CESC2020: Practical Considerations for Central Bank Digital Currencies

Okay, welcome everybody. My name is Coby. If you don't, and I'm an associate professor at the University of Cape Town to be in Austin, as a project, from a policymaker, perspectives, as well as from an industry perspective, in discussions with you and I hope it's going to be useful for the audience. Don't let me start with again, why we need to Central Bank, digital currency. And there's a very big fan of argument being made with incentive and communities, that effort organization is actually something

that we would like a drink because that's new business models. That have options action, down, welcome, and make sure we all on the same page assets. Distributed Ledger already from a centralized digital currencies. Better also springing up left and right incentive, and communities, and focus on those. That's a tissue on a distributed Ledger. The benefit of asset optimization said attendees through faster. If you look at the internet is very slow process

compared to the speed of transactions that you can have to make a centralized system because of the nature of real-time prosthetic ecosystem around. The second system itself slows the process down and increases the costs by using using tokenize assets. We hope that we can, I'm able to pass the sacraments reduce the transaction costs and increase transparency and that increasing transparency. If it is a little bit of a double-edged sword that looks and brains going to

argue later. It also comes with a couple of of challenges. Think about just internet markets as an example, when two bangs transact with each other regularly. All of a sudden, it always was over the counter and nobody could see exactly who spends acting. Now, there's a market to Banks transact and you would expect from the past history of protections that this Monday morning, that should be another transaction between the two. And this transaction doesn't happen. And then the bank that would have received the transaction goes on the internet market, price to

replace the liquidity, that didn't get from the first bank with bank, has the least amount for liquid. It is of the price that the bank will be closed to take his having ordering will change. So the transparency that we've created by it was making the Ledger fully visible. Can translate into price effects on the, on the market which is highly non-trivial and is not well understood. What is the biggest arguments for acid tokenization into moving to distributed Ledger as is the cash on that job. So if

a man transaction of a token, I want to transact between two counterparties even if the ditch or security is distributed Ledger is it's very fast as a higher transaction per second to the settlement for the payment off. This security unless it happens to us in some form of of trip lasted Has to be done through the existing payment system, which means it has to be done through the cars from the banking model that has to be done through the alley, slow process. So, this takes a lot of the advantages of having distributed ledger to settle digital

assets and the trade of the two assets. So one of the big Arguments for sentiment in the central Metro problem because we recognized that there are new business models around digital assets that are actually economically beneficial that can lead to new users. Like me we haven't seen before and this Innovation something that that is to be encouraged. So we need to solve this case and letter problem. Otherwise we would not reap the benefits of acetone ization

stablecoin, which represents central bank money, which represents a form of legal tender. And the approach taken, by some different countries are usually takes one north of three forms. So either you have already existing real-time processing system in most countries and countries that you prefer a Samsung replies to pro-choice digital payments, but you don't necessarily have some Ledger ledger to two under The settlement lay underneath it. So you have decentralized. Central banks are exploring both wholesale and Retail Center vintage,

scale and scope. And it's not what the benefits of each other. We're just at the beginning of our understanding of what's what we can we can benefit from all these different types of, of CDC. So, one of the, one of the big argument, white asset optimization can be interesting, is when you look at existing Securities example, this case could be a real estate. You could securitized assets on a distributed Ledger, and you can take away some of the lamps and risk that households tend to have that works for you. If your normal household that

just bought a house, you would have Mulga Tree House in that house as an asset is a huge lump sum risk. In your personal portfolio would like to see the Sands of smaller parts of your house and you yourself would like to invest in a more Diversified housing portal. I'm however, they usually come which I set up custom especially in emerging market, like in South Africa, problems of a population scooters from the market simply because they can't cover the relatively High set up. The hope is that if he uses of assets, Diction representations of

physical assets. We can reduce this this initial cost and make these assets more available to a broader population, helping them to Achieve Financial Security. So this has always been one of the oldest and the benefits of October nice. Assets of the mall. Elizabeth Mall in a very important aspect of creating digital Collectibles. I mean it's fun but there's something in this tissue collectible that I think it's a it's a permanent of a future that is to come. Did you Collectibles of work? Because

