WEF’s CBDC Kuddelmuddel
Lessons Learned from the WEF Report on Wholesale CBDC and Global Financial Modernization
Somebody wrote on LinkedIn: "Hey, check this out, a very good report about CBDC!" I was very tempted to reply straight away ‘challenge accepted’ or 'au contraire... + something funny.' But then I thought I should read it first before promising any meaningful feedback. Now it's too late, but here is my feedback anyway on the new report by the World Economic Forum (WEF) examining wholesale central bank digital currency (wCBDC) and their potential to modernize financial markets.
Before we get into the details, I wanted to highlight what for me is really outstanding about the publication: the artwork by Studio Miko, according to the report. I looked them up and they list Aston Martin, Manolo Blahnik (!), and the WEF as clients. In particular, they have a cool digital globe on page 12, so here is my interpretation of that subject. Feedback, of course, is welcomed.
WEF typically raises a bit of a red flag for me because they have not rescinded their 2015 survey publication ‘Deep Shifts,’ despite its fantastic claims and creative alternative terms for something as mundane as a working group, such as the 'Global Agenda Council on the Future of Software & Society' (see 10 percent enigma).
Reluctantly, I had a quick peek into the foreword to learn:
“Central banks are modernizing real-time gross settlement (RTGS) systems – the predominant wholesale funds transfer system.”
What does "predominant" mean in this context? Yes, RTGS systems have become a favorite of central banks. However, they operate in tandem with their own liquidity-saving mechanisms and high-value private systems like CHIPs in the US.
“Non-CBDC payment instruments are arriving on the scene such as fiat-backed stablecoins (FBSs).”
Fiat? Yes, our present money is fiat money, but does this mean now that the collateral supporting the coin can't be anything other than cash? Probably not.
And finally, “Central banks, commercial banks, and financial market infrastructures (FMIs) like custodians, depository institutions, exchanges, clearinghouses, and settlement agents seek to better understand wholesale CBDC’s value proposition.”
Yeah, but custodians are definitely not FMIs! And settlement agents, for instance, are more of a specific activity in a specific context than a distinct type of organization, I think. So your local custodian could be your settlement agent or maybe your local CSD is for a foreign market.
So: is this going to be one of ‘those’ reports?
I am still hopeful because what intrigues me is that the partner from the consulting firm the WEF engaged states his functional title as 'Innovation Incubation Group Lead, Accenture' in the preface section, yet he makes a comeback towards the end as 'Global Metaverse Business Lead.' Character progression is an important factor in good storytelling. We may even find out what happened, perhaps it’s a promotion that occurred during the report's creation. And I can’t wait to read about a metaverse view on CBDC. Okay WEF, here is your chance for redemption; I will read your report.
General Assessment
The reports stated goal was to clarify the role of Central Bank Money (CeBM) and wCBDC and its value proposition. But reading it a few times, I am very unclear about that particular point.
Take settlement cycles:
"While designed to eliminate risk, reducing global settlement times could inadvertently increase settlement, counterparty, and technology risks." It can also be costly to implement, yet we are heading to "T+0 as the likely next step." And then they make a comment that often it is not technology limitations which are at play, but market norms.
This is all not wrong, but it’s a bit like: so what? They include a reference about something they call T+0 (gross) and T+0 (net), which is an important distinction between T+0 and same-day settlement, and they point out the significantly different levels of complexity required to achieve one or the other. And how can wCBDC help in providing pre-trade matching with correct outcomes at lightning speed, which is kind of what’s required, no comment there.
It often seems like the WEF report presents various pieces of information and potential benefits or risks associated with wCBDC and CeBM, but then lacks a coherent argument leading to a clear conclusion.
For instance, discussing the risk weight of the SDX cash token as not qualifying as a CBDC is an important observation that highlights a crucial differentiation in the regulatory and risk treatment of CeBM versus other assets. But the report does not contextualize this information within a broader framework or use it to support a specific conclusion about the implementation and management of wCBDCs.
It makes me wonder if the authors have a recommendation how to practically apply the information presented, or not. And maybe that is the conclusion they reached; it’s hard to say where this will go, in which case a comment to clarify would be helpful: what is the report supposed to tell me?
But one thing piqued my interest.
Synthetic CBDC are not CBDC in a strict sense
The report explains some of the different digital payment instruments, including an invention of theirs, RBDC, or reserve-backed digital currencies: “A privately issued payment instrument backed 1:1 by central bank reserves, and a bankruptcy-remote digital currency secure from other creditors in the event of operator and participant default. Sometimes colloquially known as a 'synthetic CBDC,' which is a misleading term because it implies central bank backing. RBDC is not CeBM.”
This is not completely wrong although central bank reserve would imply to me that this refers to minimum reserves, which is not the case here, and I would not describe such a payment instrument necessarily as a distinct currency per se, but other than that, this makes sense. And for some reason, the authors don’t like the term synthetic CBDC because they say it could be misleading or even a mistake (RBDC, sometimes mistakenly called 'synthetic CBDCs’). I am not so sure about that.
The word "synthetic" or "synthesis" is Greek in origin and refers to composition, putting together, or combining. In financial and banking contexts, the term generally refers to financial instruments or products that are engineered to simulate other investment vehicles while often being constructed from different underlying components. For example, a synthetic ETF tries to replicate an index without investing in any equities, and instead uses derivatives. In other words, reading the label 'synthetic' on an equity fund tells me it’s somehow not the real deal. So why is it that the authors suddenly discover their love for precision in language here?
