As we look back on our 30th Anniversary year, we are reminded of all the…
ANNA 30th Anniversary Celebrations: Digital Assets Round Table
The Association of National Numbering Agencies 30th Anniversary Celebrations: Digital Assets Round Table
In celebration of ANNA’s 30th anniversary, ANNA held a Round Table with industry experts to discuss Digital Assets and the importance of the role international financial standards play in ensuring efficient and transparent global trading. Participants included John Ho, Head of Legal, Financial Markets, Standard Chartered Bank, Bruno Schneider Le Saout, FinTech start-ups board advisor and strategist, European BlockTech Federation AISBL board member, Silvan Andermatt, FinTech enthusiast and member of the Board of the Swiss Finance and Technology Association, and Rosa Giovanna Barresi, FinTech lawyer and Associate Member of the BABEL research unit at the University of Florence.
ANNA: What are some of the central banks’ concerns regarding CBDCs as programmable money?
John Ho – Programmable money that is designed with embedded smart contracts and/or in-built rules may limit universal access, constrain the users from unfettered use of money, affect individual’s right to privacy and expose users to operational and cyber-security risks. These rules could mean that CBDCs expire after a fixed date, limits may be imposed on the amount of CBDC an end-user could hold, restriction on use to certain types of goods or services, and the central bank may have access to individual’s personal data and details of transactions. In addition, users may be exposed to technology-related operational risks as exemplified by the recent service disruption to DCash, the CBDC used by seven Caribbean nations. The platform went offline for two weeks in January 2022, impacting the ability of users to complete transactions using Dcash.
Bruno Schneider Le Saout – Most central banks are not keen to change their governance with direct liabilities to the general public creating a general-purpose central bank digital currency. It also appears that many of them are quite reluctant to use digital currency’s potential programmability for better monetary policy efficiencies (accounts opening, bearing interests, conditional airdrops). In many cases, legal issues prevent them also from initiating any innovative but risky monetary policy paradigm shift without lawmakers’ approval while preserving the role of the banking industry and other private financial stakeholders.
Silvan Andermatt – The concerns with CBDC as Programmable Money are manifold, to name a few: is a retail or wholesale CBDC envisaged? Shall data privacy of cash be replicated in CBDC? Shall limitations be implemented (e.g. expiration rules)? How to address potential discrimination from underlying smart contract rules? Is a CBDC issued by one central bank interoperable with CBDC issued by other central banks? What consensus protocol and security standard shall be applied to the CBDC, i.e., will it be more convenient or more secure (and potentially with a higher impact on the environment)?
Rosa Giovanna Barresi – Programmable money and smart contracts are not a danger per se, but the risk they bring depends on who is delivering the actual code and on the platform that code is run. Contrary to some academic opinion, programmable money should not be described as lex machina, but rather as a very complex system resulting from the interplay of many small entities: as a consequence, concerns are about overall resilience, reliability and quality assurance.
It is increasingly clear that in the near future, programmable money will be limited to stablecoins. The pilot program for the Digital Euro CBDC has already left out any feature requiring programmable money. Commercial banks are favouring an early adoption of programmable money as it could ease the workload generated by the subcontracting business at the base of any advanced economy. After the new German “Fund Location Act” (FoG-E) (August 2, 2021), domestic special funds have the option to invest up to 20% of their managed assets in digital currency assets such as bitcoin. It has been years since European banks started offering digital asset custody as implemented by smart contracts. Still, custody is a very limited business and has not the same risk profile as programmable money.
ANNA: How does the recent US Fed policy report favouring an account-based digital dollar affect the chances for token-based CBDCs in the US and elsewhere?
Silvan Andermatt – China, Bahamas and other countries have already implemented their design choices. The EU, Switzerland and others have conducted studies. The US are joining a bit later in the game. Due to their size, it will be an important factor to consider for others. However, we can currently observe diverse design preferences, at least partially reflecting the regional reality and priorities, which may ultimately be considered more important than outside influence.
