How does a central bank innovate on CBDCs when they belong to a monetary union? Lithuania chooses numismatic-based NFTs
When a country belongs to a monetary union, for all intents and purposes the currency is exogenous to that country, in other words the country’s central bank does not control the issuance of the currency. The euro area, made up of 19 countries that have adopted the euro, belongs to the euro monetary union. The ECB, which is headed by a president and a council of heads of national central banks, sets monetary policy for the zone. Even if the head of a country’s central bank has influence over monetary policy, in practice it would be difficult for a country to significantly influence the monetary policy of the EU. We saw how it worked for Greece during the Grexit fury. When sovereign debts are denominated in an exogenous currency, the interest rates on that debt are purely a function of the market, a mechanism by which speculators and other traders can inflict severe damage on the national economy. This is what happens when there is a disconnect between fiscal and monetary policies operating on an economy like all EU countries.
Lithuania, after joining the monetary union in 2015, finds itself without direct control of monetary policy. 2015 was the last year that the Lithuanian litas was legal tender, before the adoption of the euro. I told Marius Jurgilas about the Lithuanian strategy of dipping our toes into the waters of the CBDC. This interview took place before the current craze for CBDCs in Europe and around the world. Jurgilas, who was educated in the United States and worked as an academic and at the Bank of England and Norges before joining the Lithuanian Central Bank as a member of the board. Jurgilas is responsible for the supervision service, the market infrastructure department, the security department and the center of excellence in finance and economic research. Areas that place it at the forefront of digital innovation and research.
Innovation in central banks almost sounds like an oxymoron, if part of your work is against the culture of the institution, what do you do? As a student and scholar, Jurgilas admitted that he was not interested in financial market infrastructure (IMF). Now he sees how important the infrastructure is, as it relates to the aspects of supervision and arbitration of the work. In fact in the expression of monetary policy itself. Lithuania, in order to get out of its weak economic position when the euro was adopted, exerted general pressure on innovation. Therefore, the innovation climate in Lithuania is very favorable. Research on CBDCs was done through the backdoor of a numismatic or collector’s coin, which the Bank of Lithuania could issue, unlike direct issuance of a sovereign CBDC which it could not.
LBCoin was planned and released to roughly coincide with the 100th anniversary of Lithuania’s declaration of independence. The blockchain-based LBCOIN consists of six digital tokens and one physical collector’s coin. The Bank of Lithuania issued 4,000 LBCOIN, or 24,000 digital tokens and 4,000 physical collector coins. Each digital token features one of the 20 signatories of the Lithuanian Independence Act and belongs to one of six categories of signatories (priests, presidents, diplomats, industrialists, academics, city officials) with 4,000 tokens each . Of course, they are all men. Very similar to all the male signatories of the Declaration of Independence in America. Women’s suffrage was only ratified at the federal level by the 19th Amendment, even in the United States, in 1920. Women’s suffrage and women’s right to vote in Lithuania came into being in 1918, as the short declaration contains these words “Constituent Assembly … democratically elected by all its inhabitants”.
For every LBCOIN purchased from a dedicated online store (lbcoin.lb.lt) for € 19.18, collectors receive six randomly selected digital tokens. They can then exchange these tokens for a physical collector’s coin, store them on the LBCOIN online store, send them as gifts, exchange them with other collectors, or transfer them to a public NEM blockchain network (NEM wallet). The denomination of € 19.18 commemorates the year of the signing of Lithuanian independence, 1918.
The idea of LBCoin has some correspondence with the way Lithuanian independence was declared. Surrounded by powerful states, the declaration of independence was a courageous decision taken within severe limits. Independence did not come about immediately. In fact, the Germans immediately repressed and were only neutralized because of their loss in WWI. He put Lithuania on the path to independence, which it enjoyed between 1920 and 1940; then in the bowels of the Soviet state after World War II. It was not until 1990, with the break-up of the Soviet Empire, that the 1918 declaration served as the legal basis for the constitution of a new Lithuanian state.
The idea of a collector’s item or NFT creates a space for experimentation and a basis for innovating on CBDCs. It took a lot of consultation, debate and compromise. It’s a brilliant idea to test the waters, ensuring Lithuania a pride of place at the table when the ECB and BIS sit down to create a digital euro.
