Blockchain Technology in Finance & DeFi (Part 3)
Instructor: Katya Malinova
Course : F741 Winter 2021
Related Development: Libra
The most controversial entrant of them all ...
Partnerships
"new financial infrastructure"
The One the world is talking about
What is Libra and how does it work?
issued by a consortium of firms (e.g., Facebook, Uber) and not for profits (Creative Destruction Lab)
original idea: each coin will be backed by a basket of SIX fiat currencies
idea is conceptually similar to IMF Special Drawing Rights (pegged to USD, EUR, YEN, GBP, YUAN)
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"
Source: Will Libra Succeed? Results of a Global Randomized Survey Experiment; by Danielle Goldfarb and Andreas Park
Will people use Libra?
Source: Will Libra Succeed? Results of a Global Randomized Survey Experiment; by Danielle Goldfarb and Andreas Park
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
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BIS Jan 2019: "Proceed with caution"
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BIS Jan 2020: "Impeding Arrival"
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BIS Jan 2021: "READY, STEADY, GO!"
Is it coming?
players
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China: in test mode; provinces prep own initiatives, coming next year
-
U.S.: has bigger problems and is always a last mover
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UK: preparing
-
Canada: contingency planning (Will happen within two years?)
Newest Developments: CBDC
BIS 2020 Survey on CBDC
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
resilient
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 withdrawal
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.
Questions for the future
What is the economic impact of "tokenizing everything"?
How will it affect investments and investment banking?
Which business opportunities will it enable?
What do tokens and "alternative money" mean for payments?
Conclusion and final thoughts
blockchain is a transformative technology, but won't be used in practice overnight
many conceptual and technological challenges remain, but there are already various areas of application
legal, regulatory, and competitive changes are needed and then the opportunities are endless ...
it will open up the banking world further, foster international competition, and change how we pay and exchange value