State of CBDCs

Transcript

all right good morning everyone um this is a very odd conversation to have here um i'm gonna talk about the state of cbdc's i'm mike lonzo i'm principal architect for cbdc's and next generation financial market infrastructure at the bank of international settlements i'm not a central banker i'm not an economist i don't come from banking i actually come from this community so i've been in ethereum since like 2016 or so i'm so i'm a public chain maxie with that said these views do not reflect the reviews of the bis cool so this is the money flower [Music] it's it's a view of different types of money um on the left with the euro you see those are your bank notes your coins to

the right of that with the ethereum symbol that's crypto stable coins um to the right of that are your bank uh so your bank money and banks and stuff like that essentially what cbcs are trying to do is be right in the middle between uh peer-to-peer central bank issued electronic um and widely acceptable so generally when uh people talk about cpcs there's two types of cpcs that they talk about there's wholesale which is bank to bank and retail which is individual to merchant individual individual but i like to consider a third one which is general purpose which is kind of both so it's kind of well defined for uh for both usages but first let's talk about wholesale so back in 2016 uh 2017 time frame central bank started playing around with senator

mike digital currencies and they started doing it in centralized dlts so they used corda and other types of dlts and essentially what the experiments were well everyone's cool with this it's centralized we can issue our money but what happens if we have to do cross-border uh payments what if somebody from the u.s comes to ucc and has to pay for things in euros doing an integration of 190 plus central banks with centralized databases is just taking one system and putting into another system that does the same thing um just with more integrations and so you started seeing these experiments um so this is the new slate of experiments where basically jura was a swiss franc um with a euro from bank to france some cool animation

and that was done on corda and we take a view back and we go to dunbar which was done uh by singapore uh south africa australia and malaysia and that is a network of central banks uh and it's actually evm uh believe it or not um it's actually a quorum and so hong kong did one with china thailand and the united arab emirates called them bridge and that's also evm based so what you're seeing is uh you know two of these three networks are evm based um and they're gonna have to talk to each other one day and you know as a public chain maxi i think you might see something with a public chain integrating in these networks which is actually a good thing so let's talk about retail this is the

thing that everyone hates uh it's scary and i'm scared of retail and i think a lot of you know others are too um but let's break it down and see you know what what's going on here so back in 2020 uh the european central bank gave up gave a consultation and asked the public what do you want in the cbdc well i think it's obvious privacy everyone's in privacy they also said cryptographic security cheaper offline and portable no surprise here um but you know we took that at the bis and we wrote a report in 2021 and we titled it the user needs an adoption of a cbdc we took a learnings our consultation for the public we asked the public what did they want took learnings and input from central bank governors and and looked at other

failed approaches and failed the monies and so we came up with these core requirements these needs so if you want to do a central bank digital currency it has to have this stuff it has to be available all the time has to be secure has to have instant settlement ease of use etc but that didn't answer the user adoption stuff and so we went further in the report and we said well to get adoption you need privacy offline accessibility has to be low cost low cost to merchants because merchants pay a lot in fees um and if you use paypal selling the same thing right but but the privacy thing in that report we wrote that individual privacy should be protected from commercial providers and

governments as a basic right let me say that again privacy should be protected from commercial providers and governments as a basic human right and that a cbdc can be built with more privacy because a central bank does not have the incentive to misuse that data that's a surprise actually you know but this report the cbp the bis report to support about how do you get adoption so privacy is a key feature so so a lot of advanced are experimenting on cbdc's and this is tough because how do you get wide adoption privacy offline 100 availability um all these components in a cbdc which is with a lot of throughput that's

difficult so so three different architectures have been proposed essentially there's this utxo model which um was done by others but hey project hamilton is the one where it's it's by the boston fed and mit with some core bitcoin folks um they built it they just basically you know made it go really fast and it was missing out some like key attributes like programmability and some privacy the next one was uh is dlt based so this is as anyone here knows you probably a layered solution and so that's what ekrona is doing uh it's basically sweden they're doing this layered approach and then the bank of visual which no one will surprise you which is actually really surprising is they're basing off zcash

