The first session of the day, entitled 'Assets of the Future,' included contributions from BNP Paribas' Phillippe Benoit, BNY Mellon's Mike Demissie, DTCC's Jennifer Peve, Symbiont.io's Mark Smith, and moderated by Julia Streets of Streets Consulting.

The discussion opened with a conversation about the evolution of assets to include digital platforms, such as cryptocurrencies and NFTs, and how they are being adopted by traditional banking.

Peve discussed the fundamental premise of what can be achieved through capital raising in this area and while Demissie added how this technology can unlock new business models, Benoit noted how this technology is changing the way banks work. Smith added that these platforms must be leveraged to create value.

Using the particular example of residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS), which have historically been associated with the 2008 financial crash, he stated that “now with this new technology you can use smart contracts and distributed ledger blockchain technology to create these things in a way in which you can get real time information about the underlying assets in those particular type of pools and securities, and bring them back in a way that is safe and secure.”

Regulation and risk

From a regulatory perspective, Demissie argued that there are three main areas of concern for regulation.

1. Are digital assets covered by current regulations? The first of these is that regulators need to look at these new assets and assess if they are covered by current definitions and constructs. He adds to this point that given the pace of innovation, providing clarity as new assets and products emerge is not an easy task.

2. What new risks will emerge? The second area is that regulators need to assess what new risks arise from these assets.

3. How can innovation be fostered efficiently? The third consideration is to be able to complete areas one and two, while still fostering innovation. Demissie added: “if you have an overly restrictive set of rules in one region others can take advantage of that by offering a more accommodating environment to capture a future growth. It's a very tough balancing act.”

Despite this optimism around the benefits of digital assets, the panel believe that there is too much attention paid to the pricing and volatility of these assets, and not enough given to the transformative nature of these new assets. Despite this, there was consensus around the fact that the biggest risk for companies is to not make any move in this space. 

The future of this technology

In the digital asset space, collaboration is important, but so is discipline. Benoit stated: “We need to filter these ideas and stick to a certain discipline, otherwise I think the pace that we all expect to accelerate to will go nowhere.”

Demissie points to three areas that need our focus for the future of these assets.

1. Education: Clarity and understanding of these concepts.

2. Infrastructure: Building on existing infrastructure with a collaborative and expansive view.

3. Resource: Investing time in public engagement and policies.

Peve said: “To move the industry forward, the implementation of any change in post-trade infrastructure to support digital assets must be inclusive and accessible to all. Today, not all financial market participants have the same capability levels when it comes to the adoption of new and evolving technology, and as a post-trade provider, it is essential that the entire community is served. This means that any innovation plans and the associated rollout to support digital assets may have to be adapted to accommodate industry variations in technological sophistication, while ensuring the new capability delivers value.”

CBDCs: the banker's perspective

The second session took on similar themes to the first, with a particular focus in CBDCs from a bank’s perspective. This panel was moderated by OMFIF's John Orchard, and included contributions from Bank of England's Tom Mutton, DBS Bank's Soon Chong Lim, Citi's Tony McLaughlin and BNP Paribas's Florence Lubineau.

The session began with a differentiation of retail and wholesale digital currencies, with much of the discussion focusing on the later. Mutton definied retail CBDCs as “digital banknotes” provided by a central bank to meet the basic payment needs of a household or business. He added that this is something which the Bank of England is exploring, but no decision has been made as to whether this innovation would be needed. Finally, Mutton defined wholesale CBDCs, used for clearing settlement for wholesale payments and capital markets. He reported that this is an area they are very excited about this area of innovation.

The panel discussed that at a regional level, Asia appears to be moving slightly faster with CBDCs. However, Europe is keeping pace with the European Central Bank (ECB) having announced its digital era project in July of this year. While this project is in the investigation stages, it could offer a digital Europe in the next four to five years.

However, Linbineau noted that regional CBDCs are not likely to differ due to different banking systems, stating, “opening access to central bank money from non-banks drives concerns in terms of asymmetry of treatment between payment service providers and banks. Banks are much more regulated [in Europe].”

Are CBDCs a threat to commercial banking?

McLaughllin, from a commercial bank perspective, stated: “Our view is that if a government wants to exert its sovereign right to launch a new national payment scheme, then we will connect to it." This comes with the caveat that we are yet to see CBDCs fully implements, and that the experience at Citi is that there will be an increase in traffic with the addition of CBDCs, as is their experience with instant payment schemes.

From a different perspective, Lim noted that the view at DBS is that Pandora’s box has been opened with DLT and other new forms of money. He added that whether they will be a threat to commercial banking largely depends on how they will be designed and implemented.

Lim summarised and pointed to three major happenings in blockchain:

1. New peer to peer networks,

2. New forms of money, and

3. The possibility of smart contracts, which allow for the input conditionality for payments.

He stated that from the perspective of DBS, it is not important whether this technology is used by CBDC or by another form of money, what is important is that the potential is realised.

Incorporating DLT vs CBDC

McLaughlin commented on the need to cooperate, and not to fragment the sector: “Let's not have narrow CBDC, where everyone has to transact in central bank liabilities. Let's not have bank coins, where we fragment the regulated sector. Let’s have a shared regulated network where the liabilities of the regulated sector are made fungible on that network.”

He proposed a two-tiered solution, which he calls a regulated liability network. He described this as a single DLT with a partition for the central banks, and anything within that partition is a central bank liability. There is a partition for commercial banks, and similarly, any tokens within this are the liability of the respective commercial banks. There is an additional partition for e-money players, as they are part of the regulated sector and their liabilities are similar.

Lubineau added that the technology used, such as DLT, is not as important as the regulation. She commented that if you do  not want to create unnecessary problems, you have to approach this issue cautiously and move step by step.

While panellists raised concerns about what is next for these new class of digital assets, and differed on some of the best ways to move forward, a clear overall message was left from these panels, one of collaboration. This is a collaboration between public and private, and between different regions and regulatory bodies.