IMF's point of view: "Synthesis of central bank digital currency" will be the future central bank currency?

The synthesis of central bank digital currency (sCBDC) is actually a “public-private partnership” model. The central bank will focus on its core functions: providing trust and efficiency. As a stable currency provider, private companies will be handled under appropriate supervision and supervision. Do other work and do everything possible to implement innovation and interact with customers.

Today, stable currencies issued by private companies are eroding traditional currency markets (such as cash and bank deposits). As the development of stable currencies is getting faster and faster, policy makers have been unable to sit back and watch, and they have to pick up the regulatory "big stick" to implement arbitration. The rules and actions of the regulator will determine how the stable currency will ultimately be used in daily payment transactions (such as the cost of paying for a cup of coffee) and, more importantly, their decisions will affect the structure and risk of the entire financial industry.

In a previous blog post, the International Monetary Fund (IMF) considered stable currency as a cryptocurrency that could be easily exchanged, and achieved minimum price volatility by anchoring with cash. Consumers may quickly accept this new, affordable, fast and user-friendly new monetary service, but at the same time there will be significant risks to this service and immediate action is required.

The world of legal tenders is also changing, and innovation will change the landscape of the banking and money markets.

One possible regulatory approach is to enable stable currency providers to use central bank reserves, which also provides a way for central banks to work with private companies to provide future digital cash, called Synthetic Central Bank Digital Currency (sCBDC). The blueprint, as discussed by the International Monetary Fund in the first financial technology note.

 

01 Supervision is imperative

Whether the stable currency is really stable is still difficult to say. For stable currency providers, they must build trust for their debt (that is, their own stable currency), and some stable currency providers will use one-to-one legal currency assets of the same denomination to support stable currency. Therefore, if the owner of the stable currency wants to redeem the banknote of the face value of 10 euros with a stable currency of 10 euros, the stable currency provider must sell the assets and pay the cash "on the spot."

The question is, can the stable currency providers on the market today meet the above requirements?

In fact, this problem still depends to a large extent on the security and liquidity of the underlying assets, and whether the underlying assets fully support the stable currency in circulation. If the stable currency provider declares bankruptcy, it also involves whether the anchored assets are protected by other creditors.

If stable currency holders want to sell their own stable currency, can they get their money anytime, anywhere? If everyone tries to sell the stable currency they hold at the same time, will it scare the market?

Supervision is to solve these problems and eliminate the risks involved. Therefore, there is also an option to require stable currency providers to have safe and liquid assets and sufficient equity to protect stable currency holders from losses. In essence, although stable currency providers are not traditional banks, regulators may need to constrain them with traditional banking regulatory standards—of course, we find this to be not an easy task.

 

02 Central Bank Support

Another solution is to require stable currency providers to use central bank reserves to support stable currencies, as central bank reserves are the safest and most liquid assets.

In fact, this solution has been implemented in China, for example, the People's Bank of China has asked the payment giant Alipay (AliPay) and WeChat payment to do so. Central banks around the world are considering requiring financial technology companies to use reserves, but they also need to meet a range of requirements, such as complying with anti-money laundering regulations, building connectivity between different token platforms, and implementing protection measures to ensure data security.

Obviously, doing so will increase the ability of stable coins to be stored as value. But in essence, this actually turns the stable currency provider into a narrow traditional bank. They can't provide loans, but they are a "peripheral institution" that holds the central bank's reserves. That's it. In addition, once the stable currency is linked to the central bank's reserves, their competition for commercial banks to compete for customer deposits will intensify.

However, the stability of the currency and the central bank reserve also have other obvious advantages, the most important of which is stability, because the assets supporting the stable currency are the safest and most liquid. Another advantage is the regulatory clarity. Once the stable currency is linked to the central bank's reserves, it means that it will fit perfectly into the existing regulatory framework. In addition, since all transactions are settled by the central bank after being linked to the central bank's reserves, the exchange between different stable currencies will be smoother, which in turn will increase the competition between the stable currency providers. Other advantages include:

1. If the stable currency providers have formed a monopoly position in the market, but they are not linked to the national currency, it will be difficult to regulate. In this case, if the stable currency is required to be linked to the central bank reserve, a payment solution that supports the national legal currency can be obtained;

2. By using a stable currency linked to the central bank's reserves, the central bank can effectively alleviate the pressure to choose alternative currencies. If the central bank also provides interest rates for the reserves held by the stable currency providers, the monetary policy transmission will change. Better.

 

03 Next: Central Bank Digital Currency

If the stable currency provider keeps the client's assets in the central bank, it means that the customer actually indirectly holds the central bank's debt, and the transactions they use to stabilize the currency should actually be seen as a central bank debt transaction – this is actually The essence of the "central bank digital currency." In fact, the currency is the debt of the issuer, as is the stable currency, so the client's assets must be protected to prevent the stable currency provider from going bankrupt.

In this case, the so-called "synthetic central bank digital currency" may be more mature and advantageous than the original central bank digital currency that needs to participate in multiple links in the payment chain. For central banks, the primary central bank's digital currency is expensive and risky because it pushes the central bank into many unfamiliar areas such as brand management, application development, technology selection, and customer interaction.

The synthesis of central bank digital currency (sCBDC) is actually a “public-private partnership” model. The central bank will focus on its core functions: providing trust and efficiency. As a stable currency provider, private companies will be handled under appropriate supervision and supervision. Do other work and do everything possible to implement innovation and interact with customers.

Of course, whether the central bank is willing to participate and choose to "synthesize central bank digital currency" is another matter. As discussed by the International Monetary Fund in a recent working paper, the central banks of each country weigh the stability, financial inclusion and cost efficiency of payment systems and assess the pros and cons. But for central banks that want to offer digital currency as a cash substitute, they should actually use "synthesizing central bank digital currency" as a potential option.

Will "synthesizing central bank digital currency" become the future central bank currency? It seems that it is still difficult to give an answer to this question, but what is certain is that the world of legal tenders has been constantly changing, and innovation will also change the pattern of banking and money markets.

Source: Carbon chain value

Compile: White Night

Editor: Qin Jin