Transcript of Question & Answer Session Panel Participation at the Sibos 2018 Conference

Good afternoon. My name is Don Weinland. I'm the Asia Financial Correspondent for the Financial Times. Today we're here to talk about central bank digital currencies. The bank for international settlements recently said that central bank digital currencies could revolutionise the role central banks play, but it's also called central bank digital currencies uncharted waters.

One striking comment from BIS recently was that it feared CBDCs could lead to a digital bank run with unprecedented speed and scale. Other regulators have chimed in on this as well. The Fed, the Bank of England have expressed concerns over how these types of currencies could react in a market system. But not everybody agrees. There are some regulators that are looking into how these could be used, and how these could be brought on. Riksbank is one of them.

Today we're here to discuss this topic. We have an excellent panel, that will give us a discussion on this. To my left, I have Michele Bullock. She's the assistant governor of the Reserve Bank of Australia. Next to her is Tino Kam. He's the head of cash management, at Nordia. Then we have Jesse Lund, the vice president of IBM blockchain and digital currencies. Last, we have Lewis Sun, HSBC's head of global liquidity and cash management for Asia. I'm going to give them a moment to tell you why they're here, to discuss this topic, and then we'll launch into the debate.

Michele, why don't you kick off?

Okay. It's probably pretty clear why I'm here. Central bank digital currencies. It's an issue that we're clearly very interested in, as are other central banks. There are probably two aspects to it, I think, and we'll talk through some of these issues as the panel goes on. The first is the issue of a digital equivalent to bank notes. Should central banks be issuing a digital equivalent to their traditional paper or polymer bank notes? The second issue, I think, is whether or not technology is providing opportunities for changes to the way business models work, and whether central bank digital currencies might be of assistance in those sorts of circumstances. I think some of those issues are the things we're going to talk about.

Thanks. Tino.

Yep. To add to that, I think where I'm coming from, from Nordia's perspective, we are a Nordic bank, and we are present in four of the Nordic countries, and we have some interesting insights or views from a central bank perspective, in the different Nordic countries. I think it's really good to understand where the Riksbank is what that's also about, digital currencies, and then on the contrary there's the Danish Central Bank, who has a bit of an opposite view on that. I'm looking forward for the discussion, and also very much looking forward from a use case perspective, so where does this add value, and how can we use this from a central bank and bank's perspective, but also from a corporate and a consumer perspective.

Thanks. Jesse.

Yeah. Good afternoon. I guess I didn't read closely enough, I didn't realise a central banker was going to be here. I'd better be on my best behaviour. I guess I would say, Don, I like that quote from BIS, where you say uncharted territory. I guess I would argue that no meaningful discovery comes from exploring in charted territory. I lead IBM's blockchain practise and solution development, globally. The focus of my interest is naturally going to be weighted toward technology, and probably more toward blockchain, as a solution foundation for digital currencies, but having spent 18 years prior to joining IBM 18 months ago at a small bank in San Francisco, I think this is a hugely relevant and transformational topic. We've seen a lot of incremental innovation in the payment space. I think digital currencies has the potential to be truly transformational in the coming years, and decades ahead.

Lewis.

Thank you. I think I like what Jesse just said about potential of digital currency. I run product development function for HSBC Asia Pacific, in the cash management department. Essentially, we're mainly dealing with ARAP, liquidity management for our clients. We do face some challenges around the current settlement structure. Seems there are a lot of demands around the domestic space, but on the cross-border space we still see a bit of more work to be done. This might be, the digital currency might be one of the potential solutions for this. Therefore, we spend some efforts to really study this. We participate into the proof of concept in Singapore Project Ubin. We also were involved in the interoperability between Project Ubin in Singapore, and Project Jasper, in Canada. I think we can share some of the observations around that, but I'm also equally keen to understand from Jesse from the panellists here how we're going to address the challenges and potentially really apply these potential options.

Thanks. Before we get going, I want to remind the audience think of some questions. Towards the end, I'll open up the floor for some questions, so have one ready when we get there. The first thing I want to do is really define what we're talking about when we talk about central bank digital currencies. Michele mentioned digital equivalents. We've heard the word distributed ledger, and blockchain, as well. Today, are we talking about both of these things? Is there a range of different technologies that could underly central bank digital currencies?

I guess from my perspective I think they're two separable issues. I think there's central bank digital currencies, and then there's the issue of what technologies you might use for that. I think DLT or blockchain is one possible solution, but it's not the only solution. In fact, central banks have digital currency already. In our case it's exchange settlement accounts. It's used by banks to exchange, digitally, money between themselves, so we already have digital currencies. I think we just need to keep in mind that a digital currency and the technology are potentially two separable questions.

