A recently published paper explores the suitability of ‘public crypto networks’ for financial market infrastructures. It was co-authored by Ulrich Bindseil, the European Central Bank’s (ECB’s) Director General for Market Infrastructure and Payments, alongside Columbia University’s Omid Malekan. Overall it’s very positive about the potential for financial innovation on crypto networks.
The authors conclude that many of the benefits of public blockchains “could allow crypto networks to provide financial market infrastructure with unprecedented efficiency.” That includes their support of decentralized finance (DeFI), their ability to eliminate intermediaries and enable automation.
Assuming the digital euro gets a green light from regulators, Europe could have a central bank digital currency (CBDC) in three or four years. The paper states, “there is no technical reason why a CBDC can’t be issued on a public crypto network. A central bank – if comfortable with the risks …- could also issue a cash-like claim against its balance sheet on Ethereum as it could on a permissioned “unified” ledger managed by the BIS.”
On the point of permissioned DLTs, the authors express some skepticism despite (or because of?) the ECB’s recent wholesale DLT settlement trials, which mainly involved permissioned DLTs. They express the argument of most crypto advocates – that a permissioned blockchain is a complex database with cryptographic bloat. The authors note that key reasons for their use by institutions include privacy, scalability and regulatory requirements.
The paper concludes that the “biggest beneficiaries from the continued improvement of ICT may end up being financial engineers who will someday get to design new products that are inspired by what can be and unburdened by what has been.”
A summary
The paper explores permissionless blockchains across five dimensions, starting with a time perspective. Public blockchains operate 24/7 and there’s no technical reason why wholesale central bank systems do not function on weekends. Each blockchain is distinctive in terms of block times and finality.
Other dimensions discussed include:
- The potential for streaming payments
- Blockchains support all types of asset and conditional transactions
- Programmability
- Disintermediation.
Given the involvement of a central banker, the paper offers some balance. It touches on some of the drawbacks of public chains such as hacking risks, governance and illicit finance.
On previous occasions, Mr Bindseil has been highly critical of Bitcoin, including in a recent report. That stance is not inconsistent with the latest paper. His primary concern with Bitcoin is that it’s a speculative unproductive asset. Hence, it could draw capital away from more productive real world investments. Additionally, he sees a wealth transfer from early Bitcoin holders to later ones.
