CFTC Seeks Industry Advice on Blockchain Applications

Not all central bank digital currencies (CBDCs) are created equal, a Georgetown Law Professor said during a Commodity Futures Trading Commission (CFTC) tech advisory meeting last Thursday.

A digital currency backed by the Federal Reserve was one of the main topics discussed during the four hour-long remote meeting, organized by the commission’s technology advisory committee (TAC). 

Chris Brummer, Georgetown Law Professor and Faculty Director of the Institute of International Economic Law, presented an overview of CBDCs, explaining how one might be designed and issued, on behalf of TAC’s Virtual Currencies Subcommittee. 

CBDCs have graduated from a niche idea to a topic that the U.S. Congress has discussed repeatedly this year. Advocates have called for a “digital dollar” as a response to the COVID-19 crisis,  and also as a way to confront economic threats posed by other nations’ tokenized national currencies. Barely a week after the CFTC meeting, the idea of a digital dollar as an economic weapon to fight China’s digital yuan was raised during a Senate Banking subcommittee hearing.

“A central bank can issue a CBDC in a myriad of ways,” Brummer said in the CFTC meeting last week.

Other industry experts also weighed in on possible applications and legal ramifications of distributed ledger technology (DLT), and compared the volatility of bitcoin and ethereum to other securities. CFTC Chairman Heath P. Tarbert and Commissioner Brian Quintez made opening statements while four TAC subcommittees made presentations.  

In his presentation, Brummer discussed six key design considerations for a CBDC that included the need to decide between an account or token-based model, meaning customers would either access currency though something like a commercial bank account, which would require identification, or through a tokenized system that wouldn’t. 

Another key consideration is whether the CBDC would be a currency with a retail or wholesale based system. A retail CBDC is reserved for the public to purchase goods or send and receive money, for example, while a wholesale currency will be limited for use by commercial banks and markets, Brummer said.

Brummer said the nature of a CBDC depends not only on how it is designed, but also on how the federal reserve would choose to issue it. A federal reserve could either issue the currency itself, or ask commercial banks to issue one on its behalf and ensure that it’s backed by the reserve. 

A particularly important application of a potential CBDC is how successful it would be in enabling efficient cross-border transactions, Brummer said. Stablecoins, or privately issued instruments that are used as a stored value or medium of exchange, are rising in popularity as a potential solution to that problem, he added.  

But a CBDC can have competitive advantages over stablecoins, Brummer said. In his view, stablecoins, like central bank currencies, are underpinned by varying degrees of trust in the issuer. “Central bank currencies can be seen as trying to provide more certainty and safety, if one will, behind the utility that a traditional stablecoin aspires to achieve.” 

He also noted that CBDCs and stablecoins are trying to solve some of the same problems, like facilitating the continuous movement of fiat currencies and contactless payments in the era of the COVID-19 pandemic. 

When the commission asked about the impact of a CBDC on financial stability and economic growth, Brummer said it was perhaps a “$1 trillion” question.

“If you have a retail CBDC, where ultimately the money creation that has been reserved to the central banks is somehow now being reasserted by the Federal Reserve, and where people and individuals are taking their money out of commercial bank deposits and putting that money in central bank deposits, that is naturally going to have a destabilizing impact on some of the intermediaries in the financial system,” Brummer said.

But no central bank that he knows of, Brummer said, is looking to disintermediate local financial systems to that degree. Central banks don’t have experience onboarding customers, or implementing know-your-customer (KYC) measures, he said. He also raised a larger question: If financial institutions’ capacity to lend money is undermined, could it lead to a “knock-on-effect” on GDP growth and monetary instability?  

The Distributed Ledger Technology and Market Infrastructure Subcommittee presentation discussed the resiliency and scalability of DLT systems through various applications of tokenization. 

“A potential reason for decentralization and the use of DLT is improved resilience to faults in the traditional system,” said Shawnna Hoffman, Global Cognitive Leader at IBM, adding that the bitcoin distributed ledger has proven relatively resilient to cyber attacks when compared to traditional systems. 

Mark Pryor, CEO of trading platform provider The Seam LLC, said that tokens can represent physical assets like a bale of cotton (weighing 500 pounds), but they can also represent a range of non-physical assets, for example carbon credits that represent one ton of carbon dioxide removed from the atmosphere. 

“In cotton in the United States, 15 to 20 million records or tokens of ownership are managed in proprietary systems today,” Pryor said. 

Pryor aligned the various tokens in these systems to the standards found in the ethereum token ecosystem. Ethereum tokens can be fungible (interchangeable) or non-fungible (unique). For instance, the non-fungible ERC 721, Pryor said, could be used to represent one-of-a-kind-products or “identity preserved commodities like a bale of cotton.” 

But ethereum’s relatively new multi-standard token, that allows one token to reference a basket of one-of-a-kind products, each with its own non-fungible token, can also improve batch transactions, Pryor said.  

Tom Chippas, CEO at crypto derivatives platform ErisX, discussed the volatility of cryptocurrencies like bitcoin and ethereum against other well-known traded commodities and securities. 

“Bitcoin is on average more volatile than the other securities and commodities noted. But there’s certainly some that have similar and sometimes greater volatility and though we didn’t do an entire comparison of all stocks say versus bitcoin, there [are] small cap U.S. stocks that had even greater volatility than bitcoin,” Chippas said.