Anyone else like to weigh in on …

I'll go there. I agree with that, actually, but I think in some ways the conversation has been expedited by the advent of the reality of cryptocurrencies, and what that means is they become more usable to the general public. I think there's obviously some concerns about stability and viability of those things. While I do think that the underlying technology could vary, and if you want to abstract it more we could be talking about really just e-money schemes, in essence, but I think the notion of a digital currency in the context of cryptocurrencies as we know them today become a new type of e-money scheme that if endorsed, and I'm not talking about the central bank endorsing a crypto, but issuing their own denomination in the form of a crypto, their own denomination of fiat currency, and the notion of that then by extension becoming legal tender, it opens up a whole range of innovation and possibilities for the next generation of payment systems in a particular cross-border payment capability. Totally agree, but here we are at the precipice of kind of a technology led transformation that we can't ignore DLT in the process too.

I fully agree on this. I guess we need to be mindful to generalise digital currency to be blockchain ledger tokenisation, but I think these are the sort of potential new technologies that possibly will bring that kind of a concept to the next level, and that is really the thing we're trying to discuss and potentially debate here, is indeed about this kind of a more traceable transparent and technology ways to ubiquity, so that the benefit can be completely unleashed, with additional capabilities offered by this.

Tino, what are you thinking of when you think of central bank digital currencies? Is it strictly blockchain?

I understand both of my panel members, but I think to your point it doesn't matter what the technology is, from a central bank perspective, which I fully understand and I agree, but I do agree as well with Jesse saying that a matter of fact we're talking about blockchain technology, enabling that. Right? So that's absolutely key. I agree with that.

I would just add that I think you're quite correct, what has generated this discussion has been the DLT, the blockchain, and cryptocurrencies. That's what has generated the ‘why don't central banks issue it?’ question. I guess I'll just make the point that you don't need to do it that way.

What problem does a central bank digital currency solve today? Why are we discussing this right now? Lewis, please.

Okay. Possibly, from a commercial banking point of view, I guess we see the potential opportunity to address a few challenges we have seen in the traditional settlement networks, availability, the sort of ubiquitous access on the markets, no time zone, no loaning on a 24/7 basis. Settlement mechanism will also be different. Rather than using a sort of intermediary bank, correspondent relationship agent bank, it's becoming a more sort of an easier way with wider access by the market, and also it may potentially address the settlement risk, the settlement credit risk behind this. I know there are some other benefits, sort of discussed on the markets, replacement of the cash transactions. I think I want to just focus on the key benefits, potentially we may see from this, from really a clearing and settlement point of view. Rather than just generalise, this may also lead to a society change, that kind of thing.

If I can follow up really fast, what are some of the problems that the traditional system right now is presenting, that would be solved by bringing on a DLT based system?

I think traditionally if we make a transaction, there's a cut out time. Only before that the transaction will be on the same day. I know new developments have been made to make sure at least for domestic transactions is many countries is largely on a 24/7 real time basis, but what about cross border. It's still not yet available for that kind of a rapid discussion. Second thing is that if you want to settle, there's a sort of an entry barrier for smaller players to be the direct participant, partially because of the technology used is based on the cornerstone, which is correspondent banking relationship. You use another bank to communicate to another part. Because of that, then the settlement credit risk will become very important. You need to establish your credit so that to ensure the transaction can get through.

These are the sort of potential areas some new technologies might be able to address.

Good. Jesse.

Yeah, I was going to add a few things. I think in addition to ringing out the efficiencies or inefficiencies in that notion of today's international payment space where payment messaging and instructions can happen on a separate network from and on a deferred basis from the actual settlement, the actual movement of money, I think that's certainly a compelling case, but I think also from just from an institutional standpoint, from a regulatory standpoint, before joining IBM, I worked for a big bank, for a long time, and I noticed that there's been a lot of discussion about the central bank's response to this fintech, the emergence of fintech, and should the central bank open up some of the national payment systems to non-bank entities, and how so and how far, and what are the implications of that. I think says easy, does hard, right, because I'm not a central banker, but a central bank issued digital currency in a limited capacity really becomes a publicly accessible extension to the RTGS, that could be without some significant impact to the existing core infrastructure kind of be an extension to the fintech community to spur innovation. That's one thing to think about.

