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Speaker

Tobias Adrian
Financial Counsellor and Director, Monetary and Capital Markets Department, International Monetary Fund

Moderator

Allyson Versprill
Crypto and Regulation Reporter, Bloomberg

TOBIAS ADRIAN: So let me talk about both CBDCs and multilateral payment platforms and it’s going to tie very closely to many of the themes of the earlier panels and, again, Cecilia’s remarks earlier this morning.

So what is the IMF doing in this space, and I would characterize it as doing really two things at the moment. So one is very much focused on CBDC and it is about support to our membership.

So we have 190 countries, and the agencies in those countries that are our members are essentially the central banks, the regulators, and the finance ministries in each of those countries. And an important part of what the IMF is doing is to provide technical assistance to those institutions to help build capacity and so we are working very closely with standard setters in order to help the membership.

We have recently been focused on CBDC so many countries have come to us to ask for help to think through policy questions about CBDC and, you know, this is very complementary to, I think, what the BIS is doing, which is more focused on the technological development and actually running projects, which is something we cannot do—we’re not set up to do. We are providing more, like, policy advice and helping countries to, like, take the right decisions, going forward.

The second thing we are doing is to think about policy frameworks going forward, so develop policies going forward. This, again, is done within the international context on the cross-border payment side in particular within the Financial Stability Board’s cross-border payments initiative, where different institutions have collaborated to think about sort of like the future of payment systems. And here the IMF comes in as we have this whole, like, role as a guardian of the international monetary system, right, and so that is covering payments as well.

So let me start with CBDC and then move to cross border. So in terms of CBDCs, there are many countries around the world that are exploring CBDC and even if they haven’t decided to go ahead with CBDC they’re sort of, like, either doing experiments or doing policy development. Again, this is done in close collaboration with the BIS, the IMF, and the World Bank as well.

So last month we put out a handbook or, rather, the first five chapters of a handbook on CBDCs and we’re planning to put out a total of twenty chapters and here we are listing so, like, the twenty chapters that we are planning to put out over the next two years that are really about the policy—the policy framework of central banks around CBDCs and the kind of decision process around CBDCs. So helping countries—our member countries to take the right decision, going forward.

So, you know, that in turn ties in to our work on cross-border payments and so here we have been working, you know, to really upgrade—to think about how to think about the evolution of the global payment system as one of the key pillars of the international monetary system.

So, you know, the international monetary system has the global payment system but also capital controls, exchange rate arrangements, and then the global financial safety net which—you know, central bank swap lines and IMF lending.

So those are the four pillars. So cross-border payments are an important pillar of the international monetary system. And that is sort of like the motivation, the secondary motivation, of the IMF, besides the technical assistance, to think about global payments.

So, you know, tying back to the discussions from earlier, when you think about cross-border payments, there are, you know, two big pillars. So one is about clearing. The second one is about settlement. And there are evolutions in both of these pillars that are very important.

The foundation for clearing is messaging. And so in messaging, we do have sort of like a very global, very multilateral messaging system that is pretty much used by every country and every financial institution around the world. The hurdles in clearing are oftentimes related to business process, legal challenges in AML/CFT challenges.

So we do see around the world that there’s still a lack of trust in oversight. So basically, in order to do cross-border payments, right, you have to trust that the institutions on the other side of those cross-border payments have all the processes in place to make sure that the payments that you are conducting are, you know, sound and legal. And so that is sort of like one big block of cost drivers. And, you know, technology can help, but it goes beyond technology, right? So it is—you know, technology can help. But, you know, processes, legal systems, and regulatory approaches are very important here.

On the settlement side, right—so this is actually making sure that payments actually get settled—they are the actual movements of funds. They’re the foreign-exchange components and, you know, the contracts that have to be honored. And this is where common infrastructures can help. So in settlement, we still see a lot of fragmentation of liquidity. There’s quite a bit of difference across different countries and, you know, assets. So there are payments and then there are assets that have settlement systems, and there’s certainly a need to improve on both of these fronts.

