The Swiss National Bank's Work with Wholesale CBDC: Thomas Moser

Transcript

so good morning everyone welcome to day two of the crypto Valley Conference here in rhod C again great to see everyone coming together finding a seat they are of course all the same price so pick and choose carefully um today we're going to start with uh a highlight I think of the entire conference something that we look forward to very often since uh Thomas Moser an alternate member of the governing board of the Swiss National bank is a regular um at crypto conferences but also at the crypto Valley Conference you could say he is what we say sometimes uh an OG someone who has been following and been active

in exploring blockchain technology and supporting the SNB in their projects as things have developed and they are developing and that is going to be the topic of Thomas's keynote this morning very much looking forward to that I hope that all of you will listen intently and perhaps we will have time for one or two questions at the end so with that Thomas welcome to the crypto Valley Conference great to have you again thank [Applause] you thank you very much uh thanks to the organizers for having me always a great pleasure to be here I always learn a lot and there's always uh also um there are opportunities to actually cooperate on

some of these uh projects we have and I will show you specifically one let me start by reminding everyone again where we come from a lot of times the question comes do you think stable coins and uh and cbdcs they can coexist and the answer I always GI is of course that's what we have right now we have a coexistence of public money issued by central banks and uh private money issued by commercial Banks so that's how the current system looks like the Central Bank issues two types of money this beautiful privacy preserving Bank notes that we have and we intend to continue to issue and then we have the deposits that are uh Limited in the

sense that they are only available for mainly banks for financial institutions and what we all use when we use digital money nowadays we use mostly I guess most of you also use stable coins maybe Bitcoin and ether but most people use their Commercial Bank deposits they access them with debit cards credit cards more and more with smartphones maybe also with online banking but so if Alice pays Bob what happens is that and Alis is a customer of Bank a and Bob is a customer of Bank B so what happens is that bank a then debits Alice's account and Bank B uh credits Bob's account and the question is now how does the money

go from Bank a to bank B and of course you could do that also without the central bank and then then the bank B would just hold a claim on Bank a this is actually what what historically used to be the case the the cers some um situation here is that bank B might end up with claims from 10 20 30 50 different commercial Banks so what historically happens is that one Bank emerges the one that uh all the others trust most and something like a central bank emerges and that's the situation we have so the the transfer between Bank a and Bank B that happens through their account at the at the central bank at

the Swiss National Bank in the case of Switzerland so the settlement between the the the banks is in central bank money because that's the the mo the safest type of money that exists and uh so when we now move to the new world so one way we could uh we could go and say okay let's have a cbdc for the public at large we would tokenize our bank notes and that's commonly called a retail cbdc in Switzerland we said we are not we have no intention to do that at least not at this stage and the other Avenue would be to tokenize those deposits that the commercial Banks hold with us and that's commonly called a wholesale cbdc there's currently a discussion among

central banks whether this is really uh a good uh good term whether we should not change that but at least at this stage wholesale cbdc would be the cbdc only available to financial institution and then of course you can say okay if we settle if the the commercial Banks settle in central bank money in wholesale cbdc why not put everything on the blockchain and then also issue uh that the the banks would issue what's nowadays called tokenized assets or you could also have issuers of stable coins issuing stable coins and then we have everything on the blockchain that's actually what we are doing right now in project aora I will say something about that uh towards the end but let me first tell you where do we stand in

Switzerland and uh we are very very far when it comes to the settlement of tokenized Securities and that's not um that's not an accident I think the reason is because we had the first fully licensed uh regulated digital exchange based on distributed leer technology and that's sdx but you see here is on the left that's the traditional Swiss uh exchange how it works and on the right you see uh six digital exchange sdx that's where everything on a blockchain c blockchain um and you see the the what what people hope here uh in terms of

efficiency gain is really that you have in the traditional system you have four different platforms that you have to synchronize you have a platform to do the exchange you have a clearing platform then you have a platform where you exchange ownership of the Securities so the settlement of the Securities that's on uh on 6 sis and then again you have a different platform where you exchange the money that's the sick platform and you have to synchronize all this that's sequentially you have to synchronize it uh it's a the the big hope with sdx or the blockchain on the right is if you put everything on one single platform that you have efficiency gains and that's so sdx went live in November 200 uh

