17th July 2022 > > CBDCs.

tl;dr

Wholesale Central Bank Digital Currencies (CBDCs) make sense, retail CBDCs do not.

Market Snap (at time of writing)

Market Wrap

It looks like BTC is benefitting from the bonhomie created by the announcement of September 19th as a potential date for The Merge. Here’s what the techies say:

Make sense of that if you will.

Curious Cryptos’ Commentary – Central Bank Digital Currencies (CBDCs)

As always when discussing CBDCs, the CCC will start with a disclaimer – CBDCs are not, and never will be, cryptocurrencies.

In an ideal world I would simply ignore them, but too many people labour under the misunderstanding that CBDCs are cryptos, and whilst governments continue to (deliberately and misleadingly) conflate the two, then CBDCs will impact the blockchain revolution.

The blockchain underlying any CBDC will not be trustless, it will not be immutable, it will be used by government agencies to pry into our lives and spending habits, it will be used to make social and moral judgments about legitimate behaviours, and it will allow governmental theft from private individuals on a grand scale (see Cyprus during the last financial crisis).

So, not much to like then, and my criticism of CBDCs has never tempered.

But that is in the context of retail focused CBDCs. A recent speech by Francois Villeroy de Galhau (*), Governor of the Banque de France (BdF), has highlighted the differences between wholesale and retail CBDCs, and in the context of wholesale CBDCs, then the situation is not so clear-cut.

For clarity, wholesale in the context of finance means transactions amongst commercial banks, investment banks, merchant banks, and Central Banks. This area of operations is fully distinct from the operation of current accounts and credit cards/loans to individuals.

…

The BdF has been running experiments on the topic of a wholesale CBDC. As Francois explains, the BdF has identified two critical use cases for a wholesale CBDC:

“First, the tokenisation of securities. A wholesale CBDC could be used for the settlement of such securities issued on DLT, which is essential to prevent market and liquidity fragmentation. This technology also streamlines the information flows in financial markets, from trading to exchange procedures and settlement.

“Second, a wholesale CBDC could enhance cross-border and cross-currency settlements.”

The nine experiments that the BdF has completed in partnership with private banks has resulted in the creation of proprietary technology that mimics a true blockchain (Francois called it “distributed ledger technology” in his speech, but of course being centralised, it is nothing of the sort), and an automated market maker (AMM) inspired by decentralised finance (DeFi).

Further experiments have been announced with other private banks, and an ambitious timetable for the introduction of a wholesale CBDC has been announced for 2023.

…

What Francois is proposing here is simply a more efficient means of recording inter-bank and cross-border transactions, which is patently a good thing for everyone.

And if the ambitions of the bureaucracy ended there then I would give my full support to this development.

However, the other half of his speech focuses on a retail CBDC. He recognises some of the problems inherent in this idea:

“Concerns have emerged that the issuance of a CBDC would threaten the role of banking intermediaries in client relationships, while draining banks’ deposits through a massive conversion into risk-free CBDC accounts, especially in times of stress.”

His solution is to say that “these outcomes are not foregone conclusions” which is a cop-out of the highest order.

Naturally he completely swerves the privacy issues engendered by a retail CBDC, and tries to shut down any debate on this point:

“I would hence suggest we don’t focus too much our discussion on this “why” question, but on the “how”, together.”

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I think a fair assessment would give Francois an A* for his work on a wholesale CBDC and a resounding fail for his work on a retail CBDC.

(*) The text of his speech can be read here:

https://www.banque-france.fr/en/intervention/cbdc-and-bank-intermediation-digital-age