Future of Finance


 A thousand dApps will bloom on the solid foundations of CBDCs

[FEB 2023]

A Future of Finance interview with Ricardo Correia, Head of Digital Currencies at R3.

Dominic Hobson 00:14:  Hello, I’m Dominic Hobson, co-founder of Future of Finance, spoke to Ricardo Correia, head of digital currencies at R3, where he leads a team that is working with central banks and financial institutions that are exploring CBDCs and fiat-backed Stablecoins. R3 is working with a number of central banks on CBDC projects, including Project Dunbar Project Jura, and the eKrona with the Swedish central bank. Ricardo, thanks very much for joining us.

Ricardo Correia 00:44: Thanks, Dominic. Lovely to be here. Thanks for inviting me. 

00:50: Should Stablecoins have access to settlement in central bank money via RTGS systems?

Dominic Hobson 00:50: Now, a lot has obviously happened in the recent past, but the issue is of what might be called respectable Stablecoins, such as Circle’s USDC Stablecoin, see themselves essentially as issuers of commercial bank money. In line with that, they would like to enjoy the same status as banks, and thereby have direct access to central bank money through an account at the central bank. Is it your view that they should be given that access?

Ricardo Correia 1:18: An interesting question. I think we’re seeing a few of those models emerge. I mean, the most obvious one is Fnality, coming out of the UK, where they have, after a long process, been granted an omnibus account at the Bank of England within the RTGS (Real Time Gross Settlement system). So it looks a little bit like a synthetic CBDC, if you like, or a private, or rather regulated, Stablecoin. So the model is certainly emerging. We’re not sure necessarily whether the retail side … And it’s important, obviously, to bifurcate what a USDC is doing versus a Fnality or even [inaudible] or, more recently, one being more focused at the wholesale end, and the other being more positioned within retail. That suggests that the retail end … What does that do? Does that disintermediate commercial banks? You’ve got privately issued money into the retail network versus a Fnality and Partior and others that are looking at the wholesale end versus the retail end. So, yeah, we can certainly see that emerging.

02:28: Should Stablecoins that get into trouble be underpinned by central banks as Lenders of Last Resort? 

Dominic Hobson 02:28: Now, algorithmic Stablecoins. We saw back in May the collapse of the Luna/ Terra Stablecoin. A number of other algorithmic Stablecoins have also come to a sticky end. Now, the question that occurs to me here is: it seems pretty obvious that algorithmic Stablecoins are an experiment which will be put on the backburner for quite a while now and are almost certainly never to be brought within the scope of regulation by central banks. But if we think about Stablecoins as a whole, it can’t be long before we see one that is Too Big to Fail. That could be an asset-backed one just as easily … Probably not quite as easily … But it could be an asset-backed one that could fail in the same way that an algorithmic one does. So do you think that the decentralised finance (DeFi) markets, which are the main users of Stablecoins, actually need a Lender of Last Resort function? And if so, should that be a central bank? Or should it be something different from a central bank?

Ricardo Correia 03:32: Yeah, great question. So I think it’s important, again, to look at DeFi through perhaps two lenses. So today, we see a lot of public DeFi. And by that I mean, most of the DeFi protocols and applications we see sitting on Ethereum, perhaps 95 per cent of them today. Maybe there’s a bit of corrosion, with others jumping into the space. But one of the opportunities that is emerging is this notion of institutional DeFi, where you have private networks that are emerging within the institutional space that would allow DeFi-type products and services to be offered within a safer network, so to speak, where you’ve got the right controls, you know who the actors are and you’ve got the right AML [Anti-Money Laundering], KYC [Know Your Client]. And you have players and actors that are offering DeFi-type services – lending, insurance and so on, but with a network that’s known and controlled, and with a form of money that is safer, so to speak. So, yeah, perhaps there is .. maybe we call that institutional DeFi [side] … Certainly that is something that the commercial banks are looking at. This seems to be a much safer environment to participate, certainly, in [the] institutional space. But on the public space, I think, one of the draws into DeFi is volatility. You’re trying to leverage and make money on the ups and downs of the money that’s being used and lent and insured and so on. So, is there an opportunity for a safer form of money within that space? Perhaps. Certainly that was the case in the beginning of the year. There was lots of interest in the public sector [in] looking at issuing into DeFi and into the public space. Of course, that’s changed significantly over the last six to nine months. So notionally it makes sense. Will we get there? I’m not quite sure with the landscape the way it is right now.

05:39: Is a central bank organised as a Decentralised Autonomous Organisation (DAO) in which citizens have an equity stake as well as a liability to back central bank money with their taxes, a viable proposition in the future if not now?

