Cambridge and Fellow Institutions’ Approach to Developing Crypto and Digital Technologies

Greengage was delighted to have the opportunity to speak to Keith Bear, Fellow, Centre for Alternative Finance, Cambridge University, about its world-class research, and continuing collaboration with business and thought leaders in global financial markets, around the development of AI, blockchain and other technology innovations.

Widely acknowledged as a pioneer in this space, Keith is also something of a phenomenon in terms of his single-minded drive to progress the crypto and digital technologies debate. Prior to his academic career, he worked for IBM for many years where he focused most recently on enterprise blockchain, before being appointed as a Cambridge Fellow in 2019.

Cambridge — leading the way in digital assets research

“Our aim is to increase transparency and understanding of what’s going on in the world of digital assets.”

Cambridge’s Crypto Assets Benchmarking survey is well known, along with others covering enterprise blockchain, and the legal and regulatory implications of digital assets. In recent years, Keith and the Centre have been “pivoting” to more digital industry tools, the best known of which is the Cambridge Bitcoin Electricity Consumption index (CBECI), an independent, impartial assessment of electricity consumed by the Bitcoin network. More recently, the Centre has also published a greenhouse gas emission model and the Fintech Ecosystem Atlas, a graph-based database that maps more than 4000 businesses.

If that wasn’t enough to be getting on with, the Cambridge Digital Asset Research Programme launched in late 2022 is supported by a plethora of prestigious institutions — public and private — including Goldman Sachs, Fidelity Digital Assets, Invesco, Mastercard and Visa, alongside the World Bank, IMF, Hong Kong’s BIS innovation hub and the UK’s FCDO. This programme is organised into three workstreams — climate impacts of digital assets, digital money (“we’re very keen to explore the evolution of stablecoins vs. evolving Central Bank Digital Currencies”) and last but not least, a DeFi dashboard (similar to the FinTech Atlas).

CBDCs — privacy and programmability as essential drivers of success

“A retail CBDC is a major contributor to the broader development of the digital economy in the UK, and all that potentially means as well.”

Keith sits on the Bank of England’s CBDC technology forum (a colleague sits on the corresponding engagement forum) alongside major banks and institutions and big tech companies like Google. These fora enable open debate from representatives of all parts of the ecosystem around the many “thorny issues” that a digital currency must address, from privacy to programmability.

Keith was a judge at the recent Barclays-led CBDC hackathon which looked at building on APIs around specific CBDC use cases, taking the BoE’s working assumptions and considering, from a technical perspective, how payments service providers, commercial banks and other participants in the payments transaction lifecycle might manage AML, KYC and other ‘traditional’ banking obligations. “The hackathon was a great example of the ‘art of the possible”, Keith says, “Particularly around the key question of programmability, a key factor in successful CBDC deployment.”

On the wholesale CBDC front, Keith noted that the BoE is going through a major RTGS renewal programme — a huge undertaking — and the Fnality initiative is expected to be in production in 2023, establishing a synthetic wholesale CBDC. As such, a wholesale CBDC may not be so far off.

On the retail side, timings are more cautious; the Bank of England’s stated timeline is the second half of this decade, reflecting the enormous amount of work required around privacy and other challenges. Nonetheless, it is acknowledged that retail CBDCs could address a spectrum of social problems including financial exclusion. “More than 1.5 million UK citizens don’t have a bank account, and around 7 million are at risk of financial exclusion. That said, a retail CBDC is a major undertaking with a lot of complexity. We are still a number of years away.” As Keith observed, the new CBDC APPG and Parliament’s stated commitment to establishing UK as digital and crypto assets hub are also very positive steps in the right direction.

Impact of FTX on industry sentiment and support

In terms of the impact of recent bad news like FTX on institutional crypto adoption, Keith, unsurprisingly, focuses on facts rather than noise: “Obviously there have been significant withdrawals from centralised exchanges, with something like a 17% reduction in funds over a two- week period compared to around 12% in the preceding four months, reflecting a knock in confidence in centralised exchanges. We can assume that this will herald a much greater regulatory focus on all things crypto, and particularly, stablecoins.” That said, multiple industry surveys suggest that there is still significant investor interest — institutional and retail — in digital assets.

DeFi is particularly exciting; a lot of entities like Swarm and Aave Arc are working on ways to incorporate smart contract layers within traditional finance, making such assets both more attractive and accessible to regulated firms. Project Mariana, a BIS initiative with Swiss National Bank, is looking at automated market-making models for FX. Project Guardian in Singapore, a collaboration between MAS, J P Morgan’s Onyx division and SBI of Japan, is considering how regulated institutions might leverage DeFi protocols and tokenization as ‘trust anchors’ (in validation processes).

What’s next for crypto and digital assets?

The IMF has produced some interesting analysis around DeFi costs (vs. traditional solutions) looking at a number of DeFi protocols (and associated marginal transaction costs). This analysis suggests marginal costs of around 2%, compared to c.4% for advanced economy banks and 6% upwards for banks in developing countries), making DeFi solutions attractive from an operational cost perspective. However, reducing costs is only one factor; major questions remain around security and risk, fraud, bad actors et al, all of which impact the trust anchor model.

Concluding our discussion, Keith acknowledged the increasing convergence of DeFi and TradFi — with the intersection representing the ‘regulated DeFi’ space. Regulation, the advent of global standards and the evolution of DeFi will continue to influence industry evolution and mitigate more speculative and hyperbolic industry narrative.

“The really interesting question is how big, relatively, each of these sections will grow and how they offset each other, depending on the extent of, and change in, the regulatory, risk and security factors that affect them all.”

To learn more, listen to our podcast series, The Gage Episode 12 — ‘The Outlook for Cefi, Defi and CBDC’

For more information, contact: Greengage and Centre for Alternative Finance, Cambridge University