1. Comparison of artificial intelligence and digital financial innovation. In AI, progress is measured in months and in the financial system in years.
2. We considered the problems of the existing financial system, such as missing consumer segments, slow and expensive transactions, low quality of customer service.
3. The reasons for the persistence of these problems are linked to the development of the financial system in isolated segments and gradual changes.
3. The concept of a unified registry is proposed that would integrate the monetary system, digital assets and infrastructure through tokenization.
4. Describes the benefits of tokenizing money and other assets to automate and accelerate transactions.
5. The South Korean Central Bank Digital Won Project is seen as an example of the implementation of the Unified Registry concept.
Here are some important quotes by Agustin Carstens, CEO, Bank for International Settlements:
The fundamental problems we still face in fi nancial systems, in advanced economies as well as emerging and developing ones, include the following: Many parts of society remain unbanked, without adequate payment, savings or credit services; Under-use of fi nancial services due to slow and costly transactions; Low customer satisfaction; and Feeble connectivity, particularly for cross-border transactions.
These problems hamper economic growth and impede the distribution of credit, exacerbating income inequality and encouraging financial activity to move into unregulated "shadow" sectors. The reason is that financial systems have evolved sector by sector and gradually, through minor adjustments to existing systems and processes. Outdated systems and products exist. Even today, money and assets reside at the edge of communication networks in separate proprietary databases or journals. These databases are interconnected through third party intermediary systems. All of this makes transactions in the current system slow and costly. Cross-border transactions are even worse, as systems need to be interconnected through international messaging networks in addition to domestic ones, which involves a range of different legal and regulatory frameworks.
Inefficiencies in settlement costs not only complicate ongoing transactions, but also carry hidden costs that discourage valuable transactions due to their complexity and cost, leading to lost economic opportunities.
The strategy of incremental improvement of legacy systems has proven to be ineffective in the long term.
Achieving qualitative improvements requires qualitative breakthroughs. And we will utilise the most advanced technological advances.
- scalable computing power;
- cheap, instantaneous communication systems;
- near-universal access to the Internet and smartphones;
- the availability of trusted computing essential for security and privacy;
- the ability to digitally represent assets through tokens that include all the information about the asset and what can be done with it.
Also on the horizon:
- The rapid development of artificial intelligence and computing based on quantum mechanics.
Exploiting these technological advances would allow us to build a fi nancial system centred on the individual. This would enable a far-reaching democratisation of fi nance where each person has access to a digital representation of any asset for fi nancial purposes, regardless of its value. And they would be able to send or receive such assets in any unit or amount, to anyone, anywhere, anytime, using any device. In other words, individuals could experience the same level of ease, immediacy, privacy, security and reliability from the monetary and fi nancial system that they fi nd in other parts of their lives, such as when they make a long-distance call to anywhere practically for free, or make an e-commerce purchase from their smartphone. Society rightly expects nothing less. Yet the sad truth is that these growing expectations have outpaced the ability of our segmented fi nancial systems to deliver. The best way to knit together transactions and operations among markets and fi nancial services is to bring them onto shared programmable platforms. This is what we have labelled a uni fi ed ledger.
A unified registry is a network of networks for seamless interaction of financial system components.
Opportunities of the unified registry: combining the monetary system with other assets, using smart contracts and composition.
Smart contracts are programmes that execute conditional commands.
Composition of smart contracts enables automation and integration of transactions in software money and digital assets.
Tokenisation is a key step for digital and software money, digital assets and digital infrastructure to work together.
The three main components of the unified registry are:
- digital and software money,
- digital assets and digital infrastructure,
- that supports their functioning and integrity.
To make all three of these components work together, tokenisation is a key step.
A way of recording money and assets in digital form on a programmable register. Tokens integrate asset records, usually contained in a traditional database, with rules and logic governing their transfer.
Users could transfer assets directly through software instructions rather than through intermediaries in the form of account managers acting on behalf of the user.
Benefits:
- Increasing automation and providing faster, cheaper and more convenient transactions
- More efficient settlement processes.
Overcoming the settlement risks associated with delivery versus payment and payment versus payment agreements, which are currently not sufficiently addressed through specialised institutions or workarounds such as escrows.
New types of economic arrangements, through smart contracts and composition.
Maintaining a two-tier system with central bank money (wholesale CBDCs) and commercial bank money (tokenised bank deposits) as the main means of payment, with the added benefit of programmability and composition.
Users will be able to purchase shares or other financial assets without the delays and costs associated with third party intermediaries. As soon as they make a transaction, the transaction will be completed and changes in their cash and assets will be reflected in their digital wallets.
Next goal:
- Tokenisation of claims on other financial and real assets such as government securities, shares or real estate registrations.
A prerequisite for obtaining the necessary benefits is that the components must interact seamlessly. The key here is to guarantee that all digital asset networks are interconnected and interoperable.
The challenge is to develop the legal and regulatory frameworks, governance mechanisms and communication protocols necessary for such a digital infrastructure to function.
We need to be practical: it is hard to imagine that we will unify markets and transactions in every relevant jurisdiction. But we should aim for protocols that unify or interconnect systems, to make them interoperable.
The different assets should reside on the same uni fi ed ledger, so that they can be embedded in smart contracts that execute complex transactions.
The future monetary system needs wholesale central bank money at its core, complemented by tokenised commercial bank money and potentially other tokenised assets. And these need to be combined on a common digital infrastructure. The concept of a uni fi ed ledger is the vision, the "north star" in designing the future monetary system.
Carstens A. Discurso en el seminario "Central bank digital currencies and the future monetary system" (Seúl, 23 de noviembre de 2023).