The Breakdown - The Timeline for Central Bank Digital Currencies Is Accelerating

Starting point is 00:00:04 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by NIDIG and produced and distributed by CoinDesk. What's going on, guys? It is Sunday, September 12th, and that means it's time for Long Reads Sunday. And today we are reading a speech from last week's Euro5 Financial Forum. It's a speech by Benoit Curie, who's the head of the BIS Innovative. Hub, BIS being, of course, the Bank for International Settlements. For those of you who are not

Starting point is 00:00:43 familiar, the Bank for International Settlements is basically the central banker central bank. And so understanding where their heads are at with issues regarding digital assets, cryptocurrencies, and, as we'll discuss today, central bank digital currencies, gives a sense of where the mainstream of central banker thought might be. The speech is called Central Bank Digital Currency The Future Starts Today. Distinguished guests, ladies and gentlemen, thank you for inviting me to speak here today. We all experienced how the pandemic accelerated the shift to virtual events, but I am pleased that today we are gathering in person. Yet the world is not returning to the old normal.

Starting point is 00:01:21 Payments are a case in point. The pandemic has accelerated a longer running move to digital. Mobile and contactless payments are already a part of our daily lives. QR codes and buy-now pay-later options are gaining popularity. Gloves, badges, and Olympic uniforms with payment functions are being prepared for the Beijing Winter Olympics. And the tech-savvy generation will soon dream about money and payments for the Metaverse. Alongside these developments, the world central banks are stepping up efforts to prepare the ground for digital cash, central bank digital currency, or CBDC. They have a job to do, delivering price stability and financial stability, and they must retain their ability to do it. Let me explain. Central Bank money has unique advantages, safety, finality,

Starting point is 00:01:59 liquidity, and integrity. As our economies go digital, they must continue to benefit from these advantages. Money is at the heart of the system and it has to continue to be issued and controlled by trusted and accountable institutions, which have public policy, not profit, objectives. Central Bank money will have to evolve to be fit for the digital future. So what are the priorities now? Know where you are going. As Dag Hammerskolled once said, only he who keeps his eyes fixed on the far horizon will find the right road, and get going. Let me elaborate. Why do we need to know where we are going? Because today the financial system is shifting under our feet. Big techs are expanding their footprint in retail payments. Stable coins are knocking at the door, seeking regulatory approval.

Starting point is 00:02:38 Decentralized finance or DFIbe platforms are challenging traditional financial intermediation. They all come with different regulatory questions which need fast and consistent answers. Banks are worried about the implications of CBDCs for customer deposits. Central banks are mindful of these concerns and are working on answers. They see banks as part of future CBDC systems. But make no mistake, Global Stablecoins, DFI platforms, and big tech firms will challenge banks' models regardless. Stablecoins may develop as closed ecosystems or walled gardens creating fragmentation. With DFI protocols, any concerns about the assets underlying stable coins could see contagion spread through a system, and the growing footprint of big techs and finance raises market power

Starting point is 00:03:16 and privacy issues and challenges current regulatory approaches. Will the new players complement or crowd out commercial banks? Should central banks open accounts to these new players and under which regulatory conditions? Which kind of financial intermediation do we need to fund investment in the green transformation? How should public and private money coexist in new ecosystems? For example, should central bank money be used in defy rather than private stable coins? We urgently need to ask ourselves these kind of questions about the future. This is the far horizon for the financial system, but we are approaching it ever faster. Central banks need to know where they want to go as they embark on their CBDC journey. CBDC will be part of the answer. A well-designed CBDC will be a safe

Starting point is 00:03:54 and neutral means of payment and settlement asset, serving as a common interoperable platform around which the new payment ecosystem can organize. It will enable an open finance architecture that is integrated while welcoming competition and innovation, and it will preserve democratic control of the currency. This podcast is sponsored by NIDIG, an institutional Bitcoin firm that sees Bitcoin has a gateway to financial security for people around the world. Find out more at NIDIG.com slash NLW. That's NYDIG forward slash NLW. This brings me to my second message. The time is past for central banks to get going. We should roll up our sleeves and accelerate our work on the nitty-gritty of CBDC design. CBDCs will take years to be rolled out while stable coins and crypto assets are

