Digital Currency Revolution: Brazil's Drex and the Future of Coexisting Stablecoins and CBDCs

Speaker A: Foreign.

Speaker B: Hello everyone, my name is Riley Fay. I'm um, the digital content and media lead here at GBBC and we would like to welcome you to Emerging Topics in Blockchain Law which is presented by the GBBC Initiative, the International Journal of Blockchain Law, also known as ijbl. IJBL is an open access online journal written and edited by lawyers and designed to help business and non legal legal communities better understand the world of um, blockchain and digital assets. So if you have any questions throughout the session, please feel free to put them in the Q and A box below and we will do our best to get to them if we have time at the end. So thank you so much. I will now turn it over to IJBL's editor in chief Matthias Arts to introduce the session.

Speaker C: Yeah.

Speaker D: Hello everyone. It's a pleasure to introduce the panelists. Let's start with Nina Moffat. She's a partner in the London office of Paul Hastings. She has been focusing her practice on providing legal and commercial advice on regulatory requirements across Europe and on helping regulated firms comply with evolving regulatory obligations. She has particular expertise in cross border offerings involving crypto asset products and product design. She also assists clients with their relations with UK regulators, including crypto asset applications for registration and supervisory issues. Then we have Diego Ballon Osio. Uh, he's a partner at Clifford Chance London's Parenting Fintech offerings. His broad regulatory practice bans across the entire spectrum of non contentious financial services regulation covering trading, custody and settlement of traditional investments and digital assets as well as strategic advice to regulatory authorities on the design and development of new regulatory frameworks. And last but not least, we have Guilherme Centenaro Helvik. He's a legal professional who currently serves as a legal counsel at the Central bank of Brazil. He currently is working in the Monetary and International Unit at the Central bank of Brazil in Brasilia covering matters related to CBDC and tokenization of financial assets. He has an extensive academic background with a particular focus on regulatory internationalization in the Brazilian financial system. His expertise lies in areas such as financial regulation, economic law, administrative law and international law. In addition to his role at the Central Bank, Guilherme is also a guest lecturer, um, in the post credit law courses. With that I would like to hand over to Eric. Thanks a lot.

Speaker C: Excellent. So, uh, I'm really excited about this panel discussion today with such an esteemed group and uh, for anybody who is expecting like a CBDC or stablecoin 101, you are going to be disappointed. It because we've we've got some interesting ground to cover today and um, you know we're going to just get right into it. So um, you know, you know we have expertise here and practical expertise with regards to the Brazilian market with G and also uh, like in the Middle east with Diego, some of the countries that he's been working with firsthand on, on what they're rolling out. Uh, so with that um, I'm just going to ask a general question to uh, both Diego, uh first then Guillaume. How are countries like Brazil and uh, the UAE considering stablecoins and CBDCs as part of their policy objectives?

Speaker A: Sure. Um, I think that the important point to set out first is to think about how the CBDC movement sort of got kicked off. And I think the, the real catalyst for that has been the proposal by the Libra consortium which included Facebook for the creation of a global stablecoin. That's I think what I would point to as the genesis of central banks considering their position around digital payment tokens. It may have started sooner but I think that certainly give it the boost that we're now perceiving when jurisdictions are thinking about their products. And so when you think about CBDCs from uh a central bank perspective I think it's a way for a central bank to deploy the technology whilst at the same time retain the monetary policy grip that they have on the wider currency. Whereas stablecoins are more an add on they are akin to commercial bank money m sometimes privately issued um tokens that will facilitate the payments but are sort of ah not an m m0um concept that they sit along underneath that and would then facilitate the wider interactions in the retail economy.

Speaker E: Um well speaking about Brazil uh on stable coins uh from a regulatory perspective we are still uh beginning to address this matter. Uh recently in 2022 the Brazilian Congress a law about um digital asset Service providers and after that uh a presidential uh decree gave the Central bank of Brazil a mandate to regulate the subject. So uh, we recently had a uh public consultation on that and uh, currently we're having internal studies and debates on that matter. So we still don't have a uh, final regulation on stablecoins which is expected uh in the end of this year. Uh, but about cbdc we have uh an initiative, it's called the Drax Initiative, it's the Brazilian cbdc uh and it's part of uh a broader strategic innovation agenda of Central bank of Brazil uh that also includes uh, fast uh payment system pix which was very successfully implemented UH in 2020 and also open finance. And then with uh, the development of cbdc, uh, we expect basically to explore the benefits of tokenization but also to preserve the central ah, role and relevance of central bank money and its settlement function.

Speaker C: Excellent. And one of the genesis for doing this podcast was um, the structures that Brazil and UAE and others are exploring and how they all interconnect between the different forms of tokenized uh, fiat or payment. Um, and so in having this discussion today there's going to be a few different concepts, uh, tokenized deposits and E money stablecoins. And uh, I'd like to sort of unpack uh, some of that here before we get into it because uh, you know, in addition to this the you know, DREX is sort of what is known as a two tier system with regards to CBDCs and these concepts become very relevant. So Diego, uh, uh, if you could kick off and then we'll follow up with Nina on this question.