If you followed closely, you would have seen that this is the first NFT issued by a central bank, and they did so to test a possible fungible token, a CBDC. In fact, if you scan each of the above images, in high resolution from the Bank of Lithuania numismatic booklet, with a QR reader, it will take you to the signatory’s corresponding Lithuanian Wikipedia entry. With the exception of those who died before World War II, many of them perished in Siberia, en route or under the Nazi regime. Of those who escaped the blaze in Europe, three made it to the United States and died there. A little independence! One of the most interesting, Jonas Basanavičius, Patriarch of the Nation and Chairman of the Council, studied to be a priest, became a doctor, created the first Lithuanian-language newspaper, and collected and published Lithuanian folklore, fortunately perished before the horrors of World War II and the subsequent sovietization of his homeland. The capsule’s biography shares its characteristics with most of the other 20 signatories, all of them Renaissance men, very interested in folklore and folk dance, in Lithuania deep, or deep Lithuania.
NFTs have been in the news lately as they appear to be a way to issue private (extremely private) tokens and sell them to the public. NFTs are a private currency, completely decentralized and tied to a specific individual; everything from a first tweet, a love letter, an idiosyncratic collection of works worked and instagrammed for years; all personal production is feed for the NFT mill. Many NFTs that have been issued have also shown that, contrary to protests, their current implementations are extremely centralized, even though they are issued over a decentralized network like Ethereum. Whoever controls the smart contract that issued the ERC-721 token controls the NFT, if it is a business, it could go bankrupt. NFTs have been removed and sometimes NFTs that cost $ 1 cost $ 200 in gasoline costs to sell.
As it is issued by the Bank of Lithuania, this NFT has a better chance of survival. To make it more attractive, it can be self-stored on the public NEM blockchain in an NEM wallet. NEM, although relatively unknown here in the United States, has played an important role in business circles in Europe.
Jurgilas also answered some of my questions about CBDCs in general, as he is also a member of the BIS innovation team. Regarding the Chinese CBDC called DC / EP or e-CNY, Jurgilas said there was no expressed policy on the international role of the euro. This seems to change as the international importance of the euro enters the discussions, perhaps influenced by the actions of other central banks.
On the two-speed model of CBDC issuance, or issuance by central banks and distribution by commercial banks. The opposite idea is that of direct central bank accounts for citizens. According to Jurgilas, this was a difference between the quantity of money and monetary policy based on inflation targeting. Both ways of controlling the economy are difficult. On the related subject of private money against public money; Jurgilas believes that it would be doing the general public a disservice to engage in this debate. Especially if we switch to a totally exogenous standard like gold. This will not stop excessive risk-taking and the introduction of instability in national and international economies. In my opinion, Jurgilas’ answer will also be of use to people who have suggested bitcoin as the standard.
Jurgilas maintains that cash and CBDCs will coexist, a sentiment shared by most central bankers. Regarding cryptocurrencies, Jurgilas says they are assets, assets have prices, prices have a forward structure (i.e. spot price, month price, etc.) what leads to the concept of interest rate is not a new concept; and even the exclusivity of crypto is also familiar. Establish that DeFI is just old wine in new bottles. The adoption of stable coins has certainly attracted attention, but above all from a prudential and consumer protection point of view. The next MiCA regulation currently being discussed in the European Union concerns all crypto-assets, including stablecoins. Regarding the payment of benefits; Jurgilas believes that CBDCs are not needed for this, especially in Europe as these payment rails work very well. The demand for changes in the payment infrastructure due to the digitization of many verticals can be met by the CBDCs, as a true central banker he hedged his bets by saying that only time will tell.
LBCoin uses the ISO / IEC 27001 standard, which is a cybersecurity standard. Security is paramount in any technical infrastructure created by a central bank, even if it is an NFT collector’s item.
We haven’t discussed the privacy aspect of CBDCs, but these debates about the form and function of CBDCs are sure to resonate in the next 5-10 years as countries decide (or not) to digitize. their basic monetary infrastructure. LBCoin is a way to test the waters, especially for a central bank whose control of monetary policy has been ceded to a monetary union.