Third-Party Innovation in a CBDC Economy

Transcript

personality. I don't know if I have to present them. Actually, I think everybody knows. Um, I'll do a quick uh Thank you very much for the water. Um, I'll do a a quick uh introduction, but frankly, we just want to know what they are doing with their uh institution. Of course, you know Thomas, you just heard about uh the project from the SNB. We are very happy to have Marco as well as head digital. I think SDX was a pioneer in this in this area. Eden, thank you very much. I've been uh moderating a lot of panel with this, but I'm very happy to have you for the first time. We we

haven't had the time to exchange so far. And Paulo, I think you've done so much for Lugano that I can't actually present more than just it's Paulo. if you don't know him actually you didn't see what happens in the past uh in Tessan these past uh years so thank you very much for um the panel today I we don't have that much time so uh when we uh exchange together um I asked to have two general question from my panelist to see where we were going and interestly I see two major leads. One is actually more on assets and tokenization

of assets actually and more on payment. So I'll do two rounds with my panelists more on these questions and I'm very very happy because it's not just hearing from public institutions or um the Swiss national banks but it's also about the conjunction and the synergies between private sector and public sector. So thank you very much for um having um the time to discuss a little bit what happened. I know we heard a lot about Thomas, but I will ask you first um the question because I am very interested to uh hear more about what you've done with

SDX, what you are going to do with uh BX actually. Uh so can you give a little bit um for once we go a little bit outside stable coins and we spoke more about uh tokenization as assets. Can you explain it a bit more? Yeah. So SDX for us is really a a very good uh and very interesting um use case of wholesale CBDC because we really believe that settlement in central bank money at the wholesale level is really necessary especially if you have uh large value payments just for for um for the security of it and that's also what the

banks tell us you know the banks tell us it's very important that at the wholesale level we can settle in central bank money and SDX has been providing the technical platform very luckily for us. So we could test that very early on in a real kind of production environment and that's also why we were so fast uh going live and actually we also uh implemented a monetary policy operation that was the first worldwide monetary policy operation on on a live a life uh uh operation on a blockchain and that was when we issued our own digital securities SNB bills which we do to withdraw liquidity and we did one of these bill issuances on SDX which became

the the world's first monetary policy operation on a blockchain. So this is an important project for us and as I said PX is also interesting because we always said there would be this other possibility to have the link but there was no demand for it and now with PX there is a demand. I'm not sure whether they in the end would also like to have the wholesale CBDC but given that they are on Ethereum. I guess they figured out that it would be a little bit more difficult for us to take that step. So they start with this link. But it will be interesting to see what are the limitations if you do not have everything both money and security on the same platform. What kind of are the the limitations that you have in terms of using of smart contracts uh or maybe other issues. Uh so it will be very very

interesting to see basically a little bit of a I should say a horse race between BX and SDX you know uh I think in the last past three four five years even five years each time it was about yeah we can tokenize securities we can tokenize um bonds but we are missing the cash leg. So this is coming actually as a synergy between SCX or uh BX and the national bank which is interesting for me is to have actually your view as a international institution. Are we going in the same direction? Are we seeing merging between um the cash leg for a

settlement and also um private sector? How do you see it? Yeah, thanks. Thanks for the question. I'll I'll maybe build on what Thomas was describing. I think both options are viable. So, if you have the cash leg on Ledger or if you integrate the cash leg, I like the framing of SDX versus DX and those two kind of operating models. At the end of the day, they both work. But as a general thesis, when you think about the value of tokenization and the value of blockchains, the more you can harmonize the format, the more composability you get and the more programmability you get and ultimately the more settlement security you get because you can create these atomically linked transactions. So I would I would propose that as the kind of best solution from from a technical level probably and then you know policy

governance things like that are always more complicated as maybe Thomas alluded to in his opening remarks but ultimately tokenizing the cash leg and tokenizing the asset leg uh will give you that atomic composable transactions that I think the industry is really looking for. Where that lands in terms of public private what happens in the public space what happens in the private space is maybe something we can discuss. So would you would you go into a direction when you think there should be harmonized standards for this kind of synergy so that it's a a better adoption in terms of procedures and guidelines? Well, I guess I didn't I didn't ask you but I'm very that's a good question. I maybe I'll say that as someone from the BS I have to say I only represent my own views and not the views of the BIS. So

anything about standards is something that we we need to be careful of. But when we think about standardization at a technical level in terms of platform standardization interoperability things like that, absolutely yes. The more interoperable things are, the more composable things are, the better they function at large. Of course, with certain considerations of circuit breakers and frictions that are necessary. Yeah, it's always this balance between trying to find a standard harmonization and not just killing the innovation in the egg. uh what what happens actually on the private sector uh which leads me perfectly to you Marco uh on how you've been working on this issue and u I would say journey because I guess it's

