While in the spaces of traditional finance there is talk of currency competition, in the sense of which denomination is preferred by savers and investors, in other areas they have understood that the real challenge is to sustain the usability of fiat money, that which is issued by central banks. On May 9, the European Central Bank (ECB) released a paper on the “Tokenization of financial instruments and the digitization of money through the central bank.” For some time now, we have maintained in this space that the seigniorage of the 21st century, apart from being about who has monetary authority, that is, the power to mint currency, fundamentally depends on who processes the transactions. An incredible opportunity for our country, which would complement the efforts that Argentines make to solve inflation and public spending.
The CPSS-IOSCO Principles for Financial Market Infrastructures are a set of standards established to ensure the safety and efficiency of payment and settlement systems, central securities depositories, and transaction processing systems. The various types of infrastructure involved in financial market transactions must be fundamentally practical, secure, and available. If central banks processed the payments of the money they issue, it would: - reduce risk - establish trust - safeguard financial stability The ECB document argues that central banks must be at the forefront of technology to ensure that the money issued remains an attractive means for processing both retail payments through forms of digital money (such as the digital Euro, in this case) and for the settlement of large financial transactions recorded on distributed ledger platforms. Regarding this last point, it highlights that the financial industry is exploring distributed ledger technologies (DLT) to: - Increase transaction automation - Reduce reliance on intermediaries - Increase transparency Some of the potential benefits that decentralized ledger infrastructure will bring to the financial system include: - Increased efficiency through the possibility of: - trading, settlement, and custody in the same ledger - automation through smart contracts - 24/7 operation → overcoming time zone differences - Opening new channels for placement: - for financial instruments that currently lack the infrastructure of traditional financial markets - for SMEs to access capital markets - Integration with the growing market of tokenization, so that securities can be registered and settled on distributed ledger technology platforms, within which Blockchain plays a predominant role. Clearly, the ECB has defined key objectives such as: - Preserving the stabilizing role of central bank money - Strengthening the efficiency of European financial markets - Avoiding system fragmentation caused by the coexistence of traditional and alternative or non-traditional financial systems (crypto exchanges or crypto banks) - Continuing the analysis of “unified ledgers” (money and assets digitized on the same platform). The finances of the future, at least in the European Union, will involve the interoperability of different markets and financial products, integrating other decentralized systems into the same ledger, offering hybrid investment alternatives, that is, based on traditional models but on new transaction processing platforms. Good job by the European Central Bank.
Article written on May 16, 2024, by Gustavo Ammaturo, who has been with us at FinGurú since the beginning and whom we will miss every day.
Comments