Bank Indonesia Workshop and Seminar · Blockchain research project: Next steps Page 15 14 November...

Bank Indonesia Workshop and Seminar Central bank digital currencies – Feasibility and impact Day 2 – Session V Dirk Schrade, Deputy Head of Department Payments and Settlement Systems, Deutsche Bundesbank *

* NOTE: Views expressed are those of the author and do not necessarily reflect official positions of Deutsche Bundesbank. The spoken word prevails.

For Central bank internal use only

Agenda

14 November 2017 Dirk Schrade, Payment System International Workshop and Seminar 2017 hosted by Bank Indonesia

Part I – Distributed Ledger Technology Part II – Virtual Currencies & Central Bank Digital Currencies

DLT in Payments and Settlement Systems


Bitcoin

Blockchain

Distributed Ledger

Central banks have the responsibility to promote „stability and efficiency“ in payment and settlement systems A central bank‘s interest in new technologies covers the following areas:

Functionality Prospective benefits & risks Changes to the market structure Implications for central banks

Definition of a blockchain


Properties: −Distributed ledger −Cryptographically encrypted −Consensus mechanism −Chain of blocks containing the shared data −automated execution of processes („smart contracts“)

Distributed Ledger = data base shared across a peer-to-peer network, which gives participants joint rights to write, read and store entries to the ledger, without the need for a central administrator

Blockchain = a special form of DLT for recording transaction histories (chain of chronologically sequenced blocks containing transactions)

A comparison of network models*


*Based on Baran, 1964 Sources: Baran (1964), Deutsche Bundesbank

Updating a distributed ledger


Source: Deutsche Bundesbank

Examples of how a payment can be settled: Person 1 pays money to person 2


Source: Deutsche Bundesbank

Classification of blockchain platforms


Public Consortium Private

Governance - Multiple parties Single party

User identity Permissionless Permissioned

Not specified Specified, access restricted to registered parties

Consensus mechanism

Probabilistic (e.g. Proof-of-work)

Deterministic (e.g. PBFT)

Finality after several blocks, high energy

consumption

Immediate confirmation of finality Low energy consumption

Processing time Long (~ 10 minutes) Short

Application Virtual currencies Interbank transfers, international trade, etc.

Use case Bitcoin, Ethereum, etc. Ripple, Hyperledger Fabric, etc.

Expectations


1. Transparency & immutability

2. Operational efficiency

3. Security & resilience

4. Independence from intermediaries

5. Automated contract performance

1. Identifiability

2. Confidentiality

3. Scalability & performance

4. Regulatory compliance (eg AML)

5. Finality

6. Relation of virtual to real assets

Prospective benefits Challenges

Potential impact of DLT


Payments Limited potential use in large-value or retail payment systems Simplification of complex processes in cross-border payments or trade finance

Settlement systems Shortened settlement cycles Easier reconciliation processes Automation of asset servicing (e.g. corporate actions)

Adjacent fields of application Increased harmonisation in reference data management Standardised processes for identification solutions (also relevant for KYC)

DLT implications for central banks


Application of private distributed ledgers? Operator

Promoting the acceptance of efficient and innovative technologies Ensuring interoperability and fostering harmonisation Catalyst

Detection of early warning signals to counteract potential risks Strengthening cyberresilience Overseer

Role of a central bank in payments and settlement systems…

Blockchain research project (joint with Deutsche Börse)


−Project goal: explore the functionality of a „blockchain“ for payments and

securities transfers as well as the settlement of securities transactions against both instant and delayed payment

−Conditions: • Maintenance of confidentiality / access rights on the basis of a flexible and

adaptable rights framework • General observance of existing regulatory requirements • Identification of potential to simplify reconciliation processes and regulatory

reporting − Implementation: Hyperledger Fabric blockchain

Blockchain research project (joint with Deutsche Börse)


Test environment for blockchain technology-based…

Cash settlement - Provision of digital coins - Transactions between participants - Payment processing

Securities settlement - Security lifecycle processing - Securities transactions processing - Corporate actions

- Interest payments - Redemption

Blockchain research project: Schematic illustration of the prototype


Source: Deutsche Börse and Deutsche Bundesbank

Blockchain research project: Next steps


The prototype is designed as a conceptual study with the goal of understanding and evaluating the functionality of a blockchain technology-based securities settlement process, not in order to develop an application!