a journey thank you ba and thanks everyone um yeah it's I mean you mentioned pioneering and yes at SCX we've been pioneering in the private sector since 2018 uh the area of regulated digital assets And I mean first of all before I even start I would be a miss if I didn't recognize and also thank the public sector and very happy to sit here between public sector representatives for the for the collaboration great collaboration in the projects you saw before and even others of course I mean this is it's really it's really necessary otherwise one cannot go alone at it so to say now on the adoption I mean I've been in this space since as I said since the beginning of at SDX at least uh 2018 And I've seen a lot of evol evolutionary

steps uh uh in in in this journey. Speaking of pace of adoption, I from my standpoint, from my point of view, I can see a a huge acceleration. I can see that the topic is really coming into uh uh into the business use case where where it's moving from let's say research and proof of concepts into scaled adoption. And I mean here you may have read about some announcements we also did recently uh of supporting uh uh the investor base at large to access preIPO markets for example in a much more effective simpler way and this is you know leveraging technology it's not

only us it's not only about SCX it's about the ecosystem also what happens before and after obviously um or or likewise also enabling uh mass customization of scale in terms of investment strategies I mean these are I always say these are all old problems. They're not new problems whatsoever. But we can find new solutions to address the problems in a better, more efficient way, faster way, more creative way maybe even. And I mean I mention this because I mean as a as private sector representative I mean we we have a special role I would say as and as infrastructure provider we have a special role of uh uh comvener or gatherer of different parties and we look obviously at the uh public sector

for uh uh enabling enabling scale adoption what I mentioned before with high quality best quality uh um settlement assets such as wholesale CBDC But we look at the financial institutions to to come and define their use cases on how to how to actually use it, you know, how to make use of it in a in a in a concrete way. And it takes both of these elements or and many more actually to to make it all work. And so coming back to the adoption, I think this is what is happening now where you have those different pieces of the puzzle coming together to uh conquer ties on a on a on a on a use case on a real use case and uh and to put it into action.

That gives me a perfect transition because we spoke more or less about the issuance. Okay. primary market you are actually linking to the adoption for the ecosystem and that gives me actually the perfect transition to you Paulo about the uh the adoption because it's it's nice to have issuance of financial instruments but if there is no market if there is no adoptions then it's just for the art it's for nothing yes so what do you how that is that that is true uh well first of all I would like to thank the CVA board for inviting me this is my first CVA conference amazing and thank you to the team organizing team because you are you are really amazing uh it is

true I mean to be seated here just next to Swiss national bank SDX and the innovation lab is just amazing so why Lugano is there I mean it's a small town southern Switzerland and the big institutions here we never participated to develop the technology side of all this big big topic uh but we have done something that I think is equally important is adopting if every everything is ready and nobody's moving it will take years before to adopt and this technology in the technology sector is always like that adoption comes later so what we have done in Lugano is to start adopting as soon as possible since Lugano has this um plan to become an international hub for adoption of

blockchain and crypto well when I saw SDX was ready in 2022 say okay let's do my next bond on SDX well honestly took me six months for the first one which normally for the traditional B it took me maybe an hour or two to get ready. Why? Well, you have to understand the platform, the process, uh the rating process with Moody's which was at the end of the day was the very big let's say time consuming task. But after four to five months we reached the point say okay we are ready we decided that we didn't decide we we we said that the rating was the same as a normal bond I using normal bond the traditional bond and then we just issued it and after the first one we did a second a third and a

fourth one actually the fourth one like three weeks ago and now it takes me an hour to get ready I don't even notice that we are settling in CBDC which is amazing if you think about I think we are unique It's unique in the world right now this kind of kind of settlement and to me adoption is no more a question of adoption is just a new standard to me it's just digital bond is the way to go couple of years ago uh they were interviewing me say are you going to issue new bonds digital bonds why say why not the real question is why not I mean it worked very well it's perfect then the second one was in CBDC I haven't even noticed that something changed for me for the banks are the same for the investor are the same So

why not? I mean I'm not going back to the traditional there is no reason and we are continue adopting this. I feel some public institution I'm talking about cantons and cities I have good connection with them. I was the former treasurer of the canton of tino. So I know many of the treasur of the cantons they're still thinking they're still looking we don't understand but there is nothing to understand. It's just the same procedure. You launch with the lead manager they issue the bond you get the money and that's it. So for the issuer, for the adopters, now it's time to go because there is no difference on that.

