Who should be allowed to issue digital dollars?

Consensus 2022


Dante Disparte, Rohan Grey, Caitlin Long, Angie Lau

We have one more session before lunch. We've been talking a bit here about new forms of public money, like CBDCs, stablecoins and others. This is causing a raging debate in regulatory circles about who should actually have the right to issue these things? How should they be regulated? This is the subject of the next session to have that conversation and hopefully have a few fireworks.

AL: I think that what we heard from the townhall was framing some of the most important issues and in our view there is nothing more important than what we're discussing on stage right now. It's happening in the public sphere and the regulatory and policy hallways not just in the US but around the world. With the implosion of Terra and Luna, this is not just a jurisdictional and industry-wide issue but it's also a nation-by-nation issue and global issue. One of the most relevant questions raging right now is, who should be allowed to issue digital dollars? Inherently that question has a lot of bias inofitself, but we have some incredible panelists. We chose these speakers because they represent each part of the debate. These are important stakeholders and they are doing this in a private way, in a public way, and in a policy way. I'd like each of you to from your perspective kick things off and answer this question to start a framing for the audience with regards to who should be allowed to issue digital dollars?

RG: Thank you for having me. I am not representing a company or product here. I am the resident skeptic and give the appearance of a real debate rather than a self-congratulatory lovefest. I know most people understand me to be an enemy of crypto which might be fine, but my work focuses on public sector institution and I support the resistance against government and I support cypherpunks and people outside of totalitarian regimes. I like financial innovation, and I like that this is a festival for a decentralized world. But the debate about a digital dollar has nothing to do with decentralization; it's going to be impossible to believe something when their income depends on them not understanding it, but I hope there are people who can tell the difference between DeFi and dollars. A dollar is denominated in the government's unit of account, it's intended to be issued and used in all the ways that public money is, and it's issued under a licensed regulated entity by the government, and its safety is endorsed by the FDIC or the full faith and credit of the government or by assets. The debate is whether private actors should be vendors for a public good. Should the government be outsourcing the issuance of digital dollars to markets? In my view at least, this isn't the business model of crypto or DeFi and we should be very clear about the difference between private actors providing public goods for their own material benefit and actual public goods. Who are the people that want to issue digital dollars? Companies backed by venture capitalists who are former Wall Street actors, people who have fiduciary responsibility to particular shareholders and decisions made on behalf of the public only by their capacity to hold wealth, and then those actors will be acting to create a revolving door to Wall Street and regulation that we have seen for decades already. If you want to come into public money and provide public goods, then it should be issued by the public by democratically accountable people and if you're not interested in that then work on DeFi but don't work at public institutions and call that decentralized finance.

AL: Alright, the gauntlet has been thrown.

DD: It's great to meet professor Grey in person and share a stage with my dear friend Caitlin Long. I had a front row seat on the future of central banking conversations all around the world. Before the Libra project was announced, burried in the technocratic institutions that Rohan so profoundly defended, was the notion of a CBDC which is the equivalent idea of the FAA in the United States building jet engines and flying planes. We'd have a very unsafe sky with no competition and only one choice. That's not only anti-Western, it's unamerican. I think it's preposterous. It took Libra and a project armed with nothing other than a whitepaper and some large tech companies on the planet with a somewhat flawed reputation, to suddenly turn CBDC into the only thing that central banks ought to do. Today, 105 central banks around the world are prototyping CBDCs. Very few of those are in production with the exception of China. If the only way to out China China is to have a censorship based money and gobble up your information and turn the central bank into a retail bank, then I think that's a massive problem that is not democratic and doesn't recognize that 95% of all money in circulation on the planet today that we transmit to each other rides on private rails. Those rails and the big system upgrades we want as an industry is to build it on non-proprietary financial markets infrastructure, aka blockchain. We live in a world where device-centric banking and payments can allow a more participatory form of capital markets and a more freer means of sending money. Circle isn't doing this as an academic exercise; our reserves are in American banking system and we have a model that doesn't need FDIC insurance because there's no fractionalization. It's a model that would make the central banks blush in prudential standards. There's trillions of dollars brdiging between CeFi, TradFi, and DeFi. That's real. That's the way you compete not only compete but win the digital currency space race that Rohan just so rightly described. I just don't think that the public sector approach is the only way to solve this.

