The future monetary system
Summary
TLDRThe speaker discusses the current challenges facing the crypto ecosystem, highlighting its instability and unsuitability as a basis for a monetary system. The talk emphasizes the fragmentation of cryptocurrencies and the reliance on stablecoins, which ultimately depend on central bank money. The speaker contrasts crypto with central bank money, advocating for a future monetary system rooted in central bank trust, with innovations like CBDCs enhancing financial stability. The conclusion stresses the importance of central banks in shaping the future monetary system beyond the turmoil in the crypto world.
Takeaways
- 📉 The crypto market is experiencing significant turmoil with many cryptocurrencies losing over 90% of their value compared to their peaks.
- 🏦 The strain on the crypto ecosystem, including shadow banks, raises concerns about financial stability and the urgent need for policy responses.
- 🔍 Despite the immediate challenges, there's a need to focus on the structural flaws in crypto that make it unsuitable as a foundational monetary system.
- 🔑 The prevalence of stablecoins indicates crypto's reliance on traditional currencies, highlighting the need for a stable unit of account provided by central banks.
- 🌐 The extreme fragmentation of the crypto market, with over 10,000 coins, contradicts the concept of money as a unified medium of exchange.
- 💡 Crypto's decentralized nature leads to high transaction costs and congestion, which are counterproductive to its widespread adoption as a currency.
- 📈 The success of crypto is highly dependent on rising coin prices and new buyer inflows, which is not sustainable for a stable monetary system.
- 🌳 The future monetary system should be rooted in central bank money, with a robust ecosystem of services provided by the private sector.
- 💼 Central banks are uniquely positioned to lead the future monetary system, providing the unit of account and ensuring payment finality through their balance sheets.
- 🏦 The introduction of Central Bank Digital Currencies (CBDCs) could offer programmability, tokenization, and other advanced features while maintaining the trust in central bank money.
- 🌐 Multi-CBDC platforms have the potential to create a richer ecosystem, facilitating transactions across different currencies on a shared DLT platform.
Q & A
What is the current state of the crypto universe according to the script?
-The crypto universe is in turmoil, with the ecosystem of crypto coins and shadow crypto banks showing considerable strain. Prices of many cryptocoins have crashed, with some lesser-known coins falling by 90% or more relative to their peaks last year.
What is the role of stable coins in the crypto ecosystem?
-Stable coins are cryptocurrencies designed to maintain a stable value relative to traditional currencies, such as the US dollar. They indicate the pervasive need for crypto to rely on the credibility of central bank money, serving as a sign of the search for a nominal anchor.
Why are stable coins often far from stable as mentioned in the script?
-The script refers to the example of the Terra stable coin, which was the third largest and collapsed significantly over a few days in May, illustrating that despite their aim for stability, stable coins can be volatile.
What does the prevalence of stable coins indicate about the crypto system?
-The prevalence of stable coins shows that if central bank money did not exist, it would need to be invented, highlighting the inherent need for a stable unit of account in the economy.
How does the script describe the fragmentation of the crypto universe?
-The script describes the fragmentation as a result of the proliferation of over 10,000 crypto coins, which contradicts the expectation that a suitable currency would lead to a coalescence around one cryptocoin.
What is the role of validators in the crypto system?
-Validators in the crypto system can be miners, large holders of coins, or 'whales' in a proof-of-stake system. They play a crucial role in the consensus-based settlement process of cryptocurrencies.
Why does the script mention congestion as a feature of crypto systems?
-Congestion in crypto systems leads to high transaction costs and rents for insiders, functioning like a toll road. It creates an opportunity for new entrants but also sustains the system by ensuring that tolls are paid.
How does the script relate the concept of network effects to money and crypto?
-The script explains that money benefits from network effects where greater use leads to greater acceptance. In contrast, crypto illustrates a case of fragmentation and high costs, which is the opposite of the 'more the merrier' property of money.
What is the vision for the future monetary system as described in the script?
-The vision for the future monetary system is the fusion of enhanced technical capabilities around the core of trust provided by central bank money. Central banks are positioned to provide the core, with a rich ecosystem of services provided by the private sector.
What are the potential benefits of using wholesale CBDCs (Central Bank Digital Currencies) with distributed ledger technology?
-Wholesale CBDCs with distributed ledger technology could incorporate additional functionality such as programmability, atomic settlement, composability, and tokenization, while maintaining privacy and enhancing the结算 of transactions.
How does the script differentiate between retail CBDCs and retail fast payment systems?