So I think in clearing there are many, many attempts for sort of like incremental fixes; so, for example, to get to better overlaps in terms of operating hours, when you think about the global economy, to improve standardization. And, of course, interlinking fast-payment systems, you know, is to a first order improving clearing.

Once you go from clearing to settlement, this is where platforms really become very key. And again, that’s a point that was raised already earlier today. You know, you do—at this point in time, you do need some, like, financial market infrastructures in order to get from clearing to settlement.

So when you look around the world and you look at sort of like what works well and what works less well, so among advanced economies, high-value payments. So wholesale payments work extremely well for both clearing and settlement, right? So, you know, settlement is in the trillions of dollars every day in the wholesale market. Among advanced economies, it’s very seamless. There are infrastructures that are super-efficient that have been operating for decades.

But once you go to low-value payment systems or you go outside of the advanced economies to low-income countries and emerging markets, you’re getting more and more [friction], right? And so I think a lot of the motivation of the international community—we had already mentioned the Group of Twenty, the BIS, the IMF, the World Bank, etc.—is really to, you know, go to those low-value payments and those low-income countries and emerging markets where there’s, you know, room for first-order improvement.

So, you know, why are we here together? You know, clearly there are very rapid changes in cross-border payments. And, you know, many countries are facing macro-critical threats from payments. And this, again, is where we have done a lot of work at the IMF, you know, to understand sort of, like, the vulnerabilities of countries relative to losing—or, the potential of losing monetary sovereignty due to cross-border payments that are outside of sort of like the regular banking systems.

So, you know, the way we think about that is that there’s the very, very big picture, international monetary system. I already talked about that. So this has a payment system component, but also the exchange, capital controls, and then the global financial safety net component. Then, from a country perspective, there’s the monetary and financial stability. So each country has to make sure that they have monetary sovereignty and both monetary and financial stability. And so the payment system is the foundation for both monetary and financial stability.

And then many countries are very much motivated by financial inclusion aspects as well. You know, in advanced economies, of course, financial inclusion is very broad. But in many emerging markets and developing economies, financial inclusion is relatively low. And there are big opportunities through enhancements of payments to increase financial inclusion and foster, you know, lending and capital market and economic activity more broadly.

So I think technology is providing opportunities to move ahead with these objectives. So a more inclusive international monetary system, a more stable monetary system. But there are also many risks, right? And so the goal of the fund and other international financial institutions is to really use those technologies for policy purposes, i.e., you know, employ all the greatness of encryption and programmability and tokenization in order to achieve policy objectives. And I think that is where the interesting work is going on at the moment.

So, the risks that we are seeing more concretely is that we could end up in a fragmented world, not just politically but also in a fragmented world in terms of the underlying types of payments, which ultimately, you know, underline capital market activity and broader economic activity. We could end up in a world where we have connected entities to some degree, but some entities and some countries that are excluded. And as a global and multilateral institution, we’re sort of aiming to, you know, provide a basic connectivity, a basic set of rules and governance that is truly multilateral and inclusive. So, I think that is—the ambition is to aim for innovation that is compatible with policy goals and that is inclusive relative to the broad membership of, say, the IMF.

So, let me—you know, oversimplifying a little bit—compare and contrast two models of payment connectivity that are being debated at the moment. So, the one is the interlinking of fast payment systems. And, you know, Cecilia explained quite a bit of that already. And that, you know, is extremely powerful, as she explains, right? So, you can have, like a central hub where these payment systems are being interlinked. And it can, in principle, provide a broad interconnectivity around the world. But, of course, to, you know, get to the settlement stage, you know, common platforms likely need it.

And so the way we look at the world is that there’s, you know, not one solution that solves all problems, so we really think that a multipronged approach is the right approach where you have a variety of possibilities of doing cross-border payments. So the platform model is connected to each of the networks, money is moved through the platform, it’s end to end, and it’s backed by escrowed money. In particular, what we have in mind are sort of like tokenized versions of central bank money. Firms would offer settlement services on a trusted, integrated, scalable, and widely accessible environment.