CL: I warned my co-panelists that I would agree and disagree with them here. That's why this is such a good panel and why we put in the work we did. The problem with a government version of a digital version is that the entire reason why our industry exists is because the technology of the banking system has atrophied. It's not by far the best technology for moving and settling dollars. The ACH system is 50 years old. The Fedwire system is not much younger. There has been nothing created since then. If we are going to hand this over to the government, which by the way has been working on Fednow, the fast payments initiative, I think it started in 2014 and here we are in 2022 and maybe Fednow will come out in the next year or so but nobody knows what it looks like or what the details are. If FedNow had existed, I don't think stablecoins would have existed at all. The traditional banking industry has been monopolized and coddled. Its profits have been privatized and losses have been socialized. BEcause the Fed granted a monopoly to a small number of tech providers, like FIS and FiServ about 15-20 years ago, every single bank except the largest ones have ot use approved integrators. What happens when a monopoly is granted by the government? Well, the technology atrophies. Who is better at providing real privacy? For the US, with the dollar, privacy does matter because there is an aversion to having the government have access to every single financial transaction that you ever do. But for those of you who think you have financial privacy, you don't. The banks have every transaction you have ever done, and they will give it to the government when law enforcement or regulators come calling. There is a perception of privacy, but it's not real privacy. The problem with the notion that non-banks can issue dollars is that the Federal Reserve has been given the right to do that delegated by Congress. I think Rohan supports the US Treasury Department directly issuing a CBDC. You basically setup an argument for why the Federal Reserve shouldn't exist from the left. Ron Paul and Bernie Sanders would probably agree with that assessment that you have overlap in that political spectrum in the US. But the challenge is that the Federal Reserve does exist and it has a monopoly on the US dollar granted by Congress whic hwould have to be reversed to change this. If the central bank decides, you must be a bank to clear and settle dollars with the Federal Reserve, then that's it. Then every stablecoins need to be by bank, because ultimately this clears through the Federal Reserve.

AL: The question from an outsider looking into this debate, some might say well if the government is supposed to take the lead, then why did the innovation happen in the private sector?

RG: The entire private industry spent years preventing the government from doing this. The ones lobbying against the creation of something that would provide services directly, and the Federal Reserve has been holding off on FedNow because the banking industry has been saying we should be [in charge of payments. Wouldn't the stablecoins do the same protectionist crap that the existing industry is? I don't like the Federal Reserve, in fact, fuck the Federal Reserve. But physical cash is the only genuinely private form of money that people have access to, and the Treasury doesn't have the same ideological commitments to the banking industry. I don't think the answer is to keep it purely private, but the status quo isn't right either because we have had 40 years of public neglect.

DD: If I told you that the best innovation you could have today for the transmission of value in a global economy that is always on and when your financial needs don't take bank holidays, is a government funded digital money that can't build healthcare enrollment websites that actually work? You're in trouble. Instead, like all things that we enjoy because you won the birth zipcode lottery because many of you were born here in the US, then if to be banked hinges on that operating model, then we're in massive trouble. I spent most of my career in national risk domain. The world's most developed nation couldn't move money fast enough. We moved money through leaky monopolistic banks and those types. But instant fast payments on public sector rails could preserve the airgap between your wallet and the central bank. That's a feature, not a bug. Stablecoins and there should be a separation between church, state, and banking.

AY: Japan is engaging with the private banking sector in creating guard-rails in place to create a platform that mimics what you hope to achieve in your view. Is the United States going to get it right? Is htere a hybrid solution?

CL: Well, who does the onboarding? If the central bank wants to open 350 million accounts for each of us, and hundreds of millions of business accounts, and handle onboarding and KYC/AML/oFAC, then great. But the Federal Reserve and other central banks are structured to serve the banking industry, and there's a reason for that, because thye have made the choice to delegate the onboarding for customer service to the private sector. Perhaps those should be utilities without privatized profits and socialized losses, and I'd be fine with that as someone who started a bank that is designed to fit into the existing structure of the regulatory regime in the United States. I know there are people in the Federal Reserve have recognized what Wyoming did; we handed the Federal Reserve a means by which to integrate the crypto industry into the existing banking industry without needing to pass new statutes in Congress and we handed it to the Federal Reserve with a bowtie and cherry on top and it's still being rejected. The real question is, why?

AY: If we are going to build a stablecoin, who will build it? Will it come from the private sector? Will it be federalized?

RG: I have no problem with private sector actors. Coins and notes are made by private actors. But the difference is that the government shouldn't hand over the operation of the system to private actors. The healthcare platform was broken because of the crony healthcare industry with privitization anyway; we can innovate with private innovation but the thing that gets produced needs to be purchased and owned by the public. It should be open-source, auditable, it should be based on standards rather than some proprietary technology, it should be hardware-secured so that we can preserve the existing privacy of cash that we have had for thousands of years. We should have a lobby interest to protect the right of physical cash to exist. There are activists in Philadelphia passing laws saying we should have a right to use physical cash. We should have a political coalition for this, and sorry to say, but it's not for the private sector to lead that. It's a public initiative.

CL: The banking operators argued for why they needed a monopoly on banking core technology and look at how fat and happy they got in 20 years. The payment system in the US atrophied. I have zero confidence in the government granting a monopoly or a small number of actors some monopoly will result in better payment rails.

AY: This is outside any government initiative or even DARPA, but this initaitive really came from the throws of the global financial crisis and you could argue the United States government was the primary instigator of that, and the private sector responded with innovation that created a parallel response to fundamentally what has been institutionalized financing. Where do you then sit, Dante, as you kind of navigate the space, how-- the market is speaking, and if the market is speaking, what do they want and how do you build to serve that?