Dominic Hobson 05:39: If I’ve understood you correctly, what you’re saying is that, if commercial banks start to issue Stablecoins, they are regulated already. And, therefore, they would naturally come within the scope of the Lender of Last Resort functionality of a central bank  – the central bank that regulates them. But central banks of course are not just Lenders of Last Resort. You began to hint at this. They execute all their other functions – controlling the money supply, maintaining financial stability, and indeed, ultimately operating the payments infrastructure, the RTGS system. They do all of that through commercial banks. But if we start to look further into the future, and think, `Well, perhaps commercial banks don’t continue to exist in their present form.’ They start to get replaced by entities which I suppose are already familiar, in a way, from the DeFi markets – they’re perhaps decentralised autonomous organisations [DAOs]. They’re very different from the public companies that are funded through insurance-backed deposits from retail investors. So I’m wondering, here, whether a central bank could, if the world starts to evolve that way, start to change their own nature. They themselves perhaps become DAOs. The CBDC itself becomes a liability of all the citizens of the country. And all the citizens of the country, in fact, have an ownership stake in that central bank. And the central bank starts to write smart contracts, which it uses to perform these functions of controlling the money supply, maintaining financial stability, operating the payments system. Do you think that idea is just too far out to be realistic on any sort of timescale?

Ricardo Correia 07:27: Yeah, it’s an interesting idea. And I think, you know, nothing’s off the table. But I’d suggest to you that …Well, firstly, it’s a great idea and makes it more appealing that the citizens would be stakeholders of that CBDC. The reality is that it’s fairly unlikely in the short to medium term. The political, legal, and policy considerations, along with some of the technical complexity, would probably overwhelm that idea. And if I turn to some of the projects that we’ve worked on, which are in that same space, [such as] Project Jura – [the] issuance of central bank money into regional networks, and that money being used by external networks in order to settle obligations. I spent a year and a half on that project, and I’d suggest a year of it, or close to [a year of it], was spent on trying to navigate the legal and political landscapes on both sides and trying to find harmony where money could be issued as a digital form and then leveraged and used as a form of settlement. So I think we’re a long way away from that. I think those ideas are really interesting. The public sector is not taking anything off the table. [It’s] looking at AMMs [Automated Market Makers], looking at DAOs, looking at private issued money, public issued money. So it’s an interesting idea, for sure.

09.00 Is a combination of CeFi and DeFi possible, in which a centralised central bank supervises a decentralised banking industry, possible? 

Dominic Hobson 09:00: Is there, assuming that idea is a little too far out to overcome all those political and policy considerations you’ve referred to, a compromise here? What might be called, in that famous oxymoronic phrase, CeDeFi, in which the central bank continues to operate, in effect, a centralised monetary policy, while the banks go down this DAO [route], issuing a private money onto possibly public as well as private blockchains. And so the central bank doesn’t become a DAO but all the banks become that, but it is able to supervise and regulate the system, in effect by acting as a filter on what sort of financial institutions are active, what sort of products they’re developing – dApps, if you like – and that way they control access to central bank money by remaining centralised themselves, but also encouraging a tremendous amount of innovation and experimentation to go on in the financial services markets. So it’s a camel, a combination of the centralised and the decentralised. Do you think a compromise like that is viable?

Ricardo Correia 10:13: Yeah, I do. I think we’re seeing these bridging type currencies. Certainly within the exchanges you’re seeing Stablecoins as a way to minimise volatility, as a bridge on and off. I think certainly within this oxymoronic kind of CeDeFi, as you mentioned, I think there is an opportunity for central banks to certainly participate in trying to bridge traditional finance with distributed finance. Andrew Bailey [Governor of the Bank of England] said just recently at a BIS [Bank for International Settlements] forum that the central banks were designed to encourage innovation, but encourage it in a safe way. And so there certainly seems to be appetite. Some of the projects and the work that we do, is exploring that opportunity with the central banks.

11.04: If the banking industry did embrace a fully decentralised, Web 3.0, DeFi-style future, how would central banks be able to retain control of the financial system?  

Dominic Hobson 11.04: So in a way, it might, I suppose, provide a useful experiment for central banks to build an infrastructure for a kind of decentralised CBDC. But from what you’re saying, it sounds like it’s a way off. So let’s imagine that the financial service industry – the banking industry  – does go down that fully blockchained, Web 3.0, DeFi path? How would a central bank operate a CBDC in that environment? How would it retain control? How would it retain monetary sovereignty?

Ricardo Correia 11:42: That’s a great question. So if we look at Web 3.0, Web 3.0 is a combination of the emerging technologies. Some of them we look at, and we’ve been looking at for a while – [self-] sovereign identity being one of them. In my mind, Web 3.0 is about bringing your identity to the Internet versus the Internet holding many, many different forms of your identity. And so, getting self-sovereign identity right, the ability for you to arrive at a door, show your identity, be allowed in, and then put your identity back in your pocket, so to speak, and then once you’re through the door, you’re a trusted actor, I think that’s an important aspect. But to your point … Once you’re in this world, Web 3.0, different experience, you’re shifting the power, so to speak, back to retail. And now the retail [consumer] not only has his identity but has different forms of money in order to pay for goods and services. I think the trick is going to be to convince retailers to use one form of money versus the other. And so the big question around retail CBDC is, well, what’s the value? What’s the value proposition above all the various payment instruments and the payment options that we have today? Why would Dominic use the CBDC versus another form of money that he’s been using for a long time? So I think there is opportunity there. There’s a whole bunch of things that we point to such as the cost of CBDC; the fact that your CBDC is a bearer asset; [that], should something happen, you can go back to the central bank, or the issuer, in order to make the claim and so on. But in my mind, there’s more work to be done in trying to ensure that the value proposition of a CBDC, certainly in a Web 3.0 space, has value for the retailer. Today, we see CBDC having clear value within wholesale. And we’re working through the retail opportunity at the moment.

