Andreas Park PRO
Professor of Finance at UofT
Stablecoins, Libra, and CBDC
Instructor: Andreas Park
Rotman – Master in Financial Risk Management
Financial Innovation
What's the relationship of payments and monetary policy?
Payments and Monetary Policy
A
B
\(-\)
0
+
Payments and Monetary Policy
A
B
0
+
\(-\)
Option 1: borrow from BoC
lending rate:
deposit rate:
target rate
target rate\(+\)25bps
target rate\(-\)25bps
Payments and Monetary Policy
A
B
0
+
\(-\)
Option 2: borrow from another bank
target rate
Why should we worry about private money? The Case of Tether
- on April 30, 2019: Tether does not have cash reserves equal to 100% of the outstanding Tethers.
- May 15, 2019 court hearing: Tether did invest in instruments beyond cash, including Bitcoin
Historically: “Tether Platform currencies are 100% backed by actual fiat currency
assets in our reserve account.”
Text
Today: "The Tether Platform is fully reserved when the sum of all tethers in circulation is less than or equal to the value of our reserves."
IS BITCOIN REALLY UN-TETHERED?
JOHN M. GRIFFIN and AMIN SHAMS
Journal of Finance 2020
vs.
Why does that matter?
- Tether = ‘pushed’
- print an unbacked digital dollar to purchase Bitcoin.
- \(\to\) additional supply of Tether creates unwarranted inflation in Bitcoin price
Text
IS BITCOIN REALLY UN-TETHERED?
JOHN M. GRIFFIN and AMIN SHAMS
Journal of Finance 2020
vs.
- Tether = ‘pulled’
- driven by legitimate demand from investors who use Tether as a medium of exchange
- \(\to\) the price impact of Tether reflects natural market demand
Text
IS BITCOIN REALLY UN-TETHERED?
JOHN M. GRIFFIN and AMIN SHAMS
Journal of Finance 2020
Flow of events
- Tether is authorized
- moved to Bitfinex
- then slowly distributed to other Tether-based exchanges (Poloniex and Bittrex)
- \(\to\) almost no Tether returns to the Tether issuer to be redeemed
- Kraken (major exchange for Tether\(\to\) USD) accounts for only a small proportion of transactions
Figure 1. Aggregate Flow of Tether between Major Addresses
Figure 3. Aggregate Flow of Bitcoin between Major Addresses.
Top Accounts Associated with the Flow of Tether from and Bitcoin to Bitfinex
- three main Tether exchanges, Bitfinex, Poloniex, and Bittrex, have considerable cross-exchange Bitcoin flows
- cross-exchange Bitcoin flows on Bitcoin closely match Tether flows
- one large player has >50% of the exchange of Tether for
- Bitcoin at Bitfinex
- \(\to\) distribution of Tether into market from ONE large player and not many different investors
If Tether is printed independently
of demand and pushed onto the market then ...
- \(\nearrow\) money supply in crypto
- \(\nearrow\) cryptocurrency prices through artificial demand
- if traded strategically, Tether can further impact and manipulate Bitcoin prices
the 1% of hours with the strongest lagged Tether flow are associated with 58.8% of the Bitcoin buy-and-hold return over the period.
Is the Price Effect Economically Important?
the "normal-times" returns
Related Development: Libra
The most controversial entrant of them all ...
Partnerships
"new financial infrastructure"
My prediction: Libra Network will go live in the Spring of 2021
The One the world is talking about
What is Libra and how does it work?
issued by a consortium of firms (e.g., Facebook, Stripe, Lyft) and not-for-profits (Creative Destruction Lab)
two types of coin: single-currency stablecoins and multi-currency stablecoin, fully backed by reserves
- central banks will retain control on how Libra network is used in their countries
- envisioned integration of CBDCs
The One the world is talking about
Multi-Currency coin
idea is conceptually similar to IMF Special Drawing Rights (pegged to USD, EUR, YEN, GBP, YUAN)
in Libra, this coin is a composite, not separate asset
not "pegged", but will fluctuate relative to any other currency (a bit like an ETF)
- reserve:
\(\sum\) cash or cash-equivalents, very short-term government securities
\(=\sum\) face value of Libra Coins in circulation - Administration: transparent to the public and auditable.
- \(+\) capital buffer.
The One the world is talking about
Aspiration
- open technology standard with incumbents and startups competing
- Open and transparent membership criteria
- Low switching costs, low barriers to entry and high interoperability
Governance
- Founding Members for
- early utility and adoption
- standard setting
- Ultimately: governance=distributed
The One the world is talking about
Long-Term Goal
-
eventually transition to a permissionless system.
-
Problem: perimeter control - can unknown participants take control of the system and remove key compliance provisions?
-
\(\to\) not happening
Long-Term Network
-
Modeled after mutually owned stock exchanges
-
Expanding membership with competition for slots
-
hope: replicate key economic properties of a permissionless system through an open, transparent, and competitive market for network services and governance.
Survey Info on Libra
Would you use Libra/Money issue by Tech Firm?
If we ask explicitly for Facebook vs Tech Firm
Scaled to yes/maybe/no. About 20% say: "Need more info"
Will people use Libra?
Source: Will Libra Succeed? Results of a Global Randomized Survey Experiment; by Danielle Goldfarb and yours truly
Key question: what business opportunities will arise?