they don't require privacy. So, having a set of digital collectibles in the impossible to baseball and football cards today as well. So you can have this chat register who has, which tissue collectible and it's for the first time that you have a digital object that you are, that you make unique by using the blockchain. And I'm making it to me by having it registered ones and having it owned by one person or group of persons. I having it, once you enter the price for this, the trash, that's because in a normal system, in a centralized

system, the owner operator of the database automatically comes, the owner of the acid. Because He has the ultimate control of how many copies of that that you object. If you can't play it infinitely, many died in that means that the market price of these of these objects. Is there an increase in the digital economy? Has outpaced the real economy? And you said in every single year, I'm going to this increasing the digital economy. Having a register of the true object will become increasingly important. I want to take out the Privacy issue, which is the Tribulation. And once we figure

this out, we can do this for all kinds of the two objects and we decided where we want to have. Tokenized assets that set up being traded using distributed Ledger. We need a payment system that is up to date on medicine in soon with the needs of of the statue. I want to talk a little bit about the difference of the Farms of Central Bank, digital currencies, that can facilitate this transition into a Matic for economy. Going for that. I want to start with the existing real-time gross Sacrament systems

designed to minimize speculations. In value happens, if the stability can be achieved by pecking. This cryptocurrency with a result of asset that can be fiat currency. It can be gold or can be added to algorithms and their various approaches to. So this ad with mixed-ability virus approaches to the to the, to the trip to acid as a as a letter So I see that you see? And we went, when we talked about Central and back that your currency, we usually talk about fiat, currency and gold, as a backing for Odyssey PC. What are the benefits of using

stablecoins? Is that programmability? So we can have Stella crimes that integrate automatically what smart contracts and other distributed computation mechanisms that makes them particularly interesting as a new form of financial instrument that completes our overall, I'm space of existing financial instruments and can lead to more efficiency. You can do things for the smart contract that you cannot do with with any other mechanism in particular when it comes to using smart contracts as a commitment device. As a financial

contract, that cannot be renegotiated because the terms of the contract asset in code, a distributed over a large group of of notes and unless you control the majority of notes, you cannot just rewrite. The terms of the contract in many instances, this has significant advantages, and, and it's desirable for financial Contracting. And we can we can address and durability. When you, when you talk about cash, for example, there's an issue fungibility because for the lower denomination coins. I'm actually don't usually

eat them because it's not worth making very low value in a minute to find some country bility becomes an issue, especially if you move into around where you have a large number of low value of transactions. And if you have sex because of the nature of the object of low cost of copying them multiple copies of them. Even if you can make them, you will end. You will end up requiring, no value fans reactions to match the gas and then what we have today and also it's about accessibility 9. I'm going to revisit this pain lately because it's

icky, practical consideration of many central banks. How CBC with the excessive This man, if you if we designed this property, such a stable crime, can be. You can be used as a means of payment or as a store of value. And if I try to put the different approaches to, to the cdc's, in inside of a sense of Matrix, you can select divide them up in the friendship between, Jose token, those use between financial institutions they got internet, marketing, Cloud, Security payments. So, all you can have them as a retail token accessible

to do a brought number or a broad range of citizens. And end-users, not only institutions they can be either has backed by Central Bank, issued assets, all by private issue passes, and I'm going to focus today on these three on the utility settlement. On Libra. As an example for week, a token that is privately issued a non-essential backpack digital currency. As an example of a central of research of the text, I sent you an issue. Let me, let me show you the the world. Before,

any of our GPS came to visit the existing word, as we listen to the T. Graham said to have a central bank balance sheets and two Banks. So, this is the simplest possible that you can have the two Banks. Both have some reserves and the central bank has of our reserves of an amount 100, which the the bank 1 borrows from the central bank bank one, then lens 50 Euro, in this case to bank too. So it's an asset for Bank on the liability for Bank to that liability is backed

by assets, which are held in the form of Reserve Holdings at the central bank. And so that the first bank's, balance sheet balances. It also has to have some of this result folding of 50, and because I borrowed 200 from the central bank has 15 together, so you have an intervention on West fifty Euros, that is backed by results with a central element of all that happens. Is that the second thing replaced, the loan to the First Bank, let the balance sheet position gets reduced by

