Introduction

Since 2009 We’ve seen the introduction of digital coins such as Bitcoin and Ethereum, to name the most popular, and a multitude of new tools and technologies emerge to trade and participate in these new digital markets. We’ve seen these markets explode and collapse. We’ve seen controversy and numerous allegations of illegal behaviour. We’ve seen the best and worse of decentralisation and lack of regulation. But we’ve also seen the potential of a new digital financial system.

This is the first article in our Future of Finance series, in which Ricardo Correia talks about what is happening inside the global Banking sector with regards to digital currencies.

NOTE: all images were generated through AI using DALL-E in ChatGPT 4

Tell me a bit about your banking background

“I grew up in Zimbabwe in the 80’s” began Ricardo. “I was 16 years old when the Zimbabwe dollar went into hyperinflation and as a 16-year-old, you’re looking at, you know 20,000 percent inflation day by day, and at some point, it got to about a billion percent. And so super curious, at 16, trying to figure out how money works, and how all of a sudden money goes into kind of hyperinflation, and my curiosity of money, creation of money, its value, how it works and so on kind of stems from there”.

For many, the most recent memory of financial challenges stems from the global financial crisis (GFC) in 2007-2008. The GFC was the most severe worldwide economic crisis since the Great Depression of 1929. More recently we’ve seen an end to a period of stability, prompted by Russia’s invasion of the Ukraine. None of this compares to the experience of ‘coming of age’ in a time of hyperinflation.

“I did start in conventional banking”, he continued, “but always really on the innovation side of banking. Understanding how, you know, money works, what the role of banks are, what the role of the Central Bank is, how money is created, how money is distributed, and what alternative forms of money there are. So today, the work that I do working with R3 is really looking at Central Bank Digital Currencies (CBDCs), and Commercial Bank Digital Currencies, so how is the format of money changing”.

When you think about changing the format of money, it is slightly mindboggling. Civilisation has spent over 2,500 years trading and paying for goods and services with coins. But coins don’t support an always-on, global, digital economy so an evolution is required. “We’ve had paper money and coins for the longest time”, continued Ricardo, “and now we’re starting to see a transition into digital. Of course, that’s spurred on by a whole bunch of things, notwithstanding crypto, which I think has been the biggest kind of catalyst for the regulated sector to really look at money and digital money seriously”.

What’s your view on digital stability?

On one side we have the perceived stability of the big financial institutions. We’ve spent a few hundred years entrusting them with our money. They are strong and secure, or at least that is our perception from mental image of vaults and security guards and sophisticated alarm systems in films. They are regulated. They sign-up to codes of conduct. They are often affiliated with the government. They have audits and insurance.

And yet, we have hyperinflation, global crises, unethical practices, hidden fees, complexity, huge bonuses, government bailouts. The global financial crisis was underpinned by subprime lending, bundled into financial products that hid the risk. Nobody really knew how exposed the financial institutions were, with high levels of leverage and a liquidity crisis that meant they found themselves unable to meet short-term obligations. Again. This wasn’t the first time we’ve seen very similar behaviours and crisis.

On the other side we have digital finance. It is decentralized. It is open and public. It promotes financial inclusion for the unbanked and underbanked. It is inherently global and real-time. Yet digital finance too has developed some very negative press, especially from its lack of regulation. Binance, the world’s largest crypto exchange by volume, has been hounded with allegations, and money launderers and ransomware attackers have all utilized crypto because of its anonymity and ease of transfer.

With his insight from conventional and digital finance, I wondered what Ricardo’s view was of this juxtaposition.

“So, you said perceived stability and that’s kind of interesting, right? Because you know, you could argue that this stable system is not as stable as we think. The perception of stability is provided by regulated entities, that have compliance against the things that they do, and checks and balances, and whole bunch of things to at least provide as much stability as possible”. Ricardo seemed to agree that this stability was indeed perceived, “We don’t quite know how things are operating, and it’s made complex by design, and it’s designed by the banks for the banks, and all this conspiracy theory stuff”.

