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Central Bank Digital Currencies Would Be A Novel Type Of Money
Vitas Vasiliauskas, a member of the Governing Council of the ECB and chairman of the board of the Bank of Lithuania, has come out generally in favour of wholesale central bank digital currencies (CBDCs).
Broadly defined, a CBDC is a digital form of central bank money that is different from balances in traditional reserve or settlement accounts. It would serve as a medium of exchange, a means of payment and a store of value, just like the current forms of central bank money.
Matt Branton, is CTO of Neutral Dollar, a next-generation stablecoin pegged to a diverse basket of four other stablecoins. He is an expert on digital currencies and has provided the commentary below.
Matthew Branton, Chief Technology Officer of Neutral:
“As the digital transformation chugs on, we are bearing witness to a growing chasm between financial innovation and structures in traditional finance. Digital currencies offer several benefits across a wide range of financial services but banks have been too slow to react. Hence, it is positive to see Mr. Vasiliauskas correctly identifying how a wholesale Central Bank Digital Currency (CBDC) is an innovative way to increase the efficiency of settlements and payments.
The status quo for settlement processing mandates that central banks debit and credit accounts, without the transfer of any assets. This can be a slow, expensive and inefficient process which is susceptible to liquidity and counterparty credit risks across parties. Using a wholesale CBDC, value would be transferred directly between identified parties without intermediaries, creating potentially significant gains in terms of efficiency and risk management. Banks can theoretically reduce barriers in areas such as authentication, record-keeping and data management.
Similar benefits can be achieved with the use of traditional stablecoins, digital currencies which are not issued by the state. These currencies peg their value to a currency, exchange traded commodities or are uncollateralized. Stablecoins allow for funds to be transferred using distributed ledger technology, and can provide more liquidity to markets, while also reducing credit risk. Benefits can be seen particularly in relation to cross-border transfers, through lower transaction costs and far quicker transfer speeds.
Central to the integration of digital currencies into the financial system is stability. Institutional investors will need to trust the CBDC or stablecoin can retain its value and serve as a hedge against idiosyncratic capital loss. In order to ensure this stability is achieved, we can examine a fundamental claim of financial theory — an aggregate product can have lower volatility than any individual constituent. Stability can be achieved through diversification.
Our product, Neutral Dollar, is a basket of stablecoins which inherits attractive properties due to its metastable design.Through numerous different tests, it has been proven that Neutral Dollar can track the U.S. Dollar and generally has less price movements, proving its worthiness as a better stablecoin than any underlying constituent. For settlements, potential downside risk is mitigated due to diversification, indicating that a Neutral Dollar can serve as a hedge against risk and a solution for stablecoin portfolio management.
The dawn of digital currencies has arrived. It is positive to see a member of the Governing Council of the ECB and chairman of the board of the Bank of Lithuania publicly recognizing the benefits of CBDCs. In order to truly realize the potential of digital currencies, alternative products which diversify risk should be explored”.
This article was originally published in ValueWalk.