Inside Central Bank Digital Currencies

[Music] ladies and gentlemen esteemed guests and colleagues it gives me great pleasure to welcome you all to this enlightening session on inside the Central Bank digital currencies Central Bank digital currencies or cbdcs for short are not just a buzzword they represent a profound shift in the financial landscape and today we gather to explore potentials of cbdcs their benefits and the way forward with the right approach in theory cbdcs can enhance Financial inclusion and Foster economic growth what makes this session even more special is the active involvement of the adma research center in this critical domain notably two of our esteemed panelists are ad GMA Research Center advisory board members alongside expert Business Leaders this panel will bring invaluable insights to our and expertise in our conversation so let's delve in this poal conversation with our esteemed panelists David what are the de developments you're seeing in the capital and financial markets that makes you so enthusiastic about cbdcs well there's a lot of reasons to be enthusiastic about cbdcs not just globally but certainly in this region um but I want to frame that answer by reflecting on the journey we've been on in the last eight years so for those of us that have been in blockchain or distributed Ledger technology we always knew the real magic of the technology was the atomicity so how can I link a smart payment to an event so my money is not released until a package is delivered and scanned till a bond is issued or to some other activity uh happens but for those of us that have a background instit tional Finance there really wasn't a an option to have money on ledger so on R3 on quarter we have tons of different assets and 100 plus applications but when we try to settle with money we actually have to jump off chain and go through a traditional Channel which introduces all sorts of inefficiencies and risk and is far from ideal the crypto craze was just a distraction because that's not appropriate for institutional finance and while regulated stable coins may be an answer at some point in the future there's no consistent regulation so what sits at the center of Finance at the center of everything is money and what sits at the center of money which is the central banks and the central banks uh Central Bank digital currency so when we think about the promise of the technology and there's been scores of Papers written about the billions of dollars of savings about financial inclusion about new products that can be built on our technology we need money on that Ledger that is that is the grease if you will that will lubricate the wheel and accelerate all of this so that we can actually realize the potential so let me just give you a quick current example um given the limited time frame is there have been scores of digital bonds issued and that's excited for a lot of reason because you can fractionalize them um and and and a lot of other things you can do with them but the vast majority except on sdx have been really issued for show and then are are novated back to the traditional rails and a lot of those traditional rails are systemically important uh financial institutions with 40y old technology so we don't want to go backwards but to have a truly persistent digital Bond we need to have cbdc on Ledger as well so that we can lend those bonds so that we can repo those bonds and so that we can pledge those Securities and if you haven't read about it the Swiss National Bank the Central Bank of Switzerland has begun to make cbdc available on sdx which is the Swiss digital exchange the sub of six um and have issued a number of truly digital bonds that can persist and trade in the secondary Market derivatives can be written against them and the like so we need to see more of that and a little later you know maybe we can talk about the the international trade and what it can do for remittances and the like definitely Marcus what are the used cases that can be built on top of a cbdc infrastructure and how can this boost Financial well-being for individuals and organizations particularly smmes yeah thanks for the question um so I think thinking about cbdcs it can be such a broad term right so there's there's many kind of design um U you know kind of decisions that you need to make as a as a policy maker as a Central Bank in order to put forward a new kind of digitally native uh currency infrastructure and you know based on these decisions I think the benefits may vary uh quite significantly I mean thinking for example about retail cbdcs you know in countries where there is not an established retail payment infrastructure a cbdc retail payment uh rail can potentially can bring a lot of benefits in terms of the sovereignty of uh you know the infrastructure kind of reducing risks of relying into private entities that can you know potentially be um uh not as efficient have less uh for example incentives to innovate and develop further the solution in order to solve retail payments can also give a better access to people who don't have access to the formal kind of banking system in order for example to have bank accounts and car cards and so on and so forth these are currencies can be distributed uh you know in in mobile devices for example uh increase us abilities by by citizens who don't have access to to physical cash for example away from Bank branches and so on so forth but in general kind of thinking about operations and both you know retail cbdc kind of examples and wholesale cbdc examples you can think about streamlining reconciliation you know and that again that kind of applies to um you know payments nationally but also internationally which is I think another kind of issue that we will discuss shortly um and again depending on you know they the way you kind of architecture the cbdc system you can give incentives people to innovate on top of the um of the cbdc infrastructure and just to give you an example I mean we've done a lot of research at the invested man uh based on the design principles but one of the Frameworks that has been proposed actually in a white paper from the bank of England was to create a platform Arrangement where for instance Central Bank would put forward uh the ledgers right uh and then would have apis accessible to uh private entities to design interfaces and through which these interfaces you can also kind of develop smart Solutions elaborate smart data um and also you know further Innovation that sits a layer