In July this year, Finextra’s editorial team embarked on its inaugural Digital Asset Series of webinars, bringing together key voices from across the industry to speak to the leading trends, issues, and updates across digital assets.
2022 has undoubtedly been a tumultuous year for crypto and the wider digital asset space, and while we are yet to emerge from this icy crypto winter, topics such as central bank digital currency (CBDC) continue to gain traction as regulators, supervisors
and governments assess what role the digital currency may play in their future.
The webinar was comprised of four speakers, including:
- Arvin Abraham – partner, McDermott Will & Emery
- Igor Mikhalev – partner, head of emerging technologies, EY-Parthenon
- Jannah Patchay – director, regulatory and market structure advisor, Markets Evolution, policy lead, SteerCo Chair, Digital Pound Foundation
- Antony Welfare – senior advisor CBDC and global partnership, Ripple
I had the pleasure of moderating the session, and consider that a number of salient areas raised by the panellists continue to present significant challenges in CBDC discussions.
The topics canvassed during the conversation stretched from CBDC sandboxes, to financial inclusion, and digital identity, but one area which provoked an enthusiastic discussion from panellists was raised early on in the session. That is, the question of
how best to implement a CBDC, and whether distributed ledger technology (DLT) is essential for its success, remains a point of contention for many players across financial services.
Providing some wider context, Abraham explained that understanding the drivers of CBDC and what a country is hoping to achieve can help us understand why they would take a particular route for technological implementation.
He noted that some countries are still debating whether or not they will push “full steam ahead” toward CBDC – particularly in the Western world. “There is an element of geopolitical competition, China has front-run having a retail CBDC issued, and they
view this as trying to promote the yuan as a viable competitor to the dollar as a global reserve currency. Tokenising it to make it a CBDC is one way to do so by leapfrogging other nations.”
Abraham continued that China is a control state, with a highly interventionist approach to managing the economy and the populace, making CBDC an immensely suitable tool to further achieve its objectives. In the West however, there is a tension between the
drive to have a competitive financial system – leveraging the opportunities CBDC can present, alongside the potential downside of privacy, liberty, and financial exclusion concerns.
Antony Welfare then took the opportunity to dive into the technological side of the topic, noting at the top of his response that given his extensive work within blockchain and current role at Ripple, we should not be surprised at his position.
He provided six reasons why distributed ledger technology should be used for CBDC:
- Scalability and global interoperability to scale and grow;
- Security: the ability to securely allow participants to join the network;
- Real-time transaction settlement: current transactions for credit card payments, for instance, can take days. Blockchain enabled CBDC would take mere seconds;
- No single points-of-failure: as there are multiple instances with DLT there is very little chance of losing data;
- Real-time transparency for full visibility of accounts and their status; and
- DLT is built for a world where there is disconnect and systems don’t necessarily integrate perfectly.
Welfare added: “For me, the power of these factors, especially real-time settlement and transparency, is why we believe that CBDC should be on some sort of DLT. The question of permissioned or private is a very different discussion – just how private or
how permissioned requires a detailed discussion.”
When it comes to the topic of whether “to DLT or not to DLT” in the world of CBDC, Mikhalev took a slightly different position. He stated central banks have taken a top-down approach for hundreds of years, and while this works in many jurisdictions, it doesn’t
work as well in emerging markets.
“To have blockchain or not for CBDCs is increasingly being answered in the negative across established economies. From our research, improvement in democracy and decision making power, reduction of political influence and decision making, are things which
can potentially be improved when the principles of decentralisation are applied to the ecosystem around monetary policy and transactions. This could reduce volatility in these emerging markets. These aspects which are specifically inherent to decentralisation
and the distribution of power, should have positive effects in emerging economies.”
However, Mikhalev continued, in each conversation carried out with central bankers in developed countries, he has found that they perceive blockchain as having little effect in situations where the supervisory institutions are not ready or unwilling to alter
their business models around a new technology. “Blockchain doesn't really make much difference if nothing changes in terms of the existing established top-down structure of CBDCs. However, in emerging economies, this seems to differ,” Mikhalev noted.
Keen to clarify Mikhalev’s position, Welfare responded: “Those are two different things – one is distributed ledger technology and the other is a decentralised world. Distributed ledger technology can be used in a centralised environment, that’s why we have
private ledgers and permissioned ledgers. My point is not around whether or not we decentralise power. The EU is made up of X number of central banks, so is the Fed. They are decentralised not in terms of power, but in terms of technology.”
He explained that we should focus on distributed ledger technology rather than
decentralisation as a term to describe their efforts, as “it’s about its distributed nature and not about decentralisation. It’s the distributed ledger technology that enables the speed of transactions and transparency.”
Mikhalev countered: “It’s my personal opinion that the use of DLT in a centralised environment is only taxing us with regard to the efficiencies – I do not see there being any efficiency gains. I can see from the e-CNY implementation [the Chinese CBDC] which
is pretty much DLT-free that this is not without reason. Inherently, if you want to use DLT, there must be a reason behind it from the policy/people aspect.
“Otherwise, in my personal opinion, if you implement it in the traditional top-down environment which is not designed to be decentralised, resiliency gains could more easily be achieved from common client server technology which we know quite well.”
“But,” Welfare responded, “that doesn’t scale well – which is the point of DLT.”
If a country wants to hold the next reserve currency for the globe, Welfare contended that it will need to be on DLT “without question.”
“We talk to the ECB and other central banks which are using DLT in their trials and pilots, and that, in my opinion, is where we’ll end up.
Taking a slightly different tack in the debate, Patchay commented: “I'm going to take step back as I am a firm believer in form follows function. Designing a CBDC is a huge undertaking for any central bank, and is not something that you can just build in
an agile way.”
She argued that there must be a very clear vision of what is to be achieved, how it will scale, and how it will support innovation in a changing economy and into the future. A CBDC is not something that can be incrementally tweaked as central banks go along.
“For any central bank, the key thing is to ensure that you're very clear on what your drivers are for implementing a CBDC and what your priorities are, because different priorities will drive out different design considerations. Is your focus on privacy,
or is your focus on efficiency or programmability? Or, what is it that you want to achieve with your CBDC? Because that's actually going to be very integral to the design decisions that you make when you're implementing the CBDC.”
As well as considering what the payment infrastructure will be supporting the CBDC, central banks must ask how participants will participate in that payments market infrastructure.
Patchay continued that these are things that ultimately feed into the design considerations that will lead to a choice between different technology options, and are very important to get right. “Because, again, although you can't build something that's 100%
future proofed, it must be sufficiently open to change and what can evolve in the future. There's no question of tearing this up in a few years and starting again and implementing a new system. It's got to be the foundation of what's to come in the future.
That's a big ask from a design perspective.”
The full webinar is available for viewing here: Digital Asset Series 2022: Navigating CBDC Unknowns,
and we recommend you stay up to date with any new CBDC updates with Finextra’s PREDICT 2023 Series, launching in late December.
If you’re interested in contributing to Finextra’s PREDICT2023 Series, get in touch with us for more information: