The coming digital currency wars
J. Christopher Giancarlo, Neha Narula, Emily Parker
2022-06-09
Our investment climate is changing, but so is the underlying structure of money. Currencies with cryptocurrency and CBDCs are entering a stage where they will be technologically competing with each other. Please welcome to the stage my colleague Emily Parker who will be discussing this with Giancarlo and the founder of the Digital Dollar Foundation and Neha the director of the MIT Digital Currency Initiative.
EP: Welcome everyone. This is a very important panel because we're talking about a cutting edge of the digital currency landscape, mainly central bank digital currencies (CBDCs). These are not bitcoin or ethereum; these are digital currencies that are issued by central banks. This brings up a whole range of philosophical questions. Both of our guests working on different versions of what a digital dollar of the United States might look like. Let's get right into it.
EP: I want to start with the big picture. Chris, why do we need a digital dollar? Why can't we just use venmo, paypal, credit cards or stablecoins? What's the argument for CBDCs?
JG: There is a need to experiment versus need to deploy. If we look around the globe today, 105 countries virtually 95% of the world's GDP are currently experimenting with CBDCs and digital bearer instruments. Of those 105, about 50 are in advanced exploration, and 10 countries have already rolled out CBDCs including China using their digital yuan in the hands of over 250 million Chinese people and that's probably an understatement. Digital currency is not only being experimented widely, it's also coming. If it comes, then the United States should ensure it comes with the right design features and what's what we're experimenting with.
EP: Whether we like it or not, it's coming so let's do it the best way possible. Neha, I'd like to hear your view. Other than FOMO, why do we need a digital dollar? Chris is right that countries around the world are doing, but what are the use cases for CBDC besides okay let's do what everyone else is doing, how will it benefit the United States' interests around the world?
Neha: This is all part of the story of money. We have private money, and cryptocurrency falls into that. You have money done by private sectors like banks and apps. But there is also public money, and if we do a survey in this room about how you receive salaries and what you do economically then you're interacting a lot with public money or money anchored to public money. So public money is important to our lives, and it's not going to stay stagnant and the way it is. So much of what we are doing is moving online and into the digital realm. That needs to get evolved and get better. We need micropayments and programmable money. Private money is a huge part of that story and leads the cutting edge, but public money needs to evolve too. It will evolve. We will not be using Fedwire and FedNOW 100 years from now, it will be some new system and we have to figure out what that new system might look like. I see this as a natural evolution of money. Technology doesn't standstill, and public money shouldn't either. We need to think about cash. Cash is so important and it's a critical part of how we maintain public trust in money and it's important to think about what digital cash might look like.
EP: Why not use stablecoins? Stablecoins are basically digital currencies that are pegged to fiat currencies like the US dollar and there are plenty of these projects. Why get the Federal Reserve involved? Why not use stablecoins?
Neha: I think stablecoins are an important part of the story. They will be incredibly valuable in terms of innovation .It's not an either/or, it's and. It's crypto and stablecoins and public money as well forming an anchor of trust to all of that.
EP: One of the big elephants in the room is China. We can't have this conversation without talking about China. China has been leading this effort for CBDCs and theirs is already deployed and was used during the Olympics. Chris, why does this really matter though? how much will the Chinese CBDC impact the United States? Why are US policymakers concerned about US dollar hegemony?
JG: China has created the first benchmark for what a CBDC can look like. It contains a lot of impressive features like the ability to program it but it also has some features that free societies might be more concerned with, like their ability to surveil their citizenry and their economic choices and also the ability to censor them. If you criticise the regime, you might find that your digital yuan won't let you take a train out of the village, rent an apartment you might want, or buy food. I think just copying China will be naive. This will be an export product. The digital censorship features in the digital yuan are going to be what other regimes around the world will want like Cuba. The people's bank of china will be exporting CDBC-in-a-box courtesy of the bank of china with those censorship features. In a few years, clients of the Silk Road Initiative might be required to use the digital yuan and have those censorship features. As a free society, what values and features might be importnat to us in a digital dollar or digital euro? Would it be censorship-lite? Would that be better than China? Or would it be in the nature of a freedom coin where privacy is actually built into the digital currency for lawful transactions? Those transactions of values need to be made today, and they apply equally to stablecoins. Will stablecoin be used in the way that social media has been used at the behest of government to censor some conversations or transactions? The future of money hwether run by the privat esector or public sector are questions in front of us. That's why initiatives like the Digital Dollar PRoject and MIT DCI are exploring this. The choice of deployment will come later, but we should experiment starting today.
EP: In terms of China exporting CBDC technology to the rest of the world, is that likely? China is already doing its own thing with the internet. They have a completely different attitude to regulation of the internet. But that didn't come to the United States. Will China's CBDC impact other digital currencies around the world or is that an unjustified fear?
