Q&A: Bank of England Vet Says CBDCs Will Be a “Centerpiece to a Wider Ecosystem of Stablecoins”

The new director of CBDC and market infrastructure for crypto technology provider Fireblocks just wrapped up a 14-year tenure with the Bank of England. Varun Paul, who most recently led the UK central bank’s fintech hub and future of finance initiatives, sat down with Blockworks to discuss his move to crypto and how central banks are thinking about stablecoins and CBDCs (central bank digital currencies).  

Paul said he began thinking about crypto in 2018 while he was leading the Bank of England’s review of financial stability risks from cryptoassets and how the financial ecosystem could change by 2030.

Nine of 10 central banks are exploring CBDCs, and more than half are now developing them or running concrete experiments, according to a survey published last month by the Bank for International Settlements.

Nigeria launched its CBDC, called the eNaira, last October, and the Banque de France conducted CBDC pilots last year. Some other longer-standing central banks, such as the Federal Reserve in the US — which published a whitepaper on CBDCs in January — may take more time to get things running, Paul said.

Check out excerpts from Paul’s Q&A with Blockworks below:

Strack: Why did you make the move from a central bank to a crypto firm?

Paul: For a long time, [the Bank of England] was asking this question about whether cryptoassets could be currency, if they met the economic definition of a currency and whether central banks believe that.

We said, in 2018, this doesn’t really function as what we would traditionally think of as a currency because of stability, transaction speed and the ability to hold it, but a lot of these things have changed.

The security and the technology at Fireblocks was the thing that made me make the leap. Having been on the skeptical side before, it was this innovation that made me think this is the time to come across.

I understand where the central bank comes from, and now I have the beauty of this outstanding technology to try and make, for example, central bank digital currencies and tokenized settlement of financial assets, a reality.

Previously one of the biggest risks for a central bank would have been how can we make sure this thing is stored safely, isn’t vulnerable to hacks and can be transferred securely as well. [Fireblocks] increases the trust and increases the speed, and those are very key things that I think were missing before.

Strack: How are central banks thinking about CBDCs?

Paul: Nearly every central bank in the world is experimenting or thinking about a central bank digital currency. The world has become clearly more digital in the last five years, and there’s been increasing pressure from the growth in appetite and interest in cryptoassets and stablecoins. 

They’re in a position where they’re saying we need to be realistic about the fact that there are, for example, huge inefficiencies in cross-border payments, and many of the benefits of cryptoassets and stablecoins could be used in the system.

But there’s another element here, which is there’s a world in which more and more of the financial system — in terms of retail payments, for example — moves into a private form of money within cryptoassets and stablecoins, where it’s no longer part of the central bank’s control of money supply. 

A lot of the central banks will say there’s a reason we’ve been entrusted with creating banknotes and ensuring the stability and the credibility of that money. And so they will see themselves as having a role to play in the provision of a digital form of money that is trusted and that has the credibility of the central bank behind it.

Strack: Can CBDCs and private stablecoins co-exist?

Paul: I don’t think that any [central banks] will feel the need to suddenly say no other money should exist. Other monies, private monies have existed for centuries. But they will likely feel that a central trusted form of digital money is important if there are going to be private forms of digital money out there.

I think the central bank digital currency role in the future will be as this centerpiece to a wider ecosystem of stablecoins for certain things, other cryptoassets for other transactions and a network of central bank digital currencies, which will underpin the value of, for example, those stablecoins in that future ecosystem.

Strack: How might the collapse of Terra’s stablecoin have impacted the way central banks think about this space?

Paul: In a world where different stablecoins and different models are being tried out, you should expect some failures. I think a lot of people will be able to look through this if they’re thinking with a long enough horizon.

CBDCs aren’t immediate — they’re not going to happen next week, they’re a few years away potentially. They will be able to look through that and say we’ve learned something here about the market. We should go in with our eyes open, is probably what they’re thinking, and they will continue to progress with caution. 

But I think they will as a result continue to look carefully at the models that work for them and will want to be careful about exactly what kind of CBDC they devise on the back of that. It’s a learning [experience] for everyone of what may or may not work in the future.

Strack: What countries or regions have you had your eye on?

Paul: I think one of the most exciting innovations that we’ve seen…is the issuance of stablecoins [by banks] in Australia and New Zealand. So there you have an example of traditional financial institutions really getting to the heart of the innovation and driving it forward.

So that’s an example where the regulator and central bank can encourage the private financial institutions to adopt, and if they can harness that innovation, they can continue to drive forward further integration toward a central bank digital currency in the future.

Strack: Do you expect the US to develop a CBDC? If so, when?

Paul: The Fed has obviously put out their discussion paper, and it set out a few questions, but it’s clear that the US is early in its thinking. They’re obviously busy developing FedNow to move US payments forward a generation. So in a sense you can imagine that a CBDC will come after that, and it’ll be the next evolution. 

But there is a world in which US regulators say we need to get on the front foot on stablecoins and set the rules for how stablecoins should work and be clear about what stablecoins are and what they are not. In doing so, they also set a roadmap of what a central bank digital currency needs to do to support that ecosystem.

I get the sense that in the US the Fed is a couple of steps behind some of the other central banks…but they will have the tools and the thinking to develop that more rapidly if they wanted to.

Strack: How could CBDCs and stablecoins impact institutional crypto adoption more broadly?

Paul: There’s increased appetite from institutions, and we at Fireblocks are seeing that enormously at the moment. Institutions are willing to hold cryptoassets in their native form, and they want to engage with us because they want to have their own way to safely secure those assets and transfer them.

In addition, though, they’re still looking for clarity from the regulator. As an example of that, the kind of message sent by a central bank to say we’re happy with this technology, and we’re happy that there is a form of CBDC to move forward with, I think will accelerate adoption.

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