A First Look at Central Bank Digital Currencies and the Repo Markets
Finadium
March 2022
Central Bank Digital Currencies (CBDCs) are on the horizon. Depending on critical design choices, their introduction could spell large scale disruption for repo markets or could mean no change at all. It is too early to say. Meanwhile, decisions are being made by participants outside of secured funding markets who may or may not be thinking about repo requirements. This situation should be avoided.
The future success of repo may hinge on market participants getting engaged early in the design of CBDC. This includes learning the terminology of cryptocurrencies, digitalization, settlements and the mechanics of holding repo in custody. To aid this process, Finadium held a roundtable in January 2022 of repo professionals to learn more about CBDCs from independent experts and brainstorm about what an ideal CBDC might look like for repo.
Perhaps the most complex aspect of a CBDC is its potential for competition with commercial bank money and stablecoins, including those issued by a bank. Some outcomes result in multiple pockets of liquidity while others see CBDC vacuuming up most of the business. This is not where the story ends however: other factors in CBDC mechanics will impact how monetary policy is conducted with repo caught in the tailwinds of the outcome.
This report should be read by a broad cross-section of securities finance and repo market participants, including cash investors, repo dealers, agent lenders, prime brokers, technology firms, regulators and legal advisors. It provides an overview of current CBDC projects, design choices that matter most to repo, and ideas about possible conclusions.
Table of Contents
- Executive Summary
- CBDC and Wholesale Markets
- – The CBDC and Repo Roundtable
- A Conceptual Overview
- Six Big CBDC Projects
- – The Federal Reserve’s Position Paper
- The Importance of Design Choices
- Responding to Pressing Market Questions
- About the Author
- About Finadium LLC