Abstract

The decentralized autonomous organization (DAO) represents a radically new way to manage databases. Since money and payments are all about managing databases and since banks play a central role in money and payments, DAO-based money and payments systems are potentially a disruptive force in the banking system—which includes central banks. One would normally expect regulatory frameworks to evolve with a changing technological landscape. However, the decentralized governance structure characteristic of DAOs renders it near impossible to regulate these entities directly—a property that makes them ideal vehicles to exploit regulatory arbitrage. In this article, I discuss some of the monetary policy implications of DAO-based money and payment systems. I highlight the prospect of a globally accessible DAO-based stablecoin that may conceivably end up financing a large fraction of global trade. To the extent that such a structure imposes systemic financial risk and to the extent it cannot be regulated directly, an alternative strategy is to offer a competing product. A central bank digital currency accessible to firms involved in the global supply chain may be one way to mitigate the systemic risk associated with an emergent, unregulated global stablecoin. 

David Andolfatto is the chair of the economics department at the University of Miami Herbert Business School and economist emeritus at the Federal Reserve Bank of St. Louis. This article is based on a lecture he delivered at the Bank of Korea International Conference "The Changing Role of Central Banks: What Can We Do and What Should We Do?" June 2-3, 2022. The author thanks Young Sik Kim and Todd Keister for their thoughtful discussions and an anonymous referee for several helpful comments.

INTRODUCTION

It is said that the only things we can be certain of in this world are death and taxes. Perhaps so. But I'm inclined to add technological change to this list. It is human nature to want to build a better mousetrap. And when technology changes, inescapable Darwinian forces compel institutions to adapt to their new environment. This includes central banks.

Central banks are, as their name suggests, central hubs in the networks that characterize modern day financial systems. They are typically delegated a host of responsibilities, including the conduct of monetary policy, along with the regulation, supervision, and oversight of the banking system. Banks are special in an important way. Unlike other businesses, the demand deposit liabilities created by banks to finance their assets are money. And because people value money for its ability to make payments, banks are necessarily involved in the payments system. Central banks play a key role the process of clearing and settling payments across banks in the payments system. It follows that technological advances that disrupt the money and payments system are likely to have both tactical and strategic repercussions for a central bank.

The technological changes that impact banking most dramatically are those that provide new or better ways of communicating, managing, storing, and analyzing information. This should hardly be surprising, as the successful operation of a money and payments system essentially boils down to an exercise in secure messaging and honest recordkeeping. The internet is probably the most important innovation in communication technology since the telegraph, at least as far as banking is concerned. Combined with advances in cryptography (necessary to secure communications), personal computers, computer processing power, and data storage capacity, the internet has transformed the way banks organize themselves and conduct their business. Virtually everyone now has access to online bank accounts and handheld devices to make payments.

Of course, technological change impacting the banking sector did not begin with the appearance of the internet. In 2003, James Dingle of the Bank of Canada wrote about technological changes from the 1970s:

It is a challenge today to recapture the degree to which the financial world of the 1970s, indeed the entire society of that time, was awakening to the astonishing power of the combined technologies of computers and communications devices. The titles of two widely read and influential books of the period are suggestive: The Coming of the Post-Industrial Age by American sociologist Daniel Bell was published in 1975, and a report entitled L'informatisation de la société, by publisher and intellectual Simon Nora, appeared in 1978 in response to a request from the President of France. It is also noteworthy that, during this decade, the Canadian government felt it appropriate to have a Department of Communications, a ministry that worked jointly with the Department of Finance on several major policy papers shaping financial sector legislation.

These pre-internet innovations resulted in a massive migration away from paper to electronic recordkeeping. The evolution in governance that these innovations spurred in Canada included the creation of a federal department of communications as well as new legislation (Canadian Payments Act, 1980), which established the Canadian Payments Association. The Canadian Payments Association (now Payments Canada) was assigned two legislated objectives, namely, to "establish and operate a national clearing and settlements system and...plan the evolution of the national payments system." While the Ministry of Finance retained oversight responsibilities for Payments Canada, the Bank of Canada was granted oversight responsibilities for the Large Value Transfer System (LVTS) and the Automated Clearing Settlement System (ACSS), which handle the bulk of retail and wholesale payments in Canada. The LVTS, in turn, changed the manner in which the Bank of Canada implemented monetary policy.

Which emerging technologies today are likely to have a material impact on the future of commercial and central banking? The big invention, in my view, was Bitcoin: a radically new form of money and payments system introduced to the world in 2009. In a public lecture I delivered on March 31, 2014, I described Bitcoin as "a stroke of genius" and outlined the threat the innovation posed for central and private banks. Regulators, including central banks, will have to think hard about how to deal with the risks these new structures are likely to present.

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