Transcript of Question & Answer Session Panel Participation at the G20 Side Events Series Gala Seminar Central Bank Digital Currency and Crypto-Assets

Moderator Perry Warjiyo

So that is the perfect tone to bring us to our next session here on today's Gala Seminar which will focus on central bank digital currency and crypto-assets.

Ladies and Gentleman, to start this Gala Seminar session today, allow me to invite back on stage, this time to moderate our discussion Mr Hyun Song Shin who is the BIS economic adviser and Head of Research with recent focus on digital innovation and the financial system, including the design of central bank digital currencies and their implications for users, financial intermediaries and central banks. Ladies and gentleman, excellencies, without further ado, let's welcome our moderator, Mr Hyun Song Shin.

Hyun Song Shin

Well, it's a great pleasure to moderate this panel. I'm Hyun Song Shin from the BIS and we have a very important and a very pressing issue right now, which is what is going on in crypto. To discuss the issues with crypto, their regulation and the role of central bank digital currencies, we have an excellent panel and I would like to invite the panellists to the stage before I introduce them. So, Governor Philip Lowe from the Reserve Bank of Australia and Governor Thomas Jordan from the Swiss National Bank. Online we're also joined by Eddie Yue, the Chief Executive of the Hong Kong Monetary Authority and Tobias Adrian who is the financial counsellor and director of the Monetary and Capital Markets Department of the IMF.

What we will do on this panel is to review some of the recent events in crypto, discuss some of the implications for financial stability, for regulation, for their use and within that framework also raise the issue of what role central bank digital currencies may play, both as an alternative to crypto, but also in the longer term. I think what we've seen in the in the recent turmoil in the crypto universe is that some of the microeconomic mechanisms that haven given rise to stress in the crypto universe are to some extent very familiar from stress episodes in conventional financial markets. So for example we have seen how leverage, then turned into deleveraging and fire sales exactly as we saw, actually, during the great financial crisis in 2008. We also saw the implications of maturity mismatch and how that can give rise to run-like phenomena in the crypto universe, again just like what we would expect in the conventional financial system.

And so, with the regulation of crypto it is emerging as a very important policy challenge and there the principle of same risk, same activity, same regulation is a very important benchmark. But the same activity could mean either in terms of the contractual form, whether it be like a deposit in a crypto-bank, or whether we shouldn't interpret same activity in terms of the underlying economic function. So in conventional financial systems we compare for example the giving of mortgage loans by a bank and the way that mortgage-backed securities perform the same economic function, but in the capital markets. In crypto most of the assets within the DeFi in a decentralised universe tend to be other crypto-assets, other crypto coins and therefore it's a very different economic function rather what we would expect in a conventional financial system where there are lenders and borrowers and there are real assets involved. So how we apply the same level of activity, same regulation, clearly will very much depend on that. Now, is financial stability the only issue? I think probably there are other important policy goals such as consumer protection, for example to make sure that we can guard investors from deceptive marketing and seeing [inaudible] and so on.

In the context of all this central bank digital currencies loom large both as a digital asset that is safe, that is trusted issued by the central bank, but there is a larger set of issues which have to do with the possible role of CBDCs within the broader payment system, both in the domestic context and also in the cross-border context.

So what I would like to do is to ask the panellists to provide their initial interventions and we will go in the order that we see here. So I will first start with Thomas Jordan, then to Phil Lowe and then to Eddie Yue and to Tobias … Thomas.

Philip Lowe

Thank you very much, Hyun, and thank you very much to my great friend, Governor Perry, for the invitation to be here today and for your fantastic hospitality in Bali over the last couple of days; it's been a real pleasure to be here.

As Thomas said, the questions that you've set for us in your session are really timely and they're important, but they're also really hard. What's the future for central bank digital currencies and crypto, and how should they be regulated? But, because they're hard, my instinct is to look back at history to see whether there are any lessons for us and, when I do that, I found three lessons that are relevant.

The first is that what our societies use as money is determined by the technology we have at hand. Once upon a time, we used gold and silver coins, then we used paper banknotes – in Australia we use fantastic polymer banknotes – and most money today actually is digital; it sits in bank accounts and it can be moved between bank accounts instantaneously. So the nature of money changes with the nature of technology.

The second observation from history is that privately-backed money can work for a while, but it usually ends in disaster. It usually ends in financial instability and a loss of confidence. People value money backed by the state, whether it's banknotes issued by the central bank or deposits in private banks underpinned by government-endorsed deposit insurance. In wholesale markets, financial institutions want to settle in central bank money, not in private money. They value safety, stability and finality, so public money is generally preferred to private money.

The third lesson from history is that new technologies drive waves of innovation, but they also drive waves of speculation, and those waves of speculation often end up in people losing money, particularly people who are not well informed, and I think we've seen examples of that just recently.