13.51: Is a CBDC a better guarantor of a fully decentralised financial future than a Stablecoin, because it is not constrained by the need to hold collateral? 

Dominic Hobson 13:51: It’s an interesting point you raised there about the `market will decide’ its adoption by merchants and by consumers as to what’s the most convenient way for them to pay and be paid. And it’s interesting because, on the face of it, if you were thinking about this without ever referring to practice at all. You would assume that a CBDC would drive Stablecoins out of business. And the reason I say that is because when you look, even at the asset-backed Stablecoins, let alone the algorithmic ones, they all have these rather curious collateral arrangements. They’re not backed one-to-one by cash deposits. It would be madness if they were because they couldn’t make any money. There’d be no point in setting up a Stablecoin. They can’t be [100 per cent cash reserved]. They have to invest in treasury bills; they have to invest in commercial paper and other money market instruments. Being 100 per cent reserved would drive them out of business at the outset. Now a central bank doesn’t face that limitation. So a CBDC, on the face of it, is always going to be superior to a Stablecoin. And I wonder if the real DeFi enthusiasts, the Satoshi Nakamoto ideologists, if you like, the true libertarians, shouldn’t actually embrace a CBDC as a better way to underwrite the decentralised financial future which they have long anticipated, rather than fretting about loss of privacy and central government control. I mean, is a CBDC a better solution than a Stablecoin of whatever kind, to fulfilling the Nakamoto dream, in your view?

Ricardo Correia 15:31: Wow, that’s a great question. Super-controversial, I think. Just recently, looking, certainly at Sibos, maybe three weeks ago, [there was] lots of controversy around the CBDC. Of course, surveillance is a big question. Being centralised. Rebuilding the world as we have it today. Really asking hard questions around the value of a CBDC versus others. In my view today, I think there’s a co-existence story. I think there’s value in exploring the co-existence of both public and private money. Of course, today, we have that. Very few people would argue that. If you are sitting around a dinner table at a dinner party, and you ask folks whether they know the difference between the cash in their pocket and the balance on their Barclays app, [whether they know] where the difference [lies] between one form of money and the other, [they would not draw the distinction between central and commercial bank money]. So I think there’s a bunch of education that’s required so that people actually know the difference between a Stablecoin issued by a private entity versus a CBDC issued by a public entity – a central bank. And then, you know, do you really care as a retailer? So there’s lots of different forms of money today on the private side. I’d suggest to you that there’s more work to be done from the central banks, in order to convince the retail end that there is an option for them to use that as a safer form of money. I’d say to you also, on the Stablecoin side, how do we get to a point where there is more trust around the collateral? Algorithmic-backed, asset-backed. There’s a bunch of things that are emerging. Proof of reserves, proof of ownership, real time, proof of collateral, proof of balance. There’s a bunch of technical things we can do in order to provide more safety on the Stablecoin side. And then there’s manual processes that we could think about auditing, and so on. That’s harder to do. But I’m pretty keen on exploring the zero proof of backing, proof of balance, proof of collateral, real time proof of collateral. But there’s always windows – margins where you can be exposed. So, there’s still more work to be done there. But I think, over time, it’ll be harder and harder to understand which form of money is safer, certainly at the retail end, so more education is required.

Dominic Hobson 18:09: Just to be clear on what you mean by windows where you might be exposed. This is where you think you bought a Stablecoin which is backed by this type of collateral, but of course it’s changing all the time, so by the time you get to sell it, it’s a different form of collateral. Is that what you mean by windows?

Ricardo Correia 18:25: Yes. You’ve got some Stablecoin that you think is backed one-to-one by the dollar; you’re holding that for a day; the next day, it’s backed by half a dollar and some HQLA [High Quality Liquid Assets]. And that’s not what you want. So how do you make sure that you’re always aware of what the backing is, so that your risk profile is reduced and you’re managing your risk? It gets harder, though. So you’re using a Stablecoin, just for a few seconds, perhaps, in order to do a transaction. Can you guarantee that the backing that that Stablecoin has when you are using it to execute a transaction is the same as when you bought it? Are there ways and techniques that we can say, `Hey, Dominic is going to buy this Stablecoin, it’s one-to-one backed by a dollar, and it will remain one-to-one backed by a dollar, guaranteed for the next 60 seconds’? Can we reduce the time windows? Today it’s very, very hard to do that, of course, but that’s the idea.

19.27: Can Stablecoins reach the point at which merchants and consumers use them because they trust the blockchain technology and techniques such as Zero Knowledge Proofs and Secure Enclaves and feel secure enough not to care about the issuer?

