Banking in 2030 Some considerations Farzam Ehsani @farzamehsani - PowerPoint PPT Presentation

Banking in 2030 Some considerations Farzam Ehsani @farzamehsani

How do we agree on who has monetary value in society? Bear Bearer ins nstruments Reg Registered instruments $ • Physical form • Physical or digital form • Holder is presumed to be owner • Record of ownership determines owner • No records are kept • Trusted party manages ledger

Humanity’s abridged money timeline Today ay Past Future ure $

In 2009 the digital bearer instrument was born Physical Bearer Physical Registered Physical Ph FORM Digital Bearer Digital Registered Digital $ Di Bear Bearer Reg egistered TYP YPE

R Central bank money Ce Central banks are testing settlement on DLT Physi sical cash R Commercial bank money SARB R R R R R R R R R Bank 1: Ban 1: Ban Bank 2: 2: Ban Bank n: n: PSOs PS Bank 1 Ban Ban Bank 2 Bank n Ban R R R R R R

R Ce Central bank money Central banks are testing settlement on DLT Physi sical cash R Commercial bank money Settlement in digital cash SARB R R R R R R R R R Bank 1: Ban 1: Ban Bank 2: 2: Ban Bank n: n: PS PSOs Ban Bank 1 Bank 2 Ban Ban Bank n R R R R R R

R Ce Central bank money Central banks are testing settlement on DLT Physi sical cash R Commercial bank money Settlement in physical cash SARB R R R R R R R R R Bank 1: Ban 1: Ban Bank 2: 2: Ban Bank n: n: PS PSOs Ban Bank 1 Bank 2 Ban Ban Bank n R R R R R R

R Ce Central bank money Central banks are testing settlement on DLT Physi sical cash R Commercial bank money Digital to physical change SARB R R R R R R R R R Bank 1: Ban 1: Ban Bank 2: 2: Ban Bank n: n: PS PSOs Bank 1 Ban Bank 2 Ban Ban Bank n R R R R R R

R Ce Central bank money Central banks are testing settlement on DLT Physi sical cash R Commercial bank money C Crypto cas ash Introducing crypto cash SARB SARB R R R R R R R R R Bank 1: Ban 1: Ban Bank 2: 2: Ban Bank n: n: PS PSOs C DLT Ban Bank 1 Ban Bank 2 Bank 1 Ban Ban Bank 2 Ban Bank n R R R R R R Bank n Ban

R Ce Central bank money Central banks are testing settlement on DLT Physi sical cash R Commercial bank money C Crypto cas ash Settlement in crypto cash: 3 rd type SARB SARB R R R R R R R R Bank 1: Ban 1: Ban Bank 2: 2: Ban Bank n: n: PS PSOs C DLT DL Ban Bank 1 Ban Bank 2 Ban Bank 1 Ban Bank 2 Bank n Ban R R R R R R Bank n Ban

R Ce Central bank money Central banks are testing settlement on DLT Physi sical cash R Commercial bank money C Crypto cas ash Conversion to crypto settlement SARB SARB R R R R R R R R Bank 1: Ban 1: Ban Bank 2: 2: Ban Bank n: n: PS PSOs CC C CCC DL DLT Ban Bank 1 Ban Bank 2 Ban Bank 1 Bank 2 Ban Ban Bank n R R R R R R CCC Bank n Ban

A potential paradigm shift: Crypto-banking (deposit-less banking) Central Cen l ba bank Com Commercial ba banks Depositor Dep Balance sheet Cumulative balance sheet Balance sheet Bonds/NCDs Loans Gold Notes & coins Gov. bonds Deposits Commercial Notes & coins bank reserves Reserves Deposit FX Capital & Equity reserves Capital Notes & coins Ass Assets Lia Liabilities Ass Assets Lia Liabilities Assets Ass Liabilities Lia NOTE: Stylised balance sheets

A potential paradigm shift: Crypto-banking (deposit-less banking) Cen Central l ba bank Commercial ba Com banks Depositor Dep Balance sheet Cumulative balance sheet Balance sheet Bonds/NCDs Loans CBCC* Gold Notes & coins Gov. bonds Deposits Commercial bank reserves Notes & coins CBCC* Reserve Reserves Deposit Deposit FX Capital & Equity reserves Reserve Capital Notes & coins Ass Assets Lia Liabilities Ass Assets Lia Liabilities Assets Ass Lia Liabilities *Central Bank Cryptocurrency NOTE: Stylised balance sheets

A potential paradigm shift: Crypto-banking (deposit-less banking) Cen Central l ba bank Commercial ba Com banks Depositor Dep Balance sheet Cumulative balance sheet Balance sheet Bonds/NCDs Loans CBCC* Gold Notes & coins Gov. bonds Deposits Commercial bank reserves Notes & coins CBCC* Reserves FX Capital & Equity reserves Capital Notes & coins Assets Ass Liabilities Lia Assets Ass Liabilities Lia Assets Ass Liabilities Lia *Central Bank Cryptocurrency NOTE: Stylised balance sheets