Then by extension to that, as a lot of the fintech motivation is focused on financial inclusion, you think about central banks wanting to provide or part of their charter is to provide economic stability, at least for the jurisdiction that they're responsible for. But what about the potential of exporting that stability to emerging economies, where there's billions of people in the world that don't have access to financial services, and yet are carrying a cell phone and have the capacity to do electronic banking, and digital currencies would be a really huge way to do that. Just a couple of additional thoughts, there.

If I could ask really fast, isn't the private sector and the creation of all the cryptocurrencies that we've seen come out over the past couple of years, isn't that addressing some of that need from the un-banked in smaller markets? Why necessarily would a central bank need to be involved in this?

It is, but in some cases, and I may be betraying my own kind here, but you look at these cryptocurrencies, and there's been a lot of criticism that you're creating some new currency that's backed by nothing. Now, I could lead us down a philosophical rabbit trail, so let's not go there. Yeah, I think the volatility of cryptos … In fact, I don't even think there's really a clear definition of what a cryptocurrency is, I don't think anyone has a clear definition, but we know what national sovereign currencies are, and what they do, and we know that they're backed by monetary policy, by humans with good intentions, that are trying to make the best for the flourishing of humanity. I think the combining of those two things is really important.

Tino.

Yeah. I think to add to that from a financial inclusion perspective, there are also some challenges if you talk about digital currencies and blockchain, I guess. Two things which have been discussed in the Nordics, I think, is that what happens from a key management perspective, so I think we also see that lots of groups of populations have difficulties from remembering simple things like your pin code, so then from a key management perspective who will be dealing with that.

The other thing I think is from a Nordic perspective as well is that if you look at using the central bank to get the currency as a contingency, that would really one of that's one of the questions that the Riksbank in Sweden is looking to, there one of the key challenges of Sweden, or one of the opportunities, I should say, is that we see that the central bank is saying basically in five years we will be having a cashless society, and they're looking at the central bank digital currency option to have a contingency solution from an infrastructure perspective, in case you only have let's say digital fiat currencies, that are the traditional ones. Now they're looking also from a digital currency from a central bank currency perspective, as a contingency perspective.

We spoke about that briefly before the panel, and it's quite an interesting view, I think, which differs a bit from other central banks.

Sure.

What's been said here sort of falls into two buckets. On the one hand, you're talking about the wholesale commercial use of digital currency to address frictions that might be there. We can perhaps come back to that. Then the second issue we just sort of moved into there was about retail, and financial inclusion. They're quite separable issues, I think.

On the issue of financial inclusion, I think potentially for emerging markets it is an important development, because bank notes are really the only government or central bank-backed financial instrument that many people have, and some of them don't have access to that either in some of these countries. There's counterfeiting issues, and so on, and cash is going down in some other countries. The response of central banks in some of these areas is to look at whether or not central bank-backed asset is a good way of giving people financial inclusion in that respect. I think that is something that perhaps emerging markets might look at, developed countries less so, because we already have a plethora of financial instruments, and more are coming. Generally, in those sort of circumstances with solid banking systems possibly with deposit insurance schemes attached to them, people can be reassured that what they are holding will have value.

On the wholesale side, the cross-border issue gets mentioned a lot, and there are a lot of frictions in the cross-border space. I'm interested to hear more from the panel on how you think that DLT and central bank digital currency could contribute to solving that. On the pure domestic side, I'm not as convinced, Jesse. I guess I come from the position where I think the way the settlement systems work well at the moment. In Australia we have access not just for banks. We have access for payment providers as well, and the system works well. And you don't actually need access to direct settlement to do lots and lots of business. So I think there's an open question there, about whether or not you need a central bank digital currency to solve a problem in a domestic settlement system. I am interested in the cross-border issue, though.

Any responses to that?

I agree. I'm more interested in the solutions that IBM is developing in this space using, I'll call it digital assets or alternative settlement instruments based on Blockchain is more focused on cross-border and making that whole process more efficient.

I was kind of using that as an example of a way to kind of easily extend that, but there's also controls that go along with that where things can get sort of out there in the wild that you would have to think a lot about. But I do agree that on a domestic scale, the payment systems are pretty efficient wherever you go. You might argue … In my country, they're the least efficient of anywhere else. Sadly.

So that's true. I think cross-border is the killer space though for this, the big use case, I agree.

Lewis, did you have …

I think just on your question around, whether private sector or cryptocurrency already solved the problem. I guess for the tokenised asset backed up by the private sector there's still compliance, trust and transparency issues around that. Our stand is still quite clear. Right now we don't see the traceability, transparency out of that kind of offering. Use that as an alternative for settlement is still not yet. There is appetite from a commercial banking side, but we are waiting to look into the potential use case backed up by the central bank from traceability, transparency, eligibility point of view as a long-term more robust potential option for this.

So this actually, a central bank digital currency would reduce the reputational risk of a cryptocurrency?

I wouldn't say it's just a reputational risk. It's really operational risk, a compliance risk. Do we really know who we're dealing with? Do we trust the value of tokenised asset? That's really the concern. I wouldn't say there's just a reputational risk behind this.

Yeah, if I could add to that. I think there is a medium between central bank-issued digital currencies and new type of Fiat denomination that is legal tender and this notion of cryptocurrencies that was created from the ether. No pun intended, right?

I think there's a medium that we're commonly calling stable coins, which is commercial bank-issued digital instruments. It's commercial bank money, it's not central bank money. We're seeing a lot of traction there, and a lot of interest from banks, at least in some of the next generation cross-border payment clearing and settlement, block-chain based initiatives that we're working on.

But again, a lot of times it comes back to the central bank or a desire to have the central bank kind of guarantee fungibility of a Fiat-backed instrument issued by one bank or another. Are they really equal? That's something that is evolving in real time actually.

On the stable coin, that largely exists in the retail space right now, right? But not in the wholesale banking space. Just kind of wondering about scenarios where within wholesale banking you could find the market for this. I think you've touched on some already.

Lewis, you were saying at this point, accessing certain type of central bank accounts for smaller banks is very difficult, right? I mean, you see accessibility changing for smaller commercial banks if there was such a thing, if you did have central banks issuing digital currencies.

I'll say if we apply the technology in the proper right way, the overall running cost for new participants to join the clearance system directly will be lower.

Okay.

It should be lower, depending on how we're going to apply the technologies. In that manner basically, the entry barrier for new players to join this network, will be lower. On the flip side, there will still be a gate keeping exercise. Who are the players that are illegible to join this? Are we going to do this completely on a bilateral basis, meaning whenever you're going to deal with a new player, you need to do a second or separate round of validation of the identity, or will there be a central utility to address the challenge?

Do you agree with that Tino?

Yeah. My question is about, from a cost perspective, I might a agree. If you can have a more effective way of doing cross border payment, of doing Nostro management. I think one of the big cost factors from a cross border perspective is obviously KYC AML sanction screening. That part will still exist even in a digital currency.

I haven't seen a solution yet for that, in the digital currency space. From that point of view, most of our costs will continue to exist to maintain that part of the KYC AML sanction screening function. There is also, obviously a key challenge for the industry, but this is also, after discussing that with a number of partners during SIBOS. That's more linked to the KYC type of challenges we have, and AML challenges we have. That's where I'm coming from.

Okay.

If I may also add a little bit of that, right, the proof of concept we have done between the Jasper/Ubin interoperability, I think from a compliance point of view, the current process has not really changed. Two different things, KYC, you know who you are dealing with, the transaction screening. At this moment, I haven't seen any central utility being discussed. Therefore, we are still counting our existing platform to make this happen. If this is a right technology being used, that platform will be able to ensure traceability and transparency. You can still have the information for your sanction screening.

Honestly, I'm less concerned about the compromised data sites. The bigger challenge will still be, how will this new tokenised asset, new currency, impact on broader issues around monetary policy, who is going to use, what real use case, who are we going to implement and who can participate, eligibility, gate-keeping, these kind of technical issues I think generally, can still be interoperable with our existing practise.

Okay. I'd like to shift really fast to the central banker in the room, and pose the question of how the role of central banks would essentially change if we did see them issuing central bank digital currencies. Could you give us some ideas on that?

Well, as I said before, the way we actually manage things at the moment is, we do have a digital currency. That's how banks exchange funds between one another. The way that we influence monetary policy, in particular the interest rate, is we basically control the amount of cash in the system. We buy securities, which injects cash into the system, or we pull it out. Potentially, if we had a central bank digital currency, which was broader on the wholesale side, it's a similar concept, that you'd have a demand for it for settling transactions, and so on, and we would try to manage the process in the way that we do.

There are some suggestions, and I know that the Swedish central bank has tossed this idea around as well, and others have, is that if you had a central bank digital currency with an interest rate, and you could raise and lower the interest rate, that might allow you to defeat what's known as the lower bound on interest rates. If you could have a negative interest rate on your balances, if you like. If you had electronic bank notes that people were holding, then you could effectively charge them money for holding that. That might allow you to have a bit more control over interest rates. I think that's an untested and quite a different idea.