“If you look at the mechanism of how money is created, and let’s just start there for a second”, he continued, “today you’d say that actually, the way that money is created is Richard walks into the bank. He wants to buy a house for 1,000,000 bucks and at that point the bank creates $1,000,000 for Richard. They go to the Ledger, they create a liability on one side, create an asset on the other side and at that very moment money is created. So, money is created today during the function of enabling loans and loans come in the form of mortgages, credit cards, credit kind of business lines and so on and so forth … in a way, money is kind of created out of thin air”. This really resonated with me and how many people think of cryptocurrencies: they only ever exist in a digital ether; they are non-physical and are created by strange mining concepts that impart an inherent value. Maybe the two systems are more similar than I imagined.

“If you look at the current regulated system that’s been operating for many years and you look at crypto that’s just emerged in the last 10 to 15 odd years, not even, 2009, there are certain things that you take away from both to say, you know, there’s good and bad on both sides”. This felt like a really fair statement from someone with real-world experience of both systems.

“What I do really like about the crypto side is, you’ve got more real time impact on monetary policy. So, you know today you’ve seen inflation throughout the world. You’ve seen the central banks hiking for 12/13/14 months and then you sit and wait for six months to see what the impact of those hikes. Arguably with a more digital form of money you have more real time impact. Like if I up the inflation rate, what is the impact across the ecosystem. You’re able to see a much shorter view of the impact versus sitting and waiting and hoping that you know consumer confidence is going to pop up and Richard is going to go back onto the street and buy stuff.”

The three things for me that I like to think about are money, assets, and identity. And those three things arguably are the pillars of the web 3 economy

One of the things the current financial system is not, is real-time. As Ricardo pointed out we have to wait months to see the impact of monetary policy. From the banking work I have been involved in, and from people I have spoken to recently, there is still huge amounts of inefficient ‘end-of day’ batch processing to finalise transactions, and an accurate financial position of a bank can be difficult to attain. Many banks still have unsupportable systems at their core, so old and so little understood that nobody dare update them. “Being able to move money around the world at the speed of an email”, said Ricardo, “we’re seeing some of that today; Revolut and TransferWise [recently rebranded as Wise] and others … It’s still not real time settle. I mean, those things are perceived settlement between you and I, but there are end of day and intraday processes that run in the background to manage settlement kind of finality. There are a lot of inefficiencies and cost in that.”

Again, this aspect of conventional banking started to resonate with complaints about crypto, “We talk about, you know, things like, Bitcoin being very heavy and not very green and so on and so forth, which is true, it’s not. But if you take the entire financial system today globally, I mean, how much are we burning? You know, we’ve really got to measure apples for apples, and oftentimes we don’t”. Perhaps the two systems aren’t that dissimilar after all. Yes, there are environmental concerns over the huge processing power required to mine Bitcoin, but is the current system any more efficient? Or perhaps we have more awareness of the impact of Bitcoin because it is exposed, it operates in the open.

Ricardo started to discuss some of the new opportunities that become possible from a digital system powered by new technology, “The fun thing to think about is, you know, things like fractionalization of stuff. If I have a house and I’d like to just sell 10% of it because I need to raise some capital, why wouldn’t I be able to do that in a secondary market just by myself, right? I can rationalise the property, put out a whole bunch of tokens, sell it in a secondary market in a safe space, right, under certain conditions, using smart contracts and what have you. But that’s fun to think about. So, you know, kind of everything becoming a little bit more liquid. And if you like, again somewhat controversial, the power shift from corporate to individual where we’re in control as well, you know. That’s fun. Like why shouldn’t we be? It’s our assets and our stuff.”

Do you think the tech has driven this revolution or do you think the revolution was looking for tech to support it?

