Wednesday, Jul 15, 2020
Virtual Executive Panel – COVID-19: Supervising the New Normal
Using Stablecoins to Facilitate Financial Stability and Inclusion in Unprecedented Times.
Join us as we deliver our virtual executive panel alongside the 2020 IMF-World Bank Spring Meetings.
Panelists
- Ceyla Pazarbasioglu – Vice President for Equitable Growth, Finance and Institutions, the World Bank Group
- Tobias Adrian – Financial Counsellor and Director of the Monetary and Capital Markets Department, IMF
- Dietrich Domanski – Secretary General, Financial Stability Board (FSB)
- Ross Leckow – Senior Adviser Fintech – Strategy and Legal, the BIS Innovation Hub
Moderator
- Aditya Narain – Deputy Director, Monetary and Capital Markets Department, IMF; Board Member Toronto Centre
Full transcript
April 20, 2020
Babak Abbaszadeh:
Good morning, good evening to everyone around the world, governors, deputy governors, heads of
agencies, distinguished guests. Welcome to this timely session on COVID-19: Supervising The New
Normal and implications for stablecoins, financial inclusion, financial stability. Under the circumstances, I
wish you good health to you and your family. I am Babak Abbaszadeh, CEO of Toronto Centre. I think
most of you know about the Toronto Centre, so I'm going to save some time and not introduce us.
Babak Abbaszadeh:
These are unprecedented time. As professor Carmen Reinhart recently said in her speech, this time truly
is different. For policymakers, this is a whatever it takes moment for large scale, outside the box fiscal
and monetary policies. Recent stablecoin initiatives have highlighted the shortcomings in cross border
payments and access to transaction accounts and the importance of improving access to financial
services, especially for the 1.7 billion people who are globally underbanked. In fact, the 2019 G7
Presidency added stablecoin to his agenda in order to examine the risks and opportunities. It remains to
be seen whether these will be indeed some solution to the problems we're looking for.
Babak Abbaszadeh:
Today, we are very fortunate to have such a high caliber speakers and moderators. You have all seen
their bios, and most of you know them already. I noticed that we have about 50 countries represented,
more than 430 participants. I want to just point out that Ceyla Pazarbasioglu is a member of Toronto
Center's Board of Directors, so is Aditya, and Tobias is a frequent contributor to our forums. Aditya, you
may not know this, but we have trademarked him as one of our key marquee moderators and so we're
very grateful to that.
Babak Abbaszadeh:
It is my privilege, before I pass the floor to Aditya, to thank our major sponsors, Global Affairs Canada,
Swedish SIDA, IMF, Jersey Overseas Aid, and Comic Relief for supporting our mission. Also, I want to
make sure that you all use the Q&A function and submit your questions to Aditya, because he's
committed to make sure that as many questions can be addressed as possible. And also want to thank
[inaudible 00:02:50] and my team, who've done such a superb job of organizing this and other events.
Aditya, without further ado, my great thanks to you and the panelists. I'm just going to pass it to you
now. Thank you.
Aditya Narain:
Thank you, Babak. And good morning, good afternoon and good evening to everybody. Extraordinary
times call for extraordinary panels, and I'm delighted to be moderating this panel of thought leaders on
the complex intersection of topics covering financial stability, financial access, and financial technology.
As an aside, we are all getting used to remote working techniques, so let me apologize in advance for
any glitches that I may cause directly or indirectly in the course of this conversation.
Aditya Narain:
But coming back to the topic, to better provide context to the discussions, we have divided our session
into two parts. In the first part, we will cover the implications of the COVID-19 health crisis for the global
economy and the financial system and the policy response. In the second part, we will drill down to the
potential of digital payments in general and stablecoins in particular to facilitate commerce and finance
in the new world.
Aditya Narain:
Just so that we are all on the same page, we will use the definition of stablecoins as put forward by the
Financial Stability Board in their most recent report that a stablecoin is a cryptoasset that aims to
maintain a stable value relative to a specified asset or a pool of a basket of assets. A stablecoin
arrangement is one that combines a range of functions to provide an instrument that purports to be
used as a means of payment and/or a store of value. And finally, a global stablecoin is one with the
potential reach and adoption across multiple jurisdictions and the potential to achieve substantial
volume. Now for the first round, the policy assessments and responses to the COVID-19, let me first turn
to Tobias Adrian, financial counselor to the IMF and director of the Monitoring and Capital Markets
Department to tee up the subject. Tobias, you lead the IMF's assessment of global financial instability in
good times and in bad and play a key role in shaping the financial policy advice that the Fund provides to
its members.
Aditya Narain:
Help us understand what is going on as we face this extraordinary uncertainty about the depth, spread,
severity and duration of this COVID-19 crisis. How do you see it impacting the global economy? The
managing director, you will recall, said in the plenary remarks yesterday at the spring meetings that
exceptional times call for exceptional responses. How long are the member jurisdictions tackling this
unprecedented crisis? And how do you view these responses?
Tobias Adrian:
Yeah, thanks. Thanks Babak. Thanks Toronto Centre for having me in this wonderful panel. These are
extraordinary times and they're extraordinary challenging and sad. There are hundreds of thousands of
people that are already sick and the pandemic has continued to spread. This is, first of all, a medical
crisis. And the first order policy response has to be a lockdown. The lockdown in turn is generating an
economic crisis. Both demand and supply is collapsing around the world. So our forecast just three
months ago for growth in 2020 globally was above 3% and it has shifted to now being negative 3% so it's
a six percentage point shift in our baseline for 2020.
Tobias Adrian:
And when you look at the downside risks, so we are looking at downside risk as the fifth percentile of
the global growth distribution that has shifted from a positive 2% to a negative 8% so 10 percentage
point downward shift and downside risks. So that is driven by the huge amount of uncertainty that is
currently in the world. And of course, equity implied volatility, for example, as measured by the VIX,
which is often used as an indicator of global risk aversion. The VIX has been as high as during the global
financial crisis so this is a historically stressed period also in financial markets. Now, some sectors across
the global economy has sold off as much as 2008, for example, airlines, tourism, restaurants,
entertainment, all hit as badly as in 2008 already.
Tobias Adrian:
In general, the sell off was not as much for three reasons. So number one, it is first of all, a medical crisis
and economic crisis. It's not a financial crisis that is originating in the financial system, but of course, the
financial system is at threat of a financial crisis. Secondly, policy measures have been put into place very
rapidly and very aggressively around the world. So we estimate that fiscal policy is about 10% of global
GDP or $8 trillion, right? These are fiscal measures that are consisting primarily of transfers to
corporations and to households in order to make sure that cash flows are not collapsing entirely. And
the monetary policy response has been extremely aggressive as well, both in advanced economies and
in emerging markets. Many central banks around the world have cut interest rates, have started asset
purchase programs, have injected liquidity aggressively and have backstopped certain sectors such as
corporate bonds in terms of backstop facilities. Banks, of course, are better capitalized than in the 2008
crisis.
Tobias Adrian:
So the benefits of 10 years of tighter regulation and regulatory reforms are paying off now. We're going
into the crisis with more capital and more liquidity in the banking system around the world in pretty
much every country. And so these capital and liquidity buffers are there to be used now, and this is
indeed what we're seeing. When you look at bank earnings announcements, they show that
provisioning is going up sharply because of course, this crisis is expected to lead to a wave of defaults,
defaults in the corporate sector, in the household sector and distress in some countries. And this brings
me to emerging markets. We have already seen record outflows in terms of capital flows, portfolio flows
from emerging markets and that has been pretty broadly across markets. Of course, there's
differentiation across countries, but pretty much all the emerging markets and low income countries
have been subject to large outflows.
