On Thursday, June 30, Hyun Song Shin joined Markus’ Academy for a lecture on After the Crypto Crash: The future role of CBDC. Hyun Song Shin is Economic Adviser and Head of Research of the Bank for International Settlements (BIS).
[0:00] Introductory remarks [14:39] Role of stable coins in the crypto universe [35:32] Drawing lessons for the future of the monetary system [52:16] Programmability and smart contracts [59:59] Similar examples [1:04:02] Cross border dimension of CBDCs
Executive Summary
A few highlights from the discussion:
[0:00] Introductory remarks. Recently, a big boom in crypto has been followed by a crypto cash among many different crypto currencies. A traditional finance explanation for this crash is a margin spiral kicking in, where lower prices increase volatility, which increases the margins and so people must de-lever, causing further price decreases. Another theory is that it is simply a crypto bubble popping right now. Questions arise when valuing crypto assets: some consider things like Bitcoin to be a safe asset (which increases in a risk-off phase – a negative beta), whereas others believe it is more like a tech stock with optional service flows far in the future (which lose value in a risk-off regime). Importantly, as central banks hike interest rates, a bubble is less likely attached to crypto assets rather than government bonds. CBDC can be seen as a guarantor of uniformity of money, programmable money leads to fragmentation of money while programmable wallets don’t. “Smart CBDC” uses a back rail ledger to connect various ledgers.
[14:39] Role of stable coins in the crypto universe. Stable coins are designed to keep a stable value with traditional currencies like the dollar, but as we saw in May with the implosion of the Terra stablecoin, their peg to the US dollar cannot be guaranteed. With money, we typically expect a virtuous circle of greater use and greater acceptance, but the fragmentation of the crypto market has led to many thousands of crypto currencies. Congestion within Ethereum or any dominant blockchain opens a gap for competing blockchains to grab market share: newer blockchains could then enter the market. On the other hand, some congestion that channels rents to validators is a feature, not a bug. This suggests that crypto does not behave like a traditional currency. Moreover, it is becoming clear that crypto only works with inflows of new users. A “virtuous circle” that can be observed in crypto is more driven by speculative buying than the nature of money.
[35:32] Drawing lessons for the future of the monetary system. CBDCs could do many of the same things as crypto without some of the drawbacks. Rather than having to use stable coins, CBDC would already be with central bank money, so there would not be the same fears as with crypto. In a digital setting, when transactions occur, users want to prove provenance so that everyone understands that the value of the money is real. In a crypto setting, provenance is proved by publicly posting everything. However, for CBDCs this is not an option because using real names would cause privacy concerns. Zero knowledge proofs allow for proving provenance without listing all the transactions; this ensures individual privacy, having decentralization, and having real names. This leaves aside ransomware attacks, money laundering, and other activities that crypto typically allows.
[52:16] Programmability and smart contracts. Complicated transactions that are only executed contingent on other requirements being met can be facilitated by CBDCs. With tokenization, you can tokenize a real world asset like a house, and then buy fractions of the asset. For the house example, this is particularly important because one smart contract using CBDC can ensure that real names are used (unlike in crypto) and there is a way of connecting the real world assets to the blockchain itself. The CBDC allows for private sector transactions to occur, without the central bank monitoring all transactions.
[59:59] Similar examples. Pix, a system in Brazil is close to a CBDC in that it has the same open architecture, meaning that service providers have to play by the rules. It has been successful, and has overtaken debit and credit cards. This has been a big step forward in financial inclusion, as the transaction fees are much lower. This is not a zero sum game in that the private sector is not necessarily being crowded out, even when people are using Pix, this allows for more business opportunities for the private sector.
[1:04:02] Cross border dimension of CBDCs. The global monetary system can allow for multi-CBDC platforms. These platforms can have different currencies being traded, though there are tradeoffs for all platforms. Even if the Fed or US Electorate decides not to do a Fed CBDC, there are still ways to integrate dollar digital assets into these platforms. Speculation would not be the same as with crypto, given that it is a 1:1 ratio with the traditional currency. Using CBDC in transactions can smooth some of the general frictions, and make transactions much easier.