank you for joining this session on what is in my opinion one of the most interesting topics in the world Central Bank digital currencies my name is Hashem Hassan and I'm gonna moderate this session today uh um I think my introduction is is already made but uh I work within digital assets and financial stability within the central bank of Denmark I'm mainly focused on digital assets uh cbdc crypto and stable coins and I would just say before presenting this great panel I just want to quickly set the stage so in the past 8 n years there's been a one big question amongst Central bankers and that's been do we need Central Bank dis currencies and within that topic one particular type of of of currency has been the the most discussed one and that's been retail CC so that's been a a a digital format of central bank money accessible for everyday citizens and businesses however there's been a change in recent re years and especially this year and that's been around wholesale cbdc so that is also Central bank money also in a new digital format but only accessible by financial institution and maybe to highlight the shift in the conversation that we've had is that the bis so the bank for international settlement they recently published a survey saying that Central Bankers or central banks are more likely to issue a wholesale Cy than a retail Cy within the next six years so the topic of today is to discuss exactly that what is happening within the financial sector that is driving some of these questions and needs what is what is a wholesale CC exactly and what are the technologies that are being explored to develop one and then finally do we actually need one or are there other means of addressing the same problems so I think without further Ado I would like the panelists to introduce themselves because they can do that much better than I can so Wayne would you like to start sure so Wayne Hughes I'm in charge of blockchain and digital assets for Security Services of BMP so very focused on preparing everything so that we'll be ready to um provide services to our clients once they're ready to start investing into different types of digital assets and I'm danela Barbosa I am the executive director of the Linux Foundation decentralized trust uh this is a new Foundation that we launched uh last week that encompasses all the hyperledger projects uh many of them that are being used in cbdc projects as well as another Foundation trust over IP and some new projects um for those of you who don't know what the Linux Foundation is just very quickly it is for the last 20 years has been the home for what I would say some of the most important open source projects obviously the Linux kernel itself but pretty much every piece of technology you probably touched today uses open-source code and much of that open source code sits under the Linux foundation so we're really um you know part of building this new infrastructure with open source Technologies and I'm very glad to be here and thank you for inviting me hello my name is Lex fison I'm the CEO of global Ledger we provide AML compliance software and Consulting and in terms of cbdc we participate in proof of Concepts and Research into like how to launch digital Euro how to address AML risks with growing speed of transactions with crossborder transactions and things like that so for the most part on this case we work with central banks and with commercial banks that are preparing for the cbdc launch to address the AML risks and risks of terrorist financing perfect so I think we've had a great I think we're going to have a great great uh discussion and I think just to kick it off one important point of understanding why we need cbdc or if if we need a cbdc is to understand some of the current developments I think Wayne coming from the private sector and coming from a a a an organization driving some of these developments could you explain what trends are we seeing what developments are we seeing uh within DLT tokenization of of of of of maybe traditional Securities but also new types of Securities and how that feeds into the whole question around uh Central Bank deals or currencies yeah sure so I'd say um as you said when we talk about more traditional types of assets and processes uh the main focus that we're still seeing out on the market is around digital bonds tokenization of funds for distribution purposes um and also of course cash no um and I think what we can say there is you know uh we're seeing some positive Trends um I think we all know things have started very very slowly so we've had to really learn patience um but we are starting to see more frequent um initiatives so more frequent Bond issuances um definitely seeing additional functionality being included in those initiatives so you know example could be coupon payments now and being included within the smart contracts um and one really important Trend that we've seen and we think very positive is we're seeing a lot more collaboration so you know this definitely started with kind of everyone doing their own thing um which in some way was a great way to start it was much simpler you didn't have to coordinate with everyone um but clearly not the way probably to get something to scale up now what we are seeing in each one of these initiatives is uh a number of entities at least participating maybe still a relatively small number but you know moving from the one or two that we saw at the beginning four five six seven participating in each one um but also uh you know really seeing that Spirit of collaborating trying to work together on common infrastructure on standards um which I believe most of us in the industry now believe are critical points if we really want this to scale up um also starting to see I'd say maybe a little bit more immature but some interesting things happening on other types of assets uh you know that could be tokenization of carbon credits um seeing some very interesting initiatives on creating a secondary market for fractural ownership at real estate so still pretty you know startup mode let's say but um we do believe those might be some of the most interesting use cases going forward now with that said still a lot of challenges at least in our opinion to really get this to scale up you know already mentioned kind of fragmentation still a challenge in some jurisdictions even