on top of the Central Bank kind of a ledger layer if you want so these are some of the benefits I think that can be delivered you mentioned retail cbdcs bney do you think retail cbdcs can cause any risks to the retail banking systems so this is a massive topic um and you put your finger on on probably the biggest live discussion around cbdcs globally um I mean the answer depends on how you do it so in in inherent in cbdc I mean there are different ways of technologically of creating cbdcs some have greater risk than others some are more expensive than others to operate and so on so forth but inherent in all of them things like cyber risk AML risk you know um data privacy risk um and if there's um concern about any of these things that can create a run on the currency because if you've got a digital asset that you might want to get rid of it very quickly and you could um subject to an fx ability to to trade on the um the other aspect of all of this for retail is whether or not you have a direct claim on the central bank and um you know there's been a lot of talk about that the bank of England have done a lot of papers on this um and some thinking I mean obviously if you have a direct claim on the ret a central bank that's more valuable than what we all have today which are claims on Commercial Banks you know we have an account with a commercial bank that's referred to as Commercial Bank money and um the risk therefore if the bank um looks as if it's got a solvency you is there a run on the bank and we have to be you want to be the first out not the last and if you have a central bank claim available you could have a run where people put their money into the central bank and that would then destroy the banking system potentially you know most nuclear level or it could at least reduce the ability for banks to fund using retail deposits which is key for maturity transformation and lending into the real economy as I understand it in the UAE you're looking at not changing the structure of the current banking system which is good um and uh therefore for retail I think we're really just talking about the first risks I mentioned the last point is on ad GM we're sitting in adgm this entire island is under a legal system and so is the next door Island now Al Island it was set up um the sort of as a brainchild uh of um some brilliant uh people in the UAE in Abu um I actually um led the team conceiving and drafting the legal and Regulatory framework laws and regulations on the common law system and I think that provides phenomenal legal certainty around the use of these sorts of assets already adgm have produced rules for digital assets and I think adgm can become a hub for the trading of cbdcs um which I think is legitimate under the under the Constitution um uh which would also open up a massive commercial opportunity for the UAE and the region amazing speaking of risks Kimo how can we ensure that cbdcs are successful or at least uh mitigate the Associated risks yes so there is an example in the previous session about a rocket ship that takes off ground and how hard it is for a startup to take off the ground and I think that's the challenge that cbdcs will also have is how to get adoption how to get actually people to use it how to um make people compelled not using credit cards or debit cards or other means of payments to make payments and make those payments instead with a cbdc and um I think um in order to solve that challenge I think central banks and Banks need to have a bit of a startup mentality um think about um doing a lot of analysis data analysis uh simulations uh um understand the customers quite a number of central banks do cash surveys how do people actually or payment instrument surveys how do people actually use different types of payment instruments where to find Pockets that could be starting first like Facebook started off with a university campus to get those network uh effects solved and then jumped into other pockets and then connecting those Pockets so what is the adoption path for for a cbdc I think that's a that's a big challenge challenge to come and a lot of the cbdcs the retail cbdcs that we been seen launched around the world haven't actually properly solved that challenge yet I think that's going to be be a big one uh on the risk side um I think um AML was mentioned and fraud so I think the uh the Big Challenge there is uh not in order to have the right people use the cbdc and not the wrong people and not for the wrong purposes because what we've seen in the um especially in Southeast Asia and also in this region in the last few years after covid a lot of new payment um um sort of instant Payment Systems have been set up and a lot of people have been brought into the realm of digital payments and that has created a lot of opportunities for fraudsters to uh to get to their monies quickly uh because there is a quick way of acquiring funds from people that they can scan and um and I think people need to be protected from themselves uh also in in the cbdc environment and there you could think of different facilities to be able to track funds being able to track them as they get onward mued in instant Payment Systems in cbdcs in different wallets um and then in order to get them back to the to the U Victim Because if I get scammed and we're probably getting all of us lot of emails sms's calls when someone is trying to scam scam us and sometimes they get through uh so the first thing I would like to um be available when I get scammed is I want my money back right uh so those type of facilities um to also for the cbdc to ensure that uh that uh it they're successful so do you think cbdcs needs to be cross border um I think that's a in very interesting question um I think lot of the domest the retail cbdcs that are being thought of um have a more like a domestic Focus but um there are a lot of countries that don't have good money around uh so I think it would be very good for for a number of countries to have a more stable currency that they could use now they might be I think that's part of the reasons why crypto uh became and spread like fire around the world because it was better than what that what was available um I think um if there are are strong uh cbdcs that could be used also abroad I think there would clearly be a demand for that um I think then it also goes into questions around soft power dollarization uh other types of uh sort of geopolitical aspects of it when if you if you let your currency to be used outside your own