There's two aspects where we think it might influence the way we with about monetary policy. The other point that you made, right up front, was the point that the Bank for International Settlements has made, is the potential for bank runs to be an issue. For example, in the GFC, we saw in Australia and a number of countries saw around the world, a very large increase in demand for bank notes. People took their money out and they stuck it under their beds, or wherever they put it. That would be so much easier in a world of central bank digital currency. People could rush and put their money into central bank assets, which would take liquidity out of the system, and centre it in the central bank. That might make the management of liquidity and the management of monetary policy a little more difficult in those circumstances.

On one level, you could manage it, but there might be challenges that arise with the particulars of having a central bank issue something that people could easily rush into.

Do you see any difference between the type of e-money, or digital currency, that's currently being issued, and the adoption of a DLT based digital currency for a central bank? Would that change anything or would this be a different type of technology for something that you already do?

I think it would come down to a different technology delivering central banking digital currency. If you did to that, and if it did allow perhaps more institutions to join and use that settlement asset in order to participate, it would still be in essence, the same system, I think.

That's interesting, because this is often posed as something that's very controversial, and central banks around the world have pushed back against it. Australia as well has said, this is not something that they plan to take on in the near future …

What we've said, and many central banks have said this, is in terms of a replacement for bank notes, no. At this point in time, we can't see that happening. We do have more of an open mind on the issue of wholesale, and whether or not a central bank digital currency could play a role in assisting with perhaps supply chains, cross border, these sort of things. I think we have a more open mind on that. But again, it remains for the industry to demonstrate to us that what we've got available, in terms of payment systems, and what is still coming onboard in terms of payment systems, can't actually deliver that already. What is it that a central bank digital currency would deliver that would make things more efficient, and competitive potentially. I think that's the challenge for the industry.

Jesse, did you have a thought?

I was just going to ask, I was thinking about the notion of the virtual bank run, and what digital currencies could do to accidentally precipitate that, as assets shift from the private balance sheet of the banks, to the public balance sheet. That's a real legitimate issue, but also in the case of crises, wouldn't a central bank issued digital currency give the central bank the ability to respond more quickly to the injection of liquidity directly into that …

Potentially.

Right? It cuts both ways, I think. I think about the financial crisis of 2008, and would this have been a lever to pull that could have averted some things, I don't know.

Well, in effect, that's what the central bank would be doing, as people rushed to the central bank, they'd be issuing more digital currency. That's what they'd be doing, but at the same time, it'd be drawing off the liabilities of the banking system, and they might have to sell their assets in order to accommodate that.

Some have argued, for example, that it would allow a central bank, in context of a big recession, to basically give a helicopter drop.

Right.

Push money out there. But in context of a bank run, that's the whole point. We would be, in fact, issuing all this digital currency, but it would be drawing from the balance sheets of the banking system.

Yeah. I'm going to be well behaved.

I'd like to come back to you really quick, Jesse. It would be interesting to get a few thoughts on where we are, in terms of the technology right now, that could be employed in the system. Is it the same type of stuff that we see, that's out there already, in the crypto-currency space, or would central banks need to adopt a different kind of technology for this, if we're talking specifically about distributed ledger.

Yeah. Well, I think that the technology has already evolved at least one iteration beyond what we know, or think of as cryptocurrency, in the Bitcoin, and the miner based, highly inefficient way to do validation of transactions, I think we're already seeing generation 2 and generation 3 of networks to support the issuance of digital assets, that could actually be a digital currency.

I do note though, that there is a difference. I've talked to a lot of central banks. I was particularly inspired, made a year ago, by Riksbank's publishing of the E-Krona paper, I think their vision of what a retail, central bank issued, digital currency could be, was pretty great. I remember, I went into that meeting in Sweden, maybe 9, 10 months ago, assuming that it's DLT that's going to solve that problem. You'll notice that the paper doesn't presuppose that.

There are other technologies, but again, I think we've already moved beyond the concept of miners. We've already moved to permissioned, public ledgers. I think the technology is already evolving, and proving itself, that it can support transaction volumes that are consistent with, maybe not to the level of global retail payments, but certainly able to support significant volume. I think that the technology is there.

There's other considerations, like what happens when you don't have connectivity? You're completely offline, how do you ensure that spending can still happen if you can't validate against a live network? These are challenging issues that were still trying to solve, that IBM's working with clients all around the world, to solve. At the end of the day, nothing's easier than pulling out a bank note and handing it to somebody. That's the ultimate form of real time settlement, right?