Dominic Hobson 19:27: And do you feel confident in the technologies, the secure enclaves, the Zero Knowledge Proofs, i.e., trust the technology, not the institution that’s issuing it? Are we – I was talking about this yesterday – [right to trust the technology]?. Bitcoin hasn’t been hacked since it started but it’s still not fully trusted. Consumers are not ready to trust Bitcoin. They’re not ready to trust secure enclaves and Zero Knowledge Proofs either. What sort of timescale are we looking at before we can start saying merchants and consumers are comfortable with this form of payment because they trust the technology – they don’t care about who issued it?

Ricardo Correia 20:08: Maybe a couple of generations, Dominic. As I think about my kids, and the way that they use technology and the trust that they have [in it], maybe it’s one or two generations away. We’ve been tainted by Mt Gox, and a whole bunch of other things that have given us that perception. But just turning to Zero Knowledge Proofs, that holds tremendous promise. I think there’s a lot of research going on there. But it’s quite early. Still a bit slow, but tremendously exciting to think about how we might bring that to bear. On the other hand, today, we have Secure Enclaves. It’s been a lot of work in securing those enclaves. Today, I’d suggest to you that there’s more trust in the Secure Enclave opportunity. We’ve done a lot of work with central banks to secure the back chain. So, in a retail space, how do you ensure that the payments that Dominic is making on the CBDC are private and anonymous and not visible to anybody, including the issuer? And so there are techniques in order to ensure that, but it does require the use of a Secure Enclave. I mean, technically it works. But there are still limitations, of course. So when do we get to a point where you trust the tech versus the human? I think we’re seeing more and more examples of human actors not doing what they should be doing. The technology as well, to your point, it hasn’t been hacked since [it started in] 2009. So I’m not quite sure where that inflection point is. But it’s probably a little bit further out than you and I would like – or expect, rather.

21.49: Is it possible to envisage CBDCs bridging not just the traditional and the digital markets but making markets of all kinds interoperable by central banks making CBDCs useable on multiple networks? 

Dominic Hobson 21:49: I was just musing on the back of your anecdote there about people at dinner parties not understanding that the notes and coins in their wallets are central bank money but their bank deposits are commercial bank money. Isn’t it ironic that we worry that when that central bank money gets digitised, as opposed to being physical, we have a surveillance and loss of privacy problem? But it made me think that actually CBDCs – certain CBDC designs – could form a natural bridge between the traditional financial markets, the centralised financial markets we have today, and the decentralised financial markets, the innovative markets which we’d like to see come into being tomorrow, because you could use central bank money in digital form in both markets. So it becomes a kind of a bridge between the old world and the new. That’s a way in which the CBDC could actually promote and sponsor innovation, in much the same way that Stablecoins have made DeFi possible. Do you believe that?

Ricardo Correia 22:59: I do, yes. On the surface of it, I think it makes a lot of sense. And there’s been a lot of work, certainly this year, around exploring that opportunity by the public sector. Can a central bank issue a CBDC into a private network or a wholesale network, and then have that money distributed into DeFi networks? Of course, that raises a whole bunch of questions. Capital flows. Security. Identity. The use of that money not being well controlled. The controls that are put on the money on the wholesale network carrying through into these public networks. So there’s a lot of technical considerations. But at the surface of it, it makes sense. Today, you’d argue that money is issued by the central bank into the wholesale network; the commercial banks make that available to Dominic and Ricardo and we then go and draw that money out of an ATM or what have you, and then [we] go and use that money wherever we like. So do we allow that same paradigm? And how do we ensure that … In certain countries, they don’t really mind that you take the money out of the country, so capital flows are fine. In others, there’s real hard controls. So there’s no one single brush for all of this stuff. I think, notionally it makes sense. There are techniques such as whitelists, and so on, to help mitigate some of that. But, yeah, I think there is certainly an opportunity there. The one thing that will unlock them, that we’ve been exploring, is interoperability. So how do you ensure the interoperability of money from CBDC networks into DeFi networks, from sovereign networks into public networks, and so on. So interoperability in 2023, although it’s been important over the last few years, I think it becomes super-critical in 2023. To really kind of double down on interoperability for these opportunities to be more possible.

Dominic Hobson 25.00: What you’re really saying, when you’re describing interoperability between CBDC networks and DeFi networks, is that it actually makes the innovations that are going on in the DeFi markets much more accessible. Because it feels safer for consumers, for merchants, for companies generally, to access those DeFi protocols. It’s much simpler, apart from anything else, than going via Stablecoins, which is what they have to do today, where you’ve got that complex on and off ramp route between your fiat currency bank account and a Stablecoin on a blockchain network. It’s pretty off-putting for people. So ,actually, CBDCs interoperable with those [networks] will probably help those markets grow. I wonder if that’s a role which central banks want to find themselves playing? I think you’re saying that they do, really. They want to encourage innovation but they want it to be safe.

