As I have said in my book, and in multiple interviews, it is not inconceivable that every bank in the world will one day replace their deposit business and issue and compete on issuing their own stablecoins. I have said this in chapter 8 of my book that the product that is most ripe for a transformation is the humble deposit account.
The Monetary Authority of Singapore (MAS) is approaching this possibility in a roundabout manner, by pointing out that they are trying to streamline the payment “processing” problem, instead of simply calling their initiative a bank-issued stablecoin. But by releasing the “tokenised bank liabilities” guidelines on the same sheet as for stablecoins, the MAS is treating both as similar types of tokens, except that one is issued by banks and the other by anyone else. This also explains why JP Morgan was invited to participate in Singapore’s pilot projects, because its Onyx project is instructive for Singapore banks.
By “outsourcing” the issuance of these stablecoins-by-another-name to the banks, instead of issuing its own retail central bank digital currencies (CBDCs), the MAS is avoiding the problem of “disintermediating” the banks that retail CBDCs would have caused. Also, the onus will now be on the banks to invest in their own marketing and acceptance infrastructure for issuing their own “tokenised bank liabilities” (stablecoins), which are big determinants of the success of any rollouts.
The governor of the central bank of the Bahamas, which has already issued its own retail CBDC, told me that the banks in his country, mostly foreign, just dragged their feet in supporting him, which guaranteed the failure of retail CBDCs in his country. Credit cards are a massive source of income for banks around the world, and “tokenised bank liabilities” are not even starters, so it’s success is not a given. Not many remember that the Singapore banks dragged their feet for over two years when PayNow, the faster pay initiative, was first proposed.
Despite everything being said about “inclusive finance” at conferences, nobody in finance has the slightest intention to bring the cost of payments or credit down for the consumer. The industry is not even structured that way. Every single venture capitalist funding every single payment fintech wants to eventually dominate and monetise their business. Even consumers enjoy their mileage points. This industry is just full of self-interests masquerading as good intentions, but that’s another story.
Given that the Bank for International Settlements (BIS) general manager, Agustín Carstens, made the same points in his comments in Washington DC at about the same time as Ravi Menon made in his speech in Singapore in November, it is clear that central bankers are mostly singing from the same song-sheet, that the focus should be on wholesale CBDCs and not on the retail CBDCs that was originally the rage. They have re-focused several times in the past two years, as they try to figure out where to take this wonderful CBDC solution in their hands looking for a problem.
There are variations still between the BIS members. Christine Lagarde of the European Central Bank does not agree with Ravi that CBDCs should be “programmable” and she had no clue what the term “atomised money”, which Ravi is fond of using, meant. Also, Hong Kong’s wholesale CBDC project called mBridge, is programmed on a real open source platform called Ethereum Solidity, while Singapore’s Project Dunbar is compiled in Corda, chosen precisely because it can only operate in a closed “permissioned’ manner where the MAS can pre-qualify every participant in a transaction.
It is also my view that if the MAS approach goes live, it will force China to throw its five-year-old digital yuan “pilot” project back to the drawing board. China started with a comprehensive CBDC pilot way back in 2018, and it is still in a “pilot” mode today clearly because they are afraid of unintended consequences. I expect China to announce that digital RMBs will be issued by “approved banks” eventually, and not as a retail CBDC by the central bank as it is now, and that the People’s Bank of China (PBOC) will refocus on managing its own wholesale money (“to be in accordance with BIS recommendations” they will say). Let’s see if I am right on this one.
I accept Ravi Menon’s idea that central banks should issue some form of digital currency, which in the case of Singapore is a wholesale CBDC, and that such CBDCs will only be a small part of backstopping the overall payments landscape. They have really thought it through very well, even if, by their own admission, they have no clue if this model can scale. Then there is the problem of unintended consequences, so I do commend the MAS for being so very bold and original in its approach. Everyone’s watching.
