Unified ledgers are the flavour of the month in payments technology. The Bank for International Settlements’ vision of the future of payments: the ‘Finternet’ – an idealised vision of a new financial system ledgers bringing together a huge range of assets and currencies – and its more immediate iteration, Project Agorá – which aims to tokenise commercial bank deposits and central bank money – both rest on unified ledgers.
Technology and the architecture needed won’t be enough. If Project Agorá is to be a success, central banks must be prepared to ask themselves, and each other, some very fundamental questions.
All payments systems need participants to agree on frameworks for anti-money laundering and detecting and preventing terrorist financing, among other things. This is naturally more complex for cross-border payments, which require a harmonisation of disparate legal frameworks. Harmonising these different frameworks is already a key part of the plan for the improvement of cross-border payments.
Rather than solving this, moving cross-border payments onto unified ledgers adds new elements to the list of things that need to be agreed upon. What will the consensus mechanism be? Proof of work? Proof of stake? How will settlement finality be determined? Can transactions be unwound, and under what circumstances?
Agreeing these shared technical standards will certainly be complex, but before they can share technical infrastructure, central banks will also need to share certain philosophies.
Central banks play different roles in their economies. Some, like the European Central Bank, are used to owning and operating major components of the financial market infrastructure in their jurisdiction. Other central banks, like the Swiss National Bank, are used to having this outsourced to third parties.
Coming to an agreement on what each central bank will do or permit to be done within the context of Project Agorá will force central banks to reexamine their positions.
If, for example, Project Agorá requires central banks to give foreign banks access to their balance sheet, that would certainly make things easier from a liquidity perspective. For some, like Switzerland, this doesn’t require a change. Switzerland, as a small market, has long seen the value of allowing foreign banks to access their currency as a means of improving their liquidity.
For other central banks, opening their balance sheet to institutions that they do not directly supervise will be a marked change in their philosophy. Some will see it as a move that compromises their monetary sovereignty or risks diluting the efficacy of their monetary policy transmission.
Perhaps most importantly, while central banks are able to participate in Project Agorá on an experimental basis, for some, the decision to overhaul cross-border payments and move to a wholesale central bank digital currency on a unified ledger will not be entirely theirs. For many jurisdictions, politicians will have the final say.
Wholesale CBDC is much less controversial than retail CBDC. However, the similarities of the terms might result in wholesale CBDC becoming delayed by objections to retail CBDC. A rebranding to ‘tokenised central bank reserves’, or something of that ilk, might avoid this, but the fact remains that in some jurisdictions, the path to wholesale CBDC likely involves a political stage, with all the volatility that entails.
Beyond the cross-border collaboration necessary, Agorá’s success will hinge on the participation of the US. The dollar is the deepest and most important currency and capital market in the world. It forms one half of 90% of foreign exchange transactions. Without the dollar, it is difficult to imagine Agorá changing the world.
Agreeing a legal framework between sovereign nations is always challenging. If it were easy, many of the problems Agorá wants to address would already have been solved. And Agorá need not be abandoned because it is ambitious. Perhaps the time is right and the new technology will catalyse co-operation. But make no mistake, Agorá’s aims require its participants to reshape themselves around it.
Lewis McLellan is Editor, Digital Monetary Institute at OMFIF.