the regulatory Clarity is not fully there um but without a doubt one of the biggest challenges right now is how do we manage the cash leg so you know kind of tying back to the theme of our our conference here um our panel and you know clearly believing that we do need some widely adapted safe uh means to manage the the cash L going forward yeah okay so so so it's new types of Securities new types of of of assets and they still need to be settled in the most safe the safest way and I think according to our Central Bankers but also I would say to most so most banks the safest settlement asset is central bank money so it's still about having access to central bank money to safely uh H settle the new types of asset and transactions and I think maybe if we can just then go to quickly into what is a wholesale cpdc then and I think Lex if you start with you and then please the rest of the panel add on if you if you if you disagree or agree because this is a a term that is widely discussed yeah I mean so whale cbdc is everything people don't understand about crypto plus everything they don't understand about monetary policy that's what uh what it is and I I have a story about that actually I we were in a in a meeting at a national bank and when we arrived there was a there was a protest against cbdc near the national bank and there was a woman with a with a banner that would say cbdc Central Bank digital conspiracy and um I I came to her and I and I tried to explain that this definition only applies to wholesale cbdc because it's only whale cbdc will be exclusive for the banks and the national bank and will not be allowed for regular people right so that might be uh frankly consider it a conspiracy if you want um but but really what the h l cbdc is um for the blockchain people the simplest explanation would be right now we have different communities like Bitcoin community ethereum community whatever and uh these communities they have their financial ecosystem systems and in order to connect with them you have Bridges so hosale cbdc is basically every country or an area like EU have their own sort of a blockchain sometimes without the actual blockchain but um your your your coins basically locked inside that area so that's the way for the government uh you know to to have somehow a monetary policy and then you in order to have a crossboard payment you would need to have sort of a bridge there are different names there are different Technologies in test but you would have that and uh instead of P2P things would would have a name like PVP and it's not like a PVP shooter it's a payment versus payment verification where you know the settlement is done on this side and it's done on this side bridge verifies that so you have that transaction so whale cbgc is a cbgc exclusively used for banks that allow them to simplify their transaction for them it would be like a software update that would go from Windows 98 to a Skynet where everything's so great and so fast so it's scary you know so that's uh think it's scary and I think the rest of the panel do you agree with with with Lex's uh definition well I think um um so it's very interesting uh definition um uh I think from our perspective and just to you know make it very simple you know today um for settlement purposes especially in organized markets we tend to settle in central bank money and in fact that's regulated in a number of jurisdictions um so as we think about creating digital Securities um and start thinking about the optimal way to manage settlement so let's say The Interchange of that asset with some type of cash um wholesale Center Bank digital currency is just a natural let's say need or request on our behalf again not to say maybe it's not the only way to address this problem and probably we can discuss some some potential Alternatives but we do believe um as a bank that it is part of the you know an important part of the puzzle going forward great and I think Lex you mentioned that this could be on a DLT it could be without a DLT and I think Daniela um you have experience in in in in in trying to apply these Technologies across different use cases across the globe could you from your experience also maybe touch upon where are we seeing some of these developments where are we which Technologies are being applied when discussing wholesale C disas because we're seeing initiatives in Europe in Asia in South America Northern America could you touch upon where are you seeing some of the developments and in which concrete use cases yeah and I'll back up a little bit because I think to understand why the central banks and the private sector are looking at cbdcs whether they're retail or wholesale is the understanding that in this digital world we have to update and make Financial infrastructure be able to keep up with what the population needs worldwide and when you're looking at wholesale C cbdcs it's really about Bank efficiencies bank to bank efficiencies it's not a conspiracy they have to move money around and if you could bring efficiencies to the that market and if you can also bring transparency to some of that in the market and transparency to that in some of the market it really makes a difference so we're not you know I don't think that the central bankers and the private sector are sitting around trying to you know create new technology and new work they actually have to fix you know upgrade our financial infrastructure and this is happen this happens you know every hundred years or so right the the banks have to go through this so when we as an open source Foundation we are essentially the Shepherds of the of the open source code that companies whether they vendors or their central banks themselves will use the open source code to do implementations um we've been seeing uh um uh implementations in both experiments as well as in production for the last eight years um the Atlantic Council has a Tracker a great tracker if you want to keep track of what's going on around the world the Atlantic Council has I said the last um stat was think 93% of the central banks around the world are currently looking at Central Bank digital currency projects whether in the wholesale or in the retail and once again why are they doing that they're not doing it because it's a fad right and they want a t-shirt because it's a fad they actually need