Ricardo Correia25:50: I’m not sure. To your point around accessibility, maybe you’re right. I mean, does it make it more accessible? Yeah, sure. To your point, there’s a bit of friction there. How do I get the cash or the payment instruments that I need in order to go and participate? And if you’re new to the space, it’s very, very difficult. But if it’s like, `Oh, look, I’ve got a bank account, and now I can transfer that into CBDC kind of tokens, and now I can use those in these networks.’ So yes, certainly, it makes it more accessible in that sense. And it makes it safer in that I know that this form of money is backed. It doesn’t necessarily make it safer in that you need to be well educated in the DeFi networks and protocols and applications that you’re getting into, right? There’s a lot of considerations there. Early days, lots of rock pools and others that you get lured into in these DeFi networks. And then if you’re not well educated, you may be at high risk. So, yes, it does allow the onboarding and offboarding much easier. It does allow you to participate. It doesn’t necessarily reduce the risk.

27.05: Can you imagine a CBDC being issued directly on to a public blockchain in the foreseeable future?

Dominic Hobson 27.05: Let’s explore a bit how a CBDC could make those protocols more accessible. If we look at what Stablecoins are doing already, they’re going multi-chain for exactly this reason. It’s obvious to them that not every DeFi protocol is going to be built on the Ethereum blockchain. So they have to become make themselves available on other blockchain protocols. And that’s an interoperability story which Stablecoin issuers are narrating, if you like. So, if we think about how a CBDC could play a positive role in accelerating that interoperability narrative, the first question that comes up is could you imagine a CBDC being issued directly onto a public blockchain?

Ricardo Correia 27:55: When the year kicked off – [by] this year, [I mean] 2022 …  I know that we’ve talked about the decline of crypto – certainly the [crypto-] winter kicking in November 2021. I’d suggest to you that even in December [2021], January [2022], it was still pretty hot, right? There was still a lot of fever around DeFi, [Non Fungible Tokens] NFTs and the crypto market was really pumping. But it was starting to plateau. I had several conversations on the public side where some of the central banks were interested in exploring the issuance of CBDC into the public servers directly, just to better understand what that would mean. What would be the levers of control that I’d have? What are the things that would be missing, in order for me to really do this? And then what would be the motivation? So it was really early exploratory. I’d say to you now that there’s less interest in doing that. As the winter has certainly kicked in and settled in, I don’t see any of those conversations anymore. But I think the question around direct issuance, maybe in a few years’ time when we get the right governance controls into the public networks – transparency, the right kind of risk mitigation controls, etc. – perhaps that will become an opportunity. What does that mean? Does the current financial landscape get disintermediated to some degree? Who knows? I’d say it’s really early. Today, the most prevalent model that we see from a central bank is the intermediated or hybrid, meaning that the central bank still expects to issue into a wholesale network and the wholesale network will then distribute that money into DeFi or the traditional space or what have you. So, it’s changed a little bit, I’d suggest to you.

29.51: If a CBDC cannot be issued directly on to a public blockchain network how can it be made useable on other blockchain networks without central banks losing control?

Dominic Hobson 29:51: Okay, so second question. Is there a way if a CBDC is getting issued, for all the reasons you’ve just described, on to wholesale, private, permissioned networks, how can you make that CBDC available onto other blockchains? How can you achieve interoperability?

Ricardo Correia 30.09: The second question is a good question. I think there’s two main approaches we’re exploring today. So cross atomic swaps, meaning that an issuer issues into their network, and the asset never leaves that network, but the ownership of the asset will change. Certainly that was the model that we explored in Jura, where the cross atomic swap allows the asset to be used to settle an obligation on another network, but the asset never moves and never leaves that network. That provides assurance to the issuer that they have full sovereign control of that asset. The other model is burning and minting, where you burn the asset on the one network that it was originally issued to, and then you remit it on another network in order to be used. And then we see other kind of other techniques around wrapping those instruments or those assets, where you might escrow the asset on the one network and  then you mint it on … So, for example, you would take a CBDC from, let’s say, a private network such as Corda, you then reissue that on an Ethereum network, but you’d wrap it in an ERC 20 token. Then you’d be able to use that. And then when you redeem it, you unwrap it, and then you release the escrow on the Corda side, and vice versa. So there’s a few ways of doing it. Each carries different pros and cons and considerations. I think the central banks, certainly today, would probably prefer the cross atomic swap. It’s safer. We know that we can control the asset. We have control of it. As the technology matures, the burning and minting might be an opportunity that they would explore in more depth. But I think there’s more work to be done around governance controls. One of the big things there, Dominic, is, [and] I use this analogy quite a bit, [is] if you bought an electric product, whatever it may be, let’s say a hairdryer, what have you, behind that it has a sticker that says if you break the seal, you break the guarantee of the product. If you tamper with it, well, then you’ve lost the guarantee of the issuer. A little bit like a CBDC. The central bank or the issuer will issue a CBDC with a whole bunch of controls and guarantees around it. Now, as you reissue this money onto other networks, can you ensure that you don’t break that seal? And if you do, you are going to lose the guarantee of the issuer. There’s a lot of work being done around ensuring that we don’t break the seals, so to speak, as these currencies move from one network to another.

32.47: Is the currency denomination of a CBDC a barrier to it being used on multiple blockchain networks?

