On the afternoon of Wednesday 16th September, we were delighted to be joined online by Lee Schneider, Jannah Patchay, Victoria Thompson and Jeremy Wilson who provided our members with a fascinating insight into Central Bank Digital Currencies: what they are, where they have been used, how far they have come and the potential implications they may have.
CBDCs should be a direct obligation of the central bank and a component of the sovereign currency of the country. They are therefore separate from stable coins as stable coins are not government-issued money, even when linked to fiat/sovereign currency.
In terms of the design and implementation of CBDC there are four main considerations:
1. Fiat Currency: Will the CBDC be part of the country’s fiat currency, equal in all respects to physical cash, or will it merely be sanctioned by the central bank with some linkage mechanism to fiat currency’s value, like a stable coin?
2. Privacy: Will the CBDC ensure the privacy of its users to the same extent as physical cash, in particular (though not solely) through a design that inherently resists tracking and tracing of user activity?
3. Trust: Does the CBDC system and platform achieve trust through transparency and accountability of key stakeholders and through public disclosure and review of its design, architecture and implementation and the powers and capabilities of key stakeholders?
4. Interoperability: Is the CBDC programmable by all stakeholders such that it works on multiple platforms and in multiple contexts to maximize functionality, availability and usage to all sectors of society?
Currently CBDCs are a very active area of interest and there has been an acceleration in interest following Covid-19 about CBDCs, and 80% of central banks are now investigating it with pilots and tests. However, to date no one has got a live CBDC.
Certain countries, however, such as China, Singapore, and the UK, are currently more advanced, so it will be interesting to see who will be the first to go live. Regarding who makes the first move, there is a huge potential for advantage as the design choices and precedence set by one will determine the decisions of others, however measured and collectivist approaches are ideal.
Examples such as the Caribbean have shown that this emerging technology can really pivot economies and there is a potential to leapfrog existing systems as it makes it very easy to move money around. Subsequently, this would be an opportunity to have a network that works for them and so give countries like the Caribbean independence.
Other countries have had contrasting conclusions to these pilots, for instance Canada had a really interesting pilot in 2016 which concluded in 2020 that didn’t see a compelling case to force this agenda, so it will be interesting to see whether Covid has changed their opinion.
One question which often gets raised is ‘what's the difference between existing currencies and CBDC?’ especially as the use of cash is in decline so a lot of our money is digital.
The key difference is around the nature and design of that currency. The existing payments infrastructure has become gradually digitised, however it still has the same underlying assumptions that cash is moved from one vault to another, which leads to huge inefficiencies. Thus, new innovations are leaping in to address these inconsistencies, responding to real needs in the market.
Libra has been very import in driving forward CBDC , as Facebook has such a large reach with a user base of 3 billion worldwide, so once Facebook announced Libra it really drew central banks and policymakers attention to the need for CBDCs and it became a question of monetary sovereignty and national interest . It is especially of interest because a privately released stable coin is only as reliable as the issuer of that stable coin, whereas CBDC eliminates that counter-party risk.
If governments do not adopt CBDCs then these gaps will be filled by the private sector, which is a key driver for governments to adopt it, however it should also be thought as an opportunity for innovation. For example programmable money can change the way benefits are paid, earmarking them for certain purposes to make sure they are spent in certain ways.
The next steps for this new form of money will likely be legislation. For this there needs to be pan-government involvement as it is such a global phenomenon.
Therefore there are some key points to think about:
• If this is going to work properly with minimum tension and accidents around the world then we need universal standards. Moreover, governments and the innovation community are going to need to be very closely involved in this.
• Also it is highly important to have enlightened regulatory oversight at every stage, which should be guiding and not stifling.
There are also geo-political considerations for CBDC, as if this money is going to be available digitally to anyone, for anything, then it starts to challenge the current reserve currency status of the US dollar, and so it will be interesting to see how to US responds to that.
Overall, new money takes decades to introduce but the foundations are being set today, and it is important that policy makers recognise this and prepare for this with a collectivist mind-set.
Genral Counsel | block.one
Lee A. Schneider is a financial services and technology lawyer with extensive experience in blockchain. Lee co-hosts the Appetite for Disruption podcast with Troy Paredes and is the contributing editor for the Chambers and Partners Fintech Practice Guide. Lee serves as General Counsel for block.one but all views expressed are in his personal capacity and reflect only his personal views and not those of Troy, Chambers, or block.one or its directors, officers or employees. His views do not constitute legal, investment or any other type of advice.
Director | Regulatory & Market Structure Advisor | Markets Evolution
Jannah Patchay is the founder of Markets Evolution, a consultancy specialising in financial markets innovation, and in helping firms to define, develop and execute their commercial strategies in a highly regulated environment. Her passion lies in building the capital markets of the future, harnessing emerging technology to create new and innovative financial services and products that can promote wider social benefit and greater access to financial services. She is also a Director of the London Blockchain Foundation, and writes on regulation, financial and technology innovation for Best Execution magazine.
IP & IT Legal Professional | Curatrix
Victoria Thompson is an experienced IP and IT lawyer with a deep knowledge of working with organisations to successfully manage and deliver digital and cultural transformation. With experience of working with clients ranging from the fashion, automotive, healthcare and Fintech space Victoria thrives on helping her clients be agents for change and launching disruptive products and services. Victoria now heads up her own innovation and IP strategy consultancy firm called, Curatrix, based in London.
Prior to founding Curatrix Victoria was the Group Head of Innovation Legal for Barclays Bank and Group Head of Technology Operations and IP Group Legal for Development Bank of Singapore. Before moving in-house Victoria worked in London’s leading TMT and IP teams at Hogan Lovells and DLA Piper working in their teams in the UK, Middle East and US and spent time on secondment to the UK Government helping with digital strategy and developing draft regulation and new government agencies to deliver change programmes.
Victoria is a member of the City of London Whitechapel Think Tank, advisor to the City of London professional services innovation sounding board, mentor to Outlier Ventures Basecamp, Founder and director of the London Blockchain Foundation, regular speaker and guest lecturer at UCL’s Blockchain Lab, INSEAD and SMU on corporate innovation. and she was also listed as one of Innovate Finance’s Women in Fintech Power list in 2018 and 2019, and also nominated for UK’s in-house innovation counsel of the year award 2019 for her work helping to launch the Barclays Female Innovators Lab based out of Barclays Rise Platform.
Previous Vice Chairman | Barclays Corporate Bank
Jeremy Wilson, after retiring as Vice Chairman, Barclays Corporate Bank and a career spanning the globe in its major business units, now pursues interests - taken up in his final 10 years there - in supporting the responsible, ethical & collaborative application of new technologies for society and their potential for keeping the planet habitable.
He is Chair of the Whitechapel Think Tank a forum for public / private sector collaboration on distributed ledger functionality across governments, regulators, academia, and incumbent & insurgent service providers; a Fellow of the University of Cambridge Institute for Sustainability Leadership; a Non-Executive Director of Nedbank Private Wealth International; a Non-Executive Chair of QPQ, a private sector enterprise developing the infrastructure for digital transactions; and a member of the Advisory Boards of Form3 and of MLC / Oleso. He also chairs various ad hoc communities in the public and private sectors supporting entrepreneurial enterprise.