It strikes me as somewhat unusual that a report aiming to clarify and critically examine the use of wCBDCs would only identify a single term as being misused. Only one throughout the entire report?! Given the complexity of the subject and the evolving nature of financial technologies, one might expect a more extensive discussion on terminology or what made them identify this problem, don’t you think? Hm hm hm.
But there is more; this section finishes with a story that goes like this: RBDC lacks key features such as liquidity, and if you don’t believe me, go and check this out from the BIS, and it throws in that Fnality just went live with the first phase of its RBDC solution. Somebody does not seem to like Fnality either, nor likes to be too truthful or forthcoming with references, and instead, I am almost too scared to say it, it seems to be throwing the BIS under the bus to cover up their 'crimes.'
Investigating RBDC crimes
The BIS simply says that while some academics use the term synthetic CBDC to describe the idea of creating a digital payments solution, whereby an entity other than the central bank issues them but ensures covering the liability in central bank funds, these concepts are not central bank money.
But coming back to the synthetic ETF example, synthetic CBDC does not mean that a private entity has the means to create central bank money using digital technology. It simply implies that the desired outcome, a payment instrument that is liquid and has low default risk, can be mimicked through other means, i.e., without central bank money, in the same way the ETF mimics changes in valuation as if it held the actual equities. Although in the WEF paper, it reads more like an absolute statement as if the BIS said these specific tokens have no liquidity, while the BIS actually makes a relative statement. That is very misleading and feels to me like a very cheap trick!
“RBDCs are a form of narrow bank money that lacks key features of CeBM, such as public policy orientation and liquidity.”
“[bank x on demand deposit) are a form of [commercial] bank money that lacks key features of CeBM, such as public policy orientation and liquidity.”
Some may say, "But what you are forgetting is this: 'a synthetic ETF is still an ETF.'" If that matters to you, then you would say it’s misleading, like central banks do because they care a lot about this particular nuance.
But if you think, "So what, a synthetic CBDC is still money," then the term is actually okay. Since these definitions concern something that doesn’t exist yet and are mostly all theoretical stuff, I couldn’t care less how somebody labels their idea.
What I do care about, though, are the real practical consequences of all these musings. The BIS says something uncontroversial: the central bank does not carry any credit risk and, broadly speaking, that synthetic CBDCs are not as flexible as current central bank money. They then point to an IMF paper from 2019, which came up with that idea, although it’s nothing more than a speculative question in the context of e-money:
“We suggest a different approach, one established in a public-private partnership, which we call ‘synthetic CBDC,’ or simply ‘sCBDC.’ After all, the central bank would merely offer settlement services to e-money providers, including access to central bank reserves. This, of course, assumes that the public understands the limited responsibility of the central bank and does not perceive sCBDC as an entirely central-bank-branded product.”
This is the other irony in all of this: the very definition of synthetic CBDC is that they are not central bank money. Reading before you start criticising - Do you see how important that sometimes can be?
The report then says something a bit out of context: "Fnality does not issue RBDC but operates the platform." Have the authors discovered the next stage in cyber theft: the coins are not only gone from your wallet, they are not in the blockchain records anymore.
Me (thinking): So where are the RBDC?
Myself (responding): Are you sure there are any?
Me: There must be!
Myself: Why?
Me: The report says Fnality announced the first phase of its RBDC solution and provides a reference for that info.
Myself: Are you thinking what I am thinking?
Me: Do I want Thai or Sushi for dinner?
Myself: No, what are the chances that the reference does not talk about RBDC? Let me answer that for you: 100%.
But our story is not finished here; it is getting more mysterious, already on the next page.
Deposit Tokens and the Fed’s Intervention
“In 2022, the Federal Reserve Bank of New York noted that DTs [added: Deposit Tokens] are a 'fruitful avenue to pursue' for a few reasons: they avoid locking up liquidity unnecessarily [...]”
Just to recap what we have so far: reserves-backed digital currencies (RBDC) are a better term than synthetic CBDC because they have no liquidity. Fnality is portrayed as such an RBDC with its currency currently in the lost & found department somewhere, and now the Fed intervenes and says deposit tokens sound good because you don’t need to lock up the money like in the RBDC example.
I am not going to comment on whether Fnality’s model means liquidity is locked up or not, but I will say something about the Fed’s position here, which is this: the Fed never said this! The NY Fed has a publication with an article that says something positive about Deposit Tokens. And the article is authored by a guy from Santa Barbara, CA who was a Vice President of the Federal Reserve Bank of New York in the past and hence seems to be given a platform to publish certain insights. I once was in Kindergarten. But what I say today should not be attributed to me in my capacity as a former Kindergarten kid.
But where are they going with this fantasy? Because if you think deposit tokens are the superior model then you're mistaken. The authors say: "their wholesale applicability is limited" - by the way, I totally agree - and they refer to the credit risk redundancies in the context of interbank payments. Yup! Surprisingly, that is correct.
And now comes the big reveal:
“However, as the Regulated Liability Network demonstrated, this tokenized private money could introduce efficiencies when deployed alongside wCBDC. A multi-token future for multiple levels [...]”
Excuse me? Is this some form of modern mind melt to tell us RLN is the needed solution to make wCBDC work, and your evidence is inventing the term RBDC and misquoting the US central bank and a trail of others?
WEF red flag is reinstated!
PS: "Kuddelmuddel" is a German term that means something like 'all over the place' or 'chaotic.'
PS2: If you are interested in the Virgin Rebellion, I have two articles on that personal vendetta here.