Matthias Hafner - Next-Gen Payments: Competition among Stablecoins, CBDCs, and other Payment Tokens

Transcript

thank you much for this nice introduction and um it's a pleasure to be here and talk about uh stable coins cbdcs and real world assets so my name is Matas and as I said I'm from the center for cryptoeconomics which is a part of Swiss economics so uh how I'm going to structure this this talk so first to give you a brief motivation um then I give you a little bit an introduction of um um today's and tomorrow's payment methods basically these are stable coins cbdcs and we discuss later as well tokenized real world assets then I will basically bring that together um discuss a little bit the interactions between

those different asset types and uh also give some uh Outlook uh for further uh like Beyond tomorrow basically okay let's start with the motivation um so uh what's the motivation well we have seen uh immen immense growth on the one hand of stable coins uh which have been here now for uh several years and theyve been grown to about 100 billion in in value dollar then what we also have um but but as you can see here on the on the right basically what we also have there have also been crashs of stable coins so um maybe discussing a little bit what what

are their um what are they uh how secure they how stable they are so there a lot of good discussions about that as well then next after stable coins we have cbdcs we had a lot of talks I think also previous year um about the cbdcs they they are expected to be launched um somehow they cover something similar than than stable coins so how does that relate together and recently um as we also heard today is um the topic of tokenization of real world assets I think we had to talk previously about um tokenized shares of s smm uh such as oxin orat um but we also have or not all not but and also in

addition um a huge Market of tokenized Treasury builds um and as you see here on the right practically the same picture as seen before basically um huge increase um in tvl of them and recently like one week ago uh Black Rock one of the or the biggest um uh or one of the biggest Financial players just announced a tokenized uh fund basically this institutional digital liquidity fund so we also see traditional players coming into the sector so from that perspectives basically uh I want to First discuss a little bit about payments about what are stable coins and then come to uh look at how they relate

to cbdcs um and to real world assets and in the end and conclude with what might the future hold for payments so before we talk about that let's talk a little bit about um why to pay and hold cash at the beginning from portfolio Theory we um basically um portfolio Theory tells us um that if you want to invest your your your wealth um then you have to diversify um this Theory based Bally says that there is a market portfolio and you cannot uh um basically there is no better option than the market

portfolio in terms of return and risk so you cannot outperform the market portfolio in the long run um having a better return risk ratio um so this is basically this m what you see here um so the D and the C these are single assets they have a worse um risk return ratio basically however what you can do is you can combine this Market portfolio with a risk-free asset what you see here um at the bottom RF and using the market portfolio and the risk-free asset you can basically or or anyone can basically um allocate um his wealth to his risk preferences so if if somebody wants to

take more risk he can leverage and uh go to the point B with high risk and more return or go to a with low risk and low return or if somebody is very risk aware he can can also um allocate all its funds to the risk-free asset RF so basically this is assumed to have no risk now let's introduce cash cash is also risk-free um so so uh well but the risk-free asset gives some return cash does not give return so why to hold cash because this difference is basically

cost of holding cash difference between risk-free asset and cash so um and yeah you have these opportunity costs basically um so what are the reasons for cash well on the one hand liquidity costs cash is the most liquid asset you have you can trade it everywhere it's also enforced by law there are different reasons um you can exchange it everywhere um it's it's used as medium of exchange so it's very liquid um which is the risk fore asset is less liquid of most often and another reason is transaction costs basically um the need to basically to need to rebalance your

portfolio so you invested uh you you you have made a decision you risk return assignment basically you invested in a portfolio now you want to buy something um what would happen you would need to sell part of your portfolio a um send the cash to the person B um B who receives it um has to again increase the optimal portfolio B because you always have transaction costs maybe it's better to have a reserve of cash instead of always exchange or always changing your portfolio at each timing point you do some transactions or buy Goods so basically due to liquidity and transaction cost consider considerations

people hold a cash Reserve okay so the next um we go to the stable coins um stable coins they can be used as a means of a payment like cash um so what are stable coins first that's very important so stable coins um they track the price of another asset um using different collateral sources and different collateral management techniques so um they represent something else and to to for having value they need some collateral they need something in their basket behind it such that they can do that there are different ways to do it

as I've shown you here they have different advantages and and disadvantages I think um the most important here um is is that there needs to be a collateral and there are more decentralized techniques like d and synthetics um they are more secure against um Bank runs but um they or they come at a cost for a higher they need a higher collateralization ration they need over collateralization so the value of their collateral is is higher than the value of the combined stable coins so to say um so you see and also what's very important here there are many many different types many many different

stable coins in the in in the world so what is really important here um is the second point I mentioned the first point already they represent something else they're not the original the second Point basically that stable coins are flexible assets that can be built by anyone um so um um there is competition among stable coins so we have a lot of stable coin types um the one who is is is most um uh demanded will win the race basically and they have diff also there are different types so maybe it's not one stable coin that window race but multiple stable coins that window race because they um they uh uh they have different characteristics as I said for

