Payment media, from gold coins to stablecoins, exist to be used, and in practice their use requires payment systems. In our paper ‘Central Bank Digital Currencies And Stablecoins – How Might They Work In Practice?’ we consider the way in which existing payment infrastructures and particularly payment banks—might reconfigure their services to accommodate Central Bank Digital Currencies (CBDCs) and stablecoins.
For this purpose, it is probably irrelevant whether the ‘coins’ concerned are created by central banks or private providers, or for that matter what the form is of the technology by which they are constituted. What does matter is that they are capable of being directly owned by the user without any intermediation. The question is whether that is how they will be dealt with in practice.
In this regard a parallel with gold coins suggests itself. If I have a gold coin in my pocket, I own that value directly. However, if I want to transfer it I must either engage with the process of transfer (by being physically in the same place as the person to whom I wish to transfer it) or employ some kind of transfer agent to hold the coin and do this for me. Although it is possible that some holders of cryptocoins wish to get directly involved in the transfer process, the majority will require some form of intermediary (a ‘wallet provider’) to do this for them. The question which the paper addresses is as to what legal form that intermediation will take.
There are two possible ways in which this intermediation could be structured. One is where the intermediary provides a ‘custody’ service. This will involve the customer being charged for the service, since the custodian derives no benefit from his holding of the asset. The other is where title to the coin is passed to the intermediary. This will enable the intermediary to use the asset in his business, and therefore result in the customer paying lower or no fees for the intermediation.
Since a legal structure involving a ‘custody’ structure—where the customer retains direct ownership of the coin—will be a more expensive offering for that customer, it seems unlikely that this will be the prevalent model. However, a structure involving a transfer of ownership of the coins to the bank would seem to have no benefits over the existing bank account offerings, and would arguably be worse for the customer, in that the customer potentially loses the benefit of deposit insurance (since a deposit of stablecoins is arguably not a ‘deposit’ for that purpose).
There may be advantages for banks in employing CBDCs in settlement of balances amongst themselves, but it is difficult to see how this is superior to account settlement on the books of the central bank of the currency concerned. CBDCs could, however, provide a valuable tool for institutions that wish to settle large balances in a particular currency but do not have direct access to an account with the relevant central bank.
The conclusion seems to be that there is no clear rationale for existing end-users of payment services to adopt stablecoins or CBDCs except in regions where existing payment (and particularly cross-border payment) services are exceptionally inefficient. There is currently a race between stablecoin providers and operators of existing payment systems to improve the quality of existing payment services, and this will continue.
Simon Gleeson is a Partner at Clifford Chance.