While I was participating a study group about digital currency with ITU (International Telecommunication Union), I had the chance to attend the IMF spring meeting in 2019. In the panel “ Money and Payments in the Digital Age” moderated by Madame Christine Lagarde (panelist was also including the Head of Circle and European and African regulators), I posed two questions:
What’s the role of stablecoin in the future? Do you think it’s a compromised version between fiat and cryptocurrency?
What’s your opinion about rising digital bank in Europe, such as N26?
After 4 years, sorry for the market panic but thanks to Silicon Vally Bank answered my questions.
If the diminishing of physical commercial bank era is coming, should we start investigating the future of the money/banking system?
Many media articles compare Silion Vally Bank event to the 2008 subprime financial crisis. Back then, as a junior banker working at wealth management department, I even had hard time to understand what “subprime” means. But if we look back, what was really going on? On January 2009, the genosis block of bitcoin, which then called blockchain that drives nearly all transformation nowadays, was quietly created, from $0.
So, what happened to Sillion Valley Bank (SVB)?
What can we buy with 1 £? A baguette, or a bank!
HSBC acquired SVB UK arm for 1 pound on March 13, 2023. We don’t have enough evident to assume that this is directly linked to SVB acquisition , but it’s worth to notice the rather advanced Fintech movement in UK. This acquisition might allow HSBC to effortlessly take advantage of the tech resources by integrating the startup and crypto company ecosystem in SVB.
Bank of England was one of the earliest central banks that actively iniciates research into CBDC subject from 2014. Accroading to their Digital pound project** webpage, **On February 2023, Bank of England published two papers: <*The digital pound: a new form of money for households and businesses?*> and <*The digital pound: Technology Working Paper*>. Here I try to resume some interesting points:
Not interest-bearing. Like a physical banknote, the digital pound would be unremunerated, which means digital pound doesn’t generate interest automatically.
The Bank will not implement central bank-initiated **programmable **functions. Instead, the Bank would provide the necessary infrastructure for the private sector to implement programmability features for users.
Infrastructure —** Core ledger**: record the state information of CBDC in issue and the movement of funds (account-based or a token-based approach). DLT or blockchain based solutions may face engineering challenges.
Exploring the concept of establishing a new wholesale CBDC platform.
(The terms will be explained in the later section)
On its US California headcuarter side, also on March 13rd morning, FDIC (Federal deposit insurance cooperation) released a press release : FDIC Acts to Protect All Depositors of the former Silicon Valley Bank.
In short, different than the “bailout” in 2008, FDIC created a national “bridge bank” and promised the depositors (both insured and uninsured) to be able to have full access their money, the system including online banking functions as usual. We will have to keep an eye on who will be the eventual buyer. Could it be another larger commercial bank like HSBC?
What is a Bridge Bank?* Let’s ask ChatGPT.*
Another interesting point that we may notice in this statement: The FDIC named Tim Mayopoulos as CEO of Silicon Valley Bank, N.A. Mr. Mayopoulos is former president and CEO of the Federal National Mortgage Association and most recently served as president of Blend Labs, Inc.
What is Blend lab?
“Blend is a cloud-based banking platform to streamline workflows and transform banking experiences for their customers. ” It was founded in 2012 and went public on 2021. Obviously, this appointment may leads the whole ecosystem into further non-physical, data driven commercial banking system.
Some basic concepts of digital money: Stablecoin and CBDC
Stablecoins are cryptocurrencies whose value is pegged, or tied, to that of another currency, commodity, or financial instrument.
*Function *— Trading highly volatile cryptocurrencies (eg bitcoin) with stablecoin instead of fiat money would dramaticly decrease the trading cost.
Earn some yield — According to Coinbase: Coinbase customers looking for a low-risk investment can start earning 4.00% APY via USDC.
USD Coin (USDC): 100% backed by cash (23%) and short-dated U.S. treasuries (77%); USDC lives natively on 8 blockchains: Ethereum, Solana, Avalanche, TRON, Algorand, Stellar, Flow, and Hedera. 43.5 billion in circulation.
($3.3B USDC reserve deposit held at Silicon Valley Bank, about 8% of the USDC total reserve was exposed to the SVB event but recovered to its peg shortly after.)
Euro Coin: the same full-reserve model as USDC; Ethereum ERC-20 standard token; Launched in June 2022; 31.8 million in circulation.
Dai: 1:1 to USD, regulated by MakerDAO**, **backed by collateral (ether).
Tether(USDT): Lanched in 2014, backed by traditional currency and cash equivalents, and loans.
CBDC (Central bank digital currency) is generally defined as a digital liability of a central bank that is widely available to the general public and denominated in the sovereign currency, as is the case with physical banknotes and coins.
Wholesale payments are large-value and high-priority transactions, such as interbank transfers. The distinction might become less relevant in a world with CBDCs.
In my opinion, the wholesale system transformation could signify a greater dramatic change for monetary system, compare that of the retail one. Besides the tendence of Bank of England, in November 2022, The Federal Reserve of New York announced Project Cedar, which tested wholesale application of a CBDC.
Retail payments are relatively low-value transactions, in the form of eg cheques, credit transfers, direct debits and card payments.
Source: BIS Quarterly Review, September 2017
In the past years, from my discussion with friends and even finance professionals, I find that this issue could confuse many people: We are using digital payment frequently already, does CBDC makes anything different?
The brief answer is: Infrustructure. For example, one of the possible solution is **DLT (distributed ledger) ****— **It’s a common record of activity that is shared across computers in different locations. On the other hand, Blockchain as a common type of DLT could either be centralised or decentralised. In 2022, JP Morgan traded tokenized government bonds that is piloted by Singapore central bank, HSBC is also exploring infrustructure on wealth management products.
To answer my questions myself, the stablecoins such as USDC performs like CBDC nowadays, especially with the possibility of having a debit card directly from crypto exchanges such as Coinbase and Binance.
The public-prive partnership could make the mass adoption process smoother and faster. Payment couldn’t be more convenient as if the money is not yours; The cross-boarder currency exchange would not even be noticeable during travelling. The non-human cloud-based data-driven banking system that “knows your behaviour better than you” will gradually dominant our daily financial life.
On the other hand, **DeFi **application (decentralised finance) was also booming, as the demand of “self- sovereignty” is growing in the society. However, DeFi on it’s core doesn’t have much different comparing to traditional finance. One still has to know what’s the logic about lending, collaterals, stake etc. Finally, on the technology side, the interoperability between web2 and web3 still takes time.
There’s no need to confuse or panic though. Learning and adapting is a life-long homework. One coin always has two sides, just like the beauty of centralisation vs decentralization. And, there’s nothing new under the sun.