Dominic Hobson 32:47: Sadly, I don’t have much use for a hairdryer. My third question in this area, which may be a stupid question, is whether there is a fundamental constraint on those techniques you’ve described  – the atomic swap, the minting and the burning and the escrow, which is that does a CBDC which is interoperable have to be multicurrency? Central banks have made pretty clear they’re uncomfortable about losing monetary sovereignty. Does that prevent any particular CBDC – a CBDC denominated in dollars or Sterling or euro or whatever – does that prevent it going multi-chain or are multi-chain and multi-currency totally separate things?

Ricardo Correia 33:36:  Completely. I think multi-chain [and] multi-currency are completely different conversations, certainly in the work that I’m doing. Multi-chain? We talked about different techniques to make your money portable, so that it can be issued on private [networks], move to public [networks], and vice versa. But the currency doesn’t change. It is what it is. It’s a pound, a USD or what have you. Multicurrency? We’re seeing more multi-currency networks such as [Project] Dunbar, for example, where you’ve got multiple issuers into kind of a currency network. And those multi-issuers, obviously in different currencies, which are participants in those networks can pick one currency versus another. And then in that space, we’re also seeing things like AMMs, of course, automated market makers, where you’re pairing currencies and trying to create exchanges and so on. So yes, I’d bifurcate the multi-currency versus multi-chain [in]to very different conversations.

Dominic Hobson 34:40: But to see it from the point of view of a central bank, on any one network, the Bank of England would have one node, the Federal Reserve would have another, the ECB [European Central Bank] would have a node on every network where they felt it was safe to be. Is that the world you’re describing? So they would  retain monetary sovereignty by being part of those networks and supplying their particular CBDC to people who want to use it inside those networks, but they’re always seeing what’s going on, in full control, [and so] they retain monetary sovereignty?

Ricardo Correia 35:10: Yes, that’s right. That certainly is a model. The Jura model certainly explored that, where the Swiss central bank and the French central bank obviously issued into their own sovereign networks, and then they had a node in the SDX network, in order to ensure that they continued to maintain the control of the asset ownership. At scale, if you squinted at that, you’d go, `Gosh, that’s going to be difficult to manage.’ But if you look at the world today, 195 to 200 odd countries, where do you want your money to be available? Probably not all of them. Some countries have very stringent kinds of controls around where their money is used and not. But today, yes, one of the models is where you have sovereign networks. Let’s call it a USD versus a pound. And the central banks would have their own networks, but they would have a node in each other’s so that you’d have money that could … or certainly assets and ownership that could flow between them.

Dominic Hobson 36:23: So it’d be like the central banks would be their own correspondent banks in that model? 

Ricardo Correia  36:26: Again, if you squint, you look, `Gosh, that looks a little bit like correspondent banking, but with central banks.’ And the model kind of works. It’s not a nostro/vostro, but it’s more of a wallet or a node in each other’s networks, right? Trusted nodes and trusted networks.

Dominic Hobson 36:44: But in both cases, it’s not like the currency is flowing, they’re actually sending the currency across national borders? It remains within their sphere of control? 

Ricardo Correia 36:52: Yes. One of the models certainly is the currency remains in its sovereign network. But the correspondent node sitting on the other currency network allows ownership of those assets to change.

37.09: Can CBDCs reduce or even eliminate the transaction costs (“gas fees”) associated with cryptocurrency and DeFi transactions?

Dominic Hobson 37:09: Yes, that’s a good metaphor for correspondent banking. One of the constraints on the growth of the industry, initially the cryptocurrency markets but latterly the decentralised finance (DeFi) markets as well, has been the enormous transaction costs. So do we think that CBDCs can help to lower or even eliminate those transaction costs, those gas fees, which you see in the way that DeFi markets have evolved? Or is there a technical obstacle here, which simply cannot be overcome, a constraint inside blockchain itself on speed and scalability? Or can CBDCs overcome that problem, and make these transaction costs much lower? Or even get rid of them?

Ricardo Correia 38.00: The quick answer is, `Yes.’ All the performance issues would persist, perhaps. So even if you’re paying for a transaction with a CBDC as your cash leg, you still have the asset leg on the other side. Just unpacking the gas fees, why the gas fees [are so high is that market participants are] trying to get faster transactions going so that your transaction can get processed much quicker. We’ve seen the emergence of Layer 2 protocols in order to alleviate some of that, and some of that’s gotten some good results. But a lot of work is still going on on the Layer 2s. The promise is that CBDC is much like cash, which is free. Who knows whether that persists as these things get issued? But the quick answer is, yes, you’d imagine that there would be an opportunity to reduce the amount of money that folks are paying today in the public networks using a different form of money. But, again, what’s the objective? If it is to get your transaction finalised, token-based CBDCs promise real-time settlement. So it’s a slightly different model than what we’re seeing on the public side.

39.17: How important is programmability in building the case for CBDCs? 

Dominic Hobson 39:17: That idea of paying more to settle something faster. I heard what you just said. But we sometimes forget that these digital forms of money can actually be quite dynamic, can’t they? And so if you start to think about the different ways in which a CBDC could be dynamic, you could start to have programmable CBDCs or CBDCs that are programmed differently for different purposes. So you might use one version of a CBDC to pay for your cup of coffee in the morning. You might use another version to settle your security token trade superfast. You might use a third one to pay your VAT at the point of transaction or pay your income tax. Or you might use a fourth version to get financial aid to people who are suffering because of a natural disaster, a flood or an earthquake or something. So this flexibility, this dynamism in digital forms of money, including CBDCs, means you’d have different CBDCs for different use cases. Is that a sensible way to look at this? How important is that programmability in a CBDC going to be? 