example die um is very secure in that sense maybe and is decentralized um maybe there are other peoples who wants that in in in comparison to maybe tedar or other stable coins that have other advantages um and what is also important to to consider that stable coins can be quickly adjusted and basically um um that Stans can respond to changes in the competitive Landscapes so let's have a look at the tedar example I use tedar here um because it's um it's it's the most easy to explain but you it's similar arguments holds also for D or or Terra

or synthetics um so what you have basically as I said you have like the collateral um that is used to give the stable coin the value um in this example um we have like 10 USD or this is like teder works just the numbers are not not real this just examples we have like for example um the collateral that used um is used to Mint 100 stable coins um is 10 um US dollar in in a bank account and $90 Us in in government bonds basically so this ratio is more or less um uh basic that's how they invest the collateral basically

so they do not hold everything T doesn't hold everything in cash or in bank account but cash or deposit money as well but also um in in risk-free assets so these treasury bills that are shown here this is basically the risk-free asset and that tedar invests the money and it receives because these 100 stable coins that are minted they um are provided to the users who can then either um conduct transactions or or also um so invest in in in conduct transactions to exchange um against other assets or buy goods and services um so they receive disabled coins but

they provide the cash which is then invested by teder basically as I said so what's interesting here is to say that is to see that basically um when we've shown before the opportunity costs um in inclusive all they go to the users both basically the users they pay in cash but they don't get anything in return for that on the other hand the interest payments from these treasury bills because this risk free Asis customer interest they go to tther and that's basically what we also see like teda reported a record-breaking T 2.85 million billion profits last quarter so teda made huge profits and because interest rates increased so um um it it

could gain a lot from the treasury builds and it kept it in for himself basically so it's not added to the collateral that's very important um or most of it um so now let's introduce um the cbdcs so the cbdcs are kind of similar um what we also have here is a collateral so usually central banks they also have a collateral uh for their for their money that they issue um so um often that is also treasury bills and we we have gold we have foreign currencies

we have Bank claims so they give money to Banks so you know that maybe also um and uh basically these are claims so they also have some sort of collateral and on the other hand Banks then have uh cash or very simplified it's a little bit more complex but um have cash and cbdcs is just a new form so um that is added to to that uh um to that right side um again what happens with cbdcs so the cbdcs are then distributed to um either Banks or users depending on little bit on the form of the cbdcs um if we look at here uh how is this is distributed on the one we have

just opportunity cost this is inflation that many people um Claim about so this is on the user side the profits are usually held on reserve some are uh also paid out like in Switzerland the cant get some of the profits but most of it is is basically hold in reserve okay now look now look let's add the stable coins to the equation um and as you can see um or what is important here is now that basically the Corral of the stable coins is somehow interconnected to the to the central bank so so um the stable coins represent basically the money from the central bank that means anything that goes to

the users uh must come somehow from the Central Bank in the beginning so it's a way longer Journey uh the red line than the green line so um there are way more risks um um at associate associated with a stable coin than with a cbdc and that's simply the case because the stable coin just represents basically cash whereas the cbdc is more or less cach digital cach so um important to note here cbdcs are basically the original the stable coins are the copy um however there are some advantages of stable coins I'm not going to tell you

that stable coins are going to uh dimish um because um cbdcs are very standardized assets um and created by Central Bank Banks so that means we have no competition at least within a currency there is maybe between currency competition but let's keep the deci side within a currency for the US dollar if us would issue a cbdc there would not be a second cbdc so there is no competition so it takes longer to adopt to changes in in in in in in in in um in the competitive environment um and secondly because um it's issued by an institution um it takes much longer to react to

outside to to the environment so as you can see we have stable coins for many years cbdcs we are thinking about it or or or um governments are thinking about this table to loue cbdcs but there is not yet a stable coin H cbdc that um is is um there are pilots but not not uh as as a mass product launched yet um so there is um these are two distinct things basically but have some main goals namely payments so let's talk a little bit about other payment forms so what we've seen um since then because the drawback of the current stable coins or basically

uh for example tedar is that they also have this this negative effect of of uh the opportunity cost so they don't provide a return when you hold them so um and with the increasing inflation a new form of payment tokens um um arised so these are for example flat coins or they so called Flat coins so their value is basically packed not to um the US dollar or to to another currency their value is packed to the cost of living so in the sense of when the living costs Rise um their value will also increase so there are two examples uh the largest examples I know is fra price

index so how they do it is basically the treasury so who manages the collateral invests it um and is able with the returns of these Investments is able to basically increase the value of of the um of the stable coin or of the flat coin um then there are other examples so frax is more like die or or not th sorry it's more like tether in the sense of that um it's centralized centrally managed um but it's still on the blockchain um so yeah but then the other example is neon which is more like D um this is basically decentralized and EXO