so whoever thought zuko would be some part of cpdc is actually interesting and surprising but that's kind of cool that they're using his technology um and then this last one is ecash and that's comes the brainchild of david chom from the 90s he's an old school cryptographer way ahead of his time he built private money uh that was private and anonymous but it didn't really catch on because people really liked credit cards back in the 90s but there's a lot of research and i think if there's something retail it's going to go down this route and using this architecture so you maintain privacy anonymity but why am i talking to you about this stuff we really don't probably care about this stuff but this is what i want to talk about was general purpose how can uh cbdc support innovation in this room right here

so i'm not going to use names or terms or or individual companies i'm just going to provide a risk and and the best thing this community because i come from this community does and nobody else really does this is you know we we build things and we talk about things and we use an adversarial approach a mindset if you look at every white paper what's the attack vector what's the adversary how do we protect against that because it's important so what i'm going to lay out is the risk of centralized stable coins i like decentralized stable coins they're cool but if you look at the market share most of the stable coins are made up of centralized stable coins um which present a type of risk and not a risk now but you know we're talking about when the trillions of dollars of stable coins are out there they're centralized

so this is how this works so alice puts money into an exchange he wants a stable coin the exchange goes hey stable coin insurance here's some money i want some stable coins stable coin issuer goes okay let's put in my bank now here's where things get weird a bank never holds that money overnight at the end of the day every bank basically wants to get as close to zero as possible um so they put that money elsewhere they put in investments they put it somewhere else they put in other banks so money goes to other banks or investments and then at the end of the line they all have accounts with a central bank to hold reserves that ultimately back that money cool stable coin insurer gives you stable points alice puts it into a layer 1 chain

she does a swap with bob bob goes ahead and puts it in layer two and puts it into a lending protocol to earn interest that's fine now let's take a look at the business model everything in blockchain is based off of fees for loans for swaps for usage it's fee-based presented with the exchanges no surprise here's where things get different the stablecoin issuer is seeking yield they're taking your dollars and putting into investment products to anneal there's something wrong with that yield is good banks too so what happens in a risk what's the risk model here what is the adversary the adversary is what what i would

consider a d5 bank run so you know there's institutions in d5 that's cool but what if you know in this world some malicious event happens doesn't have to be a hacker just has to be loss of trust and people need to exit and want cash or money in a bank account and you kind of saw this happening recently but not that the scale i'm talking about is trillions here and so everyone's making a mad rush to the exit everyone goes to crypto exchange to get their stable coins the script is changed like hey i need money now they get money it goes back to the exchange and then alice and bob or some institution get money cool it'd have it wouldn't works until it doesn't um and this is what what the quality of

loans happens uh discussion you see happen around um lehman brothers they failed because they had crap prod crop investments but also the other part of what they felt is a lot of it wasn't uh you know liquid so you can have banks that have ill liquid investments that they can't really just get money out real really fast so when you don't have funds or liquidity well that's what happens so what happened here um everyone was too far away from the actual settlement asset which in the end rose up to the central bank so everyone on the left side is actually still pretty good because they have a direct line to the central bank in some way shape or form and they're protected through legal agreements but everyone on the right side is actually not protected because when you hold a coin you can't

just go to stable coin issuer and say hey i want money you have to go through intermediaries for that and so if you look at the steps from the intermediaries there's probably like four or five steps between uh an individual on on layer one and then six steps on a layer two to get money out in cash and that's a massive risk and so what i would propose is to actually move that central bank closer to the chain and so you can have a cbdc on a main net and use it as collateral direct collateral instead of having all these intermediaries and it's not saying that stable coins can't exist they could they would just use the cdc on chain as collateral and you can put it in protocols as collateral too or treasuries um you know given you you

would meet the requirements but that's kind of a much safer ecosystem and really that's what we're trying to build is a really safe and prosperous and uh and scalable ecosystem and you got to do it with with good and safe money you know i love this ecosystem and i think it could potentially have to be a victim of its own success um i think it is successful now but uh you know imagine a world where these risks do materialize um i think you know having a central bank closer and central bank money on public maintenance are ultimately a good thing and i think that's what we should be striving for so so i really have one question really i might ask i know this is scary and i know a lot of people don't like to talk about it but

cbdc's will be here um my ass to you is you know who's going to build it uh is it going to be people from this community from this group or is it going to people with other intentions that have misaligned incentives so so that's the question i posed to you and i really want to help you guys help build this with me thank you [Applause] hey