Speaker A: Sure. I mean I think the, there are lots of proposals and lots of different concepts. So I'm unavoidably have to sort of summarize and synthesize and I may, and I may take views that are not necessarily those of every project, but I think we could take the position that generally speaking a CBDC is um, an M M0 money proposal which is backed by the central bank and either used for retail purposes or wholesale purposes or both. Um, whereas when we think of electronic money and stablecoins, certainly in the EU and in the UK I would regard those as variants of each other. And the reason for that is that you know, we've got a very long standing electronic money framework in the, in the eu even before Brexit and now it's inherited in the UK and that framework for electronic money effectively defines electronic money as uh, prepaid spending power. If you want to look at it that way. It's basically a claim on the issuer. The issuer is a non bank issuer, although banks can issue it too technically. And um, the point is that the funds received when there is a non bank issuer will be ring fenced and held in a pool. A stablecoin is simply a token that tries to retain its value and it does so through some sort of mechanism that may be uh, some sort of algorithmic mechanism. M but in most cases in the most widely used stablecoins are stablecoins where the pool of money that's been received is, is, is said to equate to a claim on the issuer and is held in a pool and you can See how we very quickly then start going into, into some sort of um, conflated concept where you know, stablecoins are, were meant maybe initially from an international perspective to be something other than electronic money, but actually because of the definition that we've got, this very broad definition of electronic money, certainly in the EU and in the UK they start to conflate.

Speaker E: Yeah, well, um, I'm sorry.

Speaker F: No, no, no, no, you go

Speaker C: dear me.

Speaker E: Well, okay, um, then, um, uh, well, I think it's important about Drax, uh, to make it clear that it's still uh, being developed. It's not complete yet. So although it's already possible to have an idea of its uh, general characteristics and key features because they are periodically updated by official guidelines, there is still some fundamental technical and operational decisions that yet had to be made by Central bank of Brazil until Drax final implementation. Um, so we have a pilot going on and uh, the basic idea, uh, about Drax, and this is really important on its model of CBDCs that uh, central bank of Brazil intends to develop not only specifically a cbdc, but also uh, a programmable platform where a uh, tokenized version of a uh, wholesale cbdc, which is Drax, interacts with ah, tokenized versions of uh, commercial bank deposits and tokenized E money, uh, in order to reap the benefits of tokenization. Um, so, um, uh, the basic idea is to reproduce in this uh, programmable platform, uh, the current structure, uh, the two tiered structure of uh, the monetary system. So uh, we still don't have the final version of it, but basically it reproduces bank deposits and e money in this programmable platform. So uh, the legal characterization of bank deposits and E money that we have in Brazil, uh, will probably apply that to this uh, tokenized versions of uh, uh, deposits and E money in this programmable platform. That's where we stand now.

Speaker C: Excellent, excellent. So to take a bit of a step back now and sort of think about the regulatory frameworks and the policy objectives more broadly. Nina, I'm just wondering if you could sort of kick off um, you know, some of the regulatory concerns regarding uh, these different instruments that we're talking about today, including things like, you know, the you know, stability, uh, competition with fiat, uh, implications for monetary sovereignty.

Speaker F: Yeah, I think let's focus on, I think E money as Diego says, has been around a long time in the UK and the EU as a concept and sort of started in that traditional sense of uh, a prepaid ah, card and has been stretched. But I think where the focus has been, frankly from the legislative perspective in the UK and the EU and particularly in the UK is on stable coins. Now I think to think about the regulatory concerns, you take a step back and say, well, what do they do, you know, what are the use cases for them? Um, and the UK government has, has recognized that stable stablecoins paved the way for faster and cheaper payments and that the use of stable coins has been on the rise for some time. Um, the UK government reported that in June 2020 the value of transactions in stablecoins exceeded Bitcoin for the first time. And we're seeing in continued growth of stablecoin use. Um, so certainly from the UK perspective, I think it's also true from the European bodies and certain other regulators and governments is that if there can be appropriate standards of regulation imposed, then stablecoins do have the potential to play a really vital role in retail and cross border payments, including settlement and to deliver things speed and efficiency and resilience. I think you already see that in the market with the likes of, um, you know, private crypto asset companies, digital companies like Ripple, using XRP as a bridge currency to move, um, money. And the big differentiator they have in the market is that they're doing it in three seconds rather than three days to move international payments. So I think you're seeing a lot more, I also think that you see in the payment in the crypto ecosystem, uh, stablecoins being effectively the cornerstone of liquidity. Um, if you deal with crypto asset firms that, that is, you know, they're always looking at the stable coins. So in against that backdrop of what they are and what they can be, there are risks. Right? You know, the more widely they're used as a means of payment, the more uh, financial stability and real economy risks they pose. Um, the UK government certainly recognize that there is an intrinsic risk to consumers. There's a risk of misunderstanding. You know, what are they. And I think Diego made that pa. What are they are a regulated money product. Are they unregulated? What uniform do they wear? And therefore what protections do consumers, um, and market participants who use them have? But I think the big thing that sticks out to me with stablecoin risk as compared to CBDCs is that you know, the preeminent ones in the market are private issued. So you are taking the risk of the issuer because you know there is some sort of claim against that issuer. Uh, you know, you are taking the risk of third parties in the ecosystem that move those stable coins around. So you know that that is A big key risk. So as a result of all of this and potentially what I think you're seeing is certain market dominance of certain stablecoin issuers as well. Um, I think that's what's prompting the, certainly the UK government to decide to address those risks. With the idea of moving this into kind of uh, a more regularized environment so that stablecoins could continue to develop and flourish, uh, maintain a stable value as well, is that you'll get, you're seeing UK regulation for example, coming in for fiat backed stablecoins. That will be a regulatory framework. There will be regulation for prudential and conduct purposes. So I think that's sort of a kind of chronology of the why and why we're seeing regulation in certainly in the UK and EU from a stablecoin perspective.