Tobias Adrian:
And of course, emerging markets don't always have this much policy space as the advanced economies
for either fiscal or monetary action. So that's where institutions like the IMF and World Bank come in.
The IMF has a trillion dollar balance sheet that is deployed aggressively. We have all of 100 requests for
assistance, right? So out of 190 member countries, more than a hundred, more than half of our
membership has already come to us and asked for assistance. Indeed, earlier this week, we have
announced that for the poorest countries that have already programs, there is a debt moratorium for
about 25 countries and we are working actively on new types of programs. So we announced on
Wednesday, a new liquidity line that is going to be available for some of the most stable emerging
markets. So with that, let me turn back to Aditya.
Aditya Narain:
Thank you, Tobias. Sticking to the team of extraordinary Ceyla, you had extraordinary firsthand
experience of dealing with several economic and financial crisis in your career in the Fund and the Bank,
and also international authority and this covers emerging markets, low income countries and advanced
economies. So how different is this? What can policy makers in general and the World Bank group in
particular do to support the financial sector in the wake of the COVID-19 outbreak?
Ceyla Pzarbasioglu:
Thank you. Thank you, Aditya and thank you, Babak, Toronto Centre. And greetings to all. I hope
everyone is keeping safe. I think that this is a crisis that like no other. I have not seen this in close to 30
years of my career. It's a human tsunami. Like Tobias said, it's unprecedented both in terms of lives and
livelihoods. It's particularly challenging for the developing economies that we work with as most of them
do not have the monetary and fiscal space to deal with this crisis and their ability to put billions of
dollars to protect their countries. They have very fragile health systems. Social distancing becomes
impossible when you are living in crowded slums, and if you're making your living in the informal sector
and when you don't have any protection or social safety net to disturbance or to the shocks to the
income. So the impact on the developing economies, especially the poorer ones translate directly into
increasing poverty.
Ceyla Pzarbasioglu:
And that's why at the World Bank group, we have mobilized very quickly. We have a fast track facility to
deal with the health implications of this crisis, working with other multilateral development banks to
help countries with systems, with ventilators, with procurement initiatives and working very closely with
WHO and others. So that's a very concrete, fast track facility that we have put in place in almost in
record time. And so far 64 developing countries have been implementing these measures and we hope
to extend this to a hundred countries by the end of April. As Tobias also said, the collapse in economic
activity, the supply and demand shocks, the commodity prices, the sudden stop in capital flows,
remittances and the movements in goods and services are all impacting households and corporates,
especially in the informal sector and the [inaudible 00:13:25] so that social and economic impact of this
health crisis is going to be also, has been, and will be very important then quite devastating for some of
the countries.
Ceyla Pzarbasioglu:
So we put in place almost 160 billion for over the next 15 months to address the health, economic and
social shocks that many of these countries are facing. So we will assess needs and prioritize the poorest
countries, those with the high risk and low capacity, and those in fragile and conflict settings with a goal
to protect the poorest and most vulnerable households, protect jobs and businesses, shorten the time
to recovery and support an economic recovery that is sustainable going forward. For the financial sector,
the policy responses to date has mainly focused on providing markets and funding liquidity and
supporting effective borrowers and providing regulatory flexibility with the key objective to preserve the
functioning of core financial markets, financial sector resilience, so that the financial sector can continue
to intermediate and provide much needed credit to businesses and households, because this is a time of
immense need so that liquidity problems do not turn into solvency problems.
Ceyla Pzarbasioglu:
But I want to remind everyone that we started this crisis with already record high levels, both in terms of
households, both in terms of sovereigns, as well as corporates in many of the developing economies. So
it is very important that whatever measures are taken are done in a transparent manner with sunset
clauses and clear risk sharing arrangements, because I worry that we end up with a financial crisis after,
as we try to deal with the economic consequences of this crisis. I'll stop here.
Aditya Narain:
Thank you, Ceyla. And thank you, Ceyla and Tobias for laying out this perspective from the IFIs and in
fact, one of our first questions is about how the IMF and World Bank will work together and we'll come
to that, but I've been giving you a heads up so you can start thinking about this. But let me now turn to
Dietrich.
Aditya Narain:
Dietrich, the Financial Stability Board was set up in response to the global financial crisis and just when it
was finishing on its reform agenda from that crisis, and possibly hoping to take a short break, it instead
is faced with having to double up and deal with this one. In the very short time that has elapsed, how is
the FSB responding to these issues and what assessment has the FSB made of the well-being, financial
stability vulnerabilities caused by the COVID-19?
Dietrich Domanski:
Thank you, Aditya. And thank you Babak for inviting me to this distinguished panel. Tobias and Ceyla
have already used superlatives to describe the impact of COVID-19 and I'm going to add another one
from a financial stability perspective, which is that COVID-19 represents the biggest test of the postcrisis
financial system to date. And the pandemic constitutes an unprecedented global macroeconomic
shock that is pushing the global economy into a recession of uncertain magnitude and duration and a
shock that has placed the financial system under strain and here it's the downward revisions of expected
economic activity and heightened risk aversion that have led to a major repricing and repositioning of
global financial markets. And that has involved as many of the people listening to this panel today know
very well significant large capital outflows from emerging market economies.
Dietrich Domanski:
Now, I would describe the challenge that the global financial system faces as a dual challenge on the one
hand of sustaining the flow of credit amongst declining growth, and increasing soreness and risk on one
hand, and managing heightened financial risks on the other hand. And as a result, the demands on the
financial systems capital and liquidity have risen. And this, I think, was very visible in the dash for cash
episode in March, which triggered the size of a large scale central bank intervention.
Dietrich Domanski:
Now, the positive news, Tobias mentioned already is that the global financial system is more resilient
and better placed to sustain financing to the real economy as a result of the G20 regulatory reforms
coordinated by the FSB in the aftermath of the 2008 global financial crisis. In particular here, it's the
greater resilience of the major banks at the core of the financial system, which has allowed the system
today largely to absorb rather than amplify the current macroeconomic shock. But maintaining this
resilience requires further efforts individually and collectively, and the FSB is working on three fronts to
maintain financial stability and sustain the flow of financing to support growth. Let me briefly talk about
each of the three areas.
Dietrich Domanski:
First, the FSB is exchanging information daily on policy actions taken by our members in response to
COVID-19. We are sharing these steady updates with the 70 countries that are in our regional
consultative groups, which include many emerging market and developing countries. Now, this broad
sharing of information is helping jurisdictions to respond quickly and consistently, and in the coming
weeks and months, it would become increasingly important to assess the impact of the measures taken,
compare notes on effectiveness and in the end, identify what is working best.
Dietrich Domanski:
Second, we are providing risk assessments, putting forward policy discussions. And first stage of this risk
assessment work has focused on four critical notes in the global financial system. These notes comprised
first, the ability of the financial system to finance businesses and households, the ability second of
market participants to obtain US dollar funding, not least in emerging markets. Third, the ability of nonbank
financial intermediaries to meet liquidity demands, and finally, the ability of market participants to
effectively manage the increasing counterparty risks.
Dietrich Domanski:
In the next stage, the FSB would be working to identify and assess the specific vulnerabilities that may
materialize during this major [inaudible 00:20:14] of economic downturn in the coming months. And
one important issue in this regard is the implications of rapidly growing solvency risks.
Dietrich Domanski:
Third, we are working with our membership and international standard setting bodies to coordinate
global policy responses and the FSB member jurisdictions have taken strong and decisive actually
response to COVID-19. These actions have obviously been tailored to individual needs, but there has
been underpinned by common principles that the authorities would continue to follow in future to
support the real economy, maintain financial stability and minimize the risk of market fragmentation.