Further research questions −Changes in technical system design −Scalability and performance −Costs of blockchain technology-based processes −Options and impact of differing role concepts (i.e. definition of user groups

and rights)

10 November 2017 Angaben zum Referenten, Ordnungsmerkmal, Ortsangabe

Activities of other CB

Sveriges Riksbank Examination on issuing an digital E-Krona

FED Thought experiment on digital currency

Bank of Canada Jasper (digitalized central bank money on DLT)

MAS UBIN (digitalized central bank money on DLT)

DNB DNB-Coin (digitalized central bank money on DLT)

Bank of England Proof of Concept for payment settlement on DLT

Agenda


Part I – Distributed Ledger Technology Part II – Virtual Currencies & Central Bank Digital Currencies

Why virtual currencies? – The invention of Bitcoin


Bitcoin: A Peer-to-Peer Electronic Cash System What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party. Satoshi Nakamoto, 2008

The emergence of virtual currencies


Source: coinmarketcap.com, 07-11-2017

− 1,265 virtual currencies

− Total market capitalisation US$199 bn

− Top 5 by market capitalisation:

0 50 100 150

Litecoin

Ripple

Bitcoin Cash

Ethereum

Bitcoin

− 766 virtual currencies

− Total market capitalisation US$46.6 bn

− Top 5 by market capitalisation:

US$ bn US$ bn

May 2017 November 2017

0 10 20 30

Dash

Litecoin

Ripple

Ethereum

Bitcoin

Strengths and weaknesses of virtual currencies


Strengths

+ No need for intermediaries

+ (Potential) global availability

+ Relatively quick settlement of

cross-border payments Weaknesses

− Strong fluctuations in value

− Performance impaired when volumes

are high

− Inefficient transmission channels

− Insecure “eco” system

(wallets/exchanges)

− Non-transparent governance

Price performance: Bitcoin & US dollar


0

1

2

3

4

5

6

19.10.2015 19.10.2016 19.10.2017

Performance in EUR (19.10.2015 = 1)

USD BTC

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

19.10.2015 19.10.2016 19.10.2017

Daily changes in %

BTC USD

Sources: Data provided by ariva.de (as at 19 October 2017), Bundesbank calculations.

Virtual currencies lack mechanism to manage the money stock


Stable money ... - ... is necessary for the efficient allocation of goods and intertemporal

allocation (consumption and saving) - ... ensures that no distortions arise between incomes as denominated in

nominal and real terms

Traditional currencies: Monetary policy responds to real developments (economic growth, velocity of circulation of money) Macro management possible

Virtual currencies: Money supply is predefined and does not respond to real parameters No macro management

Central bank-issued digital currency


Why not use central bank-issued digital currency (CBCB) to overcome weaknesses?

or:

Why to consider central bank-issued digital currency?

How does CBDC fit into the scheme of things?


Geld

Forderung an…

Zentral-bank

Einlagen Digitales Zentral-

bankgeld Bargeld

Private Institution

Geschäfts-bankgeld

Unterneh-mensgeld

Güter

Materielle Güter

Virtuelle Währungen

Money

Claim on ...

central bank

Deposits Central

bank digital currency

Cash

private institution

Commer-cial bank money

Company money

Goods

Material goods

Virtual currencies

Digitally transferable & transferable without an

intermediary

Transferable without an

intermediary

Digitally transferable

How does CBDC fit into the scheme of things?