50. And so that the balance sheet still balance, you have to use the asset side effects so you have to transfer 50 results from bank-to-bank one so that thang once reserved Holdings. And all that you that you see is that there are some that there's a swap in the reserves That Thang hold with the central bank. This is texting rtgs system where the Central Bank sees exactly, who pays whom how much So after after the sacrament has has concluded, the new

balance sheets, have a central bank with a hundred hundred results Finance through the main refinancing operations, Borrowed by bank. 1, all results are held by bank one with a central bank. Everything is just an easy peasy. Now, let's have a look at how a wholesaler token was changed at USC. Just as one example that many others out there, taking us down some over the other various concerns about your see that I wouldn't have with other Jose tokens but it's a nice example because he spent a lot of time thinking about the institutional set-up for

the word with a house AC DC issued by a private participant. In this case finality that the system is supposed to work. The best of my understanding is that he would have a technical account with a central bank. This technical account is, are separate from the central bank's other accounts, and it's a breach with existing policy. We're only banks and very few other institutions such as Central Securities depositories, have accounts with a sentence for banks and very, very few other other institutions. But other

than some of this additional technical account before we have of any settlement, nothing happens. We have the same pictures before we have to 100th and market operations, for 05, F150 of which are held in deposits at the Central Bank. 50 remaining investigation into a bank loan to bank-to-bank to help out in the form of results with the central bank. Nothing has changed from the from the picture before I accept that now. So, now that he has technically, instead of only having accounts with the central bank's know, which bank has an account

on the liability side of tonality, What's the point of counts of both Banks? And when we have the unwrapping of sense of pants when when Banks buy coins from Penelope, what they do is they transfer reserves from the reserve account to the amount of Anarchy at the central bank, which is reflected as an asset of finality personality and charm. And it's each bank with a certain amount of tokens, which I want one back in this case, with the Europe. So far, each

Bank, you have a swap on the asset side between results and coins. And functionality. You just have an increase in the balance sheet and for the central bank to have a liability side swap between reserves and that nothing else happens. Now, if we have a sacrament of claims the intervention on, the penguin has issued to been to is being repaired. Now, what this does is it looks a little different from before because the repayments of happens been truly Deuces its exposure to bank 1 by 50. The bank one balance sheet is reduced by 50% to balance sheets with reduced by

$60, change, a client's before now was able to use some of the points that they hold with fonality. So the settlement of the claim is actually happening on The Ledger of vanilla tea as opposed to the ledge of the sentiment as if nothing happens on the Central Bank. Like one of the concerns that many central banks have that. So the settlement of these transactions happens outside the Elijah in the shade lighter system, you can have a Central Bank in the note and then in all situations,

I know the central bank will insist on being note on the shed so that they actually have read and write access to the lecture. Still the control of assets of the settlement of this transaction has been moved from the central bank for public entity to a private entity. Don't necessarily good or bad, but it's a change, not just in the technical way the system operates, but it's a fundamental change from something. That is that is that is the purview of a public entity moving into into a private Enterprises Inc.

Self-centered and Elijah has a 75 gallon tank 1/25 in the same balance sheet. I've accepted you as a as a letter of 02, all this is a reshuffling of points on with with Libra. And the way that Brad has approached this So in the Libra setup, you have the number Bank sector with, with a balance sheet, you have the banking sector and so he had this includes households and firms. You have to be brought and you have a central bank so you have the simplest possible system. We have a 10 open market operations Borrowed by the banking sector. The banking sector

has issued 90 and deposits in the setting. And these deposits are held by The Man by the sector's asses who also have been 10 years in banknotes, which is a liability of the Central Bank and 100 as a loan from the banking sector. So now with Libra being introduced, what would happen is that there's a demand for coins from Libras and it's a 50/50 Libra coins. These clients must come from the only place they can come from in the existing system is if the nun Bank sector says, okay. I would like to hold