Speaker C: Excellent. And so as we start to approach some of these challenges, um, and I guess probably more so, um, you know, for the, for stablecoin. Um, but, but how do we, you know, what are the regulatory focuses for CBDCs compared to these, these concerns for, for stablecoins? Uh, Diego, do you want to lead off on that?

Speaker A: Sure. I mean I think it's that the points that Nina was, was making are being, are the primary risk focuses and so they're trying to be addressed. Right. So the main issue is you've got a non bank, non bank actor potentially issuing spending power. Um, and that is uh, you know, meant to be secured against the claim against that issuer. And so the key question for the regulator here is how do we safeguard the consumers rights to that, to that, to those funds? Um, you know, as we know banks are subject to capital requirements and you know, they're subject to very stringent rules around what they are allowed to do with capital. A private issuer that's a non bank, non bank actor wouldn't be subject to that. So what's the equivalent? And I think the UK and also the EU are playing around with, with certain protections, not allowing the pooled assets to be used, uh, for other purposes other than potentially investing that the assets must be held in a highly lucrative form. They can be transformed easily, um, and then giving some sort of right of redemption to every user that's holding the coin so that you have a direct claim against the issuer and you're not somehow sort of um, in a two tier structure where you couldn't, even though you're holding the coin, you couldn't go back to the issuer and convert them back into your traditional money. You know, those are the legal measures that are being thought about and implemented in the eu. We see that already in the context of stablecoins that also qualified as electronic money in the uk. That's at the moment the still proposal. But I think that's sort of the trends that we're looking at and creating a way in which consumers can be safe. I think that the second point then is making sure that the operational risks that exist, uh, as a result of the use of this new technology are fully understood and adequately mitigated. Um, and that's a question, you know, we're seeing that at various levels at pcbs. We're seeing it at levels of Iosco and others, of international standard setters providing guidance and saying, you know, there is operational risk. It's the new type of operational risk that the financial markets have not fully understood or have not yet having to dealt, dealt with in the last few years. And so now we need to focus our minds onto that and how do we mitigate that. And this is where some of the questions which, you know, may, may seem absurd from a regulatory, from, from a, from a um, user perspective come. For example, like you shouldn't be using public blockchains, you know, you should only limit yourself to private chains, et cetera. Where does that balance it? I think we're, we're all working towards finding that out and I think regulators quite rightly are starting to, to err on the side of caution and you know, putting in place restrictions so that we know we've got a quantified level of risk that we can mitigate.

Speaker C: Right. And I guess touching on that point of caution is, you know, particularly when we're addressing concepts of like systemic ah, risk which, you know, it seems to be, you know, ever since 2008, systemic risk is sort of, you know, taken on a greater significance. Um, you know, what are your thoughts about how this, this focus on systemic risk for now, like a new product, you know, like stable coins or CBDCs, how it's potentially, um, even potentially creating more systemic risk, uh, because everything sort of has to follow a sort of a more unitary structure that may itself present its own systemic risks and it sort of limits the ability to innovate. And, and you know, oftentimes there's failures in economic systems. If they're little failures they make, they're better for adjustment than big failures. Which, you know, if you get rid of all the little failures then you just have big failures. Right. And that can be even more systemically risky. Like um, maybe, maybe I start with Guillermo and we Just go around, you know, on that point. What are your thoughts about like um, maybe an excessive focus on systemic risk and how that, how you know, how the regulators are actually balancing sort of the pressures of innovation or you know, embracing the new technology versus sort of a unitary, more traditionally focused, uh, version of systemic risk.

Speaker E: Uh, well, I think uh, there are two sides of this question. Uh, well, firstly concerns, uh, related with the risks associated with the use of private stablecoins, uh, uh, was one of the reasons that uh, were stated by the Central bank of Brazil to develop a CBDC as an alternative, uh, in the crypto economy, uh, that could be used relying in central bank money. On the other side, as I told you, uh, we still don't have the final regulation on stable coins. But, but uh, at least in a preliminary assessment, there's no intention to ban the use of stablecoins. The idea is to make it sure that it complies with Brazilian legislation and uh, with uh, concerns about business, uh, of conduct and uh, anti money, uh, laundering and uh, well, overall financial stability. But uh, I think that there is this idea that both this tokenized version of uh, central bank money and also private stablecoins, uh, should coexist. Uh, and still, we still are taking the technical and operational decisions about that. But one of the official guidelines about the Drax initiative is to secure interoperability, uh, not only with the traditional uh, financial system but also with crypto assets and specifically with stablecoins. So that's a, a guiding principle of our regulatory approach.

Speaker C: Excellent.

Speaker F: Uh, Nina, I suppose I playing up with your sort of innovation point. I think it's a very interesting point. Whenever you get um, regulation like does that promote innovation, competition or does it not? And I think sadly having practiced uh, in the fintech space for a while, it doesn't often have the consequence of creating more competition, um, legislation. In reality, um, I think if you look at stable coins, I think the increased regulation coming out of Europe on the, on in pipeline for the UK I think is going to impact private issuers of stable coins. I think it already has started to the cost of compliance for what I would say the traditional crypto players who have issued stable coins, I'm not sure we're going to see in that same level in the new world. Um, I do think that what you, you are seeing will probably see is UK and EU banks, particularly EU banks, um, you know, diversifying their own sort of portfolios into, into stablecoin issuance. You see that already in Europe and lots of European banks continue to Explore that area. So not to be the, you know, the pessimists about innovation, but I think certainly there will be a change in the market participants in this sector. Um, I think there will probably end up being a shift more to the you know, the, the tradfi getting into the innovative products rather than the you know, the sort of initial innovators possibly having the same position they have at the moment.