And under these principles, authorities will first monitor and share information on a timely basis to
assess and address financial stability risks from COVID-19, recognize and use the flexibility built into
existing financial standard to support policy responses, to be as most, referring to the fact that it's time
to use offers.
Dietrich Domanski:
Third, seek opportunities to temporarily reduce operational burdens from firms and authorities. Fourth,
act consistently with international standard and not roll back reforms or compromise the underlying
objectives of existing international standards for important, and finally, coordinate the future timely
unwinding of the temporary measures taken. So these are the principles that would guide work going
forward. And the G20 finance ministers and central bank governors endorsed these principles in the
community earlier this week. I'll stop here.
Aditya Narain:
Thank you Dietrich. And it's very helpful to hear the message you've entered on the message of
international cooperation and coordination, which is probably very much the need of the all. And now
I'm going to start moving down from the 30,000 feet level where we've talked about placing these
discussions in context to a little bit more on the issue of innovation and technology. And I'm going to
turn to my old colleague, Ross Leckow. And Ross, when you left the IMF and joined the BIS Innovation
Hub, the Fund lost a key resource on all Fintech related issues, but we were reconciled to the fact that
this was all for the global good. So we are very keen to hear about the Innovation Hub, its mandate, and
more specifically, how it's work will contribute to the global response to the pandemic. In your remarks,
could you also share with us what the BIS is doing more generally to respond to COVID-19? Thanks.
Ross Leckow:
Well, thank you very much, Aditya. First of all, let me say what a pleasure it is to be on a panel with such
great friends and former Fund colleagues. And I'd like to thank the Toronto Centre for inviting me to
participate.
Ross Leckow:
Maybe I'll start with the Innovation Hub itself and the work that we're doing in this area and I should-
maybe share with you all that the BIS
Innovation Hub is a new initiative of the BIS. Its establishment was announced last June by the BIS, and
we're now at the point where we've actually commenced operations. It's based at BIS headquarters in
Basel, but with three regional centers in Switzerland, Hong Kong, and Singapore, each opened in
collaboration with the host central bank in that jurisdiction. And we plan to expand to new centers.
Ross Leckow:
The Innovation Hub has a threefold mandate: first of all, to do research around and identify critical
trends in financial technology of interest to central banks; secondly, to establish and foster a network of
central bank experts on innovation; and thirdly, to explore the development of new products that make
use of new technologies that can actually serve to improve the functioning of the global financial
system. And that can be shared as global public goods with the central banking community.
Ross Leckow:
The Hub is headed by Benoît Coeuré, and he's leading a multidisciplinary team of technologists, lawyers,
economists, and, and regulators. And the team, I should say, is growing very quickly. The range of
projects that we're going to be working on initially are quite broad based and they deal with different
subject areas and technologies, including the development of a Regtech Suptech platform in Singapore,
the use of distributed ledger technology in the context of trade finance in Hong Kong, and security
settlement and Switzerland, and also the use of digital identity as a foundational infrastructure for the
provision of financial services in Singapore.
Ross Leckow:
While these projects don't address COVID-19 per se or specifically COVID-19, I think it's important to
remember that the work of the hub is focused on helping to define the future of the global financial
landscape and to help to realize that vision. And I think one thing this crisis has demonstrated is the
importance of new technologies to allow us to function in a world of social distancing, including I think
society generally, but also in the financial system.
Ross Leckow:
And I think that the crisis may therefore have a lasting impact on the shape of the global financial
system and may accelerate trends, particularly in digitization, in such areas as banking, domestic and
cross-border payments, identity, and regulation and supervision. And the Hub is really focused on trying
to help identify and facilitate these trends.
Ross Leckow:
More generally, the BIS is taking a number of steps to help the international community respond to
COVID-19, and I'll just mention a few points. First of all, we're continuing to provide financial services to
the central banking community, not withstanding the challenges of remote working and social
distancing. We continue to serve as the preeminent forum for consultation and cooperation between
central banks. The regular meetings that we hold that draws together the governors of major central
banks are continuing to function, albeit in a virtual format. And we're generating research that examines
the implications of the pandemic for the global economy, financial markets, and regulation and
supervision.
Ross Leckow:
And you can actually find much of this research in two new periodical publications that we've just
launched. They're called FSI Briefs and BIS Bulletins. BIS Bulletins are short topical notes that provide
insights into current events in banking markets in the larger economy. And FSI Briefs are shorter notes,
short notes rather, that look at regulatory and supervisory subjects of topical interest.
Ross Leckow:
And if you look at these new publications, you'll see a lot of attention being devoted to the pandemic.
One article that I think is of particular interest, which is published by three BIS colleagues, Rafael
[inaudible 00:00:27:26], John Frost and [Grillo Corneli 00:04:29], looks at COVID-19 cash in the future of
payments. And it examines how the pandemic has really sparked public concerns on the potential for
physical bank notes in particular, to actually transmit the virus.
Ross Leckow:
And I think it shows that scientific evidence is demonstrating that this risk is actually low compared to
other forms of payments, including credit cards, and that to bolster trust in cash some central banks are
actually actively urging continued acceptance of bank notes and coins, while others are either sterilizing
or quarantining bank notes.
Ross Leckow:
But in terms of the road ahead, perhaps after the crisis and what this may mean, I think there is the
possibility that this may actually spur greater interest in digital currencies, whether it be private or
public, with the associated implications. Maybe I'll stop there.
Aditya Narain:
Thank you, Ross. So thank you for providing that segue into the next round of our discussions and what
have we learned so far? We've learned that the real economy is under great strain. The financial system
is currently resilient, but there are already pockets of vulnerabilities in some emerging markets and
developing countries who don't have the space to respond with the policy measures that the other
countries are being able to take. That international coordination and cooperation is essential to enable
the global financial system to continue to respond in a manner that allows for the continuation of the
post-crisis reform agenda to remain as the basis of our work [inaudible 00:29:16] followed.
Aditya Narain:
But all of this also means is that the financial system has to be prepared to transform in many ways,
particularly the transactional ways. And Ross pointed to how already many changes are just forcing us to
think about what the new world might look like.
Aditya Narain:
So with that, let me move to the second round of our discussion and let me get back to Tobias. Tobias,
you've done a lot of thinking on the broader policy implications of financial innovation, and you've
written extensively on stablecoins and digital currencies as well. You are a member of the G7 Stablecoins
Working Group, which has been very emphatic that no global stablecoin project should begin unless the
legal regulatory and oversight challenges have been adequately addressed.
Aditya Narain:
I know that the other speakers will cover some of these issues with more specifics, but could you lay the
ground for us by taking us through whether payment innovations, particularly stablecoins, have had any
major impact on payment and transaction ecosystem yet? Also a particularly vexing issue is that have
cross-border payments, which continue to be costly and difficult, despite a multitude of projects aimed
at addressing this. Can we hope to see any improvements? What is the role of the IMF in all of this?
Tobias Adrian:
Yeah. Thank you. Thank you, Aditya, for switching to the FinTech topic. I think we are in a time of
technological revolution in the payment space and over the next five years or so, we will certainly see a
vastly different payment landscape, both nationally and internationally.
Tobias Adrian:
There are four dimensions to think about. So one is the emergence of stablecoins, and of course there
are many single currency, stablecoins already. There are also multicurrency baskets that are being
planned, and it might be that the introduction of stable coins will have a first order impact on
international transactions.
Tobias Adrian:
Secondly, many countries around the world are exploring to link up their RTGSs, their Realtime Gross
Settlement Systems directly. And RTGSs themselves are undergoing a technological revolution. So many
countries are updating the payment systems nationally, and at the same time, I'm working on ways to
linking up those payments systems. So that might not work for all countries around the world, but for
many countries.
Tobias Adrian:
Thirdly, of course the correspondent banking system, the correspondent banking system is quite
antiquated. So when anybody does an international transaction today, there's typically your bank here,
the correspondent the bank of your bank, the correspondent bank of the receiving bank, and the
receiving bank. So there are four banks in a chain and every single bank has transaction costs, has
compliance costs, has to do AML CFT checks. And so it's very inefficient and very, very costly. And so
there's a huge opportunity to update the correspondent banking system, and indeed there are major
efforts underway, in particular in the area of a remittance payments to just come up with
technologically and legally much more efficient and better systems.
Tobias Adrian:
And fourth, of course there could also be some degree of more centralized global payment systems. And
so that is further down the road, perhaps, but it's something where some people are certainly really
putting some effort in.
Tobias Adrian:
So there are really four complimentary avenues where technology is already impacting payments and is
going to impact payments much more dramatically going forward. Now, in terms of central bank, digital
currencies, there are pilots in many countries and this particular crisis might accelerate the motivation
and the speed with which central bank digital currencies are rolled out. And if there are many countries
that are adopting central bank digital currencies, that in and of itself will have implications for crossborder
payments as well. So let me stop here.
Aditya Narain:
Thank you, Tobias. Let me now turn to Ceyla. Ceyla, you led the World Bank's response on innovation
and finance and supported many projects around the world which are aimed at facilitating transfers,
payments, and remittances. And you've also been involved in the bank's response to the COVID-19
crisis. Could you elaborate a bit on the role of digital payments in the COVID-19 response and the
broader implications for digital payments going forward?
Ceyla Pzarbasioglu:
Sure. So as Tobias also said, the crisis makes it very clear that digital payments are clearly part of the
COVID-19 response. The lockdowns and social distancing are making use of physical cash much more
difficult. Banks have reduced their operating hours. Physical agent locations used by mobile money
users for cash in and cash out are also affected. This is critical for mobile money networks. We heard
from several regulators that in some countries where the migrant workers are, they cannot send
remittances abroad because they are not allowed to go out and go to mobile money operators and
sometimes go to... Sorry, money transmitters, and sometimes these offices are even closed. So for
workers that do not have access to digital payments through their phone or other means, it becomes
very difficult to really survive during this crisis and help their families who are in their home countries.
Ceyla Pzarbasioglu:
So this has been also linked with a general hesitation to handle cash due to concerns in terms of
potential transmission. So all of this is leading to a greater adoption of digital payments in countries, by
individuals and the governments by governments, where the right services and infrastructure are
available. And I'd like to underline where the services and infrastructures are available as this is not the
case, unfortunately, for many countries, hence making it critical that we work on digital connectivity and
prerequisites like digital ID and the regulatory legal frameworks that allow the safe use of digital
payment services. And that I think is an urgent priority.
Ceyla Pzarbasioglu:
And to add to this, that are provisional services like health, education, and commerce that are being
widely used through digital means, and digital payments are critical not only for accessing them, but also
for the provision of these services, as well as through E-Trade and other means which allow people to
manage this crisis in a much better manner.
Ceyla Pzarbasioglu:
So in many countries governments are simplifying processes for financial service providers, existing
social benefit transfers, and social insurance payments recipients, new beneficiaries, and so on. The
experience of Brazil is very impressive. The minister was quoting yesterday that within three weeks they
were able to "digitize," quote-unquote, 40 million people. So I think of course not every country will be
able to do this, but it makes it very important that we work on helping countries as much as possible to
switch into safe digital payment systems.
Ceyla Pzarbasioglu:
So what are we doing at the World Bank to improve the safety, reliability, and efficiency of payment
systems and financial market infrastructures? This is a big agenda, as you mentioned. Provide financial
assistance, as well as technical assistance to countries, policy advice, legal foundations, payments,
infrastructure, and regulatory supervisory issues, working with international standards centers like CPMI
and so on, and disseminating this knowledge overall.
Ceyla Pzarbasioglu:
And specifically the support includes dealing with regulatory challenges to allow entry of new business
models. There are a lot of concerns in terms of trust and in terms of being able to use Cloud services,
which a lot of regulators are concerned about because most of the time these are cross-border, and it's
not clear that there would be business continuity, simplifying cost [inaudible 00:38:29] due diligence
requirements, interoperability of payment systems, which is really critical for those to access these
services. And of course, shifts to digital large volume payment systems like remittances, government-toperson
payments, and public and private sector, salary payments and bill payments.
Ceyla Pzarbasioglu:
So these are all the work that we have been doing. Of course, working very closely with many others,
partnering with many others on our big initiative ID4D, ID for Development, as well as the foundations,
the digital infrastructure, with our colleagues in our infrastructure groups to help countries to have
these possibilities. Thank you.
Aditya Narain:
Thank you, Ceyla. I think both you and Tobias, you've laid out very clearly the imperative of moving
towards systems which will enable digital payments as also stores of value. And of course, stablecoins
are a key means of achieving both objectives. So that now brings me to the Dietrich. Dietrich yesterday,
or no, day before yesterday, the FSB published a landmark consultation report. And just as an aside, I
was surfing some of the more geeky FinTech websites and immediately the big headlines were
"governments to ban all stablecoins," which is precisely not what you intend, but it's how it's being read
in some senses.
Aditya Narain:
So obviously your concern, the FSB's concern is that global systems, stablecoin ecosystems, could
become systematically important. And therefore it's important to be able to have them adapt to adopt
the appropriate regulatory framework. So what are the actions that should be taken to address the
regulatory and supervisory issues with global stalecoins?
Dietrich Domanski:
So thanks, Aditya, for introducing this second round of discussion. And I think you mentioned the
reception that our consultative report has received and sort of morphed into more tech oriented parts
of the worldwide web. And therefore, I think it may be useful to put the discussion about regulatory and
supervisory responses to global state stablecoins into context.
Dietrich Domanski:
And the first Part of just context is the potential systemic importance that stablecoins may have. The
fact that they may become systemically important is one of the main reasons why the G20 mandated
the FSB last year, last June, to examine regulatory issues. And to advise actually on multilateral
responses as a [inaudible 00:18:15], taking into account, and this is very important to not come back to
it later in more detail, the perspective of emerging market and developing economies.
Dietrich Domanski:
So that's one part of the context. I'll come back to that in a minute. Another part of the context is the
broader debate about payment system efficiency that you introduced and that Tobias and Ceyla have
already talked about. And I think it's important to note, and our report is clear on that, that global
stablecoins have the potential to enhance the efficiency of the provision of financial services. And this
argument is probably even more important in the current environment of social distancing, as Ross
mentioned.
Dietrich Domanski:
Now, cross-border retail payments have remained relatively slow and expensive. This is an issue not just
for emerging markets, but also for developing economies, but in particular for emerging markets, which
face for instance, the issue of high cost of remittances.
Dietrich Domanski:
And I would like to note in the passing that as part of this broader context, enhancing the efficiency of
global cross-border payments is a priority on the international policy agenda. The G20 presidency has
tasked the FSP to develop a roadmap for how to enhance cross-border payments and we published also
last week, as a first step towards the development of this road map, an assessment of the current issues
in payments, in international payments.
