It seems that the recent Covid pandemic has triggered a number ‘digitisation’ obsessions across the globe.
The Central Bank issued Digital Currencies discussions feels at times like a new pandemic and despite the significant research and guidelines seeking to establish standards for regulating and issuing such currencies. At a high level, the G20, and the finance ministers and the central bank governors representing countries across every continent working with the IMF, World Bank and the Bank for International Settlements are seeking to formalise the use of CBDC’s within the banking system. My understanding is that the target is also to have established regulatory stablecoin frameworks and research with a selection of CBDC designs, technologies and experiments having been concluded by the end of 2022, with the IMF and World Bank having the technical capabilities to facilitate CBDC transactions by the end of 2025.
The ECB have commenced the research around the digital euro exercise which is significant, and will realistically also take years to develop and formalise itself as an operational digital payment. The Bank of Japan have made it clear that the digital yen experiment will commence in spring, with a focus on matching the Chinese digital yuan. Brazil announced its intergovernmental CBDC study group in August, Thailand has stated that the national bank uses digital currency transactions with some businesses, and Australia announced its development of a proof of concept for the tokenised form of CBDC. Many emerging markets have also commenced similar research projects with significant research having been undertaken for years now.
Of course there are many significant questions that need to be considered around any potential digitisation of a currency. Its structure, form, convertibility, its acceptance or ability to interact with existing payment systems, costs, security resilience, scalability, and the analytics available to make use of the technology from a compliance perspective are only a few points. How this digital payment interacts with the developing and emerging Virtual Asset Service Provider (VASP) ecosystem is also important, as are of course its cross border payments ability (or restriction) from a simple monetary perspective.
There are of course many significant features of the tech which are arguably not yet really being considered. The ‘smart money’ of the smart contract layer of a digital payment or currency can theoretically introduce all sorts of features and facilities to a payments infrastructure. Some jurisdictions may consider this while others seem to feel that the third ‘retail layer’ of a CBDC cannot yet be considered, and think of the digital payment as an efficient interbank arrangement. Of course, alongside the many CBDC discussions there are significant discussions around stablecoin initiatives and regulation. From the Libra initiative, arguably the real standard setting global stablecoin initiative, and the only platform seeking to build out a compliant ecosystem to the right levels, to the recently announced European Commission’s Proposed Markets in Crypto Asset Regulations (‘MiCAR’) which among many complexities and questions has created new digital asset categories relating to e-money tokens and asset reference tokens with additional requirements for a secondary ‘significant’ issuer layer.
Most will understand and appreciate the process behind regulating a digital asset which arguably does not trigger legacy framework definitions, but others won’t agree with the high level ‘same business, same risk, same rules’ principle governing these new regulatory frameworks. How a digital asset is brought within or outside of the scope of typical e-money may not be altogether simple, and whether there are gaps within this and the asset reference token definitions which arguably do not capture algorithmic based ‘stabilisation’ mechanisms also remains to be seen.
However, what is quite clear is that the EU will be defining regulation aimed to capture cross border significant e-money token issuances, and It seems will only start to consider the question of equivalency 36 months after the transposition of the new Regulations. This proposed new regulation is in line with the Financial Stability Board’s recent report and 10 high level recommendations which seek to promote coordinated and effective regulation, supervision and oversight of Global Stablecoin arrangements to address the financial stability risks posed at domestic and international levels. However, it may be a few years before MiCAR takes effect, and years before significant retail CBDC initiatives become operational in larger jurisdictions, so what will happen in the interim?
The reality is that arguably this is already happening today. Largely unregulated or controlled stablecoins have a market cap of around 22 billion USD, with around 33 billion of trading volume over the last 90 days. There was a lot of commentary, not long ago, relating to the $15 billion market cap of Tether and its 4x increases but today this is already at $18.5 billion.
This is an increase that represents 2 million percent in four years. The numbers around small wallet, cross border transactions, interactions with unregulated exchange platforms, and defi platforms or decentralised permissionless exchange platforms or swaps are also significant. So the question is why should it take so long for relevant authorities to support the controlled development of blockchain based stabilised payment rails, when those systems already exist on a cross border global scale in a very significantly used system?
Why are central bank authorities arguably moving so slowly, and are regulatory authorities, under significant pressure as it stands with the significant work that they undertake, simply not able to handle additional complexity, new technological infrastructure and the legislative evolution required to support these systems? Of course, the pace of the evolution of the technology is almost impossible to match, and while I have been commenting on the relatively simple ‘stablecoin’ topic, some authorities continue to consider the 2017 and 2018 ICO issues and questions around utility token categorisations and offerings. Arguably in 2020 the booming Decentralised Finance or ‘DeFi’ space, and of concepts dis-intermediated, trustless, peer to peer transactions is already creating a new wave of regulatory questions and issues as the arguments between the ‘software’ versus ‘service provider’ arguments start to unfold.
There are of course many issues that merit consideration, but what is quite clear is that there is a willingness from the right participants to comply with whatever standards are developed and set by relevant authorities. Whether on the design and protocol level of a decentralised platform, or the issuance, management and compliance of an appropriately structured stablecoin support for these standards and initiatives should be provided.
Joey Garcia is a Partner at Isolas LLP in Gibraltar, a non executive director of the Xapo group, and the IOV Labs group where he is involved with the RSK enterprise CBDC Global Research Center.