Starting point is 00:04:44 already here. This makes it even more urgent to start. In the design thinking methodologies we use at the BIS Innovation Hub, the ideal product stands in a sweet spot of the intersection of desirability, viability, and feasibility. When applied to CBDCs, these translate into three dimensions, consumer use cases, public policy objectives, and technology. We have to ask ourselves why consumers would want a CBDC and what they would want it to do. The recent European Central Bank public consultation shows that they value privacy, security, and broad usability. In order to meet consumers' expectations, CBDCs need to be made to work most conveniently. Payment data must be protected. Digital functions that are not available with cash can be developed, such as programmability

Starting point is 00:05:22 or viable micro-payments. Then CBDCs should meet public policy objectives. Central banks exist to safeguard monetary and financial stability for the public good. CBDCs are a tool to pursue this through enhanced safety and neutrality in digital payments, financial inclusion and access, innovation and openness. Important questions remain. How can CBDC's systems interoperate and should offshore use be discouraged? Technology opens up design choices. System design will be complex. It involves a hands-on operational and oversight role for central banks and public-private partnerships to develop the core features of the CBDC instrument and its underlying system. These features are ease of use, low cost, convertibility, instant settlement, continuous availability, and a high degree of security,

Starting point is 00:06:04 resilience, flexibility, and safety. Complex tradeoffs will be addressed by central banks, including how to balance scale, speed, and open access with security, and how to balance offline functionality with complexity and security. Across the world, central banks are coming together to focus on their common mission. Charged with stability, they will not rush. They want to move fast, but not to break things. Consultations with payment systems and providers, banks that the public and a broad range of stakeholders have begun in some countries. To build a CBDC for the public, a central bank needs to understand what they need and work closely with other authorities. The BIS Innovation Hub is helping central banks. We already have five CBDC-related proof of concepts and prototypes

Starting point is 00:06:40 being developed in our centers, and more to come. The European Union is uniquely placed to face the future. You can build on a state-of-the-art fast payment system on the strong protections provided by the general data protection regulation and on the open philosophy of the second payment services directive. The ECB's report on a digital euro sets the stage. A CBDC's goal is ultimately to preserve the best elements of our current system, while still allowing a safe space for tomorrow's innovation. To do so, central banks have to act while the current system is still in place and to act now. I thank you for your attention.

Starting point is 00:07:11 So here's the thing that I really wanted to say about this and that I think is notable. We have a phrase that we say pretty frequently on the breakdown, which is, watch what they do, not what they say. And the point of that phrase is that very often you'll see people who are publicly ragging on crypto or saying they're skeptical of Bitcoin, but at the same time allocating to this asset class. And money talks and bullshit walks to use another famous American phrase. This is interesting because it's actually a listen to what they say and how they're saying it, and maybe let it give color to some of the other things that they're saying. for as much as these people in positions of traditional financial power have brought up questions

Starting point is 00:07:49 about the importance or viability or necessity or use cases or lack of use cases of cryptocurrencies and digital assets, one of their most vaunted institutions has one of their main representatives out on the conference junket telling central banks to hurry up, to move, to get in this game. The reality is that if you've used the traditional financial system and that, the process the weighting of dozens of financial intermediaries for seemingly small transactions, things that should be easy based on the technology we have. Even something as simple as payroll, or getting paid for a contract. And then you've also used the crypto system, there's no competing. Now, there are plenty who would say there are good reasons why there are intermediaries who create

Starting point is 00:08:32 stoppers and problems and friction in the system. Friction in the system exists to protect people. And that's fine. That's an argument to be made to discuss. But it feels pretty clear that there is too much friction, and that crypto is abstracting that friction away enormously quickly, and forcing many of these central bankers backs against the wall. They simply have to update and evolve. The thing with CBDCs is the same as it's always been. The devil will be in the details, how they are implemented, to what extent they preserve privacy truly versus become just another tool for the expansion of state power. So for me, this wasn't about a shared recommendation of CBDCs or anything like that. It's about getting a sense about where the world's

Starting point is 00:09:12 central bankers think this is headed and it's very clear. If it wasn't clear already, CBDCs are on the menu and they're starting to rush the chefs. Anyways, guys, hope you're having a great weekend. I appreciate you listening and until tomorrow, be safe and take care of each other. Peace.

The Breakdown - The Timeline for Central Bank Digital Currencies Is Accelerating

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