Dietrich Domanski:
So there's a lot of work going on. And I think the discussion, as I said, about regulatory frameworks
needs to be seen in this context.
Dietrich Domanski:
Now coming back to the systemic question of systemic importance of global stablecoins, I think you can
think of this as the flip side of their potentially global use as means of payment and store of value. And
more specifically, global stable coins could pose financial stability risks through a number of channels.
Dietrich Domanski:
The first one is that if a global stablecoin worldwide you use as common store of value, then even a
moderate fluctuation, variation in its value, might cause significant changes in use as wealth and
therefore trigger significant wealth effects.
Dietrich Domanski:
Second, if a global stablecoin is widely used for payments, any operational disruption might have
significant impacts on economic activity and financial system functioning.
Dietrich Domanski:
And then third, the large scale use of global stable coins might magnify any confidence effects related to
the workings of the stablecoin arrangements. Now, these effects might be of particular importance in
emerging and developing economies where households may come to hold notch portions of their
wealth in global stablecoins, rather than local currency [inaudible 00:00:44:13].
Dietrich Domanski:
So what could and should regulate us to reap the potential benefits of stablecoins, while containing
potential risks to financial stability? I mean, this is the essay question behind the consultative report that
we published the few days ago. And again, the focus of our report is on regulatory and supervisory
issues, not on the whole host of other questions that come with global stablecoins, for instance about
competition, taxation, and so on and so forth.
Dietrich Domanski:
Now, our consultative report includes 10 high level recommendations to address the regulatory
supervisory and oversight challenges faced by global stablecoins. I don't want to go through the
individual recommendations, but rather make a few quick points on the rationale, if you like, the
philosophy behind these recommendations.
Dietrich Domanski:
So three points. First, it is important to understand global stable coins as an ecosystem, that's why we
talk about global stablecoin arrangements. These arrangements include activities that may span across a
range of financial activities and correspondingly, banking, payment, and security regulatory regimes. So
range of functions, range of potentially relevant regulatory regimes.
Dietrich Domanski:
Second point, authorities agree on the need to apply supervisory oversight capabilities and practices
under the principle of same business, same risk, same rules. This is important for two reasons. One is
obviously a level playing field argument. Another one is to put in place a regulatory framework that is
capable to adapt to emerging business models and technologies.
Dietrich Domanski:
They could look to adapt to emerging business models and technologies employed by stablecoin
providers.
Dietrich Domanski:
Third, very important, some functions of global stablecoins may have very significant impacts across
borders. Taken together, there's a strong need for holistic approach to regulation, supervision, and
oversight and close international cooperation and information sharing.
Dietrich Domanski:
I think these are the, if you like, the underpinnings of the 10 principles. I'm happy to discuss them in
more detail in the Q and A part. Our recommendations that spell out 10 key elements of an approach
that is based on these underpinnings.
Dietrich Domanski:
I'll stop here. Looking forward to the Q and A part.
Aditya Narain:
Thank you, Dietrich. Let me now turn to Ross. Ross, you mentioned the new world order, which is going
to be based around the digital economy. Of course, this world may well be one in which many different
types of digital currencies may co-exist, including Central Bank digital currencies, cryptocurrencies, and
stablecoins. From all the thinking that you've done, can you share with us what are some of the key legal
challenges that lawyers will have to face in this brave new world? And in particular, what are the legal
issues which still remain with regard to the stablecoins that are for foremost in your mind?
Ross Leckow:
Sure. First of all, there are many challenges that this brave new world is going to present for lawyers.
Given that that world is actually evolving, many of these challenges will evolve.
Ross Leckow:
Generally speaking, neither the law nor lawyers like uncertainty. It makes it difficult for firms to know
what the rules are that they have to comply with. Secondly, what rules would apply as they structure
their transactions. This basically complicates life for operations on many levels.
Ross Leckow:
With the rise of digital currencies over the past few years, lawyers generally have had to advise clients in
an environment of uncertainty where the rules may not be entirely clear.
Ross Leckow:
Of course, the situation varies between jurisdiction where some countries are more advanced on
resolving some of these issues and others. I have to say that a huge amount of work has been done and
is being done to try to clarify the legal rules, respecting digital currencies generally, but also stablecoin
specifically.
Ross Leckow:
This work can be divided into two broad areas of the law. The first is the public aspect of the law
regulation, and the second is the private law aspect of the law, the law of commercial relations between
private parties. It's not surprising that, earlier on, much of the work was being focused on the first of
these two buckets, particularly things like anti-money laundering for digital currencies. This was
identified as an immediate concern that prompted a pretty swift response from FATF and trying to
develop some standards and guidance for its members around these issues.
Ross Leckow:
But work is now being done on both fronts and some progress is being made. But let me maybe share
with you some of the principle issues that are relevant for digital currencies, with particular relevance to
stablecoins. Some of these issues, maybe starting with the law of regulation. I think Dietrich has already
alluded to some of these. A lot of work is still being done to clarify which legal rules within a regulatory
regime apply, and where the gaps may exist. They're basic questions as to what extent a stablecoin will
constitute money, or securities, or a collective investment scheme, or electronic money, or potentially
something else entirely. Which regulatory regimes would it fall into? Potentially more than one. In what
circumstances does a stablecoin regime constitute a payment system? Does the issuance of a stablecoin
implicate banking law? To what extent are stablecoin regimes, and the service providers involved in
them, subject to anti-money laundering rules in a country? And of course, which jurisdictions actually
can assert jurisdiction over a stablecoin?
Ross Leckow:
These, particularly global stablecoins, span multiple jurisdictions with different parts of the regime in
different countries and different service providers and users in different countries. How do you reconcile
all this from a legal perspective?
Ross Leckow:
But beyond these issues of regulation, there is a whole rap to private law issues that need to be
addressed. Generally, with respect to digital currencies, but the list really grows with respect to
stablecoins. Many of these were identified in the G7 report on stablecoins that was published last fall.
Ross Leckow:
And of course, different stablecoin systems, given their different designs, may raise different legal
issues, but I'll maybe just mention a few of them. First of all, what is a stablecoin from a legal
perspective? What are the rights of the holder of a stablecoin in particular? Do they have a proprietary
right over the stablecoin, or is it simply a contractual claim between the holder and the issuer of the
stablecoin?
Ross Leckow:
Now, what are the legal arrangements around the protection of the reserve of assets underlying the
value of the stablecoin? What are the rights of a stablecoin holder to actually redeem the stablecoin or
to liquidate it? In what circumstances? How can ownership of a stablecoin be transferred between two
parties? Particularly important, what are the rights of the holder in the event of an insolvency? Does it
have a claim on the underlying assets constituting the reserve, protecting the value of the stablecoin? Or
does it only have a general claim against the assets of the issuer of the stablecoin? What is the
governance structure around the initiative and how are decisions taken? Finally, what rights do holders
have over their data when it's held by either the issuer of the stablecoin or service providers? These are
just a few of the issues that arise, but I'm sure there are many others and a lot of work needs to be done
to resolve them. I'll stop there.
Aditya Narain:
Thank you, Ross. I think you've raised some very pertinent issues, which help us to round off the
discussion. We began with the overall context, and coming down to the issue of exactly what are some
of the challenges which have to be addressed before stablecoins can be seen as useful means of
payments and stores of value, and provide the solution to the many of the problems which are being
faced in the area of payments and settlements.
Aditya Narain:
We received some very interesting questions from the audience and some of them, of course, are
beyond the scope of the panel. They are very important and very relevant, but beyond the scope of the
panel. For instance, how long do we think the logged on might last?
