Where Finance Finds Its Future


Are central banks thinking radically enough about CBDCs?

Season 1, Ep. 105

“We have yet to hear a convincing case for why the UK needs a retail Central Bank Digital Currency (CBDC),” concluded a report of January 2022 from the Economic Affairs Committee of the House of Lords. “While a CBDC may provide some advantages, it could present significant challenges for financial stability and the protection of privacy.” The Committee included a former Governor of the Bank of England and a distinguished economic historian (of the “What would Keynes do?” school). Despite such sceptical voices, the Atlantic Council CBDC Tracker lists 78 retail CBDC projects currently being pursued by central banks around the world and only six that have a wholesale component. Of course, every jurisdiction is different. Each country that has issued a CBDC (the Bahamas) or is experimenting with one (China, the Eastern Caribbean and Nigeria) has its own reasons. For most, the limited reach of conventional banking systems is a major factor. A related concern is the possible cession of monetary sovereignty to crypto-currencies or Stablecoins controlled by private interests. Some (Iran and Russia as well as China) see a CBDC as part of a geopolitical strategy to undermine the dominant position of the US dollar and circumvent reliance on payments systems controlled by geopolitical opponents. In the developed economies of the G7, the momentum is shifting from retail CBDCs back to wholesale CBDCs, where the potentially disruptive effects can be contained within the existing banking system. The emerging use-cases include cross-border payments, trade finance and securities settlement, where numerous experiments led by central banks have proved the technology works. However, concerns that a CBDC might disrupt correspondent banking networks, or undermine the funding of commercial banks with consequently deleterious effects on their capacity to lend, might be fostering an unduly conservative approach in the developed economies. After all, CBDCs also represent an opportunity to re-think the relationship between monetary policy and fiscal policy and how credit is created and distributed in a sophisticated modern economy suffering from pockets of inequality as well as illiquidity. At this webinar, Future of Finance re-visits the arguments for and against retail CBDCs, examines use-cases for wholesale CBDCs and asks whether central banks need to see CBDCs as a massive opportunity to re-design the way money and data flow throughout economies rather than a systemic threat to financial stability.

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Data provides the prices that drive activity in tokenised asset markets

Season 1, Ep. 119
Liquidity in privately managed assets is hampered by a lack of reliable and timely data about asset values. If value is hard to discern, privately managed assets are more difficult to buy and sell, harder to use as collateral and suffer from a less favourable accounting treatment. It is also difficult to develop secondary markets in which the assets can be traded. A distributed technology such as blockchain is well-adjusted to capturing, validating and then distributing data scattered across multiple databases, within as well as between institutions. It enables Inveniam to deliver the data needed to value private managed assets regularly, frequently and reliably without the need to centralise it in a single data warehouse.The data garnered by Inveniam is used by orthodox valuation agents such as Cushman & Wakefield, CBRE, Houlihan Lokey, Mercer and others to mark privately managed assets to market on behalf of their buy-side clients. The data enables the valuation agents to provide a faster, more frequent and more reliable valuation service to their clients. Where privately managed assets such as real estate, infrastructure and private equity can be marked to market daily, weekly, monthly or quarterly, by an independent third party and at low cost through the use of technology to retrieve and process data from widely distributed and highly variegated systems, two-sided markets can develop to facilitate price discovery.Accessible, reliable data improves valuations and makes two-sided markets possible, but liquidity ultimately depends on the engagement of market-makers with tokenised asset classes. They have already engaged with the cryptocurrency markets and can be expected to engage with the security token markets once issuance volumes gain sufficient momentum.The emergence of two-sided markets on blockchain-based networks will attract issuers of privately managed assets and funds invested in privately managed assets in tokenised form, because better functioning markets will lower the cost of raising and servicing capital (for example, paying dividends). Estimates indicate savings of between 20 and 50 basis points.Real estate will pioneer the tokenisation of privately managed assets in the United States because the impact of more accurate, frequent and independent valuations in reducing the capital financial institutions must allocate to the asset class is so dramatic. Similar benefits will accrue to holders of infrastructure and private equity investments as well.Reliable valuation data also cuts the cost of fund accounting or calculating the Net Asset Value (NAV) of a fund. If the cost of the NAV is borne by the fund, it lifts returns. If it is borne by the management company, it widens margins for general partners (GPs). With independent valuations, it also becomes easier to post fund units as collateral for margin loans.In the United States, the Decentralised Autonomous Organisations (DAOs) that issue tokens to raise funds and use smart contracts to service the tokens are now obtaining formal legal recognition. Three states have granted DAOs legal status and the leading jurisdiction for publicly traded corporations (Delaware) is expected to follow suit.