Ricardo Correia40:24: One of the biggest value propositions that we talk about, and certainly that’s being explored, is the programmable nature of monies. So money now becomes programmable. Why is that exciting? Well, today, you could say, `Oh, money is programmable. We can control payments. And you can do that today.’ If you go onto certain apps, you’re like, `Oh, look, I can send my kid some cash, and he’s not allowed to spend that in these kinds of institutions or in these companies or in these organisations, or what have you.’ But the rules are attached to the wallet, not the money. So it’s the wallet that’s controlling it. And as your money moves from one or to another wallet, you have to replicate those rules from wallet to wallet, node to node. The promise here is, of course, that the rules and the money and the asset live together. And so you don’t have this replication, you don’t have this issue of, `Gosh, I got it wrong. The one wallet allowed him to do something the other one didn’t.’ And so that’s a massive opportunity. I’d say to you that, on the wholesale side, again, it’s much easier to think about programmable money. You’re not touching necessarily the values that that money has for society. As it moves into the retail side, it’s a double-edged sword. Dominic is allowed to go to the ATM, withdraw cash and use that cash wherever he’d like. That’s the promise of the pound, right? Now, if you now have the same pound, but now it’s a digital form, and it’s restricting you, all those values are being broken. So we need to be very careful about that particular aspect. But yes, the promise is that it is programmable. You can have different forms for different things. We talk about food tokens quite a bit. We talk about the ability to have this notion of programmable money at different layers, where the central bank can provide a set of controls, and then it provides a template to the wholesale network where they can extend those controls. So that’s pretty interesting and we’re exploring that. But, yes, a double-edged sword. I think there’s great promise there. But we need to be very careful with how we implement that on the retail side.

42.45: Can CBDCs play the same role in a Web 3.0 economy as notes and coins do in the Web 2.0 economy (i.e., guarantee privacy and anonymity) and does that mean they must be token-based rather than account-based? 

Dominic Hobson 42:45: Can we talk a little bit about how CBDCs will fit into the evolution of the digital economy, generally? If we’re moving, as I think we are, from this Web 2.0 world, in which these large, data-driven corporations with free products and services in exchange for selling your personal data, towards the Web 3.0 world, where the vision is we will be genuinely private, there’ll be peer-to-peer exchanges, those will be anonymous, and it will be decentralised, not centralised like Facebook and Google. Now CBDC, on the face of it, could play the same role in that Web 3.0 economy as notes and coins do today. It’s an entirely private, anonymous exchange of value. But quite a lot will hinge upon people believing that the CBDC is private – some of those techniques we talked about earlier, Zero Knowledge Proofs, secure enclaves [are crucial]. Do you think they are sufficiently reassuring solutions to the problem of privacy for a CBDC to play the same role in a Web 3.0 economy, as notes and coins do in the in the analogue economy today?

Ricardo Correia 44.03: Again, it goes back to the earlier conversation. So education is going to be key to unlocking that opportunity. The promise is there, for sure. The three key things that I think about on Web 3.0 is, it’s distributed, it’s peer-to-peer, so [it’s] some form of a blockchain DLT; you’ve got identity, which is yours now, [it’s self-] sovereign, you’ve got control of it, which is important; and then you’ve got digital currencies and cryptocurrencies that allow kind of the real-time settlement of stuff which you’re buying out in Web 3.0.  So, on the money side, again, why would you choose a CBDC versus other forms of payment? Education is going to be important there. And then trusting the tech – back to that conversation. And how will we enable that? So it’s important also to unpack the different forms or models for CBDC. Account-based versus token-based. Again, more education [is needed] on an accounts-based CBDC. You’ve got more or less the same concerns as we have today with accounts. They are visible; they are held in institutions or in ledgers that are ultimately controlled by something or someone versus token-based CBDCs which really emulate what cash and coins, notes and coins, are today, in that it’s a token, it lives on your phone, you lose the phone, you lose your money. But do you really understand what that means? And the privacy that that might enable you [to enjoy]? So the promise is there. The technology is there. [But] I think legally, politically and educationally there’s a lot more work to be done.

45:45: Are CBDCs the right currency to settle transactions in the Metaverse? 

Dominic Hobson 45:45: The culminating point of Web 3.0 is the Metaverse, I suppose, in which you will require that strong digital identity you just referred to. But in its fully mature, fully interoperating form, people are going to be buying and selling, doing business, doing transactions, going shopping in this Metaverse. Is a CBDC the right currency for people to complete those transactions in or do you expect there will be multiple forms of payment in the Metaverse?

