Central Bank Blockchain-based Liabilities (CBBL)

Ezechiel Copic and Celo Labs have introduced the idea of an alternative or modified CBDC. In “Shaping the Future of Digital Currencies” and “Tokenizing Trust and Putting the ‘Stable’ in Stablecoins,” they refer to a Central Bank Blockchain-based Liability or CBBL. A CBBL would basically be a wholesale CBDC that could be used for backing in stablecoin issuance.

The basic argument is that it is better to use an on-chain central bank liability rather than an off-chain one to back stablecoins. As has been called for by regulators in the US, including the President’s Working Group on Financial Markets (PWG), stablecoin issuances should be backed by central bank liabilities like dollars and short-run Treasuries with FDIC insurance on the stablecoin accounts held in banks. However, the problem with this (and partly the reason for FDIC insurance) is the opacity of the assets actually held to stablecoin holders. It is difficult, if not impossible, for a stablecoin holder to verify the extent and status of a stablecoin’s backing assets held in a private bank. Thus, the need for FDIC insurance to provide a government guarantee that the insolvency of a stablecoin won’t result in a loss to a holder.

Copic and Celo argue that this opacity problem could be overcome by a digital central bank liability residing on a blockchain, a CBBL. A digital stablecoin asset for a digital stablecoin currency would provide greater efficiencies while providing a window to a stablecoin holder to view the actual assets backing an issuance. A holder would simply need to examine the blockchain for the status of the reserves (perhaps with the help of a third party). Further, a smart contract could explicitly link the collateral to the stablecoin, assisting in resolution upon the bankruptcy of a stablecoin issuer. This may also simplify stablecoin regulation.

The argument continues that such a CBBL would allow a central bank to avoid all the problems of dealing with a public component of a CBDC (either in a retail or intermediated model) by creating the backing for stablecoins that could act as forms of synthetic CBDCs.

However, I see no reason why a CBBL can not co-exist with a CBDC, expanding payment options and opportunities for third party developers.