Speaker C: Excellent. Um, so shifting back to, to like the interplay of CBDCs and versus stablecoins. Um how could CBDCs serve as like you know. Ah, following up on nia's point too. CBCs serve as like sovereign digital money competition, disable coins and, and what would be the regulatory implications of this competition? Maybe uh, you start with Guillaume and then, and then Diego.

Speaker E: Uh, well the idea uh, is that uh, to offer uh, building on the trust of central bank money to offer uh, and tokenized alternative in a kind of way that competes with this uh, private options ah presented by stablecoins. So um, that's the reason why uh, um the main objective of developing a CBDC in Brazil, uh it's not um, restricted to the CBDC but also to developing this whole programmable platform that goes beyond the settlement layer. It has this broader objective to uh, enable uh, Brazilian citizens and companies to um, inject the benefits of uh, functionalities like uh, smart contracts and composability, uh in order to offer this alternative to, to the crypto economy and specifically to private stablecoins. Um, so yeah I think that that was one of the reasons that led to this more ambitious project uh, of developing a programmable platform.

Speaker C: Excellent. Uh, Diego? Yeah.

Speaker A: I mean I thought your question is interesting because it can be answered from two, from two perspectives I would say. You know, if you think about um, the user, the user perspective I think, you know, how could CBDC serve as a sovereign competitor to stablecoins? It's all about the use case. All about the use case and all about what, what this, what the CBDC allows the user to do. Right. And in that context some really mundane things can drive adoption. To give you an example, in the, in the UK we've had TAP technology, contactless payment technology for a long time. But it only got adopted when something as trivial as the tfl, the Transport for London, opened it up for you know, basically day to day rail travel. When that happened, people started using the contactless payment functionality of their wallets much more that opened up the mass uses and then it sort of started to sip into other payment um, methods and now I Think in, in the UK we've got, you know, really, really high adoption of contactless payments. From the user's perspective, I think there is, it's. They don't care about the legal, the legal position of one money versus the other. They just care about convenience, about the particular way in which you can use it. So, you know, the only way in which CBDCs can compete is if they can convince the user that it's a better, that there's something in it for them, that it's a bit seamless use, um, you know, particular ability in certain products or whatever it is the use case will drive that. I think if you think about from a legal perspective, then it becomes more technical, it's less sort of user focused and it's more around, you know, can the singleness of money be preserved through the use of, of CBDCs and other. And other things. And when I talk about singleness of money, I mean, you know, this very unconscious thing that we do today when we, you know, take out our bank card and pay someone for that is exactly the same as using a, uh, $10 note or you know, uh, a uh, coin or doing some other, you know, transfer via the phone. For us, that's the same as users. Uh, but that's only possible because the value of each of these payment methods is actually the same. So we've achieved singleness of money. Money is the same regardless of what form it's taking. If that can be achieved with stablecoin and with CBDCs, then I think that's a real contender because then the CBDC framework, you know, because it's centralized, it can be operated more generically and it can be rolled out for specific issues or problems that a particular economy may have that may then sort of be the adopter.

Speaker C: So I guess that uh, is a bridge to the next question, which is about coexistence and interoperability. Um, maybe, uh, we'll start with Nina on this one. Why is, um, you know, maybe explore a little bit why the importance of interoperability between CBDCs and stablecoins?

Speaker F: I suppose, I mean I could be. I was, I was actually thinking about this myself and I do think it's important, but just to probably be contrary for the sake of this. I think there's, there's also an argument to say that, you know, coexistence between them can work and do they really need to be interoperable in, in the truest sense? You know, um, you know, they can provide separate services potentially. Stablecoins probably having a more targeted use case than the CBDCs if they get the uptake that Diego was talking about. I certainly think that um, you know, there may be a world where both coexist but don't necessarily need to you know, connect together fully, um, given, you know, and again a lot of it comes out to specifics of use cases. But I certainly think that there is stablecoins has, is in a way have the benefit of the first mover advantage, you know and they've already got a lot of. That kind of uptake that Diego was talking about is so critical. Um, you know, lots. I think in 2021 per quarter there was 1 trillion in stablecoin transactions and things like that. I mean that's not going to go away overnight but, but I think just to probably pay devil's advocate, maybe the position is they don't need to sort of. Then that doesn't need to be an interoperability between them. They just coexist in their own lanes doing their own things. Um, is one way you could look at it in the future.

Speaker C: And Guillerme, how do you think Brazil is going to approach this question of coexistence or interoperability?

Speaker E: Well, uh, there is as a guiding principle of the development of drugs, uh, uh, there's objective of uh, securing that kind of interoperability. But also um, I'd like to stress the fact that uh, this decision uh, to have a Drax platform, not only tokenized versions of bank deposits but also the tokenized version of E Money allows for the possibility of uh, developing a product that fits the basic description of a stablecoin. Because uh, uh, you can have payment uh, service providers uh, offering this tokenized version of E Money which is, will be denominated in the uh, Brazilian currency and will be fully backed. So uh, in that sense it, it fits the legal uh, characterization of E money in Brazil. So it's a kind of uh, allowing this kind of regulated uh, stablecoin denominated in the uh, Brazilian currency to also be offered and not by banks but by fintechs and with other possibilities of business models and well, opening space for innovation.