domestic borders and Marcus from your perspective yeah I think you know soing um crossb payments I think is one of the benefits that cbdcs can definitely deliver you know there's the international payment kind of um Arrangement at the moment can be quite where is quite expensive it can be quite uh slow in some ways of course it kind of depends on the international corridors that you you want to exchange money but um you know cbdcs can can deliver improvements in interbank payment settlements um and can also reduce counterbid risks you know if you think about uh mitigating the crer risks in crossb payments transactions and you have um uh a payment versus payment kind of settlement for transfers in different currencies I think you know that's that's definitely one of the benefits that can deliver but having said that I have noted down three uh points of um points of caution as as you know kind of thinking of cbdcs in Terms in the context of international payments I think one comes um out of the work that we have done the world economic forum and it's about fragmentation um I mean the system the Corp banking system that we have at the moment is is a bit more kind of streamlined over the years and and holistic in some ways um I think developing kind of a uh bilateral kind of collaborations between countries in order to implement crossb payments using cbdcs can fragment the international payment ecosystem um and also you have to streamline the economic incentives and understand better the economic incentives what will the roles of of of banks be going forward in terms of international payments and I guess the last point I could make is on these kind of new value chains that are emerging um from these new kind of cbdc ecosystems one key point that we have identifyed again that's part of a work that we have done the innovas maner in collaboration with the University of Oxford is Thea of innovation bottleneck so you really need to understand your new value chains that are emerging um you know and identify certain bottlenecks that can impact delivery of a particular solution and also chiz Innovation and the theory talks about you know data strategic bottlenecks data bottlenecks technology bottlenecks so you you really need to think hard about you know these these B necks going forward definitely David what do you think oh I think if you're going to go through the the trouble the expense and the journey of building a cbdc solution it would be kind of crazy not to use it in a in in a crossb fashion we live in a very Global world um if you look at this area one of the big advantages is your location um and the fact that you have so many trading partners and we look at international finance um and invoice financing and for example for for exporters is really difficult because there's a there's a massive amount of fraud there and since you can attach payments to digital invoicing which can be validated on chain and all you can increase uh financing options and opportunities for small and growing businesses so for a really ambitious area like the gulf and and you know given your your size relative to your Global power and influence uh why wouldn't you want to have a cbdc and what I'd like to see develop is we're working with several countries in the gulf and I'd love to see the GCC come together and have their own cbdc and prove the efficiencies of using uh blockchain and distributed Ledger technology with wholesale cbdc and atomicity to show how much you can improve uh trade and collaboration uh between the partners that's amazing last but not least going to bney I think a regional cbdc um is a massive Topic in it own right I think the Euro Zone you know the euro currency has introduced all sorts of legal um economic and financial risks uh that are barely understood and very difficult to manage and difficult to predict the effects of uh and so I don't see that I I'd be concerned about that I think a nation state needs its currency bar I didn't say a common currency though that's important I did not got it David um then there are issues about the reserve currency is it in the everyone's interest for it to be the dollar or not the cbdc is if widely used obviously could unsettle that that may be a good thing or a bad thing but that needs thinking through um the trading the FX trading you know here in adgm it would be the obvious place to do it um regionally I think is a good thing and and the fact that you can have delivery versus payment and onchain settlement is definitely a good thing and David's Vision on that I think is is compelling um then the use of um the cbdc around the world um that raises legal issues and practical issues of legal jurisdiction I mean is it going to be legal tend tender uh to settle retail trades in other countries using for instance a Durham cbdc and if unless those laws are changed and the answer probably is no unless those laws are changed though can no states do anything about it the answer probably is also no so are we going to move to a a global use of a currency regardless of state laws where people go for the most pragmatic um solutions that are the best store of value um and in which case are you best off moving first or are you best with particular Technologies or not and you best with a two-tier system with the commercial banks in place or a direct claim on the Central Bank these are massive question questions and there are all sorts of legal issues surrounding them but it's a very exciting topic uh that's that's that's certainly the case and I think it's exciting that this region and and the UAE is taking a lead a leading position on this definitely wrapping up this Illuminating discussion I express my deepest appreciation to our esteemed panelists for their insightful contributions David's perspective on Market developments Marcus's exploration of innovation bottlenecks Bourne's analysis of risks and Kimo strategies for success have collectively shaped a comprehensive understanding of the cbdc landscape the question of crossb integration resonates as a poval consideration emphasizing the need of global cooperation and clear regulatory Frameworks as we conclude it's evident that the journey towards fully realizing the potential of cbdcs is ongoing and with collaborative efforts and careful consideration ations these digital currencies can become a catalyst for positive change in the Global Financial ecosystem thank you to our esteemed panelist and audience for engaged participation in this thought-provoking discussion thank you