So, you know, we are working alongside BIS, BIS Innovation Hub. So in particular, the BIS proposed this concept of unified ledgers, which is very much aligned with the—with the second model. The BIS Innovation Hub is working on interlinking the fast-payments system, but it’s also working on many bridges which are platforms for cross-border clearing and settlement. The World Bank has various projects, particularly on interlinking. I mentioned already the FSB [Financial Stability Board], together with the CMPI [Committee on Payments and Market Infrastructures], led work on these cross-border payments platforms. And then, of course, there are all the private-sector initiatives that we already heard about.

So I want to talk about one particular version of these proposals, which is what we were thinking about, which we call the XC platform. And so, you know, it is really aiming at using new technologies in order to enhance cross-border payments in a fully policy-oriented way.

So there are three layers. There’s a settlement layer, so actually making sure that payments get end to end from entity to entity across borders. There’s a programming layer; i.e., while money in and of itself is not programmable, you can have programmable features that are built into a platform so that it can link into platforms. And then, importantly, there’s the information management, right? So what we are having in mind is that on the platform you have anonymity, but to get on the platform you have, you know, very high bars in terms of AML/CFT requirements, identity, etc.

So the information management, in turn, is closely tied to the AML/CFT and governance concerns. And you know, in many ways the settlement and programming is more advanced than this governance work, and this is where the technical assistance becomes so important; i.e., building capacity in all countries to upgrade identity, AML/CFT, and financial integrity more generally. So, you know, again, it’s the legal challenges to governance that are—that are, you know, really, really important, and where capacity building is so important.

To finish off, let me just point out that, you know, money has always been a partnership between the private sector and the public sector. When money was purely private it didn’t work all that well, so central banks were created as a backstop for commercial bank liabilities. But when you think about financial systems today, you know, 90 or 95 percent of monetary liabilities are private-sector liabilities, right? They are the deposits of banks. So how to calibrate the interaction between the public and the private sector is extremely important here. There are examples where central banks built systems that were not adopted or used by the private sector.

So, you know, having a very strong focus on what is the role in the private sector, what’s the role in the public sector is, you know, first order for cross-border payments, though it might vary across countries, right? So there are very different cultural differences across countries, different histories, different institutional setups. So it’s something we put a lot of care in and we do a lot of outreach to understand what the right balance is. So with that, let me turn to the next part.

ALLYSON VERSPRILL: Hi. My name is Allyson Versprill. I cover crypto regulation for Bloomberg News. Thanks for joining us for this later-in-the-afternoon panel.

So, during your discussion, you talked a lot about, you know, multilateral platforms potentially being a way to improve cross-border payments. You know, when you’re thinking about that, I mean, what has been sort of the biggest challenge? I think we see projects here and there kind of addressing these in smaller pockets with countries, but in terms of getting all of your members, 190 members on board, you know, what are the challenges that you’re running into?

TOBIAS ADRIAN: So that’s an excellent question. So, you know, let me first point out that, you know, the fund is not so like a very operational institution. It’s really more about governance. So when I talked about the platforms, this is really policy development. But it’s up to our membership and the private sector to actually build such things. And, again, the BIS Innovation Hub plays an important role in actually working on the technology side to build some versions of those platforms.

Our ambition would be to have platforms that are truly multilateral. So, for example, messaging is done in a fully inclusive way around the world. And I think as a multilateral institution, our ambition would be to have settlement also be, you know, truly multilateral. So the challenges are about the governance, right? It is about making sure that countries come together and agree on the standards related to integrity, identity, information sharing across borders that makes everybody at ease, to, you know, settle on the platform together.

And, you know, I think, you know, there is, of course, a regulatory body which is the CPMI, which plays a very important role in terms of developing regulations around these platforms. And we are playing an important role in terms of helping countries implement those regulations. But we think that there’s really an opportunity to have a more ambitious approach to cross-border payments that is linked to such platforms.

ALLYSON VERSPRILL: And how difficult does that sort of standard-setting policymaking become when you have, you know, already different countries maybe moving at different paces, some kind of lagging behind? You know, how do you get to some sort of global rules?