Yeah. But you've been a pioneer in many many things, not only financial instruments, you also issued a payment token uh from from Lugano. I mean that's not another that gives me also the transition to to actually the second one. But I mean that's that's also some kind of a risk taker. I don't think that any other cities have issued payment taken payment. Okay. So the the digital bond was not a marketing stuff. It was real adoption. Lugano is a broader plan which is named Lugano's plan B. Um it is a plan of adoption of blockchain and crypto generally speaking for the public administration. So for the city itself but also for the for the city economy.

So we are really pushing blockchain and crypto in the whole economy which means we have a lot of projects from education to you know uh payments. We are accepting Bitcoin with no limits with all the the the cities invoices etc. And one very important project which by the way is the very first project in blockchain we have done back to 2020 is a payment token which is the Luga the name is the Luga and it's a part of a cashback system in the city economy. You can only gain in the city economy. Everybody can download the app and get the Luga token and spend the Luga token there. Uh but it's only spendable in the city. So it's kind of control programmed uh programmable uh money. This is

amazing because after five years four year and a half we have now 22,000 users active users. Most of them they are from city and the region. We have some thousands of international because everybody can download. So our tourists come to Lugan download the app is ready. Then we have KYC in this kind of proceed but this is something else. And then we have 430 merchants accepting Luga and paying out Luga because Luga is a part of this cashback system. Everything you spend every amount you spend in a shop which is part of the circuit. You get 10% cash back in Luga not in discount but in Luga. And then this Luga can be spent in the other shop. So you spend 100 Franks in the restaurant you get 10 you spend at the airdresser the 10. So

this is very amazing because we keep the economy there. We increase the economy is a circular economy and closed economy. Uh the city of Lugano provides infrastructure. So we have our own blockchain. We have the our own KYC. We have KYC 20,000 people. So you can imagine the world. So probably the only one city in the world doing KYC like that. and um and then we provide the security that the merchants can exchange back into Swiss Franks their token because once they get a lot of tokens then they have to use it Franks to pay their their let's say suppliers because Luga cannot really be spendable in the large scale for small scale so this is not a stable coin in the sense that we don't uh segregate the

amounts we just in the balance sheet it's very easy but Lugana has a half a billion uh budget And the circulating luga today the net circulating lug is like half a million 600,000. So for us it's really nothing. One day if we will have like 10 million iluga circulating then we have to probably segregate the money in the very sense of you know backing uh backing the the stable coin behind this. So this is an amazing an amazing project is I think there are no other project like this at this scale around the world. That's kind of impressive. Uh you said it's not a stable coin. So I'm asking you when are we seeing a stable coin backed by the SNV?

I mean we do if we do it CBDC is not stable coin. So the stable coin is at least something that the private sector has to do. I mean if uh if a private sector issuer wants to back the stable coin or central bank money there are two ways. I mean you can get a banking license then you can have an account with us. You can go for a fintech license. You can also have an account with us if you're in the payment business. So that would be something to do. May I add two things on what just Paulo said. One thing is it's really a fascinating project and I think one thing that they did interestingly too they integrated a payment card into the blockchain architecture. That's something central banks are talking about. How do we uh include people who are who do not have smartphones? They

show how you can do it. And um so that's one thing and the other thing is Lugano is now issuing all its bonds on SDX and we actually allow these digital uh bonds to be used in report transactions with the Swiss National Bank. So banks can and they do use them. So sometimes you hear internationally two central banks should allow these digital assets to be used in repo transactions. We are doing it and the bond of Lugano is a perfect example that is being used as a security as collateral in repo transactions with us. And how do you see the adoptions coming on this on this specific side? I mean, Lugano now the first city in Switzerland that does all bond issuance on SDX. Uh, others have just tried it out. So far, I mean, I'm still hoping

that we will see more more and more issuances and the more securities, digital securities you have, I think the more will also be used in uh for other things like repos. Did you see the same? Yeah. Yeah. Well, absolutely. I mean I I forgot to mention before when talking about adoption but you know it used to be that we look at you know the next issuance you know with big eyes and and and celebration and and now like like Paulo said from the other end of the spectrum so to say of the of the issuer uh entity um it's it's just business as usual. I mean just this month we have three uh three bond issues happening. I honestly don't even know exactly which dates and I don't care to be honest but well no because it's just it's just normal business bau you know business as

