Can Stablecoins & CBDCs Coexist?

Transcript

[Applause] [Music] having me it's really a pleasure to be here and you can see this time i didn't bring a tie so the swiss national bank is a learning institution so what i intend to do is sometimes i get the question what happens with with stable coins if central banks start issuing cbdc so a little bit differently frame can stable coins and cbdc coexist and let me give you the answer right up front it's a resounding yes but and let me now talk a little bit about the yes and the two bots

so why can't they coexist so the coexistence of privately issued money and state money is already a reality today actually it's the norm it's not not something that is unusual and what i show here very simple is that you have the state money issued by the central bank in blue which are bank notes and also deposits for certain regulated financial institutions and then you have the what is in green you have privately issued money money issued by private companies commercial banks issuing deposits and that's what you usually pay with so you have these two possibilities to make payments you have this uh very beautiful banknote

from the swiss national bank the other ultrasound money and then you have the the opportunity to pay with your commercial bank account and so this is the first spot why can those two coexist simply because they differ they offer different services they offer different uh different applications different different services so if you want to pay offline and pay fully anonymous the the only game in town still is the banknote if you want to have all the digital uh possibilities then you pay with with your commercial bank deposit so the first lesson would be stable coins in cbdc can coexist so legally there's

nothing that speaks against it that is how the financial system and the monetary system works already today you have privately issued money you have state money but in order for customers to actually hold both you need to offer different services so what's what's going on right now is of course that a lot of tokenization at least discussions or proposals are going on one simple one that we also do at the swiss national bank is just tokenize basically the deposits that we offer to the financial institutions and that would be what is called the wholesale cbdc we have been experimenting with that in the swiss national bank in our project helvetia together with sdx

so the only difference there would be that instead of offering these financial institutions a deposit at the swiss national bank we offer that in token form on a blockchain or on a dlt and the banks the bank a bank b they use that just like they use our accounts to settle payments among themselves so we just tokenize that that's relatively simple the other discussion of course going on among central banks is to tokenize uh basically bank notes and that would be something that would be usable for the population uh in general and central banks are much more reluctant to go into this field because here you would have uh clear competition now to commercial bank deposits but

again i mean basically but the difference would be commercial bank deposits are used in a certain way they are not usable on a in this form on a blockchain retail cbdc would now of course what's also going on is the stable coins that you use today and these are now coins issued again by private entities now there are different forms i'm aware of that different forms stable coins the most popular ones are the one that basically tokenize commercial bank deposits tethered the most obvious one now what you see here is what what's happening is that you have the commercial banks that issue their own money you have a credit risk in

there that's something that you do not have with the central bank you might talk about inflationary risk but commercial banks just like just like stablecoin providers they basically pack their money the deposit that you have there to the central bank money to the fiat money and they do it by guaranteeing you a one-to-one convertibility that's how they they pack how they that's how they keep their money stable by packing it to the central bank money now if you have a private stablecoin issuer you have now you have now basically a second credit risk that comes in so you have the credit risk of the commercial bank the commercial bank could go bankrupt but also the issue of the stablecoin

could go bankrupt so if you so basically you have now two layers of credit risk which is which is riskier than just the commercial bank deposit the loan now of course one obvious way where i guess a lot of banks will go in the future is that they just do it themselves they offer this token themselves so you only have one credit risk you have the credit risk of the commercial bank another way to do it of course is that the banks that have a deposit with us they could also just tokenize the deposit they have with us uh for instance signal markers will talk later they do it for their customers sdx that will start trading this next month that's also what they do as a financial market as a regulated financial market

infrastructure provider they have an account with us they will issue a stable coin for payment on their dlt uh that is a tokenized deposit that they have with us now some people and including the imf have been calling this type of stable coin synthetic cbdc don't because that's not what it is uh say cbdc would be a liability of the central bank this type of stablecoin is still a liability of the issuing organization so in the case of sdx it's a liability of sdx you still have this credit risk in there if sdx or the issuer of that stablecoin would go bankrupt