decentralized um managed um using exogenous assets um and here how it works um so these kind of stable coins they work like that that individuals can create these stable coins but they have to provide the coll and manage it and um if they do not manage the collateral and the collateral value decreases they will be liquidated it's like a penalty for them so they have an incentive to ensure that their collateral is sufficiently large and they do it um basically by enforcing or make creating incentives to increase the collateral for the individuals and if people do not follow

this rule then they will be liquidated so both the both both these just to mention these flat coins and they exist but they don't um have U uh um they're not used very very much by the community yet I don't know what the future looks like um then what we also have is um tokenized deposits basically that's are um deposits um so these they represent Traditional Bank deposits on a blockchain so this is basically um so they're different systems I just um go to the second system which I think is more practical um what they do is they

um use the deposits as a collateral and and then create stable coins from that um the benefit from this system is basically that you you can use the alt or this can applied to the old system um so that people can trade with this stable coin but settlement is still made uh by the Banks here the fault is using cbdcs in the future um in this case um also the users they receive some return on their deposits so they don't lose value basically um or have this uh um or less um uh uh for these costs of holding cash because they receive interests on their

deposits maybe the interest is too low but that's another question so let's move on to tokenized real world assets and I will bring here the example of a set for this black rock um example of this font that has recently been launched and attracted I think about more than 2300 million um uh uh dollars in the first days um so it's very successful loue um and how it works you see it works very similar then tedar um on the one hand we have the collateral which is now tokenized so the collateral also includes back uh cash in

bank account and risk-free assets like treasury bills there are also other instruments there not going to mention it's not complete but for Simplicity and what you get then is a fraction of this um of this um of this tokenized asset so in that sense 100 bidd they call it bidd this is their token and one bidd um is also worth exactly $1 so it's also kind of a stable coin but now what here's interesting we still have the opportunities costs on this $1 but interesting and what's the difference between tedar is basically that the interest payments they are going down to the users because it's tokenized

basically the collateral is tokenized and not um um so it's clear that the interest payments also go goes to the users so um it was a very nice move from Black Rock because in the end this is kind of a stable coin that pays out a dividend um or an interest the question is whether they or a little bit difficult is with $1 whether that works or not um but as you can see here they made a step forward and provided interests um to the users so which gives them an advantage um against cbdcs because cbdcs will never or not in the close future will give you any interest um it's worth noting that is it's only

open as far as I know to institutionalsales deposit coins um something similar um that gives rewards um or interests to users um and yeah this this token this bid token um as I said it's it's kind of closed form it's on ethereum but you can only um send it um to pre-approved investors um so uh uh basically it's in that sense closed so you need to be a pre-approved investor um to be able um to redeem it okay then as I already talked to you

a little bit about interactions um more on that so basically we have the cbdcs we have this oh one note just to the real world assets a stable coin in the end is also a real world asset because if you tokenize um a dollar then and just have the dollar in in as a collateral then this is basically the same this is a tokenized real world asset but depends on what you tokenize and how and whether the payments are also or the interest also uh flow to the to one who holds the token so um we see basically um there are multiple interactions so we see that um

tangable assets or real world assets um they require stable coins for payments um of of dividends and coupons so there there must be some interactions between these um reaload assets and and stable coins and cbdcs um then what we also have is that uh as I said previously that stable coins and cbdcs in Portugal centralized stable coins and cbdcs are in some competition with with each other and lastly also that um the token the tokenization of tangable assets um increases the liquidity and decreases the need for cash so um if it's easier to con to to to trade with a with um tokenized asset with for example um a

treasury bill then maybe I don't need to just convert it first to cash and maybe I just can use the um the the to tokenized asset to to conduct trades so um how's the future of stable coins in a tokenized world look like that's U my my personal view on it so um I assume the CBDs will come um because they're also in competition between the countries um they might be not in public blockchains but there will for certain some derivatives of it also stable coins like um um then the stable coin they will remain um particular because they can innovate um and Innovation will lead

to new forms um I assume that these new forms um will provide some interest basically to the users um to compensate for for for the opportunity costs and um as I said before um we might see risk-free um real world assets um such as treasuries builds to be used as means of payments what Beyond um so this is maybe something in 10 years we can look at 5 to 10 years what is beyond um what if the technology can increase liquidity and decrease transaction costs even more why to pay with cash at all um as I

discussed before why do we need some kind of cash if if uh we can use the risk-free asset um maybe even more if if you look at the example of the portfolio in the beginning um why do you have to uh first uh convert basically um um convert my portfolio a or part of my portfolio a to cash um and then the other person has to convert that the cash he received back to the portfolio maybe in the future in the far future um we will see some automatic conversions so that we basically just allocate our wealth um to our optimal portfolio and

when we buy um buy something uh Goods on the market um it basically will automatically um uh conduct the payment and reallocate the assets so that it's uh that the the trade is is is then in the portfolio of B so we don't need this intermediary form but this is some kind of very for future and I think what is uh the point here is that I assume that the direct transfer of assets uh real world assets um will become more important in the future also as means of a payment thank you very much thank much that was it thank you very much Matias

hner once again put your hands together please