21 and you have though the tokenized Securities there and the question of course for sdx and6 was like how do we do the cash settlement we need some form of a tokenized uh money and that's where we come in and and basically you could think of three different ways of doing this and we explored all of them and are still exploring all of them when we we start on the on the left and you have bankruptcy remote uh private token money the meaning here would be it would be just a a stable coin and that's actually how sdx started they issued the stable coin so the cash settlement happened with their stable coins what we heard from the banks is no there's too much risk there's counterparty risk so you

you your own risk management gives you limits on how much of that stable coin you can hold uh it's relatively expensive you need to have provide uh capital and so on so it's not an ideal form of money so one thing and that I I should say even though uh sdx had an account with us so they backed their stable coin with an account at the central bank that's what most stable coin providers worldwide would dream of we had that already in Switzerland from the beginning but then if you want to go one step further we could say let's make that that account backing that stable coin uh somehow bankruptcy remote in the sense that if uh sdx would go bankrupt that the holder of that stable coin

could directly access the money at the central bank that requires some legal uh some legal changes we we did study that and we would have a way actually to to do that then in the middle another solution would be you say okay we just leave that last platform that I showed you before so the tast settlement we just leave the the sick platform the way it is and hook up so all the other three platforms We have basically on on a blockchain and then just hook up the blockchain to our our traditional payment system and that would be the what we call the rdgs link uh that works very easily we could start right tomorrow and there is actually in

Switzerland one uh exchange trying to get a license right now waiting for finma to approve it and that's the model that they want to to go with and uh as soon as they have the license I guess we could start but there you have to synchronize you have to synchronize the blockchain where you have the tokenized assets uh with the tradition account based deposit based uh six system where you would have the cash settlement and then the last solution the one uh we are doing in project tvia uh right now in the pilot tvia is the wholesale cbdc where you have everything on one platform and as I said most people think that's the most promising way to go

forward if you have all assets all tokens on the same platform and in Helia one we did that during uh 2020 we explored all the technicalities it was for us uh of course also first to how do you run a note uh on a blockchain how do you issue a wholesale cbdc how do you book that into your own account so we did that all uh and published a report in December 2020 then we went into phase two where we uh worked together with real Banks and did endtoend transactions and you saw you see here we had a couple of Swiss banks we had some uh some large uh International Banks and we published that report in 2020 we also did an

experiment together with the Bon defrost where we did crossb settlement so we had uh um um uh Securities French uh issued Securities uh then bought in uh wholesale cbdc Swiss frank we had the exchange of um of uh Euro wholesale cbdc issued by the Bon for this was all in a test environment do you have a question was this all done on a private blockchain or a public Blain there was a private blockchain or also a cter a cter blockchain and then we went live actually and most people don't believe me when I tell them we have in Switzerland a live wholesale cbdc it's still a pilot but it's life it's in a

production environment and we started that at the beginning of December last year and we said that pilot will run until the end of June and uh what we have seen uh so these are real transactions that we have seen with real wholesale cbdc not a test environment not the platform that we built ourselves so it's on a thirdparty platform it was worldwide the first uh such wholesale cbdc settlement for securities issued on a on a blockchain and everything settled on a blockchain and uh you saw that we we had so so these are bonds that were issued really for funding purposes not test or research purposes we had the

Canton of surich we had the Canton of Basel they both wanted to be the first so there was a little bit of a competition between them so they both came out actually on December 1st and issued their their bonds they were settled in wholesale cbdc we had the city of Lugano we had the city of sallen and uh recently we had the World Bank with the first International uh Bond issuance in Swiss frank on blockchain settled in wholesale cbdc there's more to come unfortunately I cannot right now talk about it I can also not tell you at this stage how we will proceed we will announce that on June 20th so very very close it will be good good news that that much I can tell you but so that was uh so that I think so we are live

wholesale cbdc is live the question still is more use cases we need more business on uh on on uh sdx but I think we we are going to see that what we still need to see is whether this is really more efficient than the traditional way and we have haven't really seen that yet I mean we talk about potential and we all believe in the potential but at this stage we haven't seen it there are different reasons we had very limited you uh use cases and also the banks involved here I think they still everyone is kind of waiting you know how much do we invest how much do we really automate and only if you automate everything uh then you will probably see those gains and once you start using smart contracts uh but uh as I said I'm very uh optimistic that

we are getting there another big topic right now among central banks already for a while but we are going into a huge project right now is crossb payments so if you have uh if you if you buy goods or services offchain but you need to pay somehow uh onchain and crossb payments is something that we also did uh some experiments but all this stuff I'm talking about now is not in a production environment this is still test environment but we had a very exciting project uh maybe some of you have heard about it it's project Mariana where we did crossb exchange together with the Bon defrost again with the monetary Authority Singapore and to do that we did build a decentralized exchange and

this time on a public blockchain we actually used ethereum and uh and and also actually we got some technical assistance I may say here from from crypto valy we actually built this centralized exchange we didn't bu build so much Unis swap we built curve curf is here uh in the crypto valy we got Michael agoro actually helped us build this decentralized exchange so um that was a very exciting project it worked perfectly well and we are not yet sure how we take that uh further but the way it worked basically these three countries had their own platform where they issued wholesale cbdc and then we built bridges into ethereum on ethereum we built the smart contract which was

this which was the decentralized exchange and it was the commercial banks that had access to the wholesale cbdc that got the wholesale cbdc from us from the B defrost and from the M Singapore and then uh were they those they took that onto ethereum and then were the liquidity provider for the the liquidity pool the liquidity pool contained then uh Swiss frank wholesale cbdc Euro wholesale cbdc issued by the Bon defrost and the Singapore dollar wholesale cbdc issued by the monetary authority of Singapore and uh so we also have uh the report if you're interested you will find that on the

