7 Comments

Amazing article, Luca. Loved it. Thanks for it. Reading your text I saw no mention to the fact of the current traditional financial system works with fractional reserves, and if I understood it correctly, your New monetary triangle (CBDC or CBDC+stablecoin system) suggests that we would have a system that would be full collateralized by Central Bank money. what are your thoughts on this? And again, thx for the text. I love it. And also as a Cyclist too the introduction was just perfect. ;)

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Thank you. Fully collateralised ultimately doesn't mean anything, because you can ascribe collateral value to anything. Value is a construct.

In this piece, I suggest Central Bank to be a liquidity stabiliser through other issuers, Commercial Banks and Protocols depending on the nature of the underwriting. Ultimately the monetary expansion will be done, as always, at the Commercial Bank/ Protocol level. The fact that Commercial banks do not take monopoly of deposits make this phase way more competitive and also hopefully lenders/ issuers way more focused on what they underwrite.

We are at the beginning, but we can really redesign finance in the next 50 years. And something tells me we will. Thanks for reading.

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Thanks for answering Luca. Very kind of you. My reading is that eventually if the Central Banks continue to "save" all depositors and banks we will move into a non-fractional reserve banking architecture (moving to your new system), but I am not sure if this is the best way to move forward. I see your point on the non-monopoly of deposits by banks, which makes sense, as we could have an AAVE or MAKER Like protocols competing with banks. My point is more on the change from a fraction reserve bank system into a full reserve bank system. Also, dont know if you have followed the CBDC+stablecoin EVM compatible pilot the Brazilian Central Bank will run in the comming months, it addresses some of the points you mention on your text. Anyway, just somethings that came up after reading your great article/comment. Cheers

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Thanks! "Fractional reserve" is something that only non-banking experts use. Maker does some sort of fractional reserving, simply you cannot see it because that bit is hidden behind the volatility of the underlying collateral.

I think ultimately CBDCs can be liquidity stabilisers, and can live jointly with Treasury Bonds of some sort as source of financing for the state - in stabilised form, because Treasury cannot really trust the whims of retail. Traditional banking is really inefficient, but especially now where risk free rate is way higher than the yield you get on deposits for so much more counterparty risk (and limited services) this is becoming evident.

I live in Brazil big chunk of my year so I am familiar. But beware, the problem in Brazil is that the creditworthiness of the Treasury is not risk free proxy at all, and for people the risk free anchor is the USD - so ultimately the Bank of Brazil is kind of a commercial bank of the US (ok, many will kill me for this but whatever!)

Thanks again for engaging, you found me in front of the pc and that made a good conversation!

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Great piece, thanks Luca! I've been organizing my sporadic thoughts on how primitives in defi can make the banking system more stable and looking for thought experiments in this realm -- seems like I've finally found it.

In your new system, seems like depositors have no choice in choosing their counterparties (ie. the state treasury / central bank solely manage that). That's fair and suitable for retails since most don't want to bother with selecting counterparties when depositing. However, completely removing the market from influencing where capital flows and centralize that power to the central bank looks concerning to me. How are you thinking of making sure the most efficiently run banks stand out and get the liquidity they deserve?

I've been thinking through a model in which depositors deposit with commercial banks, having all deposit as mid to long-term but the receipts of deposit can be used as money -- making it even the long-term deposits convenient to use for commercial activities. In this scenario, banks put up a certain percentage of capital as collateral to "lever up" (ie. taking deposits). The revenue of the lever up is split between bank and their depositors by a certain ratio, similar to the GP/LP incentives structure in VC/PE, and with the bank's collateral as a buffer if anything goes south.

Would love to hear your thoughts. In general, I like how defi CDP can "make any relatively liquid assets / claims function like cash" and think this primitive shift can go very far in shaping the new financial system

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You’re suggesting price discovery at the digital dollar level thru secondary. I think it’s convoluted, can be arb’ed in retail, and doesn’t even happen in stablecoin land. At M^0 we are taking a different approach, which is strong enforcement of issuing standards across network. If you want money uniqueness you need at some level of the stack someone who enforces similar standards. Otherwise you’ll always be relying on traditional 2-tier banking sector providing uniqueness thru deposit guarantee (my opinion solely ofc)

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Thanks for your reply! Learned more about M^0 and read your other post on stablecoin today. I actually really like the idea of making a money that's completely fungible with each other (in terms of the counterparty risk, value, and liquidity). Don't think that exist in traditional finance world yet other than paper cash? since custodian = lending in status quo banking, and lending means different risk-reward. in your new model, commercial banks seem to become pure leveraged underwriters. I wonder how central bank -> commercial bank liquidity distribution dynamics will play out. but anyways.. thanks for the thought-provoking piece!

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