TOBIAS ADRIAN: Yeah. So it’s a slow process. So I think this morning on the panel somebody said that, you know, to get CLS started, which is a payments platform for wholesale payments for a subset of countries, you know, took many, many years. So, ideally, we would move more quickly. But, you know, these international financial institutions, such as the IMF, I think can be helpful in terms of getting to consensus about how we should be going as a global community to, you know, upgrade global payments.

ALLYSON VERSPRILL: And in terms of leveraging new technologies, I mean, what are you seeing really being used at this point? Or where do you see kind of the long-term timeline on how some of these technologies can be used?

TOBIAS ADRIAN: Right. Yeah, so I think in the—in the shorter term, the interlinking of fast payment systems is a very achievable and very important step. And I think that’s a significant improvement, but it’s not in and of itself sort of, like, using new technologies, right? So the power of encryption, and programmability, and tokenization. So those are the three technological improvements that we’re seeing.

So in our view, you know, getting two cross-border payment systems that are incorporating all three, so tokenization, encryption, and programmability; that would be the more longer-run goal.

ALLYSON VERSPRILL: And, you know, I wanted to go over some of the projects we’ve seen already to try to improve cross-border payments. We have the mBridge Project, which is China, Thailand, Hong Kong, and the UAE. Then there’s Project Dunbar, which is Australia, Malaysia, Singapore, South Africa.

You know, you talked a little bit about some of the risks in fragmentation. Do you think when you have these projects that just involve kind of, you know, some subsets of countries does that increase the danger of maybe having more—a fragmented global payment system or what can we learn from those projects and take forward?

TOBIAS ADRIAN: The projects are very important in terms of understanding so, like, what works and, you know, they started off as technological projects but I think over time we have understood that the governance is so important—the legal frameworks, the institutional capacity across countries, extremely first order. Business processes are extremely important.

So I think, you know, the global community has really benefited from seeing those projects being rolled out and there are more and more of these projects that are starting. Still, I do hope that we can get to a more ambitious, more multilateral approach at some point that, you know, can benefit countries more broadly, which is really the mission of the IMF is really to have this broad, multilateral approach.

You know, given the level of fragmentation, the geopolitical fragmentation that we have seen around the world, you know, that is certainly difficult. But I do think there’s an opportunity to actually come together and to agree on, you know, improving cross-border payments as foundation of financial systems, banking systems more broadly.

So I think it’s—while it is ambitious, I think it’s possible and it is very important for the world.

ALLYSON VERSPRILL: And when you’re also thinking about the global payment system and some of maybe, you know, these different projects or countries moving forward how do you ensure that, you know, different systems aren’t being set up to evade, you know, maybe AML [antimony laundering] or KYC [know your customer] requirements or sanctions or things like that? How do you think about that?

TOBIAS ADRIAN: Yeah. So globally there are mechanisms to enforce AML/CFT [countering of financing terrorism] so FATF certifications are particularly important here. Within our FSAPs—our financial sector assessment programs—we also have an AML/CFT component where we are assessing the institutional capacity of countries and we are providing technical assistance to help countries build the capacity to do AML/CFT around the world.

It is difficult and it is challenging. You know, when I moved to the IMF seven years ago and I’m reflecting sort of, like, on what I’ve learned it’s really, you know, the institution capacity is so crucial for economic activity, for economic development. And, you know, technology can help but it doesn’t solve institutional weakness, weakness of legal systems, of enforcement, etc.

So it is hard work but multilateral institutions such as the IMF or FATF or the FSB really are there to help countries implement AML/CFT requirements, broader financial integrity requirements, and to assess how far they are and where they have to go.

Of course, that is complemented by enforcement mechanisms through, you know, law enforcement and, you know, courts around the world. So, you know, there are no silver bullets, unfortunately. But I do think infrastructure can be the basis for providing strong incentives for countries to sort out upgrade identity, KYC, AML/CFT in order to get to higher standards of financial integrity.