website the current project uh that we are uh involved in that's now huge that's uh a global uh tokenized um payment system and the idea here is exactly what I what I showed you here that you basically have everything on the blockchain so we kind of building here the right side that you have that you have uh different banks we do not know whether we we or at least I don't know at this stage whether it will be only commercial Banks or whether we also allow some stable coin issues because maybe you have seen the the press release by Circle three four days ago well they said we applied to

participate in project aova I don't know how the central bank community will react to that so the original idea was really you have commercial Banks there um but then you have the commercial Banks so basically you have the the customers of these commercial Banks can then pay with tokenized deposits and the the commercial Banks settle them uh among themselves with wholesale cbdc so the idea is really one Global blockchain uh and uh and have wholesale cbdc public money and uh tokenized uh deposits private money uh everything on the same blockchain and as you sorry for that as you have seen here it's uh it's

huge this project so we have seven central banks involved two from the Americas the the Federal Reserve and the the bank of Mexico we have three from Europe the bank def France the bank of England and the Swiss National Bank and we have two from Asia the bank of Japan and the bank of Korea and um what what so so right now uh commercial so the idea is seven central banks and then each jurisdiction is supposed to bring two to three commercial Banks so in the end we will have you know around 20 commercial Banks so it's a huge project a lot of legal units involved that's a little bit what I'm what I am a little bit skeptical about but uh huge project

we we had now um the call for participation we had a lot of uh Central we had a lot of commercial Banks including Circle uh applying for it um actually the most applications came from Switzerland from Swiss bank so that's that's I think very good news Swiss uh the Swiss uh Community is very active uh in this project the idea is to build a private blockchain I'm trying to push a little bit to actually use a public blockchain I'm still the only one uh at this stage yeah but uh we don't know I mean that's we're still at the beginning of this project it's evolving but I think it will be interesting to see retail

cbdc I said we are not having any intention to issue that but we had a very interesting research project uh which was called project dubio where we actually built something together with David Chia and we implemented it so it was based on ecash uh we did a update of uh ecash so that the big advantages of that retail cbdc system would be totally privacy preserving for the payer not for the payment receiver but for the payer totally private same level as Bank notes and what we also did uh of course fully scalable ecash has been uh used in the 80s uh with the computing power of the 80s and then the third thing is what we

didn't know and that's why eash too we made it quantum proof that's kind of something I'm uh lately interested in is like what do we do against quantum computers we need to replace traditional uh asimetric cryptography uh how do we do that we implemented here um um um Quantum proof cry uh cryptography latis based we saw that the performance is really suffering if you do that so the message would be if you want to be Quantum ready and intend to use postquantum cryptography start now uh to be ready in 5 to 10 years and with that let me stop here maybe one or two questions um I think we still have a little bit of time I just want to throw one quick question

to you before we start how important was the work done on different projects in Switzerland uh to convince people outside of Switzerland to work together on these bigger projects yeah I think it was very important I think it's recognized in the in the International Community that that we are really at the Forefront here given that we have a life wholesale cbdc that we are not just doing research papers but actually implementing stuff so that was very important that uh we have we were asked to participate loraa we did not have to apply perfect questions from the audience right here whe stable coins like usamp Connect CBC oror

already so I mean stable coins I'm not sure whether they will be part of the pictures but what what we clearly see is increasing regulation of stable coin issuers and uh but the central banks are also kind of pushing commercial Banks to issue these tokenized deposits so I think what we see more and more is a merging of uh of um stable coin regulation going in towards uh banking regulation light the more interesting for me is what do you do with the decentralized stable coins like uh like d and I think there Community still has no idea how to regulate a decentralized uh autonomous organization I think that's still an open question on your opinion be

legalized or I think in the end there will be some type of Regulation um but I I guess there it's still it's still open how that how that can be done my hope is that we will find a way how to regulate uh decentralized organizations uh and that we do not force them to become actually centralized in order for them to operate that's another that's one of the risks that I see okay can can we move on to another question you sir um yeah on the question of public versus private blockchains what what do you see as the main stumbling block that you hear from from from your colleagues so mainly legal compliance one is that uh the legal departments

they want to have a counterparty you make a contract with that's one thing and the other is there's really a fear that especially commercial banks that they would pay for instance on ethereum gas fees that go to sanctioned units uh because then they're in trouble I think there are solutions to that and I think you guys showed that you can solve that problem but I think the central bank community still has to catch up to that one more question you sir where does Swift uh work with your cross transactions is it outside Swift we still using for the traditional Financial system we're still using it I mean this aora will be totally without Swift so Swift is still the the commonly used

messaging system for all International payments at this stage okay I think that would be our time limit okay one more question sir I knew that question was coming there is a vote about that probably probably coming I mean no intention at this stage thank you very much again Thomas thank you for being with us thank you