So they're the three lessons from history, and I've been thinking about how to apply those to the difficult questions that we have to consider today. It's pretty clear that new digital technologies will once again change the nature of money in our societies and how that money is transferred. No doubt there's more innovation to come and we need to be prepared for it. But, at this stage, I find it really hard to know exactly what the future is going to look like, especially in countries like Australia, where we already have a very fast, real-time, flexible payments system, where money is moved instantaneously between any two bank accounts in the country. The system meets the needs of most people, and we're seeing really good innovation in the Australian domestic fast-payments system that meets the needs of most people.

But it's certainly possible that new forms of money will develop. If they do, they're going to need to provide better services than the payments system that we already operate from bank account to bank account, and it's possible that new forms of money will do that, and offer better financial inclusion. Not everyone has a bank account, and the cost of payments to merchants is still very high. Credit card payments are very expensive for merchants, and even debit card payments cost merchants a large amount and, as we all know, the cost of cross-border payments is really high. So new forms of money can help here, and I think it's also quite possible that new forms of money will offer a better consumer experience than passing pieces of paper or pieces of polymer around or moving money between bank accounts. So it must be the case that new forms of money will emerge that offer better solutions to the ones that we have now.

In particular, I think it's probable that, at some point, the banknotes that we hold in our physical wallets will be complemented by some form of digital token that we hold in a digital wallet. And, if this is how things evolve, the question we've been thinking about is: what should be the nature of those digital tokens in the digital wallet? My view is that, if these tokens are going to be used more widely by the community, they're going to need to be backed by the state or prudentially regulated, just as we regulate bank deposits.

At a really high level, I think you can think of two possibilities here. One is that these tokens are backed by the central bank, so they're a central bank digital currency that is a retail form. So that's one possibility, and some of us are exploring that. But the other possibility that we're exploring is that these tokens are issued by the private sector, not by the central bank; but that the tokens are backed by very high collateral, perhaps central bank deposits or government securities, or that the issuing authority is actually regulated like a bank. So there could be private tokens rather than a central bank digital currency.

Both possibilities can obviously work, but I tend to think that the private solution is going to be better if we can get the regulatory arrangements right. That's because the private sector, in the end, is going to be more innovative than the central bank; it's going to be better at innovating and designing features for these tokens. And there are also likely to be very significant costs in the central bank setting up a digital token system. I think it's going to be better for the private sector to manage those costs.

There are also quite a lot of risks here and operational issues; Thomas was kind of referring to these at the wholesale level. But, if the central bank were to issue tokens that sat in digital wallets just as we issue banknotes in our physical wallets, there are a lot of operational issues, there are a lot of risk management issues, privacy, AML – there's a long list. In the end, I think the private sector is going to be better at doing that than the central bank. But, if we are to have a system of privately-issued tokens, then the regulatory system needs to be really strong, and I don't think any country has a sufficiently strong system at the moment; in Australia we don't. We're looking to put it in place, but we still are not there.

People need to have confidence in these tokens. They need to be confident that they're going to be repaid, and they're going to need to be confident that the tokens aren't counterfeit, just as they need to be confident that banknotes aren't counterfeit. It will also be important that these tokens are interoperable. Just as you can use a bank-issued card at any terminal in the country and move money between any two bank accounts in the country, you'll need these tokens to be interoperable so that a token issued by one bank can be used at another bank.

So, in my view, it's still too early to know whether central banks should issue a retail central bank digital currency. It's possible, but it may well be better and more efficient to have these tokens issued by the private sector. I feel like there's a stronger case for central banks to issue a wholesale central bank digital currency, and Thomas talked about this. These wholesale central bank digital currencies could be a useful complement to our existing RTGS systems. We're exploring with various entities how they could be useful in the settlement of trade flows, in cross-border payments and syndicated loans, and they could also be helpful in developing new markets for tokenised assets. One example that people in Australia are exploring is tokenised assets for mineral resources in the ground and that somehow a central bank digital currency at the wholesale level could help in trading and development of those markets. So I think it's quite likely that, at any time, we will issue some form of digital currency for wholesale settlements that will complement the RTGS system.

The third lesson from history that I mentioned at the outset was that periods of innovation tend to be associated with periods of speculative behaviour, as people fear missing out on the next 'big thing'. And I think we've seen this recently with some of the speculative interest in crypto that's not backed by any particular asset. And I really hesitate to use the term 'cryptocurrency', as most crypto doesn't have the characteristics of a currency: it's not low cost, it's not a widely accepted medium of exchange and it's not a reasonable store of value. We've just seen 70 per cent declines in value. So I don't think that we should be talking about cryptocurrencies.