usual and so so I think I mean this is on the one hand the you know I I it's like an engine for me you know it starts before before you get to move the wheels and get to your destination a lot of pieces have to start moving a key piece is to have digital assets digital securities and to introduce them into into the BAU into into the normal uh to make them a normality and this is what we're seeing now with more and more issuances like I said now three happening and maybe there there will be more coming even I don't even know this month still um but then the point on top of it is you know people ask me why why why people issue digital bonds first answer is why not it's a great answer by

the way it's a b and second answer is well you need to start with the building blocks if you don't have the building blocks how do you even can think about the next gener thing. So you need to to to bring assets into the digital space. Uh you you need to find a way to do that and this is what is happening what we see happening and once that and now we are in the tipping point where we can see how to use those assets that are digitalized and that's where I think the concept of programmability we we mentioned it was mentioned before in the keynote was mentioned here it it plays a huge role. I too look forward to this horse race to be honest. I mean people ask me sometimes what do you think uh BX digital and so on. I I wish them really

best of luck. I'm excited equally excited. It's a different business model to what we have. I'm honestly excited to see them launch and uh and and and see adoption being taken up also there. I think it's very important. But to me a key difference is when you have the cash lag you mentioned earlier and the asset lag on ledger on the same ledger or or at least on the same let's say technological um sphere that's when you you you need to unlock the programmability aspect and composibility aspect. This will be the the proof of the pudding so to say and I think we I feel we are coming much closer to this proof of the pudding and and that's where we go. Yeah, that's um may I add something on this because as my first

bond was done by circanal bank alone at that time only three banks were in the circuit and I could work only with one not telling the story but at the end I work out only with one bank so which is a risk I is 100 million with one bank you know a digital bond new one etc then the last one I got yeah five six seven banks where I issued the the let's say I send the offer so you have a broader so banks are on boarding now SDX I don't know how many banks and institutions you have. It's uh 14 now with five in progress. So So how many uh 14 banks on the on board on the CSD on the post rate side with four uh five sorry in progress. So in a couple of months they will be also there which gives more

resilience to risk typically. So this is very important for an issuer that maybe was the the people like scared about issue only with one or two banks in competition because it's a competition for us. We send out a request of offer and then we get the best offer but then you know if you have more banks then you are really comfortable and scale scaling. Yeah. And and Marco are do you seeing uh it's more Swiss banks or do you see that it's something that comes uh internationally which provides also adoption and resilience? Absolutely. No, no, it's it's I mean I think we have still the majority of the onboarding banks are Swiss and I think that's that makes sense and it's very important for the Swiss financial sector but we do have already international banks on

boarded like Commerce Bank for example uh uh and we are well you read announcement so it's now finally out in the public we are on boarding uh also city bank and and interestingly it's not the Swiss branch it's a branch in London and in New York so and we are working with obviously a lot of other European and and and even intercontinental uh banks. So this is this is great because what we talk here of course has also geographical spheres and again coming back to the programmability use case or to be honest the real question is why why to do it you know what's the point and when in order to answer to come close to answer that question you need those elements to come together both

from a capability point of view CBDC wholesale CDC for example but also from a an ecosystem point of view including international ality like the projects we heard before about project Agora before that's a perfect example of that there is maybe one very important point from the issue point of view why we should adopt digital bond for for all the bonds and actually tokenize the old bonds back to digital but that's another question we are working on that too it is the cost of issuing a bond when I issue a bond I have between 300 and 400,000 Franks cost I'm not talking about the spread just the costs pure costs so today I don't earn anything on issuing digital bonds because I'm not expecting now is to still at the beginning so the infrastructure is there they have to

amortize the the the the infrastructure but in the future I'm expecting from the banks that my bond cost maybe 50,000 100,000 because if it's really more efficient which is you cannot justify me 300,000 Franks anymore did you see the cost each time you think for when you issued the B the bonds each time you did the issuance did you see a little bit the No the cost are the same today and I'm not expecting today this because there's really few bonds you of the infrastructure cost the people are not trained enough etc. So I'm not expecting but in five years they have to reduce the cost if it's more efficient. So in blockchain is efficiency, transparency, less risk etc etc. So this is important for the issue to adopt now increase the number of digital bonds so it becomes completely

efficient. Then we will see the reduction on the costs. That's very important. You see it as well. I I guess from an infrastructure perspective is the same. You see it as well. from an infrastructure perspective the reducing of costs but I won't comment on similar I can't and I won't and it's also as as he rightly said our customers are banks not the direct investors and issuers but indeed I mean the the whole point of reach higher efficiency more automation decrease risk risk has a cost everybody in this knows there is a big dollar sign or Swiss Frank sign attached to different levels of risk so so yes That's that's for sure the ambition for