Aditya Narain:
I leave those out, but I'll pick up those ones, which have more direct relevance to the topic today. Not
that the others are not important, but those are ones which we may not be able to contribute much to
the body of knowledge.
Aditya Narain:
Let me start with the first question, and feel free to respond to the other questions when your turn
comes up. But Tobias, I'm going to go with you first. One of the questions we have is that the scale of
this crisis is daunting and much of the damage could be longterm and structural. Is it so, or will be snap
back really quickly once the vaccine and treatment are discovered?
Tobias Adrian:
Yeah, thanks. This is the crucial question of this crisis. There is a large amount of uncertainty around the
medical issues, right? Is there going to be a vaccine? Is the virus going to retreat? Is there going to be a
re-infection once people go back to work? Could there be re-infection in the fall or next year? I mean,
these are all questions that are basic medical questions that we don't have a clear answer to yet. Or is
there going to be a treatment? Is there going to be either vaccine or some other treatments via drugs,
right? All of these are very unclear at this point, and that is one source of uncertainty.
Tobias Adrian:
The second source of uncertainty is now that you have these lockdowns to protect lives, this is what
needs to be done. We need to protect lives. What is going to be the economic implication? Of course,
this generates the tremendous amount of economic hardship. People can't go to work anymore. A huge
fraction of the population around the world has either no savings or very little savings, and many around
the world live from the wages to their food, so to say. They might be facing extremely difficult times due
to the lockdowns.
Tobias Adrian:
And finally, of course, they are scarring, right? Once you shut down the economy, you shut down
businesses, you get people unemployed. This can have very long-lasting and very persistent effects.
Even if on the medical front things go unexpectedly well, or somehow this virus is retreating more
quickly than expected, the economic implication might be fairly long- lasting. There's uncertainty about
the magnitude and the timing.
Tobias Adrian:
And then, of course, there's the uncertainty about the financial sector, right? Because as we discussed,
banks are well-capitalized. They have a lot of liquidity. But if the most adverse scenarios realize... When
you look, for example, at the world economic outlook, we look at the adverse scenarios. Those are more
severe than pretty much any stress tests that have been run, right? Supervisors over the past decades
thought that these adverse scenarios and the stress test were really severe, and now suddenly we have
a crisis where the baseline is about as severe as the supervisory scenarios. But where the adverse
scenario relative to the current baseline is more severe than what most supervisors around the world
have imagined. That is going to be another challenge.
Tobias Adrian:
There remains a large amount of uncertainty, and this is where policy has to come in, right? This is
precisely why institutions such as the IMF, the World Bank, the FSB, the VIS, were created. It's to
coordinate policy, to provide fire power, to provide funding to countries that cannot receive funding
anywhere else. We have seen that to some extent, countries have come together to do the right things.
Within countries, policy makers have come together to do the right thing, and my suspicion is that we're
going to need a lot more of that going forward, both on the international corporation front in terms of
taking dramatic actions and in terms of being courageous, to take a big policy stance.
Tobias Adrian:
This is a crisis where you certainly want to hope for the best. Perhaps things turn out better than we
expect, but we have to prepare for the worst. We don't want to regret not taking the steps that should
have been taken because it is costing lives.
Tobias Adrian:
We have to be aggressive. We have to be forceful on the medical front, on the fiscal front, on the
monetary front. And of course, in terms of what international organizations are doing.
Aditya Narain:
Thank you, Tobias. You covered with your response another question which had been raised, which was
the one on the lives versus livelihood discussion, and I think you've made that pretty clear.
Aditya Narain:
The next question which we received is a little bit more focused on stablecoins, which is, would the
prevalence of stablecoins weaken the power of monetary policy in targeting inflation? Ceyla, Would you
like to go on this before I bring it back to Tobias?
Ceyla Pzarbasioglu:
Go ahead. Why don't we ask Tobias to go, and then I'll go.
Aditya Narain:
Okay. Perfect.
Tobias Adrian:
It depends a little bit on the design of the stablecoins. At the fund, we proposed to have stablecoins
phased into a regulatory framework of [inaudible 00:13:59]. We call that synthetic CBDCs. That would
involve creating a special charter where stablecoin issuers would acquire a very simple banking charter
that would allow them to hold the reserves with the Central Bank. That has the advantage.
Tobias Adrian:
First of all, the stablecoins would be within the regulated banking sector in a very simple fashion. These
synthetic CDBC issuers will be very, very simple banks. On the assets side, they have central bank
reserves. On the liability side, they have CBDCs. That's it. Those synthetic CBDCs could be operated out
of banks, out of FinTech companies, out of telecom companies.
Tobias Adrian:
The AML-CFT issues would be resolved in exactly the same way as they are done in the banks, because
these would be simple banks. These will be very safe organisms because they hold reserves with a
simple bank. So this is high powered money. It's extremely safe. At that point, it's within the monetary
system, so you know how many reserves are corresponding to CBDCs. You can, in principle, do what
China does, which is whenever a CBDC is created, reserves a drain on a one-to-one basis so that you
keep monetary control. I think this is one avenue to go, and these it's called [crosstalk 01:01:48] CBDC
because it's a two-tier system where it's private operators, either banks or enterprises running the
synthetic CBDC, which is a stablecoin, and the central bank doesn't have to deal directly with the public,
which has many problems. AML-CFT would be done by the bank, but it would have the safety of an
institution that is backed by reserves and that is regulated by bank regulators.
Tobias Adrian:
This proposal of the synthetic CBDCs would address exactly the problem of monetary control. In fact,
many countries around the world are expressing interest precisely because they're worried that the
global stablecoins can undermine monetary control. Dollarization is so much simpler once you have a
well-known app that everybody uses. Billions of people that can transact across borders and that can
threaten monetary autonomy. You can have polarization, potentially very quickly. And in particular, in
this period of time where people don't use their homes, everything is done online, this push for
dollarization, or stablecoinization, so to say, could get very quick and could overwhelm monetary
systems.
Tobias Adrian:
What many countries saying is, "Well, we want to lean against that by developing our own CBDC so that
there is a digital currency in domestic currency." And of course, the countries where these digital assets
have advanced the most are oftentimes emerging markets or developing countries. It is entirely possible
that there will be an acceleration because stablecoins are becoming more popular, but policymakers are
also becoming more aggressive in terms of their policy response because they are worrying about the
monetary autonomy. In fact, the IMF is working on a paper for the July G20 on exactly that issue.
Aditya Narain:
... For outlining this, and I think you brought out the issue of why global stablecoins or stablecoins can
become systemic quickly, the point which was being made earlier by Dietrich.
Aditya Narain:
I'm going to move now to Ceyla, but first I'll give you, Ceyla, a question for you, which is a twist to the
financial inclusion issue. The question is: Experience so far indicates that sophisticated investors tend to
corner these coins or their benefits. Doesn't this work against the objective of financial inclusion? Could
you address this, as well as if you have any follow-up to the questions I asked Tobias? And I'll go around.
Ceyla Pzarbasioglu:
Okay. Two issues. One is, the whole premise of these innovations is to allow others to be able to access
it and make it much less costly and efficient than effective, and so on. I think to the extent that... And
many of it, as Dietrich can explain more, as many of it has to do with the fact that, for example, the
across border payments are extremely expensive. For many, remittance corridors are not affordable
when some migrants, workers, or remittance senders have to give in fees or have to pay fees and other
kinds of service fees on their costs for their payments. It makes it very important that we actually
address these issues and see how these stablecoins or digital currencies, the way also Tobias described
it, can be used in reducing the cost of sending money, receiving money, and so on.