Why does BigTech enter the finance game?
They have ZERO interest in becoming a financial institution/bank
\(\rightarrow\) no expertise
\(\rightarrow\) competitive market
\(\rightarrow\) one of the most regulated business environments
My take
They are trying to deal with frictions that impede their business
They aim to collect data which will vastly improve their business
Related Development: Central Bank-Issued Digital Currencies
Newest Developments: CBDC
CBDC = Central Bank issued Digital Currency
not a cryptocurrency \(\to\) just a "normal" liability on central banks balance sheets
-
BIS Jan 2019: "Proceed with caution"
-
BIS Jan 2020: "Impeding Arrival"
Is it coming?
players (inter alia)
-
China: in test mode; provinces prep own initiatives, coming next year
-
U.S.: has bigger problems and is always a last mover
-
UK: preparing
-
Canada: contingency planning (it'll happen within two years)
players (inter alia)
What's the problem and what should a CBDC look like?
current problems
future concerns
crib sheet
too slow
too expensive
not flexible
lack of competition
disintermediation
by new players (Libra)
data harvesting
with no way out
ineffectiveness
of monetary policy
demise of the Loonie
two-tiered world in Canada
fast
cheap
flexible/programmable
universally accessible
Possible CBDC architectures
Source: BIS Quarterly Review, March 2020
What is "disintermediation"?
two types of money
government:
-
reserves
-
cash
commercial
-
each commercial loan \(\to\) deposit
cash withdrawl
convert commercial money into government money
lowers bank's balance sheet
disintermediation \(=\)
Would a CBDC destabilize the banks?
BoC analysis (August 2020):
- [banks] are well-positioned to absorb potential temporary negative effects on profitability and liquidity
- Banks[can] absorb the shock under plausible adoption scenarios.
- [No] threat to the stability of the financial system or to banks’ competitiveness in terms of ROE.
- banks will maintain healthy liquidity levels, and liquidity could become a concern only in the most extreme scenario.
Why issue a CBDC?
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Would a CBDC improve the efficiency of its currency function?
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Would CBDC improve the efficiency and safety of both retail and large-value payment systems?
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Is CBDC an appropriate policy response to payment innovations such as privately issued e-money and digital currency to achieve its monetary policy goals and to implement policies promoting financial stability?
"Central Bank Digital Currencies: A Framework for Assessing Why and How " Fung and Hallaburda 2016, BoC Working Paper
- the use of bank notes were to continue to decline to a point where Canadians no longer had the option of using them for a wide range of transactions; or
- one or more alternative digital currencies—likely issued by private sector entities—were to become widely used as an alternative to the Canadian dollar as a method of payment, store of value and unit of account.
When would the BoC issue a CBDC?
Contingency Planning for a Central Bank Digital Currency (BoC website)
CBDC: Token vs Accounts
CBDC: Token vs Accounts
token-based
identification of the object being transferred as a means of payment
account-based
identification of the individual whose account is being debited
example: cash
example: ETH
Should the central bank issue e-money? Kahn, Rivadeneyra, Wong, Bank of Canada working paper 2019
A Taxonomy
Bech and Garratt (2017)
- who is the issuer (central bank or other)
- what is its form (electronic or otherwise)
- who can access and/or hold it (universal or not)
- how is it transferred (centralized or decentralized).
Prevailing view: account-based central bank e-money system is unlikely to be the preferred choice of policymakers
Tokens or Accounts?
Prevailing view: account-based central bank e-money system is unlikely to be the preferred choice of policymakers
- expensive to operate
- CB has no comparative advantage for operation
- CB directly competing with commercial bank accounts
- system was feasible even before the advent of DLT
Why not?
Some history on private money
- free banking era in the US:
- "discounts" between different state-chartered banks prior to 1863
- discounts between notes vary with distance to the location of the issuing bank and its risk-taking behaviour
- Canada, between 1817 and 1890:
- commercial bank notes and provincial notes (later Dominion notes) circulated simultaneously
- discounts until the Bank Act of 1890 (insurance scheme for the redemption of notes of failed banks)
- regulation and supervision of financial intermediaries are necessary to control the discounting between alternative means of payments, counterfeiting and manage price stability.
CBDC: Impact of "Global" Money
CBDC: Impact of "Global" Money
Cryptocurrencies, Currency Competition and the Impossible Trinity
Benigno, Schilling, Uhlig (2020)
Old: impossible trinity
New: with free capital and global currency, equalization of national policy interest rates
\(\to\) less of a point of national currency
Platform Economics
Examples of platform markets
gamers
users
“eyeballs”
cardholders
videogame platform
operating system
portals, newspapers, TV
debit & credit cards
game developers
application developers
advertisers
merchants
buyer
platform
seller
Platform pricing
Source: Jean Tirole's Nobel Lecture
Implications for the platform business model
Source: Jean Tirole's Nobel Lecture
- account for what each side can bear
- account for externalities
- \(\to\) skewed pricing
Simple Example: heterosexual clubbing
assumption: people go clubbing to meet the opposite gender
common problem: imbalance of people from each gender
common solution: differential pricing (including free entry) for one side of the market
Regulation?
Question: is it a must-use arrangement or do people have alternatives?
MFRM: Stablecoins, Libra, CBDC - Part 5
By Andreas Park