for sure the ambition. Well, we have five minutes. Should we speak very quickly about Promeisa? Where we stand? Aiden, where do we stand? Promisa. Well, I can maybe try to connect projects to the discussion around digital bonds and why not to your to your narrative. So project permissa is a project with the Swiss National Bank and uh the World Bank and the BIS and actually the IMF is also an observer on the project because they share a lot of the similar pain points and use cases and the project really looks at these promisary notes that are currently done on paper with a lot of back and forth and different formatting and uh a lot of reconciliation between the ministries of finance that are donating the central banks that are effectively operating as

custodians and payment agents and the multilateral multinational development banks that are the recipients. of these funds. So, Permissa takes all of that, puts tokenizes it and puts it on a common platform and the idea is very simply it's kind of the issuance of this promisary note that in a way is a simple form of a bond. There's no secondary markets and things like that, but it lasts over maybe 5 to 10 years and it's solely drawn on and those funds are used for specific purposes by the development banks. One thing immediate is you can take all of the operational complexity and reduce it to a very very simple streamlined process. And I think that this echoes the efficiency and effectiveness of that kind of thing. But maybe a couple points that shouldn't be lost when you actually

think about the future of a project like this. When you scale it up to multiple countries and multiple development banks, it scales up beautifully as a distributed system. So the same complexity that you would have issuing one promisary note with one development bank, you could have hosting hundreds of notes against many banks and it scales beautifully in a distributed system that preserves privacy and things like that. So there's one problem kind of when when you just look at the tree but when you zoom out and look at the forest the solution becomes even more compelling both to the central banks and to the development banks. The other side is the cash leg. So today these promisary notes are drawn down. The cash legs go through all types of different uh mechanisms correspondent banking different banking

relationships depending on which countries are the contributors. In a world where we have cash on ledger potentially the cash leg the efficiencies on the cash leg will also be increased tremendously. And then maybe I can come full circle and talk about user adoption. It's one thing to think about the volumes and scales of how promisary notes are used today to fund international development. If we do our work correct with Promea and Promea goes into a minimum viable product and hopefully into production uh barring all the governance and considerations that are are happening right now, what we could actually see is more funding going through these instruments to multilateral development banks and ultimately that's a good thing for everyone. So I think that that's a really really great simple use case at first but it scales up really well and

it's doing something good for the world. So it's been a pleasure working you follow on the project that are invested through the cash I guess the whole because the idea is then to invest on these projects right so you can you can have both end the contributors and the project in several countries if I understand yeah that's correct that's correct so we're Thomas you want to stop Thomas you want no exactly but the I mean the technology is beautiful it works the big issue as often is now the governance you know who steps up as the owner of this system. How do you set up the governance across different jurisdictions? That's the big headache right now, not the technology. I was when you were talking about that and

that's echoes what you are saying. I was I was thinking that typically that could be fantastic for the EIB the investment the European investment bank that has multiple projects uh infrastructure projects in upcoming uh countries. So this is typically where yeah I can build on that for a moment. So, so really we're looking at the inbound flow of funds at the moment. Really the connection is to also connect that to the outbound funds and the actual funding itself. And it would be it would be great for these ministries of finance not just to say we're donating this amount of money over the course of this time frame for this cause but actually to see those funds flowing out and the things that it's impacting directly. So when I look at like green bonds, some of

the work that we've done on green bonds for example as part of the innovation hub at the BIS similar we've created similar constructs. You can look at your green bond portfolio for example and actually see the impact of the bonds. So reduce the greenwashing and things like that as well. So connecting it to these sources of data is including to the private markets actually. Yeah. Fantastic. But that's not in this phase yet. Yeah. Yeah. Too bad. May I add just briefly on promising a lot the the developments and culminating with the report published indicated earlier. You see me sitting in these color chairs very often during the years talking about use cases and ecosystem and programmability I just did earlier and it's all correct. It's all absolutely correct because I have the

capital markets view and let me tell you it's a complicated ecosystem obviously because of the different parties and agents and so on. Therefore coming to those use cases really you know to to respond the big question the model questions I mentioned before takes time and complexity. Here I find Promissa has the opportunity of being I I call it simple but a highly sophisticated and effective use case which can really show showcase the benefit tangibly. You can actually touch it with the piece of paper you can touch it with your hand in a much more direct and simple way. So I I'm hopeful that there will be a future for for this kind of project because I think it will help also again the adoption the of the concept of this is

it something we can read about it's on the so the report the proof of concept report is published yeah and now we are thinking about uh the next stage. Okay, good. Well, we are already late. So, thank you very much. It was really interesting. Thank you guys.