Speaker A: Eric, uh, if I may. I was just. I wanted to react to Nina's point because I thought it was a, it was a fantastic uh, point that she's making, which is that it sort of depends on what you mean by a stable coin. Right. So you know, if we. And this goes back to also my point around singleness of money. So if you have, if you assume that stable coins are meant to be the same as other payment methods in a particular jurisdiction, then you absolutely need them to coexist and you need them to be interoperable in some way, shape or form. Whereas if you accept that stablecoins are just another form of holding spending power and they may not be the same today, they are not the same. So today you can have versions of stable coins that are completely different and people are fine with it as long as people understand that they're not the same thing and that they're taking on a slightly different type of risk, whatever that risk may be, if it's credit risk or something else, then I see no issue with them not coexisting or not being interoperable. The question then is what is the regulatory framework trying to achieve? And I think the, you know, the slight problem maybe in the UK is that the regulators have assumed that fiat backed stablecoins should be the same in all cases, which is sort of a, you know, an assumption. Right. And in order to facilitate that singleness of money thing, what they are then imposing is a lot of requirements of fiatback stablecoins to actually be redeemable for money in, in the way that other forms of money are redeemable. Right. And that creates, that creates, I think, barriers to innovation. It creates, you know, problems for, for, for providers to comply. It also, you know, potentially messes up, you know, some of the business models. If you think about it, one of the, the extreme scenario in the UK would be a systemically important fiat backed stablecoin that would have to be regulated by the bank of England, which could not operate on a public blockchain. Now the largest two stable coins have got in the world. Trillions of dollars of transactions operate on public, uh, on public blockchains. So how would that work? Right, so there's an inherent flaw in that thinking, but I think it's driven from that assumption that, you know, regulates want them to be fully interchangeable.

Speaker C: Right, yeah, sorry Nina, please.

Speaker F: No, I'm probably going to say thing, I think that's right. I mean it's what, what, what you're going to want it to be, you know, and if that, as Diego says, if that's sort of where, you know, a, a government takes a view, then yes, they all make, they can't coexist, right, because one becomes replacing the other and, and the CBDC wins, right, because of the, you know, the power to kind of push acceptance through a central bank, through the uptake and you know, as opposed to, let's say more of a, a Private, Private. I think for me I, I sort of see a way, a way through insofar as um, stablecoins having a targeted use case for, for kind of finite things, not for the uh, to some extent cutting against what for example the UK government says about stablecoins being, you know, the potential to sort of facilitate, you know, retail cross border payments and be used as a sort of cheaper way of doing payments. You know, maybe we'll see a phoenixing of stable coins being used for very targeted use cases within models, you know, within bank models and um, or you know, within particular ecosystems where you know what you're trying to do is much smaller. You know, it's like a mass market, mass payment product. Um, but I think a lot of it does, it does come from the policy decisions of the banks, of the governments of what this could be. Um, um, and you know, trying to, you know, work out what box you put them in. Because if from a policy perspective you're trying to achieve the same with a stable coin and a cbdc, then they cannot coexist. But I think conceptually they can. But they have to all have in a way very clear, um, use cases that work and the differences have to be accepted.

Speaker C: Right. And is one of the, I guess victims, um, of this or one of the things that gets traditioned as a result of this. If, uh, the different central banks are applying their own regulatory frameworks to the two stable coins, does that now start to fray at the international use case of private stable coins?

Speaker F: I think it, yeah, I mean, I mean, I think, I think it can. I mean at the moment and Diego's point, the two largest private or consortium issued stable coins that are openly publicly grappling with, you know, mica, uh, what's coming down the pipeline in the uk the mess that is the United States. Any other jurisdiction, and I think different jurisdictions, different regions, taking different approaches creates um, legal uncertainty, maybe create certainty in the jurisdiction, but creates global uncertainty about how you kind of globalize and push out a product that works in all jurisdictions. Um, and also the cost of compliance goes up. Um, and so you have a cost benefit analysis to a lot of this. So I do think it is for the current world of the sort of privately issued stable coins, the ones that we all think about, I think the world will look very, very different the more um, regulation comes in in that specific area. And you see CBDCs, um, coming in in other jurisdictions as well.

Speaker C: Right. And so I think, um, And Diego, do you have anything to add on to that?

Speaker A: No, no, I mean I think that that was probably what I was going to say.

Speaker C: Excellent. So I think um, maybe we'll take a, in that context we'll look a little bit deeper at the two tiered model. Um, you know and, and what the two tiered model means for you know the paths of stablecoins and CBDCs versus a Ah, maybe a single tier where you know it's CBD, you know, CBDCs cover both the wholesale and the retailer has this broader application. Um, so, so in the context of, of Drex, what are the you know, I, I, what are the policy considerations in terms of like the benefits? Is it like primarily to encourage that um, use case for stablecoins to ensure that the system can operate under both systems? Is that the thrust of the two tiered model? Are there other things, is there just the bifurcation in the way that they're sort of approaching these various instruments that serve other policy purposes? Uh, uh, Guillerme, if you could share with us some thoughts on that.

Speaker E: Well, okay. So um, uh the basic intention is to reproduce in this uh programmable platform which is the current structure. Uh so tracks will be uh, accessible uh as a wholesale CBDC only to these uh regulated intermediaries. And these intermediaries, uh, which will be banks and uh, uh payment institutions by its turn will issue uh, these tokenized versions of bank deposits and uh e money and they will have relationships with the end user. Uh the end users will have wallets uh provided by uh, uh those intermediaries. One of the benefits of this approach. Well first of all from a legal perspective this reproduction of the current model doesn't need a new legal uh, basis. So we can develop this model uh at least in preliminary assessment with the current legislation. At the same time it uh, preserves the intermediation function of banks and other financial intermediaries which is very important credit supply and other uh, really important functions to the economy. And as Diego has stressed, uh, this approach also uh, tries to keep the relevance of uh, the singleness of money. So uh, that was, this was uh, an important reason that led to this approach.