to do it for us to be able to move money around the world as individuals and as and as uh corporations and Banks as well so what we see is we see um you know central banks for example um we have within our own um Foundation we have central banks the Central Bank of Brazil the bank of England the bank of France um Mas the monetary Authority and others who are actually bringing Engineers to the table to understand the technology and the things that they need to do that is going to change how uh their infrastructure current works and this is important because it's not magic there's not a book written about it there's a lot of people writing books about it but there's not a book written about it and there's not going to be one DLT to rule them all there's also not going to be one approach to R rule them all there's going to be some jurisdictional regulations that actually might write into their law that they cannot use blockchain and you know that is okay right the it's not just going to be one view so for us what's really important is to have a forum for the tech technologists and then obviously from a bank perspective the economists to understand because the economists really need to understand the tokenization the aspects of tokenization and how it it apply you know how long-term it applies to it so we're seeing all around the world you know I'll do a call out specifically to Regions you know that bunked of France here in Europe and with the European Central Bank and maybe Wayne could talk a little bit about that we're seeing a lot of great experimentations out of the bis certainly U and the monetary Authority is Singapore with the projects like project uin and Gora they all have such great names but all of these is private sector and and and um central banks um and The Regulators getting together and looking at technology to see how the technology is going to fit their needs their future needs as well um so like I'll give an example in Brazil um in Brazil I think they're one of the most forward-looking central banks um they have a cbdc project called the drexx and what Brazil did which is kind of unique and I think more and more regions around the world are looking at this is they didn't approach it like we're going to build a cbdc to just move money around they said we need new Financial infrastructure in order to mature right in order to support our people the Brazilian people worldwide being able to do business around the world we need to make sure that from a financial inclusion people have access to Central Bank digital currencies and to money so what they're building is on top of What's called the Drex using blockchain they use uh bezu which was one of our projects um and it's an evm it's an ethereum virtual machine they're very interested in what's happening in the public blockchain space but their interest is really in building new Financial infrastructure so they can modernize the way that Brazil not only interacts with money inhouse but across the world and that's kind of the difference between I think a lot of different projects that started like five six years ago which were great experimentations and some of them have been proven that not they really didn't bring efficiencies to the market right and you know what the way we do it is just fine we'll use intermediaries um so I do think over the next five to six years we're going to see some real use cases of value um across the globe and I would say keep an eye in certainly in Brazil um and keep an eye in places like Indonesia um and um even you know in the Middle East as well there's some interesting projects going on there great thank you and I think you mentioned that um that you know the use cases and the collaboration between central banks and Commercial Banks and and and and especially around you know the ACB is running experiments uh and trials and I know Wayne that you've been involved in some of those and and and also working together so could you maybe explain a bit about what you've been working on within specifically within this field and the different use cases that you've been exploring sure sure so um you know talking about the ECB trials for wholesale Central Bank digital currencies we've been quite active on our side um there's three different Alternatives proposed and we've been able to um test out the three different options so one's more what we would consider a true wholesale Central Bank digital currency so let's say a token on the blockchain um and the other two are what are called trigger Solutions so basically um a a smart contract which based upon the um asset being ready to settle triggers a traditional payment um whether for Target 2 or some other payment system so it's been um very interesting um and I say it's been very interesting that's it's still continuing this goes up until the end of November and we still have two or three trials planned um overall and again not jumping to conclusions as as it's still ongoing but maybe just some first um Impressions you know I think one of the first things for us is we've seen it very positive as far as getting people engaged there's been a ton of interest um from our clients uh from our counterparts in the market you know we we really think it's kind of created a little bit more excitement um uh and and you know sparked a little bit um additional interest out there in the market so that's been very positive um so all already you know a real benefit we believe um I think the second part and important for what we're discussing here is you know everything indicates from what we've seen that there are viable Technical Solutions um to manage the cash leg to do cross chain settlement let's say you know we haven't seen anything that makes us think that this is not a viable solution going forward um so that's very positive then what I would say right now we're really um you know hoping that there is a continuation now so this program ends at the end of November and a little bit still to be seen what's the next steps um so again very much hoping that there is a continuation and that we'll be able to leverage some of these solutions to start scaling this up great and I think maybe moving I think you had you made a great bridge into into into the next topic and that is is a wholesale CC the right solution to a potential need from the sector I think this is