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Public-private solutions necessary for acceptance

June 4, 2020

On May 26, Tommaso Mancini-Griffoli, a representative of the International Monetary Fund, said In the future, the potential of the central bank’s digital currencies (CBDCs) could best be exploited by promoting synthetic partnerships between the public and private sectors.

The deputy head of the IMF, Department of Monetary Capital and Markets, further explained his views on the subject and explained that the vision behind developing countries with changing economies is completely under the control of a central bank.It is now out of date and the entry of private agents could promote it of innovations.

When asked how such an association could be realized conceptually, he suggested this In synthetic partnerships, the private sector should focus on issues such as innovation, interface design and customer management, while the public sector should focus on issues related to regulation and trust-building.

Public-private solutions necessary for acceptance
Public-private solutions necessary for acceptance

Mancini-Grifolli believes that this joint effort will thrive not only on CBDCs, but also In addition, these unique financial offerings can work seamlessly within the confines of a regulated framework, maximizing financial stability.

Advantages and disadvantages of synthetic CBDCs

To better understand the matter, Cointelegraph turned to Luisa A. Blandon, representative of Micobo GmbH, a software consulting and technology development company focused on distributed general ledger technology (DLT) for capital markets. He pointed out that the public-private CBDC proposal is not new and that future-oriented central banks like the People’s Bank of China already need payment providers like Alipay and WeChat Pay to keep customer funds in shape. of reservations.

Blandon also alluded to the fact that other central banks such as the Bank of England were also considering the option. Not only that, but also the Reserve Bank of India, the Hong Kong Monetary Authority and the Swiss National Bank They offer special licenses to non-bank financial technology companies that allow them to hold reserve balances subject to an approval process.

As for the benefits of synthetic CBDCs, The main advantage of this association would be to increase the stability of “electronic money”.. Synthetic CBDCs can ignore market and liquidity risks and mitigate default risks. These two points seem constant when you consider how easy it can be to spend electronic money. Not just that, but Public and private CBDCs can also make it easier to review and control customer funds spent with electronic money, especially when funds are spread across many banks.. Given this, CBDCs can remain credible by offering lower risk and being redeemable, meaning that they have the same value as national currencies.

Another advantage of this approach is the direct involvement of central banks in the issuance of electronic money. With DLT technology, all coordination between participants can be made more efficient and transparent, ultimately protecting consumers and reducing transaction costs. Furthermore, Audit processes and compliance procedures can be automated and encrypted, which increases the reliability of the financial network in question. In addition, the link between the public and private sectors also guarantees healthy competition in the market, as the network can be controlled by a central bank authority, which prevents the occurrence of monopolies.

In a somewhat opposite sense, Matthew Unger, CEO of iComply – a regulatory technology and services company “KYC / AML” – stated that the partnership model between the public and private sectors can allow this when properly structured. Blockchain technology is ahead of everyone else Alternative applied to CBDCs. However, he added:

“As with many things, the devil is in the details. Who is the ‘private’ part – Huawei? You already own the hardware of around half of the world’s central banks and have been committed to blockchain-based CBDCs for a number of years.”

Blandon commented on the disadvantages of the public-private configuration, noting that synthetic CBDCs would end if they spread in the near future. “Conversion of the current fractional banking system to a tight banking systemHe also added:

“In times of economic crisis, massive flows of bank deposits can flow into e-money, and if funds from customers who support e-money remain as wholesale financial banks, the flow could reverse as the customer would likely be protected from Conversely, the risks of the run could not be discounted if these funds were held as central bank reserves, leading to a migration of uninsured deposits from banks to e-money providers. “

Will the central banks accept the idea?

Despite the fact that synthetic, partnership-based CBDCs sound extremely attractive on paper, it is still worth seeing whether central banks are willing to consider such a committed idea and lose so much of their power.

Cointelegraph spoke to Rich Foster, former head of Citigroup’s North American market and securities settlement services and founder of E2E Blockchains, a project designed to facilitate settlement strength with banking currencies. central. In Foster’s opinion, many established banks are already investigating the idea of ​​synthetic CBDCs. In this regard He alluded to a newly formed consortium called Fnality International that has developed its own digital central bank currency – a hybrid CBDC that continues to hold funds in each country’s central bank account and is available for wholesale use only.

The consortium is supported by many of the largest commercial banks and national stock exchanges worldwide, including UBS, Barclays, Banco Santander, BNY Mellon, CIBC, Commerzbank, Credit Suisse and ING. Foster added: “From a retail perspective, the Digital Dollar Project is another solution that is currently in the public debate phase“”

As the banking sector continues to lose consumer confidence worldwide, the idea that private companies will replace certain banking functions and CBDC distributors would most likely be seen as a positive development. .

Finally, some believe that it would be ideal if CBDCs were supported and spent by central banks and that the distribution of things should be done by private institutions. This is because private companies can not only ensure higher settlement efficiency when using CBDCs for retail payments and billing., but also in full payment options, including high value, high priority transactions.

Could privacy be an important factor?

Concerns about data protection with regard to public and private CBDCs have increased significantly in recent months, especially as the financial sector is increasingly turning to digitization. However, When traditional banking configurations fail to protect data, encryption-related technologies such as knowledge-free evidence and smart contracts provide users with a highly secure transaction environment. In this regard, the portfolio architecture for CBDC distribution should ideally be designed using advanced cryptography such as homomorphic encryption or other similar methods.

Blandon believed that with a synthetic CBDC, many additional layers of technical complexity could be avoided, so that regulators could have direct but relevant access to encrypted transactions instead of having to go through rounds of requests, making payments leaner and less complicated. He added:

“And while these changes can change the current rules of good practice, the result would be the same, that is, The information would be easily accessible to all interested parties, especially if their goal is consumer protection“”

Unger believes that with the advent of client-side authentication software, knowledge-free testing, and frameworks such as the Massachusetts Institute of Technology’s OPAL project, concerns about KYC and AML can be significantly addressed. However, he added that a public blockchain in a CBDC without the right controls for privacy and governance would “Citizen surveillance tool that affects more privacy than we have seen“”

Electronic money all the way

It seems fairly clear that institutional and traditional financial agents are aware that the future of payments and value reserves is in the area of ​​electronic money. However, it seems that they have not yet fully understood and adopted this technology with open arms.

For this reason, synthetic CBDCs offer many risk-averse key players the opportunity to take advantage of the progress that private initiatives have successfully implemented. Furthermore, Big banks may now need to rethink their role and start improving their skills to become better, more reliable, and more efficient e-money providers.

Synthetic CDBCs would definitely change many of the functions that banks are currently performing, but they could also make consumer protection much more efficient and reduce compliance risks and costs.

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