Speaker C: Okay, do you got anything to.

Speaker A: Yeah, I mean generally speaking, and I've looked at this for, for various central banks Now I think the, the, the big fear that central banks have if I may say is they don't want to deal with cost with, with retail customers. They just don't, they're not good at it. They don't want to have to bother with the, with the aml. They don't want to have to bother with the, with the you know the nitty gritty sort of um, process that you have with each individual person. And so uh, really if you think about it the only way is to outsource that and to give it to someone else and facilitate that to be done by somebody who's much better at it. And we already have a population of firms that are much better at it because they do it already and have been doing this for years which is the banking system, the payment service providers etc which is the second tier. I think that's how you explain it. It's the easiest way of illustrating it. And the added benefit I think for this is not just that the central bank no longer has to deal with retail uh customers directly is that also the central bank is not particularly uh, uh a fintech sort of use case provider that's going to come up with clever ways in which uh the new payment is going to be used. Typically those are the people that are going to make money out of interchange fees or they're going to monetize the transaction somehow. And that is normally the payment services provider banking population. And so I think, and we see this for example you know Israel has now come up with a uh, with a project where they're creating a non riskless intermediary for the provision of CBDC as part of their second tier. The reason they've done that and I've been lucky enough to work with them in the early stages of that project via the BIS is that um, the reason they've done it is in order to facilitate as much competition as possible for that CBDC wallet provider population so that you can come up with lots of use cases, lots of innovation and lots of possibilities for the user driving that adoption piece. And is it's about finding that one use case that will uh, uh drive the mass adoption and the more providers you have that are fighting for that little bit of exchange fee the m higher your chances of a really fantastic use case and real innovation.

Speaker E: Eric, if you allow me to.

Speaker F: Sure.

Speaker E: Just complement what Diego was saying. I think the main idea is to combine uh the best efforts of both public sector and private sector because then and its respective roles. So uh, central bank will uh, provide the infrastructure and the regulation and the supervision but uh, you know the, the creativity and innovation. Uh part of it uh will be uh an attribution uh to the private sector and to um, uh private companies that operate in definition sector. That, that's the idea.

Speaker C: I was just going to follow up a little bit on, on what On Diego's point, which is, you know, when we talk about the innovation and the different possibilities, um, one of the things that comes up is obviously the pro programmability, like that's, that's the, that's the killer use case, right? The extent you have programmable money, that's, that's why we're, you know, in some ways there's a tracking component of it, but in terms of utility, uh, and, and how it hits the road for, for the population, the use cases, it's the program. Programmability is, is, uh, you know, is, is where the rubber really hits the road. And I guess, you know, for Diego to start, you know, what are you seeing in terms of like the, the really thoughtful approaches to either facilitating or executing on the, you know, the programmability, um, and its potential efficiencies.

Speaker A: I, I, um, I fully agree with you that that is probably the, the killer use case. I don't know whether the limited examples of programmability that we've seen so far do it justice. So what I've seen so far are things like, for example, you can pre tag a supply chain finance transaction. So if you're a supplier, you're receiving a payment, you can already pre tag that and give that away before it even hits your books. So that you, you know, the bank or the credit provider is already protected and has some sort of confidence that the money is going to flow into them. Um, so you've got various levels of doing that and you can allocate portions of your salary to something. Those are, I think, the early stages. I think what at the moment is sort of still a bit tricky is how do you enforce those things, those contracts and are they true contracts or not? And um, where do we find the binding regulatory and legal relationship that will actually make that stand up in court? That is tricky. And it varies from jurisdiction to jurisdiction because you can program something on a platform, but only, it will only bind people to the extent that people have signed up to that platform for a contractual perspective and are liable to that platform, to the others, etc. So you need to create complex contractual arrangements that achieve that. And so I think we are only getting into the first stages. As this develops, as legal positions become clearer, you know, we'll start seeing this develop much more and I think then we'll see real innovation.

Speaker C: Right.

Speaker A: And I'm imagining sort of something sitting no longer having to have a payment app as such. I find that that is going to go away. So, you know, the wallet will be embedded in other Apps and you'll be able to log into it directly as part of your normal day to day thing and then that's going to become seamless, the payment piece becomes um, seamless right then.

Speaker C: And certainly the complexity of pairing contracts, you know, across those, you know, inter integrated use cases is still going to exist. You know, I, I think certainly the promise would be that over time the immutable operation of the different smart contracts which effectuate that um, you could, you could simply make a disclosure and, and by definition if you're participating in it, you agree to the operation of, of the smart contract. I mean there'll always be edge cases about enforceability, but the, the necessity of sort of a bilateral contractual arrangement, um, you know, to the extent they can be mimicked within a smart contract, which is neither smart nor a contract, but still that immutable operation of how it operates might, might uh, you know, might not have the same driving considerations that would require you to kind of have a whole contractual, uh, you know, two sided, three sided, what have you, agreement, uh, between the parties. I mean that's, that's also the killer use case of blockchain. It's horrible. If we like do all this, like we create all this wonderful stuff like, and at the end of the day we're still like shuttling stuff back and forth between DocuSign, which is you know, an improvement, uh, you know, over the last 20 years, but still not, not the end goal. Right?

Speaker A: Yeah. I mean I think the question is whether you can actually point towards you having agreed somebody directly with that other party when you can truly identify that bilateral relationship or not. Which I think sometimes it's tricky because of the way the information flow goes. Right, right.