Ceyla Pzarbasioglu:
This will not just... We're not talking about Bitcoin now. This is not for speculative purposes. This is using
digital currencies for the much-needed cross border payments, and so on. Many countries are also,
especially smaller countries which do not have the ability to build these infrastructures on their own, are
looking at joining perhaps some regional platforms and system. That's also an opportunity for many
countries to be able to participate. To the extent that we can deal with the risks... And the risks are
there. We have to be all cognizant they include AML-CFT related risks, they include cyber risks, they
include financial capabilities and capacity to be able to use such innovation.
Ceyla Pzarbasioglu:
To the extent that we are cognizant of those risks and can take measures to address them, there is huge
potential for increasing financial inclusion through digital payments. We see this in many countries who
are actually far ahead of many of the advanced economies. Kenya comes to mind. Ghana is making a lot
of progress in this area. Many Asian countries have made huge progress, allowing much more efficient
and less costly payment systems, and I do not agree that this would be contrary to financial inclusion. If
anything, it should help it. But again, we need to really be cognizant of the opportunity, but the risks,
and mitigate those risks.
Aditya Narain:
Thank you very much, Ceyla. Let me move next. Question for you, Ross, is that with this pandemic
situation and the increasing use of stablecoins, all FinTech and payments, do you think there's already a
need to include these FinTech related accounts into the deposit insurance arrangement? We've
discussed this before many times, and I'm glad I'm asking you the question and not having to answer
this one.
Ross Leckow:
It's a very difficult question, Aditya. Honestly, I think that it's premature to consider that. Deposit
insurance serves a very specific purpose, and stablecoins have a broader purpose. We certainly have to
put in place a more comprehensive and effective regulatory regime that guards against the risks that
stablecoins may present, as really everyone has commented on. But deposit insurance requires probably
some more thought.
Ross Leckow:
Deposit insurance requires probably some more thought.
Aditya Narain:
Thank you, Ross. So I have another question for you, Dietrich. I don't know if you've had the time to read
the new proposal by Libra because the question is about that. It says, "Regarding the new proposal of
Libra, will some of the requirements or the assessment of the FSB change because of COVID because
privacy concerns could not be the same?" If you haven't had a chance to read this proposal so far, which
came out, I think, only yesterday, maybe you could respond to some of the other questions. I leave it to
you.
Dietrich Domanski:
Yeah. Thank you, Aditya. I had a quick look at the revised white paper that cover that. I would be
reluctant to comment on any specific stated [inaudible 01:09:54] proposes that concern individual
projects, including important ones. I think looking at developments through the lens of our work and our
report, as I said before, I think one important consideration for our work was to provide a broad
framework in the form of principles that is robust tool involving business models, changes in the
external environment, and well, technological innovation, right? So I think there are a couple of
interesting points in the revised proposal that relate to some of the principles. I mean, there's a question
about the composition of the reserve and a question about the ... that also alluded about the claim that
the hold office state record actually has.
Dietrich Domanski:
So I think I would see an interesting discussion continuing going forward. I would leave it at that general
level, if you don't mind. I would rather like to come back to a point that the chain I was talking about
concerning the relationship between innovation and payments and financial inclusion, and I think the
really good news is that the issue of enhancing efficiency in payments is firmly on the policy agenda, and
I think it is important to consider a number of elements here, not just one model for enhancing crossborder
payments, which could be a stablecoin type solution say, but there are also other ways,
[inaudible 01:12:07] the currencies have been mentioned, but also there are probably opportunities to
enhance, to build on, existing cross-border payments arrangements.
Dietrich Domanski:
I think this is the idea behind the roadmap that we have been asked to develop for the G20, and that I
mentioned earlier, not to provide, if you like, one ... to identify a roadmap for one specific solution, one
single way to more efficient payments, but if you like, a roadmap that charters the territory, lays out
what the issues are, and provides elements, technical solutions, legal solutions, regulatory solutions that
can be used, that can be combined in a way that takes individual economies, but also on international
basis, the system as a whole, to new solutions. I think a combination or, if you like, competition between
different approaches, I would see that as a good thing.
Aditya Narain:
Thank you for that, Dietrich. That's very, very interesting. There have been other questions also on this
issue of financial inclusion, financial stability, and the nexus, but one question which I have now, Tobias,
this is on whether the linkage of stablecoins to capital outflows, and the question, I think, you addressed
it a little bit in your remarks, but the question is the stablecoins entail financial risks, especially for
emerging economies. Under certain macro financial context, the existence of a stablecoin linked to a
foreign currency, you raised the dollarization issue, might lead to a relatively more volatile demand for
assets in the domestic currency, particularly bank notes and bank deposit. This would have some impact
on monetary and financial stability. What do you think about this? When there are episodes of nominal
and foreign account exchange tension, will this provide an additional channel for capital outflows?
Aditya Narain:
I think you've already responded to this in your question, but if you have any additional view, you might
want to say it. Let me throw another question at you, which is, I think, also broadly one for the entire
panel, which is what is your thinking: Once the fiscal and monetary stimulus, the unprecedented
monetary and fiscal stimulus that has been released, when that halts and the unwinding begins, will the
global financial system be more vulnerable, and in the post COVID-19 scenario, what kind of asset
classes and institutions may become new sources of fragilities in the financial system?
Aditya Narain:
So if you could think about the second one for the panel as a whole to conclude the discussion, but
meanwhile, if you have anything else to add to the first one.
Tobias Adrian:
So let me start with the first one. So on the capital flows and stablecoins, so one interesting question to
think about as if a country imposes a capital flow manner, like a capital control, how do you deal with
that when they are stablecoins? From what I understand, the stablecoin operators, or those who are
planning to be stablecoin operators, would impose those capital controls, right? So the stablecoins are
trying not to be a shadow payment system but are trying to be part of the regulated and well-governed
financial systems. So that would mean that those capital controls and capital flow measures would have
to be imposed on the stablecoin as well, and so that will be done at the wallet provider level. So the
wallet providers would, basically, limit ... So say country X imposes some capital control. Then the wallet
provider would limit the outflow or whatever the measure is. So imagine the country X limits the extent
to which currency, or any capital control out, any payments can flow out, that would have to be
imposed at the wallet level, and there would have to be a governance and a legal framework around
that, of course, in every single country.
Tobias Adrian:
So it's certainly possible to do that. I mean, banks are subject to imposing those, and it's certainly
desirable, right? I mean, some of the crypto assets, of course, are completely outside of any of that,
right? I mean, some stablecoins are attempting to be totally outside of any of this. They are trying to be
in the total parallel world to the current financial system. So there's a deep philosophical divide between
alternative stablecoin providers, and you can imagine what regulators are thinking about those
alternative approaches.
Tobias Adrian:
Another issue, of course, that hasn't come up yet is sanctions. I mean, some countries are sanctioned,
and in principle, stablecoin providers are also trying to deal with that because, of course, if they are
transactions with sanctioned countries, they are going to be subject to legal prosecution, et cetera. So
again, there's a philosophical divide where some stablecoin providers say, "I want to be completely
away from any of this," while others say, "I want to be compatible with the laws and rules and
regulations of the international financial system."
Tobias Adrian:
So let me now move to the second question, which is about this crisis and financial stability in this crisis.
So when you look at yield curves or implied inflation, I mean, last year we put out the global financial
system [inaudible 01:18:49] report that was called "Low for Long," and the theme this year is even lower
for even longer, right? I mean, yield curves are very low, very long all around the world. I mean, that
doesn't mean, of course, some countries are subject to pretty big credits spreads, and they might not
benefit as much from those low and long rates, but the benchmark rates around the world, like the US
dollar, the Euro, the Yen, the Swiss Franc, et cetera, I mean, they have very low grade, long yield curves,
and so monetary policy is going to be an unconventional territory for a long time.