When it comes to evaluating the US Fed report about CBDCs and the papers that have been published after it, what are the chances of account-based CBDCs, Rosa Giovanna Barresi gave her view – The proposal of an account-based, single-tier digital dollar solution has already been rejected by both the American Bankers Association and the Republican Party. Some economists point out it could be a very efficient way for giving subsidies. Still, the opposition counters managing an account-based structure for all US citizens is totally beyond the Fed’s capabilities. From a political viewpoint, the issue of an account-based CBDC looks too divisive to be raised before the midterm elections. At present, all the Fed’s impulse is targeted at regulating stablecoins and launching the FedNow instant payment system, which is planned to happen in 2023. In my opinion, the Fed’s report describes the operation of a single-tier, account-based CBDC but does not say that it will happen in the near future. From the technical side, there are presently only three operational, account-based, single-tier CBDCs: the Bahamian Sand Dollar (2020), the Cambodian Bakong (2021) and the Nigerian e-Naira (2021). The latest two should be better described as electronic wallets guaranteed by the Central Bank but operated by the Commercial Bank retail network.
ANNA: Stablecoins or CBDCs? Which offer the greatest benefit to the public?
Bruno Schneider Le Saout – Which is the “public” we are talking of here? Public as professional or individual investors or public as consumers and businesses? As for citizens, stablecoins can’t be used as a digital cash payment solution yet. In case they will be regulated soon, they won’t be costless and they won’t be “legal tender” in many countries. Furthermore, we have to consider that stablecoins are today “probabilistic” systems where deterministic systems are required for transaction’s time and cost certainty as for industrial supply chains with machine-to-machine automated payments. For investors, banking or financial industry this is another story with better internal and cross efficiencies and costs reduction.
Rosa Giovanna Barresi – As an investment vehicle, dollar-pegged stablecoins are gaining the favour of the global public: they offer exposure to the dollar at the lowest possible cost. They can be used to bypass currency controls. They are used for making payments on a blockchain, as in the corporate-oriented JPM coin or as in the crypto-oriented tether. However, their actual circulation in everyday life is negligible, as they are not a solution to the day-to-day problems of the public. Nobody presently accepts stablecoins as a means of payment for taxes or rents, let alone a deposit for buying a new car or a house. In the economist’s language, some deals need the low-risk profile inherent to Central Bank money. In my opinion, the real benefit to the public would come from a low-cost, reliable and pervasive instant payment system which, over time, will probably evolve into some kind of CBDC.
ANNA: How might price inflation or energy shortages comprise the development of the crypto industry?
Bruno Schneider Le Saout – On one hand, the speed of innovation adoption in blockchain consensus protocols towards green or more energy-efficient protocols, including no mining solutions, is really too slow “yet” to cope with the energy crisis and net zero transition which comes with the “emergency” of climate change risks mitigation towards clean and/or renewable energies (cf. “proof of work” bans projects in many jurisdictions). On the other hand, the development of important renewable energy sources in advanced countries have to be considered, so chips makers announcements, like Intel, promising better energy saving computing solutions (1000X) for blockchain mining which have to be audited.
Silvan Andermatt – Energy consumption is, in particular, an issue for proof of work consensus mechanisms, thus a technology that is available since early stage. It is very secure, on large scale, but also energy-intensive. Arguably security comes at a price. However, for the whole DLT ecosystem, other options are available, such as proof of stake, which consumes far less energy.
Rosa Giovanna Barresi – Inflation is already having indirect consequences on crypto, as the NCBs are reacting to that by delivering less capital and at higher interest rates. We should understand that energy shortages and higher energy prices are going to be a permanent problem. Our lifestyle needs heating during winter and air conditioning in the summer. In my opinion, crypto mining is just another economic activity producing a commodity and, as such, should be regulated by the Department of Trade and Industry. That does not mean crypto mining should be forbidden, but it should be part of a global energy plan. If we want a transition to a greener economy, energy consumption should be planned and controlled in the same way that National Central Banks plans and control the availability of fiat money.
ANNA: Where does the application of DLT in financial services have the ability to make the greatest impact?
John Ho – Asset tokenisation has the potential to present the greatest impact. DLT has given us the ability to tokenise any kind of digital and real-life assets. It offers the potential to open up private markets by unlocking the full potential in illiquid, relatively high-performing asset classes through enhanced market access and wider distribution.
Bruno Schneider Le Saout – Distributed ledger technology’s positive impacts (automation, disintermediation, efficiency, …) are already established for many financial services like trade finance, payments, securities services, asset management, investment services, …, it seems too early for any impact ranking but the OECD blockchain policy centre’s research and surveys estimate the impact of DLTs on trade finance from 3 to 4 % economic growth depending of the region.