ALLYSON VERSPRILL: And so this question, I mean, during your presentation you mentioned that a lot of this will have to involve both the public sector and the private sector. Can you maybe elaborate on the role you envision the private sector playing in all of this?

TOBIAS ADRIAN: Yeah, absolutely. So, you know, the financial system is run by the private sector. And the public sector is providing backstops, is providing oversight, and is providing regulations. But, ultimately, we need to create a financial sector that helps economic activity, that improves economic efficiency, financial inclusion. And so it’s the interplay between policies and regulations and private-sector initiatives that are going to lead to success, right?

So, you know, these are processes that evolve over time. And I think, when you look, you know, in cross-border payment space at platforms that are very successful, these tend to be public-private partnerships that have come to governance mechanisms and regulatory oversight that has worked for the benefits of countries for, you know, payments purposes, which, again, is the basis for capital markets and economic activity.

ALLYSON VERSPRILL: And what happens, I mean, if there are countries that, you know, decide they’re not going to maybe invest in exploring these new technologies or moving forward in this way? I mean, what happens? I mean, what is your prediction on those that fall behind?

TOBIAS ADRIAN: So, you know, payments are multipronged, right? I mean, if I want to pay you for, you know, some service or so, I can do that in many different ways today, right? And I don’t think we want to think of cross-border payments as having one solution that solves our problems. I think there will always be a multitude of approaches. And different countries will make different choices, right? So, you know, we don’t want to think about, you know, one thing that works for everybody. So it is multipronged.

So, you know, the incentive of participating in platforms are net-worth effects, right? It is that the more countries and the more institutions participate, the higher efficiency can be achieved. And that’s a very powerful economic force. Now, it does require that you fulfill these requirements to be participating on the platform. And, you know, that requires that you have the legal, institutional, and regulatory frameworks, you know, to participate. And I think, you know, some countries may not meet that. Some institutions may not meet that. But, you know, being part of the platform or the platforms in principle provides incentives to improve the institutional environment.

ALLYSON VERSPRILL: And I guess, to switch gears a little bit here, I know you started with CBDCs. I guess I will switch and end with CBDCs. Let’s talk about, you know, CBDCs versus stablecoins. And, you know, I’ve heard some chatter of, well, if you just regulate stablecoins, then that can, you know, kind of have the advantages of having a CBDC. Especially, you know, the U.S. right now seems—there’s some political headwinds on the CBDC front.

Can you talk a little bit about that? I mean, does the—do those serve essentially the same function? What are kind of the benefits, the risks, of either one of those?

TOBIAS ADRIAN: Yeah. So, you know, I think there are two important dimensions to stable clients. So the first one is about technology. So do you use DLT and encryption for payments? And, you know, in principle you can use those without stablecoins or CBDC, right? So a number of countries are moving towards exploring tokenization of commercial bank deposits. And I think, again, this morning we heard some discussion around that. So, you know, new technologies could in principle be used by banks, as well as by, say, stablecoin providers, and potentially by central banks. There are many hurdles, many regulatory and legal hurdles at the moment to do so. But there’s certainly a push by countries to understand how to do that.

The second aspect to stablecoins is that, you know, they have some features either more like money market funds or more like narrow banks. So, you know, the money market fund version of stablecoins holds its assets in marketable securities, such as treasury bills are so, while the narrow banking version would hold it in either commercial bank deposits or in central bank reserves. You know, so the question for countries is whether they allow stablecoin providers to actually hold reserves in central bank money, which, you know, many countries don’t allow at the moment, but are exploring. And whether, you know, stablecoins that are more like money market funds, where the stability of the liability is not guaranteed because the asset is fluctuating, you know, whether that is considered to be a stablecoin.

So, I think, you know, what is the reserve is one question and what’s the technology in terms of having more of a tokenized and wallet-based payment system, as opposed to an account-based payment system? So those are, I think, the two economic questions. You know, countries are exploring, you know, phasing in CBDC as well as tokenized deposits, as well as stablecoins, so that you can think of that as upgrading not just one of those things but, so, like the entire ecosystem of the financial system. You know, where countries are coming out could be very different across jurisdictions. And, again, we see our role at the IMF not so much as telling countries what the right pathway forward is, but to help them make the right choices and take the right decisions in terms of thinking through tradeoffs and making policy choices.