Speaker C: So I want to make sure that we have enough time to get to the questions and we can certainly circle back to some of these questions. Um, but we do have one. Uh, and Nina is. I'll answer it. So there's a, there's a devil's advocate perspective. So I'll read it. So, um, if, if clear guidance is provided in jurisdictions, bank and existing financial institutions will issue their own stable coins. And uh, you know, and, and if they are allowed to, on and off ramp crypto and digital asset, isn't this going to favor incumbents and challenge existing stable coins, which I think we've been sort of talking that it might, um, we may see this in the eu, Current stable coins will lose their dominance as banks issue their own stable coins. You know, talk about usdt, um, being delisted in certain jurisdictions, um, you know, due to, you know, under Micah. So Nina, do you want to.

Speaker F: Yeah, I suppose I was. I think that's probably put better than I was doing earlier. I think I share the view. Um, I think, um, I think we're already seeing that with Mica. Uh, um, I think uh, generally the sort of traditional crypto participants that have been the issuers of the stable coins and sort of using crypto as bridge currencies and things are um, in for a challenge. I um, think there's already publicly and sort of we're aware of a lot of European banks investing a huge amount of money into developing their own stable coins and doing more in this space. I think that's a real possibility. I think uh, a lot of it comes from the cost of cost, um, of compliance. Um, and the reality of sort of a lot of these crypto businesses growing up as tech businesses and then moving from completely unregulated world to regulated world very, very quickly. Um, where the infrastructure, has an infrastructure, governance, you know, the whole host of the things that, the three lines of defense, all the things that financial institutions have lived and breathed for, many, many are not quite there and haven't been there and are being developed, but at the speed and the cost of increasing compliance, not quite there. So I actually echo the question. I think that is actually a real possibility certainly in the UK and the eu.

Speaker A: Um, may I sort of provide an alternative view on that? Um, because I think the one thing that may actually prevent all of this happening, it is happening as Nina says. I agree. I think the one ah, spanner in the works may actually be the capital requirements that banks need to hold against crypto assets. Um, we've seen the BCBs develop their framework which is not particularly conducive to banks actually holding crypto assets themselves. It's different for stable coins and it is perfectly possible for banks to issue stablecoins coins, but only stable coins that actually meet the electronic money definition. Right. So it's, it's a, it's a narrow. In the eu, it would be a narrow set of stable coin. Not any tokenization will do that trick and anything else will be heavily penalized from a capital perspective, which, you know, sort of suggests that regulators are not particularly comfortable in banks swooping into the sector and, and being the new, the new crypto providers. Right. So there, there is a clear uh, barrier for banks to be doing this particularly for, for on balance sheet assets.

Speaker F: I think that's, I think that's right. I think it's sort of, it is in that stable coin world, I think you see already pre mica that somewhere like Lithuania bans banks from doing anything in crypto. So has already had to separate out. I think that's been practiced from a lot of the European policy um, regulators for some time. I agree. I think they're going to wipe out the crypto industry. But I do think that the kind of stablecoin market's up for grabs if I can say that.

Speaker A: Yeah, I mean for, for the narrow e money stablecoin market I think I would agree. I think the, the wider sort of asset backed market is, is not necessarily at the same level. And, and as you know, I mean we've spoken before. Nina. Ah, um, on, on the PRA's publication. Maybe you want to share that with, with the, with the audience sense. But you know there is some hesitation around electronic money and saving codes being issued.

Speaker F: Yeah, no, and I think just, just for those benefit who don't follow it, it's not, I mean it wasn't, it was back in 2023. But I think it's interesting Diego and I were talking in the sort of prep sessions that you know there's a lot of legal ambiguity and all these terms like tokenized deposit, e money stablecoin and I think we could probably as lawyers spend far too much time enjoying ourselves on the minutia detail of all of that. But I thought it was interesting that Pra, uh, you know, came out in 2023 and certainly you know, vis a vis banks in the UK said look like, you know, if you're going to do tokenized deposits, they've got to be deposits. We don't really want you sort of doing stable coins any money out of the banks. You know they're, they're concerned about consumer protection and misunderstanding and um, and confusion around FSCS protection. I think in that you know, since then um, you know they, you know banks are going to do it, they want them to do it out of separate sort of effectively ring fence entities with very different branding. So I think that' interesting take from a regulator systemic, you know, the prudential regulator rather than the conduct regulator interestingly enough, but sort of wanting to have that distinction. And I think, I think the risks are there because I think Diego, to your point the regulators are still very hesitant about the legal ambiguities and to your point that you made earlier that the risks of consumers misunderstanding and not understanding the different products and the protections that that may or may not come with them.

Speaker C: Right. Um, another question, uh, from, from Sandra Um, much of the focus until now is on the G7 regions. What are the panelists views on developing growth markets where the crypto growth is the fastest? What countries do you keep your eyes on, if any? Who wants to take that one to start?

Speaker A: Um, I think the, I think obviously I'm slightly biased because I'm based here in the uk um, and my practice focuses on the UK and the eu. But I think the development of a single regulatory framework on the mica and the promise for a single regulatory framework in the UK make uh, both these, I mean the uk, the EU primarily part of, because it's such a, such a big market, a real um, potential area of development and real growth in this space with legitimacy, which is what the crypto industry has been pushing for for such a long time. So from my perspective I see that, that mica effect already playing out. Lots of firms are moving, you know, those that want to comply and really want to do this are moving headquarters or regional headquarters into the EU and are really trying to look at, at ways in which they start combining not just the crypto piece but crypto payments, uh, securities trading, derivatives into, into a single potential proposition. And that is exciting.

