Organisation for Economic Co-operation and Development
OECD Forum on Blockchain, September 2019
High-level Policy Panel Discussion on Central Bank Digital Currencies
Remarks by Mario Marcel, Governor of the Central Bank of Chile
Disruptive technologies in Finance or "FinTech" are transforming the financial industry landscape, challenging
traditional business models. These technologies have been able to address some gaps in the traditional financial
industry that can be grouped into five categories: Access, Speed, Cost, Transparency, and Security.
Leveraging on open-source technologies and Smartphone penetration, FinTech has seen fast adoption, disrupting
all areas of the financial services such as payments, investments, savings & lending, insurance and risk
management.
One example of the innovation across different financial services is this research framework from the World
Economic Forum. Fintech innovations are identified and grouped into clusters, which in turn are a result of
innovation triggered by common themes that cut across financial services. These themes are enabled by different
technologies.
The main takeaway here is to understand the potential of these technologies to innovate across all financial
services and have a visual image of how this is reshaping the financial services. As this reshaping is taking place,
the policy makers, regulators, and supervisors need to understand the forces driving this innovation wave, in order
to assess the risks and opportunities of these new business models.
Our Central Bank understands that a new ecosystem is being developed and has responded to these new
challenges with the 2018-2022 Strategic Plan, where the disruptive technologies are one of its five main focuses.
Specifically, we have put in place two initiatives to address FinTech challenges: the Technological Observatory and
the TechLab.
The Technological Observatory seeks to play an active role in financial technology research, assessing potential
impacts, risks, and policy actions, as well as to strengthen coordination with other institutions. During 2018, the
Observatory's work focused on understanding the various business models, risks, and opportunities of the
domestic FinTech ecosystem. Therefore, communication with the FinTech industry has been intense through
articulated meetings, consultation, informal briefings, seminars, workshops and publications. Internally, the work
has focused on agreeing on the areas in which we need to build knowledge.
The areas of interest are open banking, SupTech, securities and cash settlement of the CBC's operations using DLT,
cryptoassets from a financial stability perspective, digital payments (retail and cross-border, mainly), CBDCs,
cybersecurity from a financial stability perspective, and Big data and digital economy.
On the other hand, the TechLab's objective is to implement in an experimental stage disruptive technologies that
impacts cross-cutting processes within the CBC, such as cryptocurrencies, big data, artificial intelligence, and the
like. Currently we are experimenting with blockchain and machine learning techniques. Anyway, the TechLab was
started only three months ago and we are also exploring initiatives with other technologies such as APIs.
Let us talk a little bit more about the technology that brings us together, blockchain. This technology has several
use cases for a central bank: (i) Central bank digital currencies; (ii) Financial Market Infrastructures such as
largevalue payment systems and trade repositories, or more generally RegTech or SupTech implementations; (iii)
Issuance and lifecycle of financial instruments; and (iv) opportunities of optimization of back office processes, such
as settlement of operations and reconciliation.
Notwithstanding the potential this technology has, there are some yellow flags that need to be addressed:
a. DLT technology is still on an early stage and there might be unidentified drawbacks. Smart contracts that
can build on top of this technology make it significantly more powerful, but there is little experience on
how this works in practice.
b. Borderless technologies raise concerns in regulatory compliance across regions. Coordination and
information sharing may be especially relevant.
c. Proof of Work (PoW) consensus protocol is slow and needs intensive use of energy. Other consensus
protocols have limited use at this point: Proof of Stake or Proof of Authority.
d. Regulatory gaps may arise: identifying theses gaps is a central point in the exploration of the technology.
Therefore, we need to understand this technology in order to embrace its benefits and mitigate the risks that
some use cases may involve.
With that in mind, we started a Project in collaboration with our local Central Securities Depository (CSD). This
project explores the feasibility of issuing bonds in a blockchain platform, and managing the whole life cycle of the
bonds in this platform. Hence, settlement of primary auctions and corporate actions are done in blockchain.
First, we discussed a conceptual model that would be a better fit to our regulatory framework. Secondly, two use
cases were selected and implemented as a proof of concept (PoC). Dummy versions of our real systems simulated
interaction with the DLT platform. Finally, a report with our conclusions will be released in November, once the
PoC is completed and possible corrections of the conceptual models are included.
Having several other use cases that we could have implemented, why did we choose this one? The most important
reasons are: (i) duplicity of ledgers in current systems needing reconciliation periodically; (ii) more than one entity
access and write on the ledger, even though this conceptual model only had the Central Bank issuing, this model
was conceived to be used by other primary issuers (this is where the business model makes more sense!); (iii)
opportunities in optimization of settlement processes for issuance and corporate actions; and (iv) to study the
feasibility of this technology (as an alternative) for the renewal of the current systems that manage our issuance
and the lifecycle of our bonds.
As a consequence of our first hands-on experience with this technology, some questions which are still
unanswered were raised during the process:
a. How could this primary market be integrated with the secondary market? Could this same model be
useful?
b. There is the need for further analysis of our legal framework and identify possible gaps (the PoC scope
only has a high-level legal analysis).
c. When will this technology be mature enough to be considered as an alternative for critical systems?
Now, I will narrow the topic of blockchain to Central Bank Digital Currencies (CBDC), which is the focus of our
panel, and talk about the motivations, benefits and concerns.
To begin with, it is important to understand that CBDCs are not new, and Central Banks have been issuing CBDCs
since the first RTGS systems were around. These are the commercial banks' reserves held in the RTGS systems.
