‘What counts as money is not always in the control of central banks’, a payments policy lead at a G7 monetary institution said at a recent OMFIF roundtable, grappling with how stablecoins, tokenised deposits and other forms of money might co-exist within an interoperable and supervisable perimeter.
Rather than cigarettes in Germany after the second world war or barter arrangements in Argentina in the 2000s, the policy-maker meant unregulated stablecoins and other ‘bearer bond-like’ digital assets. If these were stable and widespread enough to become a demotic means of exchange outside the regulated money system, then monetary policy, sovereignty and supervision are lost.
This fear, which motivated the thwarting of Libra and ignited central bank digital currency discussions, is driving central banks to chase after the means to interact with or potentially co-opt the blockchains where so far only dollar stablecoins have been growing at speed.
An interim fix
The European Central Bank, Hong Kong Monetary Authority and Bank of England, among others, are solving this for the time being by creating a mechanism to connect non-blockchain-based native wholesale electronic money platforms and their real-time gross settlement systems, with the regulated institutions dealing on blockchains. This ‘synchronisation’ arrangement enables commercial banks to tokenise their operations while still settling in non-blockchain-based central bank money, therefore potentially diminishing stablecoins’ utility either as payment or settlement on-chain, keeping money ‘account-based’ via the banking system, and therefore be supervisable in the way it is already.
Jurisdictions outside the US are also hedging their stablecoin bets at the same time, creating cautious rules and licensing processes rather than outright bans. Consequently, a widening array of money formats in a multi-moneyverse is expected or even endorsed by policy-makers: tokenised deposits, stablecoins, public digital money, and possibly tokenised money market funds, in parallel to the existing electronic payment and settlement systems, retail and wholesale. The composition will vary jurisdiction to jurisdiction.
‘Uninteroperable’ interoperability solutions
Although there are theoretical and technical options to solve the jurisdictional challenge, together with a host of pilots and sandboxes, there is not yet an agreed means to enable these formats to interoperate or even be fungible within a jurisdiction, let alone between them. None of them is operating at scale yet, and there is no national or international consensus on the medium-term format of public money – wholesale or retail.
‘Stop-gap’ synchronisation might suffice, though plenty of working groups, including the ECB’s Appia, are exploring wholesale central bank money tokens within or passing between blockchains.
The Federal Reserve, though unable to talk freely about ‘tokenised reserves’ in case this is seen as a sneaky technocratic circumnavigation of the US’ prohibition of CBDCs, is taking part in multi-jurisdictional blockchain project Agorá, which is likely to require digital money in exactly this form.
A China-centric cross-border CBDC ecosystem, mBridge, regarded by many as a means to disentangle the participants from the extra-territorial reach of western systems, currencies and jurisdiction, will use a private permissioned blockchain controlled only by its members.
Intentional fragmentation from competitive deglobalisation, and unintentional fragmentation from uninteroperable pools of money and securities, might be the perverse result of the digital money revolution.
Unsung RTGS systems
Central banks can help de-clutter the field quite simply. OMFIF has heard several admit that they have no intention of abandoning their RTGS systems any time soon. Yet, others suggest that ‘synchronisation’ should suffice in the medium-term regardless of how mainstream DLT-based finance becomes. There are various reasons for their reluctance. These include the sunk costs of recent systems, the likely expense of developing a distributed ledger technology-based form of money and concerns about maintaining or supervising a platform which operates 24/7 – though RTGS systems may anyway be heading in that direction. The ECB’s T2 is three years old, the Bank of England’s £431m upgrade a little over a year and the Fedwire Funds Service is currently in the middle of an upgrade.
Central banks might be advised to say this more openly, while also standardising public money wallets connected to their RTGSs and inviting industry to organise around them, rather than scramble after the opposite. The downside is a mismatch between a 24/7 atomic settlement DLT world and the currently time-limited operation of RTGS systems. However, banks and central securities depositories might be able to provide the buffer.
Interoperability between tokenised bank money and CSDs could be solved either by the CSDs themselves and/or a range of new interoperability platforms such as Ubyx and ClearToken, leaving the central banks unencumbered with creating a solution, and focusing entirely on moving public money between regulated institutions holding reserves with them – banks, and possibly narrow-bank-like e-money institutions such as stablecoins. Such an RTGS-anchored arrangement for money versions also keeps the source of public money on secure, proprietary, private government infrastructure.
Stablecoins at central banks
Enabling these e-money tokens themselves to have access to central bank reserves, as the Bank of England will do for systemic sterling-denominated coins, is also a potential balm for the interoperability sore. The coins get to operate as (partially) state-backed money, and the central bank can be a – or the – interoperability channel via RTGS links with banks. Stablecoins could, like the banks, prevent the need for the central bank to have to facilitate atomic settlement on the same network all the time.
Though yet to be fixed to make this workable is an equivalent level of know-your-customer/anti-money laundering supervision between banks and stablecoins. It is not impossible that regulators and technologists could meet in the middle on that conundrum.
Harmful silence
A related problem is that central banks are typically much less able to advocate for themselves and their versions of money than either commercial banks or the DLT industry, both of which have recourse to well-funded lobbying resources. Populists have attacked CBDCs, and independent central banks have to tip-toe around accusations of democratic unaccountability, even if they are acting in the public interest.
Ulrich Bindseil, formerly of the ECB’s digital euro team, argues in a recent paper that public discourse on payments is more-or-less impossible partly because of this. The inability of central banks to defend public money might ultimately be hindering the private sector by obliging it either to sit on its hands while ambiguity prevails, or spend their rents lobbying for an obsolescent status quo, or build potentially redundant silos.
Fixing a problem already solved?
What about cross-border interoperability? Intriguingly, stablecoins themselves could be an unexpected answer even among regulated institutions with central bank backing. The new Open Standard project, an undertaking of more than 140 banks, payment companies and others worldwide, including many household names, such as Google, IBM and Mastercard. The project is apparently issuing a dollar-denominated stablecoin which will enable global payments between its users. The dollar-centric nature of the project has, though, raised eyebrows among non-US policy-makers already worrying about monetary sovereignty.
What about cross-border blockchains between sovereign central banks, then, where they want it? They might copy the mBridge model, although such systems immediately stumble on the reference rates for foreign exchange, which tend to come from commercial banks.
It may well be that an upgrade to the existing architecture, using blockchains at Swift and within commercial banks, or new token settlement exchanges between banks, who in turn synchronise with central banks, is good enough and may get the world to a minimum viable product in tokenised finance much faster.
John Orchard is Chairman of the Digital Monetary Institute at OMFIF.
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