“The big catalyst that I saw, and it was a funny story”, began Ricardo, “the BIS, the Bank of International Settlements, back in March 2019, was clear that there was no case for a Central Bank Digital Currency, or commercial bank digital money. In July, just three, a few months later, the tone turned to oh crap, I think there definitely is and we should start looking at this seriously. And the catalyst there was Facebook Libra … all of a sudden, big tech getting into money and creating, you know, a form of value that could be used in real time, globally, across 1 billion people, the largest economy, virtual economy out there, right, or community?”.

“That’s a massive threat,” Ricardo continued, “because all of a sudden, you’re like, shit, if Richard and Ricardo are using an alternative form of money, I can’t enact any monetary policy. I can’t enact stability, and so all the things that I’ve been set up to do as a central bank are irrelevant, redundant. If that’s the case, do we need you, Mr Central banker, Mrs Central banker? And so those things become quite threatening … my sense is, there certainly is an opportunity for reform. New technology, not just blockchain, AI, others, quantum, should enable us to rethink how we’ve laid all this piping, all this infrastructure, all these processes, which are inefficient, right? And so, there’s a great opportunity”.

Bitcoin has been around since January 2009. Just over 10 years later, the BIS has decided to enact digital currency. Even then it was in response to a huge, disruptive threat from a tech giant looking to enter the financial system. In the world of banking and finance, especially where global policy change is required, 10 years is nothing. 10 years in technology has seen the iPhone go from 0 to 1.2 billion devices globally. ChatGPT was released on 30 November 2022. 5 days later it reached a million users. It has been dubbed the fastest growing Internet application ever, with an estimated 100 million monthly users in January 2023. Technology is fast. Again, there is a juxtaposition between finance and tech, or perhaps even finance and the digital age. From the outside, the financial system doesn’t seem to be adopting digital currencies. Is this case or are governing bodies being diligent and considering financial stability, regulation, and policies – I put this question to Ricardo.

“First of all, is the world becoming more or less digital? I think that’s an easy answer. And then if we go, OK, well, if we believe it’s becoming more digital, do we believe that there is a new opportunity, an opportunity to deploy a new form of money, right? Regulated money. Institutional, regulated money, that is safe, but has, you know, kind of next generation properties as we’re seeing in the crypto space? Do we believe that fiat money and Central Bank money will become more digital? And the answer there is yes, absolutely we do. And you know, these are central banks. They move very, very, very slowly.”

“The work that we’ve been doing is 7 years old. We’ve been working with the central banks for seven years and the first question was, what is this technology? And then you spent 3-4 years saying, but it’s not Bitcoin, it’s not Mt Gox. It’s none of that stuff, guys. And so, we’re way past that now. We’re way past the does the technology do what it says on the box”.

Ricardo had highlighted two clear pointers to the technology driving the revolution. The central banks were trying to understand what the technology was, they weren’t necessarily looking for ways to create a digital future. Big tech trying to muscle their way into the financial system resulted in a response. Even the anonymous entity or group known as Satoshi Nakamoto, who introduced Bitcoin, described their motivation behind the cryptocurrency in their original whitepaper as a way to create a decentralized digital currency that operates without the need for a central authority. This can be seen as a response to the perceived shortcomings of the traditional banking system, such as the reliance on central banks, the possibility of government manipulation, and the lack of privacy, that had just triggered the global financial crisis. They wanted to use the technology to disrupt. This is exactly what Zuckerberg and the Libra Association were trying to achieve too.

Ricardo went on to explain that the technology is no longer the challenge, “The critical path for us now is, what is the monetary policy impact on introducing Central Bank Digital Currencies on blockchain, right? What is the economic impact of doing that? And so, we’ve moved away from the tech … the tech will do what it says it’s going to do. Let’s just understand the impact of these things”.