ALLYSON VERSPRILL: Well, in terms of countries that are moving forward with CBDC, are there common threads on the ones that are kind of moving fastest? Or what are the use cases that are cropping up?

TOBIAS ADRIAN: Yeah, so I think when you think of the CBDCs that are already in existence, you know, three of those in the Caribbean. And the use case is very much motivated by the catastrophic risk of hurricanes, right? Where it’s extremely difficult to get cash into—across, you know, the hundreds of islands. And so having electronic money that can be used for transactions but also potentially for payments, for transfer payments, is extremely powerful. I think this is why we have seen quite a bit of movement in the Caribbean there.

I think the second important use case is, again, what Cecilia was talking about earlier today, which is about the disappearance of cash, right? As we’re moving to a digital world, cash usage is disappearing. And countries would like to have some ability for individuals or corporations to actually hold central bank liabilities. Even if 95 percent of monetary liabilities are private sector liabilities, i.e., deposits, you know, as a central bank you would like to be able to issue liabilities that people can hold in principle. And if there’s no more cash, no more physical cash, you know, there’s a strong case for some form of CBDC. Though, you know, countries could take another approach here, right, which is to allow banks to issue, you know, tokenized forms of money, but to have a very strong backing by central banks, so to exchange tokenized private money against tokenized central bank money in wholesale CBDCs.

So I don’t think we will necessarily see retail CBDC everywhere, but we may see, you know, more motivation to wholesale CBDC, perhaps combined with tokenization of deposits—though, again, you know, that is—you know, from a legal perspective, that is possible in some countries but in other countries it’s extremely, extremely challenging to tokenize deposits. So, again, there’s a lot of difference across legal and regulatory frameworks across different countries. So I would think that we will see some movement in this direction, but it’s not going to be the same across the world.

And I think the third use case for CBDC is financial inclusion. So, you know, in advanced economies, you know, the financial sector assets relative to GDP can be, you know, 300, 400, 500 percent or so. In many low-income countries and emerging markets, it’s like 20 or 30 or 50 percent. So the potential for financial inclusion is tremendous, and extending payment systems is a first step towards credit and other financial services. And we have seen in some countries tremendous inclusion benefits through broad access to payment systems.

ALLYSON VERSPRILL: And I also wanted to talk—I mean, one of the things you mentioned in your—in your speech was the CBDC handbook, and in that I thought there was an interesting point about, you know, one of the potential risks being larger and more volatile gross capital flows. Can you speak a little bit to that and how countries should be thinking about that as they’re designing CBDCs?

TOBIAS ADRIAN: Yeah. So it goes back to sort of like my main theme, which is about institutional fragility, right?

So, you know, the vast majority of countries does have some form of capital controls, right? And that is a way to make sure that capital isn’t leaving the country and to make sure that monetary sovereignty is still staying in the country. So a digital form of money from an individual perspective might be very rational, right? So you might want to hold your savings in foreign currency, and that could be that much easier in a digital form. But of course, from the point of view of the government, it does undermine your ability to conduct monetary policy.

And in our assessment for some emerging markets, you know, that is of macro-critical magnitude. So dollarization has always been a challenge for emerging markets, but it can be more of a challenge in [a] digital age. So, you know, this is, again, where so, like, policy objectives and individual objectives might not be fully aligned, but where policy frameworks are extremely important. So, as we’re thinking about [an] upgrade in cross-border payments, we also have to think about the role of, you know, capital controls in the world, which, you know, given institutional weaknesses in countries, is an important element to make sure that macroeconomic stability is—can be managed.

ALLYSON VERSPRILL: Well, and it looks like with that we are running up on the end of our time here. I’m sure these are going to be topics that we’re discussing for years to come, so I’m sure there will be plenty to learn from you in the future. But thank you for joining me.

TOBIAS ADRIAN: Thank you.

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