Neha: There's a risk here. We don't know the risk. With China's internet, it might not be happening in the United States but it's certainly taking root in Asia and it creates an economic divide. How many people here use Tiktok today? That's a Chinese app and we will see more like that. Evne if you don't want to look at it from a geopolitical angle, I think what Chris said is so important: we want to think about what values we want to embed into our money. Is it the values of freedom, openness and privacy? I think people fear the concept of CBDC because of the risk of surveillance. That's actually why we got involved in this work not because we want to build surveillance but because we want to make sure that it's possible to build a different future where we can embed privacy into our money. That's hwy it's important we get into this right now. We have an opportunity here to show a different way of building this type of technology.
EY: First of all, most Americans have no idea about digital dollars or CBDCs. But the ones that are tuned into this debate, they are basically saying no way, this sounds terrible. I think it's a very American thing to say hey I will give whatever data to Facebook or Google but if it's the US government then no way. I think people are concerned that the US government would see all CBDC transactions. How do you do this atnd also have privacy? This is a question that exists for crypto and especially when you get any central bank involved, how do you have a private CBDCs? It sounds like a contradiction in terms.
Neha: The short answer is that yes we think it's possible. There's a lot of work to be done. It's exciting because we can look at strongly privacy preserving coins in the cryptocurrency world. The technology exists and works. It's not perfect. Data is a sneaky thing. Once it's out there, it's out there. So you have to think carefully about how to secure it properly. There's a lot from the crypto world like multi-party computation, homomorphic encryption, and plain-old encryption, and zero-knowledge proofs that we can bring to bear on these problems. There's a lot of cryptography research in this area as well. This can help us alter the regulatory regimes to be more coherent in this new world of technology. I think there's a lot we can do. I'm optimistic. We speak with a lot of central banks around the world like Bank of Canada and Bank of England and the Boston Fed to work on CBDC and everyone ranks privacy very high on their agenda. No central bank that we speak to wants to become a surveillance state; they want to be privacy preserving and they don't want that data.
EY: Perhaps that's why the United States has been so slow on developing a digital dollar because of the concerns on privacy.
JG: Whenever you go from an analog to a digital system, you are now free of technological constraints to make design choices. The question of privacy in a digital dollar or stablecoin is a design choice. What are our values? The work that Neha has done with the Federal Reserve Bank of Boston is important because they are looking at the design choices. When we think about a digital dollar, as a free society we should demand privacy in a CBDC because that's what we do in a free society. If you think about it, if we get it right, a digital dollar could be the most private instrument on earth because our federal government has a restriction in the 4th amendment that prohibits our government from interfering. The private sector in social media is not restricted like the government in censoring our speech. You could imagine a world where private digital money is subject to censorship, and government money if we are true to our values would not be subject to censorship. As a free society, we get to make these design choices. Money is a social construct as mucha s it is a government construct. We should make sure this accords with our values as opposed to the China government imposing its own values on its citizenry. We're here to call for experimentation and get design choices right. The future of the digital dollar and digital euro should empower us to have greater freedom and not restrict our freedoms.
EY: A lot of people are freaking out about CBDCs and they are assuming private companies are going to violate our privacy, and it seems like the government seems less likeyl to issue a..... with so much alarm about privacy with the government, then the public money one might be more safe.
JG: I talk with the Cato Institute and the libertarians and they all freak out, but why should we assume that the private sector will be more private and more free? Why not have our government live up to the principles of freedom and privacy? A digital dollar with privacy would be the instrument of aspiration for free people around the world. It would be the instrument that everyone would flock to and protect the United States dollar's reserve status for generations to come. If we don't protect privacy, then we might destroy the dollar and empower other nation states. It all comes down to privacy being the key issue and other values-- will get the technology right, and Neha has already proven we can get the architecture right. But what do we all insist the future of money looks like? Whether public or private sector money, we need to make our voices heard in the future.
EY: To help the audience better envision what this is, could you give some specific use cases for a digital dollar? Where would you use a digital dollar where you wouldn't use a credit card or stablecoin? Where is this instrumentation necessary?
JG: Right now our financial system is a walled garden. In a world of 8+ billion people, where 1.5 billion or more do not have sufficiently credentialed identity to access our financial industry which precludes their access to the financial system. If we can create a digital bearer instrument that is cash-like and carries value, then you would not need to have your value recorded in a banking instutiton but you could have it on your mobile device or in the cloud. That's what we're talking about. It's a digital bearer instrument. It would increase financial inclusion. Our current system takes about 2-3% of the world's GDP just to move money around the world. We have proven that we can send telegrams, photos, or text messages instantaneously around the world, so why does it cost so much to send money around the world? Why is it cheaper for me to get on a plane and send money in a suitcase instead of a wire transfer? Digital money will solve this, and it will lower costs and get more people into this.