-The main difference is that retail CBDCs are a direct claim on the central bank, while a fast payment system gives users access to the liabilities of payment service providers. Both aim to enhance financial inclusion and lower the cost of payments.
What is the significance of multi-CBDC platforms mentioned in the script?
-Multi-CBDC platforms bring together CBDCs from several central banks, transacting on the same platform, governed by DLT, and represent an important component of the future monetary system, fostering richer ecosystems with diverse private sector service providers.
Outlines
📉 Crypto Turmoil and Structural Flaws
The script addresses the current turmoil in the crypto market, noting the significant strain on the ecosystem due to leverage and maturity mismatch. It highlights the crash in cryptocoin prices, with many experiencing a 90% or greater drop from their peaks. The speaker emphasizes the urgent need to address the risks crypto poses to financial stability, while also considering the deeper structural issues that make crypto unsuitable as a monetary system. The prevalence of stablecoins is discussed as an indicator of crypto's reliance on traditional currency, and the instability of these coins is underscored. The fragmentation of the crypto market, with over 10,000 coins, is presented as evidence of crypto's inability to serve as a unified medium of exchange, contrary to the benefits of network effects seen in traditional money.
🚧 Crypto's Congestion and Validator Economics
This paragraph delves into the economic model underpinning crypto, particularly the role of validators such as miners or large coin holders, and how they benefit from network congestion. The speaker explains that congestion is not a bug but a feature in crypto, akin to a toll road, generating high rents for insiders. The chart presented illustrates the relationship between user fees and transaction volume on the Ethereum blockchain. The paragraph also discusses the challenges of balancing capacity and security in the crypto space, and how the fragmentation and high fees of Ethereum led to the rise of alternative blockchains, such as Terra, before its collapse.
🌳 The Future Monetary System: Central Bank Digital Currencies (CBDCs)
The speaker outlines a vision for the future monetary system, centered around the trust provided by central bank money and enhanced by technological capabilities. The metaphor of a tree is used, with the central bank and its money forming the solid trunk, supporting a vibrant ecosystem of private sector services. The components of this system include central bank money (M0), commercial banks, non-bank payment service providers, and the potential for wholesale CBDCs using distributed ledger technology (DLT). The paragraph discusses how finality in permissionless DLT platforms can be achieved using real names and cryptographic techniques like zero-knowledge proofs, and the potential for additional functionalities such as programmability and tokenization.
🏢 Retail CBDCs and Financial Inclusion
The script explores the potential of retail CBDCs and fast payment systems to enhance financial inclusion and lower the cost of payments. It highlights the similarities between retail CBDCs and fast payment systems, such as their reliance on open architecture and APIs for interoperability and effective competition. The success of Brazil's Pix instant payment system is cited as an example, showing how it rapidly gained widespread adoption and significantly reduced payment costs for merchants. The paragraph also touches on the potential of tokenized deposits and conditional payments in a permissionless DLT system.
🌐 Multi-CBDC Platforms and the Future of Monetary Systems
The final paragraph discusses the concept of multi-CBDC platforms, which bring together CBDCs from several central banks on a single DLT platform. The BIS Innovation Hub's trials of such platforms are mentioned, along with the potential for these arrangements to support a rich ecosystem of services provided by the private sector. The speaker concludes by emphasizing the importance of central banks looking beyond the current crypto turmoil to focus on the long-term goals of the future monetary system, which should anticipate future developments rather than just reacting to past ones.
Mindmap
Keywords
💡Crypto Universe
💡Stable Coins
💡Decentralization
💡Network Effects
💡Congestion
💡Validators
💡Central Bank Digital Currencies (CBDCs)
💡Distributed Ledger Technology (DLT)
💡Financial Inclusion
💡Multi-CBDC Platforms
💡Finality of Payments
Highlights
The crypto universe is currently in turmoil with prices of cryptocoins crashing and highlighting risks to financial stability.
Crypto's deeper structural flaws make it unsuitable as a basis for a monetary system.
Stable coins, aiming to maintain a stable value relative to traditional currencies, show the pervasive need for crypto to rely on central bank money's credibility.
The prevalence of stable coins indicates a search for a nominal anchor, yet they have been far from stable.
Crypto's fragmentation with over 10,000 coins shows it is not suitable as money due to its inability to serve a coordination role.
Decentralization in crypto leads to validator-based settlement, causing fragmentation and high transaction costs.