Ricardo Correia 46:19: Before we go there… The Metaverse versus Web 3.0 – I think we talked about this previously- so, well, what’s the difference? Certainly, in my mind – I don’t know whether you’ve been to Decentraland and other kinds of Metaverses that are emerging – [but] it’s a little bit like .. I see my son playing Minecraft. I’d suggest to you that that is the ultimate example of a Metaverse today. You know where you are; you have an avatar; you’re walking around; you’re doing stuff. And it’s a very VR [Virtual Reality] type experience, if you’ve had that, which is fun. I’m not sure whether we have everything in place today to make it really sticky. You walk around Decentraland, and so on, and it’s important that the experience of [the] Metaverse is different to Web 3.0, Web 3.0 being the technologies that might enable that, or the underlying technologies that enable identity, enable peer-to-peer and enable payments using digital forms of money versus virtual reality and other kinds of technologies that then bring the Metaverse to life. So again, you’re in the Metaverse, and you pop into a store and you want to buy an NFT. What form of money do you use? I think it’s just about optionality. I mean, you have options today, don’t you? You walk into a store and you’re like, should I pay with cash? Or should I pay with my Apple Pay? Or should I pay with my MasterCard or my Visa card? So you’ve got all these options. And, as a retailer, again, you have to get educated as to what form of money makes sense for the transactions that you’re wanting to complete. So, yes, it [CBDC] should be a form of money that’s there. But, again, education is required to say to you, `Hey, Dominic, if you use a CBDC, you can trust that it is fully anonymous, so no one’s going to see this particular transaction, versus other forms of money that perhaps would be less private.’

48:31: Do you foresee the Metaverse, as a simulation of the physical world, becoming a useful testbed for applications of CBDCs in real world economies?

Dominic Hobson 48:31: If we if we view the transactional side of the Metaverse like that, so for the consumer the question is, `What is the cheapest and most private way of paying for this NFT which I bought?’ What’s the cheapest [and] safest-to-deliver, if you like. And from the merchant’s point of view in the Metaverse, it’s what is the safest and fastest form of me receiving value from this customer who’s just bought the NFT? Does that make the Metaverse like a useful simulation of the real world to run proofs of concepts? Even pilot tests of different forms of CBDCs, do you think? 

Ricardo Correia 49:12: Maybe that’ll emerge. We’ve been talking a little bit about a global, simulated environment where we could test all these different forms of money. And maybe that’s where we get to. Honestly, today, I don’t see any of that in my universe. We don’t see any public sector organisations exploring that just yet. Although you do see a lot of private sector organisations making claims to be in the Metaverse, doing some Metaverse stuff. So it’s not too far a stretch of the imagination to assume that maybe we could get there. Maybe that would be a really good testbed. But I’m not sure that we have all the controls that the public sector would need in order to make that leap. 

49:59: Is a US dollar CBDC essential to the maintenance of the US dollar as the premier reserve currency of the global economy? 

Dominic Hobson 49:59: One final question for you, Ricardo, and it’s this. We’ve had nearly a year now of deflation, if you like, in the cryptocurrency markets and the DeFi markets, which has accelerated in  recent weeks. Some of the hype has come off the Metaverse as well. Yet we still, as we look at these new marketplaces, these new technologies, how they’re developing …Almost all the applications inside them, DeFi applications, are ultimately dollar-denominated. The world’s premier reserve currency still underpins even these most innovative products and services in financial services. So do we think … I may be misreading the Federal Reserve here, but I think they’re not that enthusiastic about issuing a US dollar CBDC. So is that, in your view, potentially a strategic mistake? So if the financial markets do move more towards a DeFi-style model, if there isn’t a US dollar CBDC available will the US dollar continue to dominate the financial markets in that new model?

Ricardo Correia 51:13: Cool. Yes, big debate. [Jerome] Powell has been very clear. We’re going to do it slow; we’re going to do it well rather than fast. Not verbatim, but certainly that’s the message. And you see the same from the UK: we’re taking this thing really slow. Just recently, you would have seen even as recently as this week, I believe, the announcement of the Fed in a project called the RLN, the Regulated Liability Network. So suddenly, we see the Fed exploring different kinds of models. The RLN is an interesting model. It allows wholesale settlement using different forms of money, public [and] private money, all mixed in one network, which is really interesting, using central bank digital money as the final form of settlement. So that’s one opportunity. The other things that we see in this – and this is Ricardo’s opinion only- [are], might the Fed not issue a domestic CBDC, but might look to issue perhaps an international CBDC in order to retain its position, or at least participate in what’s evolving as many different forms of digital money [are emerging] globally? So the jury’s out. It’s very, very early. I’d suggest to you that the Fed has been very cautious in its exploration. You see a lot of other central banks being a lot more advanced or not advanced – that’s not the word – but running as fast as they can towards this opportunity, and sometimes falling foul of certain things. So I think that, certainly for me, it’s the right approach. Take it slow. We’ve seen the last six months, even the last six weeks, being super-volatile. So who knows, Dominic? It’s very early. But many different models are out there. I’d suggest synthetic CBDCs. Again, I talked about Fnality earlier. That’s an interesting model. Certainly, the Fed I believe is looking at that as well. So, who knows? In the next couple of years, we’ll probably have a better view of what that looks like.

Dominic Hobson  53:29: Ricardo Correia, thanks very much for taking the time to share your knowledge and experience with the members of Future of Finance.