October 5, 2022

Unitranche

Supportive Business Potential

R3 technology boss adds to hopes that CBDCs and stablecoins can co-exist

Stablecoins and central bank digital currencies can coexist, according to R3’s chief technology officer, Richard Brown, despite their different objectives.

There could even be synergy between the two, he told Financial News — in the same way as banks currently provide commercial money to the market, which is underpinned by central bank reserves, the same could be done with stablecoins and CBDCs.

“A firm sets up a legal entity, that legal entity holds a CBDC on the asset side of the balance sheet issues a stable coin on the liability side,” Brown, who has held his role at the financial services technology company since 2015, explained.

Though CBDCs and stable coins have a similar purpose — to be digital assets without wild fluctuations, making them a store of value — the use cases and users for the two are currently quite different.

The spotlight has been put on stablecoins after the spectacular failure of TerraUSD. The implosion of the coin and its paired cryptocurrency, luna, has had wide-ranging market effects with bitcoin trading around $30,000 having lost 25% of its value in the past month.

Brown said stablecoins were designed and are mostly used by digital natives. They are primarily used to purchase other crypto assets such as tokens or NFTs, while a retail CBDC’s primary objective would be to target regular consumers making payments into the real economy.

“The stablecoin revolution can be thought of as demand-led by people who are participating in the ‘web3’ economy,” he told FN. “The argument is: it’s natural also to want to have representations of real world currencies.”

His sentiments were echoed by Lael Brainard, vice chair at the US Federal Reserve.

In testimony to Congress on 26 May she said: “In some future circumstances, CBDC could coexist with and be complementary to stablecoins and commercial bank money by providing a safe central bank liability in the digital financial ecosystem, much like cash currently coexists with commercial bank money.”

READFed’s Powell and BoE’s Bailey say laws need to adjust to boom in crypto

TerraUSD was algorithmically pegged. In an effort to save the coin, Luna Foundation Guard, the company that manages TerraUSD, exchanged more than half of its 80,400 bitcoins, then worth around $3.5bn, to no avail.

Crypto accelerates central bankers’ work

The rapid growth of the crypto market has pushed many central bankers to move more quickly to research and develop CBDCs. According to a survey conducted by the Bank for International Settlements, six out of 10 central banks said the growth of crypto assets has spurred them to accelerate their own work in CBDCs.

Some 90% of central banks are now engaged in some form of work on a CBDC. In 2021, more than a quarter ran a pilot programme, up from 14% the year before. Nine CBDCs have been launched — eight in small Caribbean nations, and one in Nigeria.

One of the supposed benefits of CBDCs is their safety, as they would be a digital token that is backed by the central bank. For advanced economies, there is little risk of digital commercial money going under like TerraUSD, according to Brown.

“In countries with deposit insurance, including the US and the UK, the risk to a consumer of their bank going bust is quite low,” said Brown.

The use case for CBDCs in advanced economies that already have robust retail payments networks and an established banking sector will depend on differentiating them from what is available as it stands.

READCBDCs shouldn’t be the only form of money, central bankers say

“If the consumer can’t tell the difference, then we’ve probably done it wrong,” said Brown. “There has to be a corresponding consumer benefit.”

“We don’t think about cash as a product, but it’s a really cleverly designed product. It doesn’t follow that just because we build a digital version of it, that it will be similarly successful.”

In the UK, the Bank of England along with the Treasury is scheduled to start a consultation sometime this year to look at the merits of a digital pound. Tom Mutton, director of fintech at the Bank of England,  previously said that CBDCs shouldn’t be the “only form of money we use.”

The Fed is conducting joint research with the Massachusetts Institute of Technology to look at the technical feasibility of a CBDC. The European Central Bank, having completed a consultation in 2021, has moved onto the development phase.

To contact the author of this story with feedback or news, email Jeremy Chan