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Olga Yaroskevsky: You’ve described 4 possible scenarios for a CBDC to evolve: interbank settlement, similar to cash, new policy tool, public deposit in CB, but none of them are perfect, according to your words, perfect. Why?
Alicia Garcia-Herrero: It depends on what you want to do. If you ask me about the current situation with China’s payment system, I think the wholesale, which is the first one, is the best. It’s less disruptive for the banking system, for existing digital payments in China. The underlying currency is still renminbi, but they could be close to a synthetic stablecoin. Why create an e-currency that destabilizes methods of payment that are very efficient, and already digital. Actually, both Alipay and WeChat balances are kept at the PBoC, which means that the central bank has control of that liquidity and it can’t be lent out, as a variable value cryptocurrency. These are indeed stable coins, the value doesn’t change, everything is kept in a bank’s vault, it’s not invested in, it’s not Libra or something. For me the key here is to understand that the PBoC having already done such great strikes on that concept of synthetic stable coins, for means of payment with stable value, the last thing you want to do is to destroy that. In my opinion, the wholesale option is the only option for the PBoC. Frankly, it’s the only option for most central banks because it’s the least disruptive.
OY: Isn’t there a dangerous component in a possibility of a global tech/economy/currency crisis? Can such currencies or stable coins even compete with economic elephants that now hold the whole economy on their backs?
AGH: This brings me to the history of banking. It’s the best way to understand or to have a view on what will happen to cryptocurrencies, as opposed to stable coins, synthetic stable coins, all the way to CBDC. This is like the history of banking, where you would have a fully unregulated banking sector issuing a currency – that would be world of cryptocurrencies, and a fully regulated sector where you only have a monobank, which would have options of a central bank and commercial banks together. That would be CBDC with a narrow banking. That’s another option – the most incapsulated, more powerful digital currency that goes all the way to a consumer. That’s a monobank in the history of banking. The other option, the crypto world where you only have private currencies, would be the banking sector that issues currency. This way we are only replicating history.
But history shows us that with unregulated currencies the state uses the power and regulation to control the issuance and the value and the risk of financial crisis. That’s why we moved from free banking to central banking. Because we learned that lesson we won’t be all the way to the monobank anymore. It will lie somewhere in between.
I think the IMF vision of synthetic stable coins is very powerful. Because it’s a mix of public and private ownership, bringing the best out of the two together. That is how we will proceed.
In my humble opinion cryptocurrencies for payment will be regulated. And the balance will have to be pulled by the central bank. And now the question is whether the central bank will penalize it comparing to cash, maybe offer negative rates, that’s to be seen. But we’re already there. I don’t think it will be any of the two extremes. Either the monobank, which is the CBDC, with the central bank accounts for every single individual in that country, that option I think will be ruled out. In very small countries it may happen, but certainly not in China. The other once, with free currencies, cryptos, becoming the currencies of the world, totally ruled out today. Doesn’t mean you don’t want to invest in cryptocurrencies, but that’s different – it’s not for payment.
OY: What about the broader category, the digital assets? Bakkt’s launch of physically delivered BTC futures was less impressive an event than some might have hoped. What do you think about the new emerging class of assets, the digital assets? Are institutional investors ready for it, and does it even contain an element of «disruption»?
AGH: For me this is the future, I’ve no doubt about. This is what blockchain is about. If you ask me why blockchain is changing the world – one of the reasons is that all of our assets, and eventually probably all of out physical assets, will have identification. But to get there you still have to get that relevant regulatory framework. Because an asset is a stock, while cryptocurrency is a flow. Converting stocks in something else is very different. In economics, in my economic brain – stocks never happen before flows. I never change the value of the denomination of my debt before I change the flow. It’s a great idea, but we’re not ready yet, because starting with a stock is just very difficult.
The part that I find more successful about this technology than the cryptocurrencies is actually changing the value of investment tools, be it real assets or financial assets. But because it’s such a massive endeavor it will take very long to get there. But that’s a way to go. That’s a key advantage of this technology. Surely this will work, the world needs it.
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