Speaker C: So I'm going to go to Guillerme on that because you might have a different view.

Speaker E: Well, um, basically I have you know, Brazilian regulatory view. Uh, go back to my first answer. I mean we're still uh, internal debates and studies uh, on how to regulate stablecoins. It's still being prepared, uh, but the use of stable coins, uh, uh, last year uh, there was a significant increase in the use of private uh, stablecoins in Brazil. Uh, tax authorities already monitored that use for tax reasons. Uh, this use, as I have already told you, is a uh, concern. One of the concerns that led to the development of uh, tokenized ah, central money alternative to that. So uh, that's how we see uh, from a policy perspective this decision.

Speaker C: Um, and we don't have too much time, but I'm going to kind of do this a little, maybe a more lightning round. So you know we, there's a lot of talk on, I mean part of the question was, you know, there's so much focus on the G7 and, and the question is, is what jurisdictions outside of the G7 do you draw? Like, I mean in the case of Brazil do you draw inspiration from. Do you look at your Latin, uh, American counterparts or other, you know, with regional counterparts or I mean, or maybe you look at, at it more globally where, you know, what do you turn to when you're kind of like trying to contemplate this as thought leaders other outside of the G7. So, um, yeah, and we'll just sort of go around for the lightning round question here, starting with gear may.

Speaker E: Okay, so, um, well, speaking for myself here, um, I don't know about any, um, clear, uh, inspiration in the Brazilian model, as a matter of fact. I mean, uh, this idea of developing this unified, uh, ledger, uh, that now is being, uh, talked about in BAS publications, uh, BAS appoints Brazil as one of the pioneers in developing this. This model. So, uh, there is not a clear inspiration in any other country, at least that I know.

Speaker C: So you're the inspiration,

Speaker A: maybe.

Speaker C: Ah, I'll put words into your mouth.

Speaker E: I hope a good one. There you go.

Speaker A: Go.

Speaker C: Um, Nina,

Speaker F: I, I think, I think that's difficult. I mean, I think generally there's some outside of even CBDCs, but generally in terms of innovation in payments and, and generally in fintech, I think, I think when you do look at it, Brazil's been doing a lot of stuff, not just in that sector, but generally looking at open banking and all that sort of stuff. And, and I'll, you know, um, not to steal Diego, Sandra, I know he's very well experienced in the region, but I do think that, you know, there's a lot of interest, at least at that. That high level government level in the uae, in the Middle East. Um, and so, you know, whether you take inspiration, but I think they're doing a lot of good thinking. They're getting the right people in the room. They're doing some really interesting things in this space. And I say, you know, I think it's, uh, you know, those areas are ones where there's been a lot of investment at that level. Maybe some other countries have been a little bit more cautious or, you know, haven't thought about things the same way. I always think that, you know, I would love to know more about what's going on in China. I think sometimes we all would. But, you know, I think it'd be always interesting to see, uh, to see more because given the nature of the political system over there and, uh, it would always be interesting to see where they are and how that may work, if they are, um, how they are looking into it. But, um, I suppose there's many places where you can get, uh, food for thought and lots of people thinking about these things.

Speaker C: All right, so, Diego, you have the unenviable position of being less on this, and you can't repeat anything else.

Speaker A: Sorry, I would have said Middle east, but I think, I think Singapore is the other one that I would mention. So Singapore is doing an interesting position. They are certainly developing their fintech market, they're developing their crypto markets, but they're doing it in a way which is um, not necessarily for the sake of developing it. They're doing it with a very measured, um, and quite focused manner where they are really, really trying to attract um, sophisticated wholesale markets into their, into their position. And I think that for me is the wholesale markets that really drive the innovation and you know, the uptake for serious financial services businesses. You know, retail, retail is great, but it's difficult because you need to make sure that you. Protecting your consumers, farmers, et cetera, if you want to do it right.

Speaker C: Any thoughts on the African continent? Anyone? What's an interesting experiment going on there? I know Nigeria, there's Kenya, there's a number of jurisdictions doing things on this front. Uh, and perhaps they have even more of a, of a plane to work on just given uh, how money is actually used in the country currently. Right. You know, in the absence of a banking, you know, of an established banking system that people commonly use, you know, these kinds of experiments can actually have more traction and impact those regions. Any, any thoughts? It's okay if there's none. Just uh, you know, figured I'd fish it out before we, we close up here.

Speaker A: Look, some of my clients perception on, on, on Africa generally is that they are all booming markets. The slight problem is there is um, for, for sophisticated businesses there is still a lot of uncertainty. It's political uncertainty as well as regulatory uncertainty because the, the, the rules can, can shift very quickly. Um, and, and I think that makes it very difficult to, to sort of maintain uh, an ongoing strategy. So for those, those clients that are invested in, in the African continent and see it as a booming business, which it is, then they, they need to be, they need to be prepared to quickly pivot into different directions. Um, and so I agree with you that there is lots going on and it's a, it's a great, great, it's a great place um, to do, to do business. It's just that you know, for some businesses that are set in their ways, it may not be conducive for them.

Speaker C: Okay, well, with that we're a little bit over time. Uh, this has been a great panel. Thank you so much everybody for joining. This was a uh, pleasure to host and uh, um, thanks to all the uh, listeners for tuning in. Um, yeah. And I guess we'll close it out

Speaker F: there thanks very much, Eric. Thanks, everyone. Nice talking.