Congestion in crypto platforms, like Ethereum, leads to high user fees and rents for insiders, contrary to the benefits of network effects in traditional money.
The collapse of the Terra blockchain illustrates the instability of crypto platforms and the risks they pose.
Crypto works primarily when coin prices are rising and new buyers are entering the market, but it unravels when speculative inflows dry up.
Central banks are uniquely positioned to provide the core of the future monetary system, building on their issuance of central bank money.
The future monetary system is envisioned as a tree with a solid trunk of central bank money supporting a rich ecosystem of services.
Wholesale CBDCs could incorporate additional functionality, such as programmability and conditional payments, using cryptographic techniques for privacy.
Multi-CBDC platforms bring together CBDCs from several central banks on the same platform, governed by DLT, offering diverse ecosystems.
Retail CBDCs and fast payment systems can dramatically lower the cost of payments and enhance financial inclusion, as seen in Brazil's PIX system.
The canopy of the forest metaphor represents the integration of multiple monetary components, including multi-CBDC platforms, in the future system.
Central banks are on a journey to fulfill the vision of the future monetary system, focusing on long-term goals beyond the crypto turmoil.
Transcripts
thank you augustine um and and welcome
everyone um as augustine noted the the
crypto universe uh is in turmoil right
now uh the ecosystem of crypto coins and
shadow crypto banks that add layers of
leverage and maturity mismatch through
the system
um are showing considerable strain
um and as i was say noted the prices of
cryptocoins have crashed they are you
know many of the lesser-known coins
have seen their prices fall by 90 or
more
relative to their peaks
last year
now crashing prices and runs on shadow
cryptobanks highlight the risks to
financial stability
and clearly addressing these risks
is indeed an urgent policy challenge
but while we address these urgent
challenges we should not lose sight of
the deeper structural flaws in crypto
that make it unsuitable as the basis of
a monetary system
and we need to keep
the longer term structural issues on our
dashboard
as we think about the future monetary
system
now what are these deeper structural
flaws of crypto as money
as i was noted the first clue lies in
the role played by stable coins
stable coins as you know are
cryptocurrencies that aim to maintain a
stable value relative to traditional
currencies such as the us dollar
but
the prevalence of stable coins show uh
the pervasive need of crypto to
piggyback
on the credibility of central bank money
it is a sign
if you like of the search for a nominal
anchor
and yet um as we've seen stable coins
are often far from stable
the market value of the terror stable
coin which had been the third largest
collapsed over a few days in may
crypto started by turning its back on
central bank money
but it has quickly rediscovered the need
for a stable unit of account
which is best provided by by real money
issued by the central bank
so if you like the prevalence of stable
coins
shows that if central bank money did not
exist
it would need to be invented
the same goes for money's role as a
medium of exchange
money is a social convention we accept
money
because we expect others to accept money
in the future
and money is the perfect example of the
benefits of network effects
which entails this virtuous circle
of greater use
and greater acceptance
but crypto doesn't work like that
what is striking is that there has been
a proliferation of crypto coins
the result has been the extreme
fragmentation of the crypto universe
if crypto were suitable as money we
would have expected
uh one cryptocoin around which everyone
coalesced
instead we have a severe form of
fragmentation
of the crypto universe with over 10 000
crypto coins
jostling for a place in the limelight
and gone is any pretence
that crypto money can serve a
coordination role
now the reason
for the fragmentation
of the
crypto universe is that crypto runs
under the banner
of decentralization
where settlement is done through
consensus
formed by validators
now who are these validators the
validators can be miners
as in bitcoin or large holders of coins
or so-called whales
as in a proof-of-stake system
the fragmentation of crypto arises from
the need to channel rents to validators
and other insiders
and one way that rewards are kept high
is through congestion
when the crypto platform is used
intensively by users
transactions costs
and hence rents to insiders
uh tend to skyrocket
and this particular chart shows the
relationship between
the user fees on the vertical axis
and the number of transactions on the
horizontal axis for the ethereum
blockchain
so
if you like unlike money which rests on
the virtuous circle of greater
acceptance and greater use
crypto generates instead high costs
high rents to insiders and congestion
they open a gap for new entrants
with often higher capacity
but they often also cut corners and
security
in fact
finding the right capacity
at the outset is like balancing on a
knife edge
and let me explain that
as i've as i've explained congestion if
you like is a feature uh not a bug of
crypto
it's like a toll road
collecting tolls from users
but too much capacity
means that no one pays the tolls
which means that the system cannot be
sustained
in fact the the picture on the right
hand side um is uh from the time of the
so-called bitcoin
block size wars uh some of you may may
recall that