your deposits and more clients. So that is a swap from deposits into that is reflected on the banking sector balance within the first step. It doesn't matter. It's just a different account that used to be the deposit account and now it moves into the deposit account. However, Eva is not necessarily likely to hold these deposits. So the Libra Reserve would change these deposits into lungs. So it would take some of these deposits and and buy claims on the on the Monday Titleist MB government. Bonds, it can be such a

high-quality, liquid assets, all kinds of good assets that Libra wants to purchase from the banking sector. The big problem is that, we plan would gain a lot of bargaining power towards the banking sector because they know that they can add short, notice change the deposits into any kind of claim on the Monday instead. So they can force the banking sector in pollachi quality Outlaws into a fire sale of the bonds that they hold on the timesheet and that is you So, do to address this issue. That's a, that's a lot of central banks that explore Central

and two children. And we start as before with the exact same balance sheet, you have the notes. And now we want to, we want to sort of half notes and clients that I issued by the central bank. So this is assumed that the Central Bank offers the non-mining sector access to its balance sheet, how much are the taxes is up for discussion in the, should we give access to license service providers non-banks at regulated registered entities? That would perform payment services So in this case, what you would do is,

you can say, okay, the set of clients like that on the, on the bank's balance sheet, also represent a change from the banks open on the central bank's open market operations because the banking sector needs to reduce the deposit. Old, is the slowest at the at the non-bank sector are initiates by changing that amount from deposits, two points has have to come from somewhere. So what this first, as it increases the central bank's balance sheet and all the sentiment needs to decide,

how to how to create insides in the first model. You could create more open market operations to provide liquidity, into the banking sector. But if you do that, you'll require require additional exposure is Adipex. Yeah, ternative is like, instead of doing this with open market operations center, banquet and gauge into Bond, purchasing program, Spike sample and then to choir claim on the private sector from the bank, which I miss you too, by the system preferences from deposits to clients initially is of the fierce that we will see it

and disintermediation at the eclipse affect us, not clear. Because it could, well, be that our customers prefer to hold a more deposits because they're easily changed it to send you my picture of currency and the cash just doesn't exist anymore this month. So instead of just having a mixture of cash deposit, would you always have because cash is cumbersome and difficult to get an expensive. You would probably have more deposits that when there is a prices, you could initiate around into into Central Bank Is it going to send check

to wrap up in the last? And the last 30 seconds, I want to talk about the four pieces before missing building blocks for Central Bank, digital currencies, the first sustainability just to give you one simple example. If you have a country is 58 million uses. Your letter needs to be able to handle around about 5000 transactions. Per second in a half behind this morning. This is, if you have 16 hours a day during which elections happen, roundabout all transactions per person is just how many transactions per second. Do you need to be able to write a very, very few letters who can

handle this up all retail Center in touch with her sister, the scale, you need to look at any time we've discussed around cdc's. Nusenda Bank setting is the issue of privacy cash. Guarantees privacy is important because the that should be limits to how much the government. Sofia in the in the private lives of its citizens. So what we want this, we want to have no value of transactions that you to retain privacy and high-value transactions. I need to be fully article within the same protocol does not

exist in any protocol. I know, especially if you combine it with the demand for scale. So this is one of the big open problems in on the protocol. Problem is the one of inclusivity and South African fighting. I'm only about 50% of South Africans. Have a smartphone How do we, how do we include users that don't have smartphones with this? Radical, inclusivity of is lacking from most replications of the next 16 way to little research and work being done on this particular issue. If they

are good Solutions out there, I couldn't you just contact me what that amount from Central and specifically this issue of accessibility setting. Ninjago bility in a future world will be as very sentimental. This is how can we ensure that tokens in different jurisdictions are intolerable. So there's still some token creatures out there but it's still not fully business ready, I would say. So when we had to look at the difference of open britches all day and I hope I'm not offending

anybody. And I think there's still work to be done on the interoperability issues in particular for nobody, but those out, if we can get those right, I think there's a huge demand, among Central Bank, has to understand evaluate, and eventually Implement sentiment that reproduce these days. We can move to do this to a point where we can have CDC us and we can make them a reality. I think the sky's the limit and many of you. Business models in the new digital

economy willyrex, thank you very much.