EXCLUSIVE: “Road to Somewhere” – Paul Wong, Stellar in “The Paytech Magazine”
Paul Wong from Stellar believes digital currencies and their supporting technology are about to open up a ‘financial superhighway’ that will prove to be a game changer for the payments industry and finance in general
Opinion is split on whether cryptocurrencies are the ultimate root of all evil or a force for good.Those who’ve chased the market and cashed out at the top of cryptos’ many rollercoaster highs made a fortune. Recent major crashes in the values of decentralised and unregulated tokens like Terra’s Luna and its associated US dollar-pegged stable coin, have ended in misery for investors who suffered heavy, and possibly unrecoverable, losses.
But, beyond the backlash headlines, there is support, both at government and corporate level, for investing in other types of digital currency that is similarly developed on blockchain technology. Indeed, nine nations – The Bahamas, Nigeria and seven countries in the Eastern Caribbean Union – have already created a central bank digital currency (CBDC). And almost 80 more countries are either actively pursuing one, or considering doing so – with India, Russia, China, Sweden and Jamaica likely to be among the next issuers of CBDCs.
In March 2022, US President Joe Biden signed an executive order to promote responsible innovation in digital assets, while the Bank of England is now starting a consultation process about creating a CBDC to run alongside cash and bank deposits. But it is not just governments that are heavily involved in research.
A blockchain ecosystem with some 1,500 different platforms is continually evolving, where established decentralised currencies like Ethereum and Bitcoin, the Hyperledger collaboration hosted by the Linux Foundation to advance cross-industry blockchain technologies, and the Corda distributed ledger technology (DLT) platform rub shoulders.There is also the Stellar Development Foundation, a US-based non-profit organisation on a mission to create a more open and inclusive global financial system, which has a blockchain network processing more than five million transactions a day. Paul Wong, Stellar’s director of product for CBDCs and institutions, whose background includes running the Federal Reserve’s digital currency experimentation programme, is in no doubt of the game-changing potential of the underlying technology.
“I think what we’re really doing today is building a new financial superhighway, and that is incredibly exciting,” Wong explains.“From my perspective, we’re currently operating on a two-lane highway that was built in the 80s or 90s, but has been repaved several times over. In some cases, we’ve been able to expand that highway to four lanes, we’ve built new highways to handle different asset classes, but otherwise, fundamentally, not much has changed over the last few decades.
“Today, our financial highway is somewhat siloed. Payments are on one highway, security is on another, and commodity is on yet another. And that structure exists for a number of reasons, including, for example technology, technological limitations, regulatory constraints, legacy systems, the list goes on.” But blockchain and other DLTs, he believes, have the power to overcome all that. “Innovation is really challenging the current arrangement. The blockchain community today is working to build multiple financial superhighways, with eight-to-10 lanes, accommodating a number of different users,” he adds.“These highways are able to accommodate more than just freighters and cars, for example; they will hopefully allow for walkers, bikers, autonomous vehicles, whatever you can think of.
And, if you step away from my superhighway analogy, what we’re doing is creating a new financial and economic platform. Blockchain is really allowing us to rethink how we record information, how we maintain records, how we do business. So, if you can imagine a world where we can send payments at almost zero cost across borders, if you can imagine a world where anyone can access the capital markets to fund businesses, if you can imagine a world where we are in control of our assets, it’s an amazing future.”So where do CBDCs potentially fit into this mix?
Wong is more sceptical about this.“The superhighway I’m talking about is currently being developed by the private sector. Central banks can engage in this activity as well and build their own superhighway; and, in many cases, it might be more effective for a central bank to do so than the private sector. “The benefits of a CBDC will vary by jurisdiction. An appropriately designed CBDC will accelerate the innovation that will come from this space. At the same time, a really poorly designed CBDC will limit growth and innovation.”Other potential benefits of the widespread use of digital currencies for the issuing central banks, include receiving an instant picture of economic activity, as well as more accurate and timely economic data for gross domestic product (GDP) estimates than is available today. CBDCs can also help in the fight against corruption and money laundering, as authorities would be able to trace transactions far more effectively than is currently possible.
But Wong warns there are major issues for governments to consider and extensive consultation is needed. He says: “We really need to be careful when we think about introducing any CBDC.“We need to understand what it’s designed for, how it’s designed and its purpose. CBDCs can be a catalyst for innovation and positive change or, as I say, they can lead to poor or possibly disastrous results. How do we avoid disastrous results? We need to have significant and broad consultation. Designing a CBDC is all about trade-offs, and these trade-offs need to be made with the people using them. “How much information do we, as a society, want to share with government?
Where should our data live? How should our privacy be protected? There are so many issues that need to be addressed before we can issue a CBDC.”And consultation with the full range of potential participants will be key.“We need to have broad stakeholder engagement,” continues Wong. “This includes reaching out to that five-person startup working on decentralised financial applications, the 100-employee crypto foundation, the 20-strong non-profit focussed on financial education, and even the 200-employee fintech unicorn. These organisations are essential to consult, in addition to the big techs and the large financial institutions that are already engaged in significant lobbying and consultation efforts.“The reason I’m calling out the small players is that they typically don’t have the resources or the network to influence policy decisions and policymakers, but policymakers really need to consult with them, because they’re the ones that are effecting change on the ground.”
The European Central Bank (ECB) has noted another area of concern for central banks. Issuing a CBDC could potentially disrupt the commercial banking sector if people, particularly in times of economic stress, pull their savings from commercial banks and place them in risk-free accounts directly with the central bank, which could trigger a bank run and intense stress on the commercial banking sector. And, as Wong highlights, data privacy and compliance with applicable consumer data protection and data privacy laws is another potential area of conflict.
For example, if transactions are immutable, how will the ‘right to be forgotten’, a core tenet of the General Data Protection Regulation in the European Union, be addressed by affected central banks? It would likely lead to those people who com want anonymity continuing to rely on cash transactions. Many central banks are embroiled in intense debates like this; around the potential use cases of CBDCs, including the merits of wholesale-versus-retail use cases, direct-versus-indirect-versus-hybrid claims on the central bank and tiered-versus-non-tiered architectures.“In my humble opinion, we’re still at the beginning stages when it comes to CBDCs and many early pilots have not passed the test of time,” says Wong. “Many jurisdictions have been studying CBDCs for a few years now, they’ve experimented with them, and nothing has really gone to full production.
This, to me, suggests several things: that CBDC may not be right for all jurisdictions; the use case for CBDC is still being determined; and, equally or more important, building a CBDC is really hard.“For advanced economies that already have an instant payments system, like the US or the UK, the viability for issuing a CBDC is a bit more challenging to assess. Advanced economies have more complex financial markets and more moving parts. The key questions I would ask are really ‘what is our vision for the future?’, ‘what is the central bank’s vision, or role in that vision?’ and ‘what role does a central bank play in affecting that vision?’. “These are all questions I think central bankers at the Fed and the Bank of England are thinking about.
“I think the lack of a CBDC might actually create more innovation in America, and also in the UK. If we go back to my highway analogy, what we’re really talking about is akin to building a new train tunnel between New York and New Jersey, or adding a new runway at Heathrow. The logistics coordination effort is huge.”And, lastly, to the question: will CBDCs replace existing decentralised cryptocurrencies? Wong doesn’t believe so.“It’s important to consider that we use different forms of money today, not just central bank money. In fact, we probably use commercial bank money and non-bank money more than we use central bank money,” he replies.“I rarely carry cash, and I only use it when no other form of payment is accepted. In my opinion, stablecoins and cryptocurrencies that are used for payments are different forms of commercial and non-bank money, and they’re here to stay.”