In fact, many examples of unbacked crypto seem to be little more than forms of speculation to me. The crypto provides very little utility to its owners, other than the ability to sell the crypto to somebody else, hopefully at a higher price, or to buy another form of crypto. So the underlying utility, at least for many of these crypto … I don't like using the word 'assets' because I don't think they're assets either. So we can't rule out the possibility that people will eventually find using these various forms of unbacked crypto useful for making everyday payments, but I'm really sceptical that they will. Most of these crypto examples, the prices are volatile and there's quite a lot of problems with the scalability of the technology. They can be used in small closed-loop systems, butthere are problems. So I think it's unlikely that these various crypto things – not assets or currency – will be used as a form of money. But, if they did, then we'd have to be confronting a whole series of very difficult issues.

So I don't think we should be thinking of them as currency or assets, but they do need regulation, and I think the main focus needs to be on consumer protection. People need protection and they need education. People need to understand what they're buying and what they're not buying and that they're protected from scams. We need to deal with AML issues, which are really serious in this space, and we need to deal with privacy issues. So there' are a lot of consumer protection issues to work through. And we also need to understand the implications for broader financial stability, and I know that this is something that the Indonesian G20 presidency has focused on; we need to understand it. At the moment, I'm not particularly concerned about it. My main concerns are really consumer protection and making sure that people who are not particularly well informed don't lose money.

The final point I want to make is that the one piece of the crypto landscape where I think there is real promise is in stablecoins that are linked to the value of our national currencies. I think it's quite possible that these stablecoins will form the basis of privately-issued tokenised money. If that's how things develop, and I think it's quite possible, then we need to have a first-class regulatory regime where these stablecoins are effectively regulated like bank deposits. We regulate private money in banks; we should ultimately regulate private money that's a stablecoin that sits in our digital wallets as well. Thank you very much, Hyun.

Hyun Song Shin

Thank you very much Tobias. I think, we've had a very wide ranging set of initial comments. What I would like to do now is to turn to the panellists and ask them to address two sets of questions the first one is on crypto and the second one is on CBDC. With respect to crypto … And I will ask the same question to all the panellists and ask them just to pick and choose elements of the questions. I guess with the regulation of crypto one issue is whether regulation itself is going to legitimise the whole [crypto] universe. I think Phil raised the issue of how we should call them, but I think crypto is a good terminology there Phil. And I guess to the extent that we regulate them there are lots of different entry points, so one way for example – as Eddie mentioned – was to actually regulate the on-chain activity itself or it could be other entry points through exchanges and other intermediaries in the crypto universe more broadly. Or should we focus much more on the points of contact between the crypto universe and the conventional financial system and one very important issue that Phil raised was the role of stablecoins. How should stablecoins be regulated? I think we heard Phil's approach to this question and I think it would be interesting to hear the other panellists as well. Let's start in the same order that we had the opening interventions. So let's Thomas start with you.

Philip Lowe

Well, on stablecoins, if they're stable in terms of our national currencies, then I think they should be regulated like bank deposits or they should have very strong collateral requirements with collateral being at the central bank or government securities; so I think they're fairly easy to deal with. The other crypto things that have variable prices, prices go up and down, they shouldn't be viewed as currencies and we shouldn't regulate them like currencies or bank deposits, because they're not that. But they do raise very significant consumer-protection and AML issues, and I think that's where the focus needs to be. As you say, the on and off ramps are important for AML and also important for consumer protection. So, if people end up wanting to invest in these, 'investors' would be the word here, buy these things whose prices are going up and down, then people should be free to do that, but they should understand what they're doing and they should be protected against scams and criminal activity. That's where the focus needs to be on things whose prices move up and down.

Hyun Song Shin

So, Phil, if I may, I just have a follow-up, actually. I think you made a very important point, which was on the self-referential nature of some of the crypto activity. So DeFi very much is about the, if you like, crypto-activity, buying and selling and lending and borrowing other crypto-coins. So I guess one concern that I've certainly heard from some quarters is that, if you start regulating them, you will actually give them more credibility, you will legitimise and so something which is half-baked would actually do more harm than good. Do you have a view on that?

Philip Lowe

Well, if we start calling them currencies, then I think that's counterproductive. If we start treating them like currencies and regulating them in the same way as currencies, I think that's problematic, because they're not that. They're not backed by anything, they're not backed by a central cank, and the price moves around all the time. But that doesn't mean that we shouldn't regulate them, because people have an interest in buying them; the prices go up sometimes, and they want to buy them to benefit from the capital gains and perhaps sell them to somebody else. So, like any asset in our economies that people trade, there needs to be regulatory arrangements to protect people and to make sure that there isn't criminal activity as well. So that doesn't give them any legitimacy as a currency, but we do need to protect people and provide the infrastructure, if people do in the end want to trade these instruments.