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
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Part I – Distributed Ledger Technology Part II – Virtual Currencies & Central Bank Digital Currencies
DLT in Payments and Settlement Systems
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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
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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*
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*Based on Baran, 1964 Sources: Baran (1964), Deutsche Bundesbank
Updating a distributed ledger
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Source: Deutsche Bundesbank
Examples of how a payment can be settled: Person 1 pays money to person 2
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Source: Deutsche Bundesbank
Classification of blockchain platforms
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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
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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
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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
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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)
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−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)
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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
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Source: Deutsche Börse and Deutsche Bundesbank
Blockchain research project: Next steps
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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)
Page 16 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
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Part I – Distributed Ledger Technology Part II – Virtual Currencies & Central Bank Digital Currencies
Why virtual currencies? – The invention of Bitcoin
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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
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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
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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
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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
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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
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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?
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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?
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Source: Bech / Garrat – Central Bank Cryptocurrencies, BIS Quarterly Review September 2017
Defined assumptions regarding digital money
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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
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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
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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
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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
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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!
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What challenges are there?
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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?
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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
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Thank you!
Page 35
Dirk Schrade Deutsche Bundesbank Deputy Director General Payments and Settlement Systems
14 November 2017 Dirk Schrade, Payment System International Workshop and Seminar 2017 hosted by Bank Indonesia
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