an open discussion around are there other possible solutions or do we is the only viable solution the wholesale CC on the DLT or do we see other ways of actually addressing a potential need from the market and I think Lex if we can start from you and then I guess we just have an open open discussion about how you how you view this area look from a from a National Bank view it it it seems like that's actually the best solution because if uh we say there's another solution let's say stable coins but stable coins are too cross border already the you know the usdt usdc when you cross the border you don't actually carry your you know stable coins they just exist in all the countries simultaneously so from the National Bank perspective National Bank want to control let's say dollarization of the economy want to control rate of the national currency want to control inflation deflation all these sort of processes right uh stable coins are taking out the ability to do that so cbdc basically locking up to your location um control of the money supply and things like that basically allow you to have better control of the economy and that would mean a more stable economy I definitely think that a national bank doesn't want to happen something like Luna or FTE right with with something right so the goal of the National Bank as a stability of the economy and and the commercial Banks actually interested in that as well I mean they interested in slightly higher rates and cbdc maybe especially if there's some automations with D5 will come forward on in retail side they will allow the banks also to attract customers again uh to with slightly higher rates on that right and um uh but in know from the even from the business point of view or banking like a commercial banking Point of View stable coins are still a viable competitor and if you think about it this is really fascinates me like people are scary about stable coins for example now in Europe and just generally scary you know some of these stable coins being pretty big they you know they don't have good proof of reserves and people still use them with all these risks I know friends that if I call them today and I say hey tether went zero and they're like oh you know they sorry for that word but that would be like one of the options for them like it could happen you know where the National Bank cannot think in that sort of category so stable coins are nice probably for foreign trade and maybe you know the cbdc will still require some intermediary in the form of this sort of bridge right between different countries different systems different maybe parts of the globe so maybe stable coins will take a little bit more share in a foreign trade but uh from the national stability point of view and control of the economy point of view that that's just really the best as we can get that's a software update to increase speed and to increase just uh you know trust in the system remove inter a lot of intermediaries because routing is the problem what we people get from that is we get faster transactions faster settlement and uh what commercial Banks get from that they don't experience counterparty default risks for example and uh they have high velocity of transactions yeah and I think I think and maybe moving away from that into other solutions to getting access to central bank money so one is as you we as we've been discussing is actually having a tokenized central bank version of reserves but there's also other ways of connecting into the Central Bank systems that could be other inability Solutions and do you see those as as as as alternative solutions to the same problem so uh yeah I think um let's say I think definitely concur with the opinion that the the perfect solution in some way is a central bank digital currency so issued by the central bank but as you said you know um maybe there's Alternatives and maybe if we wait till we get to the perfect world also we'll be waiting a long time no so we do think it's interesting to at least consider alternatives one alternative that um you know we're definitely uh involved in this finality um which is very much as you said it's a a way to work with central bank money um without the need for the central bank to actually issue our currency it's leveraging a t type of account structure that already exist uh in the Central Bank in the UK um for payment systems so could give us an option to have a tokenized representation of central bank money much sooner then probably we'll really see you know some of the central banks at least here in Europe issue something so we do believe something like that could be a viable alternative at least let's say to get the ball rolling Daniela do we have yeah I mean I I agree with that and you see things going on and discussions around things like uh unified Ledger and uh Global layer one um this concept of the fin internet that bis has put forward so I think you know everyone is kind of working towards this how do we build these new rails and what are the approaches and I just want to you know go back to the technology part right so the the technology is there it scales it works you know Wayne even said doing us as Pilots um and the thing is you know keeping in mind is what you need what you architect a technology to deliver to the market so um you know we're very you know proud of our projects within the Linux Foundation whether it's bzu or hyperledger Fabric or aoha um and other Firefly for example and these are all projects that are open source and it's really important to just be able to and I encourage everyone to take a look at it to you know be able to participate and be part of what essentially is building the financial infrastructure of our future great I think maybe just to summarize quickly the time is running and we are out of time so the sector still needs central bank money Daniela you mentioned every 100 years we're innovating we need to change the systems we still need access to central bank money that access can happen in different ways it could be a unified Ledger it could be inter Mobility it could be many other ways stable coins might not be the right solution in this case uh but otherwise technology could solve some of the issues but it depends on the actual problem I think we're finishing now please help me thank the great panelist for these great insights