When the person that you're transacting with isn't right in from of you, they're across the country, or across the world, or they don't accept that form of currency, and then foreign exchange comes into play. What I've seen so far leads me to believe that, and I hate to use the word DLT, because I think in some ways, we've divorced shared ledger technology, distributed ledger technology, from the really unique thing that Bitcoin demonstrated to the world, as much as we all hate Bitcoin, and that is the ability to reliably convert electricity to a unit of value. Maybe not a great store value, but we've proven that that concept is real.

In so much as, it can be digital cash, almost the next best thing, that verifiably can settle in real time, just a little bit less good than handing somebody a bank note, but it's hard to ignore that technology. I think the scalability, the availability of that tech, only being 3, 4 years old, in practical purposes, it's pretty profound how far and how fast it's come.

Have we already seen tests, or commercial operations of DLT wholesale banking, where you have very large transactions being pushed through such a system?

We definitely have. Project Ubin is one. Project Jasper, in Canada, is another. I know they're focused more on the wholesale markets, none of these digital currencies have been made accessible to the public. My colleagues could talk about the efficiencies that have been seen there, but I know you have seen some. I think there's expended use cases to connect these national wholesale digital currency systems together, across central banks. I think Jasper, and Ubin are starting to do that in successive generations.

Depending on how we are going to define, completely live, or in operations, I think right now those are the experiments as a proof of concept. From a technology point of view, the conclusion is technology are no longer a big problem. Certainly, there will still be challenges to be very vigilant around cybersecurity, resilience, and stability. Technology should be able to support that kind of a use case.

If we could follow up with the transaction and cash management bankers, what are your biggest concerns? What do you see the biggest challenges being, in terms of actually rolling out such a system, in terms of the rules around trading between different jurisdictions? Can you guys talk about that? Lewis, or …

Sure. If I may share my views around this, I think the study, we had around the interoperability, suggest a few potential areas we need to be very mindful. One is really the impact on FX market. We've been discussing about digital currencies, behind that concept, there is essentially a key area we need to look into, which is really accessibility. The circulation area of the digital currency.

It should be as ubiquitous as possible, but is not really fully accessible by everyone, therefore the liquidity of digital currency, versus fiat currency can be slightly different. Then, when you exchange this currency into another currency, will that follow the same exchange rate? Or, there might be a separate exchange rate market being established for the interoperability between one digital currency, to a different type of fiat currency. Will that be a premium, or discount?

That might be something we need to observe, because from an efficiency point of view, holding the digital currency has a better liquidity. It's real time usable. But from an accessibility point of view, circulation is only within the sort of accessible participants. We see that both sides of the coin, what would the impact to the financial market, crypto market.

Tino, what would your biggest concerns be in terms of putting this in practise?

I would agree that it's not for sure technology, because I think we will be able to capture that, to master that. I think one of the things is we're talking about the wholesale use case. On my way to Sydney, I visited Singapore, and we spoke to MIS, Singapore. Then they basically they're very forward leaning in these projects, and they try to understand, and interface, from a central bank perspective, but they also say at the same time we don't see an economic case from a consumer retail perspective. I think going back to the central bank digital currency discussion, I think that is still, I think, maybe in the future there will be use cases from a wholesale perspective, I'm sure, and these are the use cases we're discussing.

I think from in the near term, probably economic case for the retail consumer type of solution is at this moment not there, and even the Riksbank, their paper or their conclusion will come somewhere 2019, I believe, in the second half of 2019, and although their use case is slightly different because of the cashless society from a Sweden perspective, and using it as a contingency, it's very interesting to see where this goes. I think we definitely we all believe I think there is use cases, but more in from a wholesale perspective, from an ethics or cross border perspective, and perhaps less than in a retail consumer perspective.

Okay. I'm going to ask the audience for questions in a second, but I want to go back to one thing we've touched on a couple times, which is it seems like there's a bit of a dilemma on things such as KYC or reputation risk within the DLT currency space. It seemed like at one time some of you were saying that it would be easier to, that such a system could lead to more transparency within the banking system, however some regulators or experts have opined on this and said there's huge reputational risks for central banks because I guess maybe they're looking at the blockchain on bitcoin system where there is no traceability or transparency. How would you address that type of question?

