Policy dilemmas and commercial implications of sovereign and central bank issued cryptocurrencies

1. CRYPTO-ASSETS
AND CRYPTO-CURRENCIES
A BANKING PERSPECTIVE
1
2 MAY 2018 COPYRIGHT 2018 WARDROBE PLACE MANAGEMENT LTD HADI KABALAN, CFA

2. AGENDA
1 - BANKER’S DEFINITION
2 - SECURITISATION TECHNOLOGY
3 - CENTRAL BANK CRYPTOCURRENCIES
4 - COMMERCIAL BANK RISKS
5 - COMMERCIAL BANK PREPARATION
2
2 MAY 2018 COPYRIGHT 2018 WARDROBE PLACE MANAGEMENT LTD HADI KABALAN, CFA

3. CRYPTO-ASSET
A unique record that is tradable for value
3
2 MAY 2018 COPYRIGHT 2018 WARDROBE PLACE MANAGEMENT LTD HADI KABALAN, CFA

4. BLOCKCHAIN RECORD
Secured through cryptography
Once verified, can no longer be deleted or modified
Has no central point of control
Is available to all participants in the network
Is verified through a consensus mechanism
4
2 MAY 2018 COPYRIGHT 2018 WARDROBE PLACE MANAGEMENT LTD HADI KABALAN, CFA

5. TRADABLE FOR VALUE
Available to anyone on the internet
Clear, transferrable title of
ownership
Exchangeable into monetary value Example: Cryptokitties
Digital tokens with unique
characteristics (game-DNA)
trading at up to $150,000 per
token. They breed further
unique tokens. Unique, liquid
and dividend-paying?
5
2 MAY 2018 COPYRIGHT 2018 WARDROBE PLACE MANAGEMENT LTD HADI KABALAN, CFA

6. MASS-MARKET SECURITISATION
Anyone from anywhere
can issue a digital asset
or share an asset with
no intermediary
In very small or very large
quantities
And trade the asset with
instant settlement
6
2 MAY 2018 COPYRIGHT 2018 WARDROBE PLACE MANAGEMENT LTD HADI KABALAN, CFA

7. SOVEREIGN-ISSUED
CRYPTOCURRENCIES
Central banks have already tested sovereign-
issued cryptocurrencies:
Digitally-programmable money supply
Direct digital relationship between the user and
the central bank
Each unit is uniquely identifiable and trackable
7
2 MAY 2018 COPYRIGHT 2018 WARDROBE PLACE MANAGEMENT LTD HADI KABALAN, CFA

8. SOVEREIGN-ISSUED
CRYPTOCURRENCIES
Digitally-programmable monetary policy
could:
Restrict cash injection to specific uses,
e.g. healthcare or housing
Incentivise consumer or infrastructure
spending through programmed expiry or
accelerated value erosion of money
8
2 MAY 2018 COPYRIGHT 2018 WARDROBE PLACE MANAGEMENT LTD HADI KABALAN, CFA

9. COMMERCIAL BANK
RISKS - DISINTERMEDIATION
Risk losing deposit-taking role
Risk losing fractional reserve credit creation
ability
Risk severe client loss unless the customer
relationship is redefined around fee-based
business
9
2 MAY 2018 COPYRIGHT 2018 WARDROBE PLACE MANAGEMENT LTD HADI KABALAN, CFA

10. BANK-DEPOSIT FUNGIBLE
SOVEREIGN CRYPTOCURRENCY
Central banks know they have neither
the mandate nor the expertise to take
on the credit role of commercial banks
The sudden end of the fractional
reserve banking system would destroy
the economy
Political and social ramifications are
unacceptable in most countries… today
10
2 MAY 2018 COPYRIGHT 2018 WARDROBE PLACE MANAGEMENT LTD HADI KABALAN, CFA

11. BANK-DEPOSIT NON-FUNGIBLE
SOVEREIGN CRYPTOCURRENCY
Commercial banks could be part of the
currency issuance and verification
protocol
Could be subcontracted to commercial
banks to issue for domestic consumer
use
Exactly equivalent to physical notes and
coins in circulation
Programmable
11
2 MAY 2018 COPYRIGHT 2018 WARDROBE PLACE MANAGEMENT LTD HADI KABALAN, CFA

12. Instability in loan capacity
May require greater
liquidity, lower
leverage
Substitution risk
May require
development of
own crypto-term-
assets to retain
clients within the
bank’s network
COMMERCIAL BANK
RISKS - LIQUIDITY MANAGEMENT
Deposits
Loans/
Assets
Fiat Only Fiat <-> Crypto
Today Tomorrow
?
12
2 MAY 2018 COPYRIGHT 2018 WARDROBE PLACE MANAGEMENT LTD HADI KABALAN, CFA

13. COMMERCIAL BANKS
CAN PREPARE
Intensified global competition
Instant settlement without reliance on correspondents and
traditional network
Develop
KYC as a service
Credit-assessment as a service
Crypto-custody as a service
Crypto-asset broking and payment solutions
13
2 MAY 2018 COPYRIGHT 2018 WARDROBE PLACE MANAGEMENT LTD HADI KABALAN, CFA

14. 2018 Predictions
Regulators will define global minimum
standards for regulating crypto-assets as an
asset class
At least one global top-10 technology
company will issue a regulated crypto-asset
At least one emerging-market company
will bypass their own stock exchange to
issue a regulated crypto-asset
14
2 MAY 2018 COPYRIGHT 2018 WARDROBE PLACE MANAGEMENT LTD HADI KABALAN, CFA

15. Thank you
15
2 MAY 2018 COPYRIGHT 2018 WARDROBE PLACE MANAGEMENT LTD HADI KABALAN, CFA