Tobias Adrian:
So humans like to anchor the future in the past, and so they always think that somehow normalization is
to come, and I think that is one particular behavioral bias, right? I mean, it's not clear at all that we will
go back to the kinds of level of interest rates that we have seen in the past anytime soon. So that's going
to present challenges for monetary policy. Now, moving to the financial stability part, of course,
reaching for yield is going to come back, and regulations are important. I think if anything, on the bank
side, I think if anything, we might move to even more capital and more liquidity because now we have
seen ... We might see a crisis that is the most severe than the 2008 crisis, right? I mean, in some sense,
the post-2008 regulatory reforms are calibrated to a 2008 time. We might see something worse, and so
we might calibrate it to something even worse.
Tobias Adrian:
That is one thing, and the same thing I just want to say on the market-base front, I mean, central banks,
including the Fed, The Bank of England, the ECB, basically have felt compelled to backstop the entire
market-based financial system. That is going to raise regulatory questions as well. So let me stop here.
Aditya Narain:
Thank you. [inaudible 01:21:17] turn to Ceyla, and if you could also provide your views on when the
waves recede, what will be left standing?
Ceyla Pzarbasioglu:
Okay. So I guess we don't know how big the wave will be, so it's a guess. So there are two states of the
world, right? We don't know how T plus one will look like. We don't know what will be behavioral
changes in terms of consumption patterns, saving patterns, how will the disrupted value chains will be
mended? Will there be more protectionism? Potential output is down, how temporary this will be, and
so on. So how we will come out of this is not yet clear as many of us said during this call. It depends very
much on how severe this pandemic continues for and the impact of the measures, but what is really
clear is that there is no differentiation right now. Everyone is considered as risk, and countries have
turned inward.
Ceyla Pzarbasioglu:
So it's very clear to me that those that come out of this crisis stronger by taking whatever structure
reforms are possible, I know this is difficult to talk about at this health emergency, but I think this is
going to be, as soon as countries can focus on that, it's going to be important, continuing to strengthen
bank resolutions, safety nets, and also corporate bankruptcy frameworks because I think we started this
crisis. We have a book out, which is Global Waves of Debt, and the cover is like a tsunami. This was
before the pandemic. This was published in December, and we are already at record level of sovereign
and corporate indebtedness. So it's obvious that we will have corporate insolvencies, and hopefully it
won't be systemic, but the more prepared we are to deal with these potential failures, I think, the better
off countries will be. So really looking at out-of-court settlement systems, all the types of measures we
took after other crises where we face systemic bankruptcies, I think will be critical. Hopefully, they will
end up being drawer plans, but I'm afraid for some countries they won't be.
Ceyla Pzarbasioglu:
So the more we can prepare, the stronger countries will hopefully emerge from this crisis.
Aditya Narain:
Thank you, Ceyla, and may I ask Dietrich now for his views?
Dietrich Domanski:
Yeah. Thank you. Thank you, Aditya. Three quick points on, well, what will be left standing? First, role of
buffers, I think we've seen over the past couple of weeks how important it is to have buffers available
that can be used when they are needed, and it's good that we are using the flexibility that is provided by
international standards in terms of using buffers. However, looking ahead, at some point in order to
have buffers available down the road, they will have to be rebuilt and replenished, and I think this is
something to bear in mind, that we need to look beyond, at some point, beyond the current crisis, and
also bear in mind the need to rebuild buffers. I think this is also reflected in our principles that we are
not going to roll back with the policy responses on existing agreed regulation, but we are using the
flexibility that exists in order to preserve financial stability going forward.
Dietrich Domanski:
Second point quickly on non-bank financial navigation posts, Tobias mostly framed with you have a
speech I wrote in his letter to the G20 that the impact of COVID-19 on credit markets and investment
[inaudible 01:25:19] highlighted potential vulnerabilities in the increasingly important non-bank financial
navigation sector and that it's important, more important than ever, to understand the risks and ensure
that we can reap the benefits of this dynamic part of the financial system without creating risks for
financial stability. The FSP has formed a senior group of market regulators and macroprudential policy
makers to be [inaudible 01:25:49] to develop a proposal on how to organize work on this important area
in the FSB going forward.
Dietrich Domanski:
Last point, important to look ahead, not lose sight of the fact that there will be a world after COVID-19,
and therefore, it is important to continue on initiatives that can support, and hopefully will support, a
strong recovery. I'm very grateful that we have just this focus on innovation payment systems and
stablecoins. The other areas of work that need to continue, honestly, the benefits of technology
innovation more generally assessing the effects of reforms is important, promoting efficient and
resilient cross-border payment system we talked about, and from an FSP perspective, last but not least,
also supporting a smooth transition away from LIBOR remains important issue.
Dietrich Domanski:
[inaudible 01:26:46].
Aditya Narain:
Thank you, Dietrich. Ross, the last word.
Ross Leckow:
Thank you, Dietrich. I'll be very brief. I think one thing that will be left standing will be global financial
and payments landscape that will continue to evolve and, I think, move towards greater digitization, and
I think to ensure that this process is a force for good, it's critical that the public sector, particularly
central bank standard at center, to ensure that the system that evolves is not only stable and efficient,
but also inclusive. This will involve, I think, central banks being directly involved in innovation, but also
the public sector ensuring that regulation is in place that protects the financial system and the people
participating in it, and I think that the nature of regulation may change in this context.
Ross Leckow:
I think Tobias just pointed to a fascinating example of capital controls, where new types of service
providers involved in digital payments will have to exercise some oversight over the purpose for which
transfers of digital currencies and stablecoins will be made. Historically in countries, this has been a very
paper-based process involving banks and other types of traditional service providers. What will it look
like in a digital world involving new types of service providers? I think this will involve a great deal, I
think, of imagination, hard work, and creativity on the part of the public sector working with the private
sector.
Ross Leckow:
I'll stop there.
Aditya Narain:
Thank you, Ross, and I think you very accurately summed up the discussions. So I can just add very little
to the wrap-up. In a sense, what I think we all recognize, and there is a consensus here, that digital
payments are front and center in many ways of the COVID-19 response, as we have seen in the way the
governments are reaching out with their various means and methods of transfers and payments, and
this could well determine the winners and losers. The point, which you made Ross, about what's left
standing will be the payment ... those which are very well integrated with the digital system. This could
well determine the winners and losers in the new world, and it will be an urgent priority for everyone to
catch up, in a certain sense, and global stablecoins, as we discussed, they provide a very useful means of
addressing these issues, but many risks, as pointed out by all of you, still need to be addressed.
Aditya Narain:
As was pointed out, there are deep philosophical design differences, which dictate design issues and
application issues, which also have to be very well understood, else they may well end up causing the
next distress in the financial sector.
Aditya Narain:
So with that, let me just first quickly thank the Toronto Centre for the excellent work that they have
done in bringing this panel together. They do it every spring and annual meetings. We are very grateful
to them for the legwork that they do. Let me also mention that this proceedings are recorded and will
be available for those of you who want to see it. Finally, there was some questions which I could not
come to, some which are very important and interesting, and we will see if through Toronto Centre we
can reach out and respond to some of those questions, but finally, and for everybody, please join me in
a virtual applause for the fantastic panel that we have had today. Thank you.
Tobias Adrian:
Thanks very much, Aditya, and thanks Toronto Centre.
Aditya Narain:
Thank you. Thank you everybody. Bye-bye.