But I don’t accept his view that cryptocurrencies have failed as a form of payments. Carstens says the same thing. These central bankers are too quick to declare the demise of their nemesis, crypto, with no regard to its widespread global acceptance, usage and the massive number of applications being continuously developed and rigorously tested every day by real users. In fact, all the CBDC initiatives we see around the world today are merely struggling to be good copies of the breakthroughs in crypto technology.
That is also why all these central bank “pilots” are taking so long. It strikes nobody to ask why some of these central bank pilots have been on since 2016. In one sense they will never end. The best cryptos are already programmable, interoperable, 24X7, fully networked and run beautifully on their own liquidity, while CBDCs have none of these yet. Singapore tried very hard to avoid taking the “permissionless” approach that is de rigueur in crypto, but it appears that they are now warming up to it because its the crypto technology that sets the standard.
The most important existential feature of crypto technology is that it is the foundation of a free and libertarian society. Here, it must be understood that crypto and central banks sit on opposite ends of the philosophical spectrum in the future of money. All the nation-states in the world sit somewhere on the continuum between conservative and liberal. Central banks like the MAS imagine that they will be able to tame the technology and make it work for their carefully curated story, which they have done very well so far. In their speeches, central bankers make it sound as if they have won. The story ain’t over yet.
Central bankers also condemn the volatility of cryptocurrencies, but it is exactly this volatility that is a daily judgment on their utility relative to everything else that is changing in the economy, while central banks draw from taxpayers money to recreate all the same features in a way that they can control.
More broadly, central bankers are quite disrespectful of the ability of free society to find its own way into the future with or without them. The fact that there are 420 million holders of cryptocurrencies today should say that something is happening in society as the world becomes increasingly networked. This tension between the libertarian marketplace and highly regulated ecosystems is a universal theme that is not just about finance. The answers belong to neither and to both at the same time. I just cringe every time central bankers make speeches that sound as if they have the last word on the matter, which they don’t. We are all learning together and that spirit of mutual enquiry is essential in creating a future that the common man can accept.
In any case, the MAS has kept enough of an open view to respond accordingly as the technology changes. Soon, anyone can issue a stablecoin, and regulators like the MAS have set some clarity in their tentative path on which all of us can find our way. The Singaporean banks will hopefully scramble to add features to their “tokenised bank liabilities” to compete with private issuers. Not every bank will be good at this, and it can affect the core deposit profile of some banks if they are not able to launch their “tokenised bank liabilities” with features that customers want.
This whole “tokenised bank liabilities” initiative does risk falling flat on its face if the overall payments infrastructure is fragmented and confusing. At the end of the day, it is the free market that should decide what will work and what will not.
In my book, I said that innovative breakthroughs in finance happens in periods of extreme crises, and not out of an engineered intent as it seems so beautifully executed in Singapore. The US especially is fully capable of changing the rules on everybody else, as they did in 1971 when they simply walked out of the gold standard. For now, US treasury officials also imagine they too can introduce wholesale CBDCs just to get past the need for approval in Congress for a retail CBDC, but watch the pushback they are going to see from the ground and then you will understand what I mean by the force of libertarian values. Having said all that, it is really commendable that the MAS does keep its friends close and its enemies closer and the approach it is taking does give as many different players to be domiciled in Singapore as the future is being crafted. It should also allow the ordinary Singaporean to take all the risks inherent in experimenting with the different options even if it costs them their life savings because that is what a free society is.
My friends in the new digital-only banks will do well to pay attention to these developments instead of banging their heads against the wall of the current deposits game which they cannot and will not win. Every digital bank should start issuing its own stablecoin and compete on features, not interest rates, while they are still small and nimble enough to navigate through new technologies instead of trying to build the same old-fashioned balance sheets that the giant incumbents are not going to yield.
As I have said in my book, if the product does not change, all the so-called talk about innovation in finance amounts to nothing, and that the product that is most ripe for change is the humble deposit account, which is what the MAS is pursuing right now.
Click below for the MAS press release on the “tokenised bank liability” and “stablecoins” and click here to read the table of content of my book where I have discussed the issues quite deeply.