I can take a shot at that, initially. I think it goes back to what I said about if we're thinking about it in context of what we know about digital currencies based on bitcoin, and the bitcoin paper that was written nine years ago, then we would have cause to be concerned, but I think the technology has iterated at least once, maybe twice since then. Granted, who does KYC in the case of a central bank issue digital currency changes, because central banks aren't normally engage in that activity, they kind of defer that activity to the commercial banks, and then they just stand back and say here are the rules. Somebody else would have to do that, either on behalf of the central bank or the central bank would have to take on that role. The technology to provide what I'll call the hooks, that when a digital asset changes hands as an event that can occur in the lifecycle of a digital currency, to pull or to trigger a response from the regulating authority, that technology exists today.

It's not like oh, no, we turned it into the wild, and we're going to have to chase after it. It would be implemented in a way such that there are hooks, transactional hooks that lead back into the issuer and the regulator, that would allow them to ensure that no account could hold this digital currency unless the person who holds that account has been successfully identified, if they try and transact and send it to somebody it's not a free for all like bitcoin, where it just goes and it's all gone. The issuer has to know who that account owner is on the other side. Those controls and that tech is built. It's built, and it's stable. It's not just IBM's technology or the technology that we've been contributing to. There's a whole range of technologies in the DLT space that support that kind of model.

Any other thoughts on that?

No, simply just to emphasise that in those circumstances I couldn't see a world where a central bank would offer an anonymous style.

Probably not.

But the sort of use cases we're talking about, it doesn't lend itself to that sort of thing. It's all about knowing who has assets, who has the funds, and making sure that they're distributed and given to the right people. You need to track things, in those circumstances. I don't see any inconsistency there at all with that sort of approach.

Going back to what we started with this idea of uncharted waters, it does after listening to you guys talk about this it sounds far less risky than you might find in the media. It just seems like maybe it's a question of whether or not there's a market for this on either the retail or commercial banking side. I'd like to open the floor to questions. We have a microphone that can go around. Raise your hand if you have a question. We have one in the back.

How do you see central bank digital currencies working in the cross-border context? Let's say if Singapore issues a Singapore central bank digital currency, Canada issues one of itself. How do you see the payment flow working? Would it then be similar to what happens in the fiat world? The other complication would be that the CBDCs would be essentially liabilities on the balance sheet of a bank, not really an asset, backed by fiat. How do you see this working in the cross-border context?

In the proof of concept, there are three different models. I will take out two different models, not using digital currency. They're in total five operational models discussed around how to support a cross-border transfer. The three models that involve digital currency will be running on completely two different platforms, and these two different platforms are not interoperable. Therefore, the cross-border transfer from a settlement funding point of view will go back to the original way, option number one.

Option number two can be that digital currency can be interoperable, meaning a counterpart on the other side of the world can open up, can participate potentially into this digital currency platform. Third option, we just issue one universal, so-called universal, wholesale central bank digital currency. You can imagine the challenges behind each of the models. The first one is really riding on technology, but not using the technology for cross border. Second thing, then your network is suspending from not only domestic, but also to overseas participants. We talk about the accessibility, and the eligibility discussion. Now some central utility also needs to KYC the new participants from other side of the world. The third option will be who to issue that universal central bank digital currency.

I think these are the potential options, but which one will be the most viable one, I think, is essentially still needs to be decided, based on the practical solutions to address this, and the use cases behind this.

Okay. Thanks. We had another question up here. Can we get a mic up here? Oh, got it. Go ahead.

How would you see cryptocurrency apply to inflation? Would be that a good tool to fight inflation? For example, in Venezuela they're using bitcoin now to exchange. Would that be a valid tool in Argentina, Venezuela, or whatever?

If I understand your question correctly, the concept that you have a fixed money supply, and then basically that's a deflationary (model), but with a central bank digital currency you wouldn't get that, of course, because the central bank digital currency would be on demand. As with bank notes what happens is that supply of bank notes is determined by demand, and the way you address inflation is by the price of money, in effect.

I think the issue you're referring to with bitcoin, for example, with a fixed supply, potentially, what you end up with is in effect a deflationary model. I don't think that's sort of a model that we'd like.

Great. A couple other questions. Who's got the mic? There we go, right over here, up front.

Hi. It's a great day, seeing a central banker and commercial banks agreeing on everything.

Not necessarily.

At least it appears to be. I think the traditional currency has a lot of juice left in it. If the central banks and the commercial banks were to remove or would work hard enough to remove the frictions from that, we wouldn't have to … I mean there would be no need for anything new. There's enough. There's enough all there. You've got organisations like Swift coming up with newer things, with newer tools would help in removing those frictions. Is this thing about digital currencies, is it because there's really a need that you see, or is it just a fear of being left behind, and not doing anything about it, so let's all jump on it?

