Introduction:
Beyond Disappointment: The Technological Promise in Cryptocurrency
The juxtaposition of cryptocurrency’s perceived underdeliverance to its revolutionary potential has prompted global entities such as the International Monetary Fund (IMF) and the Financial Stability Board to advocate for reinforced regulation, a sentiment expressed by Tobias Adrian and Tommaso Mancini-Griffoli on March 10, 2023.
Evolution in Payments:
Technological Leap Forward
While the private sector has been innovating and tailoring financial services, the public sector too can leverage technology to upgrade payment infrastructures, ensuring interoperability, security, and efficiency—concepts discussed in our recent working paper “A Multicurrency Exchange and Settlement Platform,” resonating with similar propositions by others.
Tech Advancements:
Tokenization, Encryption, and Programmability
The transformative technologies include tokenization—which represents rights to assets on a digital ledger, encryption—facilitating trust and transparency by limiting sensitive information access, and programmability—offering ease and autonomy in financial contracts through mechanisms like smart contracts.
Private Sector Innovation:
Revolutionary Applications and Implications
The private sector exploits these novel tools for the tokenization of financial assets and money, and for process automation, stretching the horizon of innovation and customized service provision beyond the early waves of cryptocurrency.
Tokenization of Assets:
Tokenizing stocks, bonds, and other assets could lower transaction costs, integrate markets, and increase accessibility, contingent on compatibility with the ledger in use.
Stablecoins:
These are viable when conforming to regulatory standards and showcase an example of bank-tested tokenization for demand deposit accounts.
Automation:
Automation allows third-party programming functionalities akin to app development, signifying an advancement in accessibility and utility in the financial sector.
While the private sector extends the boundaries of innovation and bespoke services, it may, even with adequate regulation, fail to guarantee secure, efficient, and interoperable transactions.
Central Banking Role:
The Advent of CBDCs
Central Bank Digital Currencies (CBDCs) could be instrumental, serving both as a monetary tool and an indispensable infrastructure for clearing and settling transactions.
Instrument As Monetary Tool:
CBDCs present a secure medium of exchange and alleviate counterparty risks, infusing liquidity into the payment ecosystem.
Infrastructure for Digital Currencies:
They could offer interoperability and efficiency for private digital currency and asset networks through CBDC-led platforms.
Opportunities for Cross-Border Payments:
New Horizons and Governance Complexities
As per our working paper, a public platform could facilitate transnational trades of domestic central bank reserves’ digital representation without needing extensive national payment system reforms.
Enhancing Transaction Security:
Alongside fund transfer, embedded functionalities like risk sharing, currency conversion, liquidity management are paramount, with smart contracts can mitigate aborted transaction risks.
Automating Compliance
With single ledgers and programmability, capital flow restrictions can be automated, ensuring consistent contracting with fully supported escrow provisions, reducing idle capital costs.
Information Management
Thanks to encryption technology, the platform can manage information dissemination, verify Anti-Money Laundering (AML) compliance, facilitate anonymous bidding on platforms while providing full transparency on bid-ask spreads.
Therefore, technology could be pivotal in fulfilling key public policy goals of interoperability between national currencies, safety through custodied central bank reserves, final settlement, automated contract execution, and efficiency derived from low transaction costs, public participation, contract consistency, and high transparency.
Conclusion:
The Irony in Innovation
While the driving force behind cryptocurrency is often seen as a bypass to intermediaries and public oversight, ironically, its true value might well lie in the technology which the public sector could employ to enhance payment and financial infrastructure for the greater good. This advancement in technology promises to bring interoperability, security, and efficiency to the innovative and tailored services offered by the private sector.