A potential paradigm shift: Crypto-banking (deposit-less banking) Central Cen l ba bank Commercial ba Com banks Depositor Dep Balance sheet Cumulative balance sheet Balance sheet Balance sheet reduction Problem for: 1) Credit creation 2) Liquidity for commercial Bonds/NCDs banks Loans Gold CBCC* Notes & coins Gov. bonds Deposits Commercial bank reserves Notes & coins CBCC* FX Capital & Equity reserves Capital Notes & coins Reserves Assets Ass Liabilities Lia Assets Ass Lia Liabilities Ass Assets Lia Liabilities *Central Bank Cryptocurrency NOTE: Stylised balance sheets

A potential paradigm shift: Crypto-banking (deposit-less banking) Central Cen l ba bank Commercial ba Com banks Depositor Dep Balance sheet Cumulative balance sheet Balance sheet Unsecured Loan CBCC* Bonds/NCDs Unsecured Loan CBCC* Loans Gold CBCC* Notes & coins Gov. bonds Deposits Commercial bank reserves Notes & coins CBCC* FX Capital & Equity reserves Capital Notes & coins Reserves Ass Assets Liabilities Lia Assets Ass Lia Liabilities Assets Ass Lia Liabilities *Central Bank Cryptocurrency NOTE: Stylised balance sheets

Unsecured central bank lending is essentially unheard of… GOV GO IOU IOU Central l Ban ank Go Government Treasu sury

Unsecured central bank lending is essentially unheard of… GOV GO IOU IOU Central l Ban ank Go Government Treasu sury

…but the net effect is the same is you put a bank in the middle GO GOV GOV GO IOU IOU IOU IOU Central l Ban ank Commercial l Ban ank Government Go Treasu sury Central banks therefore do accept un unse secure red as asse sets Relaxing the assumption that central banks only lend on a secured basis opens possibilities 1 1: Once upon a time the thought of relaxing the assumption that paper money could be unbacked (by gold) was unthinkable!

So balance sheets that originally looked like this… Cen Central l ba bank Commercial ba Com banks Retail de depositor Balance sheet Cumulative balance sheet Balance sheet Bonds/NCDs Loans Gold Notes & coins Gov. bonds Deposits Commercial Notes & coins bank reserves Reserves Deposit FX Capital & Equity reserves Capital Notes & coins Ass Assets Liabilities Lia Ass Assets Lia Liabilities Assets Ass Liabilities Lia NOTE: Stylised balance sheets

…could look like this, with banks not being depositary institutions Cen Central l ba bank Com Commercial ba banks Retail de depositor Balance sheet Cumulative balance sheet Balance sheet Unsecured loans to commercial Bonds/NCDs banks CBCC* Loans Gold Unsecured Gov. bonds loans from central bank Notes & coins Notes & coins CBCC* FX CBCC* Capital & Equity reserves Capital Notes & coins Ass Assets Lia Liabilities Ass Assets Lia Liabilities Assets Ass Liabilities Lia *Central Bank Cryptocurrency NOTE: Stylised balance sheets

Why would we even consider a crypto-banking world? Ben Benefit its of of cr crypto-bankin ing Risks Ris ? • • Real-time transparency of financial system (critical Increased reliance on prudent central bank policies for policy making) (creation of money would vest purely with the central bank – no fractional reserve system – narrow • Reduction of credit risk (and more importantly banking system) – a central bank funding curve could elimination of bank runs) emerge ? • • Reduction of settlement risk (atomic swaps as other Risks of unknown technology and systems assets are issued onto a “sovereign blockchain”) ? • Large transformation from credit risk to security risk • Increased stability of banking system (less reliance (as with physical cash) on TBTF institutions) • AML improved • Codification of money • Financial inclusion due to lower cost base

A word on what we call money Forms Physical Digital IIII Functions Means of exchange Unit of account Store of value ÷ = Features Divisible Durable Fungible Portable Scarce Accepted

Decentralized cryptocurrencies: The most frictionless assets today Feat atures s of f money ÷ Divisible Durable = Fungible Portable Better money Scarce Accepted = = = = ÷ ÷ ÷ $

What does all this mean for Banking in 2030? Bankin Ba ing St Store re Tr Transfer Pro rovi vide Pro rotect (deposits) (payments) (lending/investing) (risk-off / risk-on) • • • • “Currency under Decoupled from storage Increased data (private Improved access to management” – of value and public) for quicker/ derivatives and anticipate and provide more informed decisions insurance in a form storage services for new (credit committees take palatable to clients asset classes too long) Banks need to find ways to meet their governance process but not stifle their agility to adapt to an increasingly fast-changing world