where there was a proposal to increase
the block size of bitcoin to
gather more transactions into one block
um but then but that was uh that didn't
really catch on
the the right hand uh
um image comes from someone who is
advocating for the status quo saying
look you know this is what you're
proposing
and to really drive home the point on
congestion
uh let's look at the proliferation of
different blockchains
in the decentralized finance or d5
sector
as recently as late 2020
most d5 applications ran on the ethereum
blockchain
and that's shown in the
size of the blue bar there
and this is to say most of the
collateral that was posted
in the d5 sector was posted on
the
ethereum blockchain
but over time
coming into
2021 other blockchains exploited the gap
created by congestion and the high fees
that i showed you in the previous slide
and by early may this year
ethereum here in blue
only had about half of the collateral in
the d5 sector
meanwhile
the terror blockchain shown here in red
was growing very rapidly and grabbing
market share
however as we know all this came to an
abrupt halt when the terror platform
collapsed
so with this levers
money and its network effects should
give rise to the property of the more
the merrier
so the more money meets general
acceptance the more it will be used
instead crypto illustrates the opposite
dictum it's a case of the more
the sorrier
and the fact that crypto is so prone to
fragmentation
makes it unsuitable as a basis for the
monetary system and that's what we
conclude in the chapter
what's also becoming clear in the
turmoil right now is that crypto only
really works when coin prices are going
up
and there are inflows of new buyers of
coins
and this particular chart shows a number
of new d5 addresses
shown by the bars
actually follows the price action of the
crypto coin itself which is the black
line just as the annual change
and as we've seen in the last few weeks
when speculative inflows
actually dry up the market can quickly
unravel
now when we look back
the rise of crypto over the last several
years has been a remarkable spectacle
it highlights the place of technology in
the popular imagination
and its galvanizing role in debates on
the shape of things to come
so in this respect
crypto offers a tantalizing glimpse of
newer arrangements
and technical features
but as we um argue in the chapter
everything that can be done with crypto
can be done also with central bank money
well except perhaps for money laundering
and ransomware attacks
but that's uh
that's with good reason
so as agustin showed the vision our
vision for the future monetary system as
laid out in chapter three
is the fusion of enhanced technical
capabilities
around the core of the trust
provided by central bank money
and central banks are uniquely
positioned
to provide the core of the future
monetary system
after all they issue central bank money
which serves as a unit of account in the
economy
and from the basic promise that's
embodied in the unit of account
all other promises in the economy follow
and of course the second fundamental
role of the central bank building on the
first is to ensure the finality of
payments
by using its balance sheet
so the metaphor that we use for the
future monetary system is that of a tree
it's solid trunk is the central bank and
central bank money
and the tree supports a rich and vibrant
ecosystem of services
provided by private sector institutions
and arrangements
in this tree the ecosystem is rooted
in the settlement on the central bank
balance sheet and this is the metaphor
uh that uh
that really comes in everything is
rooted in the settlement
on on the central bank's balance sheet
now what are the components of this
monetary system
as the foundation we have central bank
money or m0
which supports the monetary system
but building on central bank money are
the commercial banks and non-bank
payment service providers or psps
who take on the customer facing
activities
and within this structure we can
envisage a superior representation of
central bank money
available to banks and non-bank psps
through wholesale cbdc's
if these wholesale cbdc's operate with
distributed ledger technology or dlt
they could incorporate additional
functionality
these functionalities are fully
compatible
with the requirement of using real names
rather than hiding behind private keys
as is the case in crypto
so
how is finality attained in
permissionless dlt platforms
using real names
and the mechanics can be explained
through
a simple analogy
of passing on a physical banknote
the recipient of a physical bank note
here it's person d at the end of this
chain
wants to be assured that the note is
genuine
and not counterfeit
in a cvdc platform this can be done by
proving
the source
the origin or the provenance of the
money
now in the case of crypto
the provenance is proved by publicly
posting
the full history of all transactions
with all the uh the private keys all
listed
of course when real names are used um
such public posting would violate
privacy
and would be unsuitable as a payment
system no one else needs to know
where i buy my groceries
in the case of dlt systems using central
bank money this is where cryptographic
techniques
such as zero knowledge proofs come in
and cryptographic techniques allow the
payer to prove that the money was
obtained from valid past transactions
without revealing
the full history of who paid what to
whom
and depending on the detailed
implementation of such a system we may
also need a notary
to prevent the the same digital token
being spent twice
and needless to say the central bank