I'll have a first go at that, and then I'll leave my colleagues to disagree with me, probably. I think there's an element of it's a new technology, we've got to find a use for it. I think there is an element of that. This idea that somehow, we've had cryptocurrencies, but why can't the government issue these things now equivalent. I think if you look at what central banks have said about this, at least the developed countries' central banks, they're not talking about replacing cash. They're talking about whether or not there might be a need for an alternative, a complement in some sense. That's why when I said earlier I'm interested in what frictions these technologies are designed to address, because in many cases I just don't see what the point is. So that's the pressure I put back on the private sector is to say what problem is it solving. I've got an open mind on the wholesale side, but I'm not convinced actually that it has a use.

I think from a commercial bank point of view, we're not just exploring this one single option. I think yesterday it was a pity I couldn't join the Swift sessions. Swift is also moving from GPI into the real time transfer experiment. They've done some panel cases, sending Swift payment from one place to another place, actually into Australia, counting on the NPP platform to bear the UETR information, writing back to the tracker on the real time basis, real time as in sixty seconds. It's already proved to be viable.

There are different options to address the same use cases. I fully agree. I think behind this, we don't need to find a use case for technology. We need to really look into what other issues we have, apply the right technologies to address this. It sounds like blockchain technology is a potential viable option for this. That's the reason we're here, to really explore what might be the upside, what might be the downside. If there are downsides, how are we going to address the downsides? Then will that still be a viable option for what possibly not really a retail digital currency. I would agree with Tino.

I think There's a higher likelihood, potentially, we may start this kind of an experiment from a wholesale central bank digital currency. Thank you.

Time for one last question, a quick question. Go ahead.

Okay. Thank you. Excellent discussion. Thank you very much. A lot of it has been around the wholesale side. On the retail side, just for a moment, I very much respect that every country has a different problem they're trying to solve, and for Australia certainly it's a very advanced economy, very different when you go into other parts of the world. Being able to adopt a digital banknote kind of an approach, which you referenced when you began speaking, is something that is available today, in the way that it was already used this year by the central bank in Uruguay, for example. What I wonder on this is in that kind of an approach, which is a value based digital bank note, it is not anonymous, it is traceable, it's not an anonymous instrument, how big of an impact might that have for a retail use?

Let's pick on the central banker.

Pick on me. As you well know, a lot of the criticism of the paper or polymer bank notes, whatever your taste, is that they are effectively untraceable, once they go out of the reserve bank or the banking system. One of the issues for retail digital bank note, is that it would in fact I think have to be issued to be traceable. You couldn't replicate the anonymity, as I said before. I just don't think that would be a feasible thing to do. People might use it, but then it looks very much and feels very much like commercial bank money. I think except that it's got the backing of the central bank behind it, that's what it still has.

Yes, I think it is feasible. I don't rule out that for some emerging economies this might in fact be some sort of financial inclusion, and be something that's positive for them. But I guess my point with a developed economy like Australia is in those sorts of circumstances I'm not sure what it offers, really, that you don't get with commercial bank money.

One last thought. Jesse.

Let me say, I definitely appreciate the sentiment that this is a solution looking for a problem, but I think it also depends on the philosophy that you come from. I managed the innovation labs for Wells Fargo for the last three years of my tenure there. It's easy to quote Steve Jobs or Apple, but the late Jobs would have said people don't know what they want until you show it to them. Then they know. As a company that has reinvented itself and reinvented and disrupted industries all over the place, over and over again, I think there's a place for that here.

We kind of know that there's some uses for this, in a retail case. We can't quite put our finger on exactly what it is, but this is where the sandboxes that a lot of central banks have created are for. MAS, Singapore has one that's pretty well known. I think we ought to continue to lean into the concept, in a controlled environment, which is what these sandboxes are for, and what that really looks like in my opinion is the live issuance of maybe a retail central bank digital currency in a very controlled environment, and so that we can see what kind of innovation is borne out of it. If nothing, then I concede it was a solution looking for a problem, but I have this inkling that entirely new use cases are going to come alive when we do that.

By the way, as you know probably, that's why central banks have these sandboxes, is to play around. We're not going to know the answer to a lot of these assertions until we try it. I guess my last comments would be let's not write it off, let's try it.

I'll just clarify I'm not writing it off, but I may need to be convinced.

Fair enough.

Let's give our panel a round of applause.