now these are the so these are the forms of basically tokenized or tokenization of already existing money exist today or at least are talked about today i guess that's the most popular forms and so the first lesson is yes they can co-exist but you have to make sure that you that that the customers want them so you have to offer different type of of services with the stable coins now the next part is about regulation so basically what what what i could imagine is that the stablecoin providers that the commercial bank themselves will just start issuing stable coins as i said before you will reduce credit risk or that stable coin providers will

become regulated banks basically then you also take that layer of credit risk out now that has a lot to do with the stabilization mechanism and i think in switzerland finma has done a great job regulating uh the the emerging crypto financial sector and there the rule usually is if you do something the same risk same rules if you do something similar that other financial uh institutions or services do you get the same regulation so if you think about asset-backed stable coins uh the most popular one like tether what they basically do is just like commercial banks they they uh make their stable coins redeemable at the fixed price or

this convertibility that's how they uh keep the stability that's how they keep their coins stable and to do that to to be redeemable or convertible of course you have to hold reserves most of the stable coins started with full reserves just like commercial banks and at one point they realized that the probability that everyone at the same time shows up and wants to redeem or or convert their stable coin again into the underlying asset is very low so that they move usually to a fractional reserve system it's much more profitable that's what's happening with tethered that's what's happening with other staplecoins that's what historically happened with commercial banks and that's where you see usually comes the need in

for regulation because accidents can happen customers are not happy it's not just that the state wants regulation a lot of times it's the customers who do not want to lose money and they ask for uh regulation so that's one thing if you if you have an asset back stable coins redeemable you will somehow go into the direction of a regulation similar to commercial bank or bank regulation now of course you could say let's forget about this convertibility make it not renewable but basically the coin would be some kind of an ownership share of the underlying assets and that's of course that's when you go into the direction of mutual funds close then probably mutual funds or exchange

traded funds in that case the stablecoin will reflect the underlying value of the of the assets but it doesn't necessarily have to track it very closely you know you can have a divergence of prices uh it depends whether you uh on the arbitrage that's going on but that usually works relatively well that's something that at least dm when i read the the last white paper intended to do it looked more like an exchange traded fund where you also had authorized dealers who could then do the arbitrage issue and buy back these stable points but then you go into the direction of the regulation of these financial vehicles of course more interesting is if you do an algorithmic stablecoin

where you have no underlying assets and here you have basically you could say no intrinsic value in the case of asset-backed stable coins where you have either convertibility or you have ownership share then you have some kind of an intrinsic value you can get something else for that i mean where there are also on-chain backed staple coins that's a little bit the more difficult case but basically the most popular are are the ones that are backed usually by commercial bank deposits if you have an algorithmic purely algorithmic staple coins with no assets backing it of course then you have no intrinsic value and i think these are the interesting things emerging and that looks much more like a central bank than like a commercial bank and here usually

what you have as a price stabilization mechanism you do you basically do algorithmic central bank policy just like a central bank you you either adjust the supply or you adjust interest rates which basically in the end is the same but these are the two instruments that you have to do monetary policy that's how you keep it stable now the interesting uh thing of course to me is that uh a lot of uh people talk about the inflation risk that they don't want to take that's why they want to go into the crypto into crypto assets now of course stable coins even algorithmic stable coins i'm at least aware of they all pack their value

to the fiat currency so you still have the same inflation risk that you have when you hold the commercial bank deposit or whether you when you hold bank notes directly so what would be interesting uh is to see a state a stable coin that actually packs for instance the the consumer price index just like that's what central banks do we basically try to have stability against the consumer price index so that would be a real challenge and that would be something where you could try to beat a central bank in terms of uh inflationary uh stability of course you can also say i don't really care about this uh stability uh towards a fiat currency you can buy

ether like we heard just before on bitcoin and then you you have this price volatility but i guess that's interesting if you're an investor but to use it as money at least what we can see is that most people want to have the stability to consumer prices and that's why you have so many uh staple coins emerge in this ecosystem and let me stop here let me uh sum up so can they coexist yes they can but probably you have to offer different services than what central banks do that is uh probably not that difficult because central banks if they will issue cbdc they will basically focus on on something very basic they will focus on

security on stability they will not be very innovative just like today so there is room for innovative uh private issuer uh and so the co-existence is possible but the second part as i said there will be a regulation coming sooner or later just because customers will demand that and let me close here