would be a a very natural choice for for
this kind of role
now whatever the specific implementation
is chosen
decentralization and new capabilities
can be achieved with all the benefits
that come from central bank money
and new capabilities may include for
instance programmability
or the ability to make payments
conditional on specific criteria being
met
this can
this can allow for instance for atomic
settlement whereby two legs of a
transaction that are inseparable
are executed together or not at all
another capability is composability or
the capacity to combine several
operations into one
and the image as you see here is that of
money legos that combine
different operations into one block
the third capability is tokenization
or the creation of a digital
representation of money or other assets
to be traded on the dlt platform itself
this could allow banks to offer
tokenized deposits
which could be used for conditional
payments
so how would this work
the
classical notion of settlement through
the book entries of intermediaries can
find new expression
on these dlt platforms
where tokens are transferred in
settlement rather than
through book entries
so in this respect the economics remain
the same
but the technological medium
progresses
in this way wholesale cbdc's could
support the settlement of the purchase
of assets for instance
so here for for example the buyer of a
house
may wish to make a large payment
but
a large payment to the seller of the
house
but conditional on the title of the
house being transferred
now from the seller's perspective the
seller wants to ensure that the title is
transferred only on condition
that the money is received
and the buyer and seller
may do this with a tokenized deposit in
a permissionless dlt system
together with
a token that represents the house itself
in the background the wholesale cbdc
helps this transaction to settle
and those
movements all occur
in one bundle
so far i have described wholesale
applications
in parallel with wholesale solutions
financial inclusion can be greatly
enhanced in the retail domain
through either retail cbdc's
or through retail fast payment systems
both of which will allow for instant
payments by households and businesses
now as we discuss in some detail in the
chapter
retail cbdc's and retail fast payment
systems
actually bear a very strong family
resemblance
both rely on an open architecture
together with application programming
interfaces or apis
that ensure the interoperability ensure
the interoperability of services
provided by banks and non-bank psps
and interoperability
ensures effective competition that
lowers costs
the main difference between retail
cbdc's and retail fast payment systems
is that cbdc's are a direct claim on the
central bank
whereas
a fast payment system only gives users
access to the liabilities of the payment
service providers
retail cbdc's and fast payment systems
can drive can sometimes drive dramatic
progress in lowering the cost of
payments
and enhancing financial inclusion
for example
this is a case for brazil in brazil the
picks instant payment system
was adopted by two-thirds of the adult
population
in just over a year after its launch
and in terms of use as you see here in
the in the green line
pix transactions
have now surpassed credit and debit card
transactions by volume
for merchants accepting fixed payments
costs only 22 basis points
again here shown in the tiny green bar
there
and this is just one tenth
of the cost of accepting credit card
payments for merchants
and
additional work which you can read about
in the chapter uh by various central
banks show that retail cbdc's
hold similar promise as these retail
fast payment systems
particularly if they're designed with
interoperability
and financial inclusion as the key goals
now we started with a tree as the
organizing metaphor
but when we zoom out we get to the
canopy of the forest
where the tree branches meet
and the canopy
actually embodies an important
additional component
of the future monetary system
in the form of so-called
multi-cbdc platforms
and such arrangements bring together
cbdc's from several central banks
all transacting on the same platform
now these arrangements involve more than
one central bank and here and and
therefore more than one currency
and this is
why such arrangements are typically
governed
as dlt platforms
so this is a view of the canopy from
above
and the bis innovation hub has
coordinated trials of several multi-cbdc
platforms
and in a new report that was published
at the same time as the annual economic
report
it draws initial lessons on the design
and implementation of these multi-cbdc
platforms
the early trials opened the prospect of
examining
the
open the prospect of examining richer
ecosystems
with a diverse range of private sector
service providers
of course
the full extent of possible innovations
is difficult to foresee
but one thing is for sure
all of them
will be supported by the tree
firmly rooted in the ultimate settlement
on the central bank's balance sheet
so
let me conclude
central banks as guardians of the
monastery system are embarked on a long
journey
in fulfilling the vision of the future
monetary system
and here the objective is to put in
place the arrangements that anticipate
future developments
rather than merely to react to past
developments
so while the crypto universe is gripped
by turmoil and attracting all the
headlines
uh it is incumbent on us in the central
bank community
to look beyond the headlines
and to think about these longer-term
goals
thank you very much
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