He began to elaborate on the level of adoption that is taking place, and where the challenges lie, “Let’s just say there’s 180 countries. 89% of them are actively working on Central Bank Digital Currencies? If the Central Bank is working on new forms of money, the commercial banks need to be thinking about that as well, right? All those commercial banks are looking at, what is the impact of the introduction of the Central Bank Digital Currency? It’s positive and negative and there’s been a lot of tension there for a while, right, because the first thing the Commercial Bank thinks is, well, crap, if you introduce a Central Bank Digital Currency and you distribute that directly to Richard, well then he’ll take his money out of my deposit account and he’ll put it into this new form of money, which is smart. You can tell it what to do like, hey, at 12 o’clock if this condition is true, pay that guy and the money just does whatever you tell it to do. Super cool”.

Smart contracts are little bits of code that can be added to a blockchain. The code, like the blockchain transactions is public. Smart contracts can be set to automatically run when conditions are met, which can give the perceived experience that the money, in this case, is intelligent and able to make decisions.

“So, then you’ve got this real big threat of credit allocation and deposit reduction, right, on the commercial bank’s side. And so, you know, lots of kind of back and forth and trying to find the right models. And today I’d say to you that we’ve kind of landed on the model that everyone is pretty pleased about, you know. A two-tier intermediate model. What does that mean? It means that the central bank issues a central form of money, and the commercial banks distribute that form of money either directly, but being able to create smart contracts and programmable money around it, under certain conditions, or by reissuing that form of money as a tokenized deposit, which itself carries smarts and a whole bunch of cool stuff. So, no one is disintermediated in this new world, right? So that’s been the tension, but it’s taken us a long time to move the entire, and it’s the, it’s kind of the whole world kind of view if you like. What does that new form of money look like, and how should we deploy it?”

Do you think there will be a single global digital currency?

When we think about the current financial system, the US Dollar is ubiquitous and is often considered the global currency, particularly in countries where their local currency is unstable or weak. Going back to Ricardo’s experience in Zimbabwe, the US dollar became the default currency for everyday transactions as it was stable and reliable – from one day to the next it held the same value. I was curious to see what Ricardo thought about the prospect for a single, global currency.

“So firstly, yes, the US Global reserve, I think it’s sitting on around 68% of all global trade, maybe 65, I don’t know, it’s corroding a little bit, but 65-68% of all global trade is made on the US dollar. The reason for that is because it’s stable and secure. And we can unpack that, like why is it stable? Well, because it’s got a big military, and it’s got a stable Government, and all these things that go OK, well, you know, we trust that form of money, and it’s readily available, I suppose. There are initiatives today that are looking at, you know what alternatives there could be to that.”

“One of the projects, mBridge, is a multi-central bank issuance platform, where multiple central banks are issuing into this network their own sovereign central bank digital money, and then that money can be used for trade. So, then you can pick and choose. So rather than just default to the global reserve, you might have some smart conditions like hey, what is the best currency out there today that is going to be the most cost effective, and time efficient for this particular transaction, and then just give me that currency to fulfil this kind of payment. So smart money, smart payments. So maybe that’s the way it goes, where you’ve got these networks of multi issued central bank money, and then you’ve got smarts, smart contracts that then pick and choose depending on the conditions that you have, right? So that’s fun to think about you know, so you don’t just default to something. And then your exposure is reduced to just that transaction – hey, it needs to be stable for the next 30 seconds, or 20 seconds, 10 seconds, 5 seconds, or whatever it is.”

“But certainly, it’s not lost on the US that, you know, being the global reserve is important. And so, you know, working on certain initiatives to be able to maintain that position is going to be important for the for the US and the Fed. And one of them in particular you may have seen, a project called the Regulated Liability Network? The Regulated Liability Network was a project just run recently by the Fed. They released the paper on it just recently, a couple months ago. For those folks that are interested to have a look at that, you know that paper makes certain steps towards statements around how, you know, a digital US dollar may be able to help preserve some of those kind of positions.”

In 10 years’ time, what difference will people see with digital currency?