Neha: I think that's right. Another one is improving competition. Right now in order to transact digitally online, before bitcoin, you had to have a bank account and you had to sign up and show your identity and had to have someone say you had to sign that 100-page terms of service. Cash does not come with a terms of service. Anyone can use cash, no matter if you're rich, poor, have access to the internet or not, it doesn't matter, yo ucan use cash. We're trying to create a digital instrument that anyone can use that solves for these corner cases when you can't get a credit card or when your bank charges high overdraft fees and having that kind of thing available is a pressure valve on the system and improves competition and interoperability and makes everyone in the system behave better because you have alternatives. Another thing is that this is a platform for innovation. Cash doesn't work online and it's not programmable. You want to have another instrument with all these features. I want to stress that this will work in tandem with cryptocurrencies and stablecoins; it won't be in competition. It's just not the case. If a country was to issue a CBDC and make digital wallets for everyone, that's a huge onboarding event for cryptocurrency too.
EY: When you talk about programmable money, what does that mean? That's the idea that the US government wants to give out some relief after a disaster.
Neha: Thta's a great point. This is where we get caught up which is fiscal policy. It's true that fiscal policy is easier in a digital context, but I mean a platform where developers can write apps and move money and the way that they write apps. It's not about fiscal policy.
JG: Not just about moving money in space and seconds, but move money in time. Think about programming your money to do things in the future, or program your money for your yet unborn grandchild that upon reaching a certain age and whatever requirements you want like they are sober or have a college degree then whatever the conditions are met then the money is there. This will allow us to move money instantaneously around the globe and move money into the future. The ability to tie money with smart contracts will absolutely change money and democratize it; today if you want to move money in time, it requires executors and trustees that may or may not follow your instructions when you're gone. The ability to program money opens up a lot of possibilities.
EY: Disaster relief and fiscal policy could be things like, you can program money that it can be used for food and medicine but not for other purposes, which alarms people because it's the US government placing a covenant on what money can be used for. Cash is awesome. When we look at cryptocurrency, there are some that are privacy protecting. Bitcoin is not that private. Cash is the most anonymous currency that we have. If this digital dollar ever happens and it becomes mainstream, will webcash eclipse cash? I feel like that's not known.
Neha: All the central banks we talk with don't want to get rid of cash. They don't see CBDC as a way to phase out cash. They see CBDC as a way to continue to remain relevant as more transactions move digitally. Cash is great but it doesn't work digitally or across large distances. We have a lot of work to get to the point where digital cash is ready to eclipse cash. In Sweden, the big part they engaged in this work is because their use of cash is declining dramatically and they are getting worried about it and they want to provide a public option for money and payments. CBDC is not a reason to get rid of physical cash.
EY: Where do CBDCs fit into the largest landscape of cryptocurrencies? You hear people including policymakers act like this would be a substitute for bitcoin and then you hear others say no, it will actually make the case for bitcoin stronger. Where do you fall on that question?
JG: When we think about money today, we think about two types. There is public and private money. I like to think about it as cash and digital bearer instruments being about 10% of what we use, and the other 90% are basically liabilities that sit on proprietary balance sheets of financial institutions. Your bank has a liability to you, your money in the pension is a liability that the asset manager recognizes to you. Those liabilities are basically an analog system of recognition. What crypto is about, is protocols that allow us to use the internet to recognize value. No longer is money a value construct that is a personal relationship between you and an institution, it's now on the internet, and that's kind of like how the internet revolutionized information and entertainment. It has moved the interactions from institutional relationships to more of a network relationship between decentralized actors. When I talk about crypto, I move away from thinking about it as some funky new investible asset class, but rather a protocol that allows us to use the internet itself to estbalish immutable value that lasts forever and hopefully is anonymous so that regulators can move away from an entity-based regulatory model to more of an activity-based model where we can maintain anonymity in a new future of digital money but in the event that law enforcement needs that pseudonymity can be uncovered where necessary. The future of money is internet-based and digital. There's a role for both public sector money and private sector providers of money as there are today. The future of money is undoubtedly digital. What is it going to look like though? If we get it right in the free society, it's a ocmbination of the government and public sector building towards the values we expect to see.
Neha: I I think the reason people are attracted to digital decentralized currencies is completely separate from reasons why people might want to hold central bank money. It's all about the future of money.
EY: You guys are on the cutting edge of this technology. If you had to guess, will the US actually have a digital dollar, and if so, what is the timeframe we're looking at? Is it next year, or 10 years from now? The United States is definitely behind. What do you think?
Neha: I don't know if the US should issue a digital dollar. I don't know if that's the right thing to do. I'm working on this to get more data and to determine if we were to do so, how could we preserve privacy and be responsible? The ultimate evolution of money is digital and there is probably going to be a role for public money in that future. I don't see how every country doesn't move in this direction.
JG: The future of money is absolutely digital, and central banks can play a role. In 10 years, I think the United States might be using a CBDC. We have to be engaged right now s othat if the US engages then it should reflect our values of a free society.
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Transcript: The coming Digital Currency Wars https://diyhpl.us/wiki/transcripts/coindesk-consensus-2022/digital-currency-wars/ @CoinDesk @Giancarlo_MKTS @neha @mitDCI @emilydparker #Consensus2022