Source: Bech / Garrat – Central Bank Cryptocurrencies, BIS Quarterly Review September 2017

Defined assumptions regarding digital money


Central bank-issued digital currency (CBDC)

• Central bank liability • Fixed rate of exchange with other forms of central bank money • Transferred outside of existing central bank accounts via digital systems

Digital commercial bank money

• Commercial bank liability • Convertible into central bank money Virtual currencies

• Free of any value basis • Transferred P2P via digital systems

Technical options for central bank money


Cash Non-cash central bank money

Digital central bank money

Physical Electronic Electronic

Value based: Transferable P2P (without an intermediary)

Account based: as a claim, transferable within central bank systems

Both possible

Anonymous transaction Documented transaction Both possible

Access for non-banks Access limited to monetary policy counterparties

Both possible

Use limited to vicinity Use within the circle of account holders

No comparable limits; circle of those involved can be limited

Non-interest-bearing Interest-bearing Both possible

Motives for CBDC and virtual currencies


Motives for central bank-issued digital currency

− Liquidity for monetary settlement on the blockchain (interoperability)

− Financial inclusion − Efficiency of settlement − Cash supplement − Effectiveness of monetary policy − Transparency and monitoring − System stability (technical safety)

Motives for virtual currencies #

− Liquidity for monetary settlement on the blockchain (interoperability)

− Financial inclusion − Independence from existing

financial system and central banks

Payments - Substitution of other

forms of payment - Crowding-out of payment

service providers

Implications of the introduction of CBDC


Banking - Interest margin &

profitability - Stability risks (loss of

deposits in stress situations)

Monetary policy & central bank balance sheet - Effect of transmission

channels - Structure and risk profile

of central bank balance sheets

…

Macroeconomic effects - Volume of lending - …?

Concepts relating to CBDC


CADCoin* E-krona* Fedcoin*

Target group Wholesale Retail Retail

Access restrictions Yes, only participants in the RTGS system (on DLT basis)

None, but generally settlement of smaller sums

None

Convertibility into other forms of central bank money

Tokens regularly issued at start of day and redeemed at the end of the day

Possible at any time (complements cash)

Possible at any time (substitutes cash)

Anonymous or registered

Registered/account based

Registered/account based for large sums, anonymous/value based for offline payments

Anonymous/value based

Payment of interest Only indirectly through conversion

Not planned, but possible Not planned, but possible

Monetary policy Neutral, as only exists intraday

Included Indirectly included via cash

* As defined by the Bank of Canada (Project Jasper, 2017), the Swedish Riksbank (E-krona Project, 2017), and Koning (2014, 2016)

- Should central banks issue digital currency?

- What could be the greatest benefit?

- Where might the greatest risks lie?

Issues for debate – We want to know what you think!


What challenges are there?


Mandate

Acceptance

Trust

Legal

Financial stability

Regulatory requirements

Consumer protection

Cyber- resilience

Governmental control

Independence

Technological progress

Risk concentration

Contagion

KYC / AML

Confidentiality

Interoperability

Market structure

Non-tiered retail access Central banks make digital currency available directly to the public Major implications Monetary policy operations will probably have to be widened Operational system structure will need completely reorganising. New understanding of the role of central banks, banks and non-banks

Tiered retail access The public, too, can access central bank-issued digital currency via registered intermediaries Implications broader Monetary policy operations will probably have to be widened

Wholesale access Central bank-issued digital currency is available only to registered users and for predefined purposes Implications small Monetary policy operations unlikely to be much affected

Way forward…possible scenarios?


Currency competition

−Money is a public good

=> Private suppliers have too few incentives to ensure stability

−Competition of currencies / money is already existing

Foreign currencies

Regional money

Virtual currencies

Commercial bank money

−Ultimate criteria is: stability

−Without stability a currency is subject to increased substitution

eg dollarisation

−Also important: stable and efficient means of transfer


Thank you!

Dirk Schrade Deutsche Bundesbank Deputy Director General Payments and Settlement Systems


Bank Indonesia Workshop and Seminar · Blockchain research project: Next steps Page 15 14 November...

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