I normally ask what difference people will see in 20 years’ time, but as the whole IT landscape and global innovation is moving so fast at the moment, I felt it more pertinent to ask Ricardo what 10 years in the future might look like. What would somebody going about their day-to-day life experience when digital currencies enter circulation.

“You know, if you went to a dinner party today, ten of your friends sitting around the table and you asked them if they know the difference between the £10 in their pocket and the £10 in their Barclays Bank app, would they know the difference, do you think?”

It is a really interesting question. If you were asked the same question, would you know the difference?

“They wouldn’t care. They’re like, that’s the same thing, right? It’s £10, but it’s not at all. It’s completely different. So those two forms of money are completely different, and they carry completely different risk profiles. So, you know, 10 years into the future, I don’t think the retailer is going to know any different. Right? It’s like, oh, this is your form of money, just like the old one, but it’s got smarter. Maybe the retailer will see that there’s a smarter form of money. So let me give you an example. So, you have a Barclays app, right? Let’s just say so because I bank with Barclays. I wake up tomorrow and I open my app and it says, hey, we’ve got a welcome message. There’s a new account that’s been opened for you called Central Bank Digital Currency. Right? The CBDC. You’re like, wow, what does it do? Well, you can tell it what to do. You can put conditions on it. It’s super smart. It’s working for you whilst you’re sleeping, right?”

You could see that happening, right? Often when you open your banking app of choice there’s a message about something new: a new type of account; a new balance transfer offer on your credit card; a new way to invest money. This seems like a perfectly natural prompt to appear in your app.

From a user experience point of view this sounds amazing. Years, probably decades of work behind the scenes, creating a whole new financial system, and yet you can be onboarded within a couple of minutes just by answering a simple question. But there’s obviously much more going on under the hood, and I’m not just talking about changing fiat into digital. Global financial stability is huge, it has such an impact on people’s day-to-day lives that the Central and Sovereign Banks cannot simply take a chance and hope it is OK. Remember Ricardo’s experience growing up in Zimbabwe with hyperinflation? Remember the Global Financial Crisis? Remember the recent recession? Imagine all of those things affecting every country and every individual if the new digital financial system wasn’t well thought through and fit for purpose.

We’ve seen plenty of issues with crypto and whilst lots of people have made their fortune, many have lost theirs. The Banks cannot risk similar issues with their client accounts – this is why everything takes so long.

“There’s a story around, you know, Richard does 8 hours work of every day and at the end of the month he gets paid. Why doesn’t Richard get paid every second that he’s working? So, you know, his app is just filling up with money as he’s doing the work right? So, it’s super liquid.”

“It’s not going to be like that in 10 years, but you’d imagine that money becomes less lumpy, more liquid, and assets become more digital. You know, you can tokenize your car and then you can flick me the token, and I can flick you some money, and then all the paperwork and all those shenanigans, are kind of settled for you.”

Final thoughts

From the outside, it has felt like the Banks aren’t really doing anything to adopt crypto or digital currencies. It has seemed like people around the world have been playing with these new types of digital money in the Wild West, where there has always been a tension between digital trailblazers and opportunists looking to exploit the system. Banks don’t like instability and the whole cryptocurrency space is hugely paranoid and volatile.

In reality though, there is a tremendous amount of work going on to balance the existing banking system with a new, digital banking system. By examining and taking the learnings from the last 2500+ years, and the best of both systems, and considering regulation and stability, a new future, global digital currency isn’t too far away. This future system will support even more global integration and trading, and provide new opportunities for innovation. Hopefully one of these benefits will be that the openness and visibility of the current blockchain implementation that Satoshi Nakamoto intended remains, and a new breed of banking will emerge that is also inherently open and trusted by design.

Part 3/3 with Ricardo Correia, talking about whether there
will be a single, global digital currency, how one or more digital currencies are likely to manifest in day-to-day life, and what some of the benefits might
be.