Silvan Andermatt – DLT has the potential of disintermediation, thus facilitating direct transactions amongst peers, e.g. in cross border remittance/payments, allowing for significant cost reduction and efficiency gains by reducing the time of settlement from T+2 to almost instant (even a little quicker than SEPA instant). Lending to underbanked and unbanked people is a further potential application, with a potentially huge impact on their quality of life.
Rosa Giovanna Barresi – In my opinion, innovation in the financial markets should focus on the issuing of securities. Public Debt and Private Stock issuing processes are hindered by old requirements for notary (or official) supervision. Largely manual processes force the adoption of jumbo-sized issues and require the support of underwriters’ syndicates, whose fees add up to the cost of capital provisioning. Two experiments have been made in Europe about issuing debt certificates over a DLT. One has been conducted by Société Générale and Banque de France, and the other as cooperation between the German Department of the Treasury, the Deutsche Bundesbank and the Banca d’Italia. Also, the market for US Treasuries, which is really dispersed on many different platforms, is being targeted by innovation. Jay Clayton, former chair of the US Securities and Exchange Commission, has recently stated that the US Treasuries are the dog, and the digital dollar is just the tail of the problem.
ANNA: Which regulatory standards exist for the classification of tokens? Where is there potential for additional regulation?
Bruno Schneider Le Saout – Despite existing regulations like the one from the Swiss FINMA or the European Union MICA one to come with their tokens classification and also many private industry bodies’ token standardisation initiatives, there is no global agreement or consensus yet. The G20, the Financial Stability Board and other financial intergovernmental bodies (IOSCO, etc…) have to develop some global standards, but this will take time. Some crypto industry stakeholders are okay with this status quo, saying it’s too early for standardisation which will stifle market innovations and kill the market.
Silvan Andermatt – Global standards were not available in February 2018, when the Swiss Financial Market Authority, FINMA, was likely the first regulator in the world setting clear guidelines for initial coin offerings (ICO), including a token classification distinguishing payment token ( intended to be used, now or in the future, as a means of payment for acquiring goods or services or as a means of money or value transfer), utility token (intended to provide access digitally to an application or service by means of a blockchain-based infrastructure), asset token (represent assets such as a debt or equity claim on the issue) and hybrid forms of them including elements from more than one of the basic type. In 2019, one year later, FINMA provided guidance on stablecoins.
In December 2018, the Swiss Federal council announced crypto nation Switzerland and adopted a report on the legal framework for blockchain and distributed ledger technology, (DLT), in the financial sector, showing that Switzerland’s legal framework is generally well suited to dealing with new technologies, including blockchain. Nevertheless, areas of further development may be found in RegTech, DeFi (de)regulation and open banking.
Rosa Giovanna Barresi – We are constantly talking about stablecoins as they were all created equals. It is not so. Some stablecoins are not directly convertible into fiat money and are more similar to a fund than to a stablecoin. The composition of stablecoins’ guarantee funds has constantly been the object of speculation. However, at the moment, there is very little that can be done: we must wait for the Executive Order about the assignment of crypto and stablecoins regulation rights to the agencies of the US Treasury. What will come out of that effort is probably a multi-tiered system based on risk profiles. And that will reflect on the classification of tokens, the so-called “taxonomy”.
ANNA: What role can standards play to support further adoption of digital assets?
Silvan Andermatt – A clear regulatory framework is of essence to foster the development of the digital asset ecosystem. For instance, institutional investors seem keen to enter the digital asset market and invest in the technology but may need assurances. The same goes for companies providing services and products. In this sense, establishing global standards will be of utmost importance for the growth of digital asset adoption.
Rosa Giovanna Barresi – Asset coding and numbering is a basic requirement for Digital Assets custody, trading and auditing services. So far, the evolution of the market has been so fast that all efforts at classification have been rapidly put out of date. How could the old hierarchical schemes help auditors distinguish between a dollar-pegged, instantly-convertible, treasuries-backed stablecoin, permissioned blockchain-traded stablecoin and another one which is dollar-pegged, fund-managed, commercial paper-backed, non-permissioned blockchain-traded? Only a multi-dimensional taxonomy could describe the risk profile of those two, offering enough space for introducing new products. A meaningful taxonomy may support the achievement of Financial Literacy and help reach the target of a uniform treatment of Digital Assets in different jurisdictions, as put forward in the Resolutions of the G20 and the Recommendations of the Financial Stability Board.