Even though this form of CBDC is not blockchain based, it is important to mention that the CBDC concept is not a
novelty.
That being said, the central banks need to have a clear motivation to issue a CBDC. These motivations will be
different and therefore the CBDCs will be different in their design, benefits and concerns.
One way of categorizing CBDCs is by their access: general purpose, or retail, and wholesale. For retail use, the
motivations in emerging economies are mainly to reduce cash in circulation, or promote electronic payments,
foster financial inclusion, and reduce informality and tax evasion. On the other hand, the motivations for
wholesale use are mainly efficiency and security.
We could also mention cross-border payments as a motivation for either of the two categories as well.
In terms of the benefits, I can mention the following:
a. Some research indicates that DLT may enhance market efficiency. DLT registers based on real user
identities can improve competition, price transparency and liquidity.
b. Crisis management around the Zero Lower Bound. In a world of low real interest rates, the impact of
unconventional monetary policies, such as QE, nominal GDP targeting and forward guidance, appears to
be limited (Blanchard, Dell'Ariccia and Mauro, 2013, Gagnon and Sack, 2018). Fixing negative nominal
interest rates in a flexible way could improve the Central Banks' toolkit (Rogoff, 2019). However, there
are some drawbacks. The general public could interpret negative interest rates as a new tax and probably
legislators would restrict it (Rogoff, 2019). Also, price and wage rigidity can persist, due to
habitconsumption, market power, organizational inertia, information frictions.
Continuing with the benefits:
c. In a world with a widely used CBDC, commercial banks could be smaller/less systemic. CBDCs can give
central banks more intervention tools and reduce the risk of runs (Kumhof and Noone, 2018).
d. Transparent balance sheets can make it easier to unwind troublesome financial institutions and divest
their assets.
e. Monetary policy channels in a world with CBDCs may be faster and more powerful. Today monetary policy
works by affecting the balance sheets of banks and some financial intermediaries, which do not pass on
all the rate changes to final users due to market power and other frictions. If central banks can reach out
to more and more agents (businesses, households), then their role will become ever more central and
effective.
Lastly, use of CBDCs could be explored as a more efficient alternative for remittances.
In Chile, immigration has had a sharp increase in few years. As in other parts of the world, they face high costs for
their remittances when using traditional methods based on a structure of correspondent entities. An alternative
option that is being used, although because of its nature is not possible to have detailed information, are
remittances based on cryptoassets. While these remittances may be faster and even cheaper, they are outside of
the regulatory perimeter and thus their customers are exposed to several risks (counterparty, liquidity,
operational).
The cross-border use of CBDC would reap the benefits of crypto-based methods, without their risks. Certainly, this
would require coordination between the central banks involved.
•
Cross-border use of a CBDC may be explored as
a more efficient alternative for remittances
A wholesale
CBDC may have
• Remittances using a structure of correspondent
institutions are expensive and usually take time
several benefits
to settle. On the other hand, crypto-based
alternative may be more efficient, but they are
unregulated and have risks.
•
The cross-border use of CBDC would reap the
benefits of crypto-based methods, without their
risks. It certainly would require coordination
between the central banks involved.
On the other hand, some concerns have still not been fully addressed:
a. Development and management costs of a CBDC, specially a retail CBDC that is available for a large number
of people, can be substantial. Technical capacity is still not mature enough, and risks of cyberattacks are
exacerbated.
b. The level of anonymity that the CBDC should have is still a matter of discussion. In digital networks it can
be easy to identify anonymous users due to their links to non-anonymous nodes, such as large companies.
The public is already frightened by how much sensitive individual information is stored (NSA, Uber,
Google, Facebook...), it is possible that a CBDC could create anonymity concerns.
c. Some of these concerns end up in a discussion about which is the optimum design features: anonymous
or pseudo-anonymous? Interest bearing? Guaranteed convertibility of bank deposits into CBDCs?
d. Finally, there are some additional risks to take into account: Reputational risk if CBDC is not widely
adopted by the public, or if privately issued currencies gain more traction; Financial exclusion of the
"nontech" persons?
Even though many CBDC experiences are from developed economies such as Canada and Sweden, there are also
some experiments in developing economies such as China, Colombia and Uruguay. For emerging economies,
where persons tend to be financially underserved, is CBDC the most efficient way to solve this problem? Other
alternatives, such as fast payments solutions, can be evaluated.
In conclusion:
a. Blockchain technology implies opportunities and concerns that should be carefully addressed: Which is
the goal of technology adoption?
b. This is especially important in the case of CDBC: financial inclusion, response to new forms of e-money,
facilitate wholesale payments, faster payments, cross-border payments?
c. CDBC does not necessarily need blockchain.
Our understanding is that DLT or Blockchain technologies are more useful when several participants of a
given system need to have access to a ledger of information and/or when participants do not necessarily
trust each other (and therefore proof of work requirements make the register almost immutable).
However, when a Central Bank issues its currency -- either in physical or digital format -- trust should be
a given. Also is far from obvious that all market participants should have access to sensitive information
such as all transactions in which the CBDC was used. In fact, the pilot program of Uruguay ("e-Peso") was
not blockchain-based.
d. There are different policies being explored and there is no "one size fits all" answer.
e. Nevertheless, countries could largely benefit form sharing their experiences.
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Central Bank of Chile
September 2019
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