DD: Physically, I sit in the middle, and on the question I also sit in the middle, and I don't mean that to be cheeky. The fact is that free market innovation is the thing that we have to fight for. The word free is not just about the liberty to participate; this industry in crytpo might not be for everyone but everyone's right to join and participate should be protected and enshrined. That's what's most important. Along the way, what we're proving is that it's no longer an abstraction. Every device on the planet can become a compliant payment endpoint, and then you don't need to send cross-border payments. You don't send cross-border emails, you just interact freely with counterparties. Both Caitlin and Professor Grey have described this as a monopolistic industry. Crypto is a correction from the 2008 financial crisis. Since then, we have been making steady gains in all financial assets that we have been talking about depsite the roller coaster rides and the fact that we can't buy insurance on houses on fire. But I'm more optimistic than ever that what happened to the internet will happen to crypto here. There are trillions of dollars of economic value waiting on the sideline waiting for regulatory clarity. We're not asking for permission.

CL: Some of us are asking for permission.

DD: Well, you're the real champion on the stage.

CL: Thank you for everyone who has been running up to me thanking Custodia Bank for suing the Federal Reserve.

AY: Why that conviction and what do you want to set as precedent and narrative as future rails for how we interact with our banks?

CL: I'll leave the lawsuit to speak for itself. I can't speak in that context. I will step back and talk about the vision of the State of Wyoming that Custodia is following to try to get the door open. We recognized that the Federal Reserve because ultimately every dollar flows through it, then they can turn off the fiat-backed stablecoins today because they can lean on the banks and say stop providing US dollar services. There are proposals in Washington DC and evidence that bank regulators are implementing something to do just that. The central bank controls the clearing of the fiat currency, so this industry to say hey I want a US dollar issued on a public permissionless blockchain that's a powerful concept and there's an estimate that $2 trillion of traditional US deposits have migrated out of the US system and into crypto. These deposits will probably never come back. These markets skew younger demographic. Someone who isn't allowed to open a bank account as a teenager may never open a bank account because they have already moved beyond it by using crypto. Wyoming has made a multi-year initiative to join these industries. The new bill has a structure to do this. You must be a depository institution in order to be able to issue a dollar, which is what we have today. There are some depository institutions including Custodia that have not been able to get in, and the question is why? This structure has been presented to the bank regulators in Washington DC and it fits exactly in the existing regime and they need no changes. So now if the fed will not be issuing licenses to Circles of the world, then fine the states will. New York and Wyoming have locked arms both through our senators in Washington and through the State initiatives at the state level. In the US, in order to be able to issue a dollar recognized by the Federal Reserve, then you need a bank charter which can either be from the OCC or the 50 state bank authorities. That's why Wyoming did. They created a statute and there is rules and there was a 700-page exam manual, and it was up the mainstream as much as possible all the rules, ask for permission, check every box, and apply all the rules from traditional banks and also go above and beyond by Custodia applying to become a Federal Reserve member bank.... and we still had to sue the Federal Reserve this week.

AY: At the end of the day, when we talk about stablecoins, we have to pull back and with a global view point, China has an 8-year headstart on CBDC. Their digital yuan is beyond pilot phase and there's a rollout and the beta is being used across their country and potentially around the world in terms of CBDC migrations with other trading partners of China. If you look at the world of stablecoins politically for the US government that has not had a very strong thesis when it comes to a digital dollar, and it has been pressured and pushed by the market... is there a world that stablecoins has already played by default in providing that 1-to-1 perception of the US dollar in a digital form that allows it to leapfrog and engage while CBDC innovation has been happening all around it for years. Now with stablecoins and this huge market, this market is demanding that it be a US dollar backed stablecoin and not a Thai Baut or potentially a digital yuan.

DD: I wrote an article about this tdlling the counter-narrative. The narratives until recently from Yellen was massive pressure to out China China, because we do not have the same instrument that allows honest tax payers to pick up the cost of improving the money movement technology. Building a CBDC is like building a high speed rail but not the trains. USDC has powered trillions of dollars across multiple public blockchains. That creative/destructive cycle is exactly the type of long-range win that will tell a different story now. FedNow is FedWin, all these innovations are masquerading as RTGS systems. Stablecoins flow freely on the internet. It's internet money for the private world, and it's no longer an abstraction.

AY: Is it black and white, Professor Grey?

RG: It better be Grey. I think the reality is that you say that you will ask for permission and do it for free market, but you're a limited liability company and you get a license for being a stablecoin issuer, and if you ask the Federal Reserve for permission, then why do you think they will be a vehicle for saving you? If you think the politics is that asking the Fed for permission will create freedom, then I don't agree with you. We need people who really want this ideology and not with profit seeking. If you believe stalbecoins, then just do the DeFi things. This is not stablecoins this is just another form of crony capitalism and that's ultimately why the Federal Reserve will allow it.

AY: They don't have a business if they don't have customers.

RG: The market is responding to a failure to provide a public good. Until we do that, the secondary suboptimal options will be more attractive to the status quo but they are still incredibly unattractive and we need something better than motivated self-interest for motivating change because selfishness and greed is not the most powerful force.

DD: ... it didn't replace the need for the physical dollar, it added extensibility. A dollar when tokenized is doing the same things ACH, Visa, and SWIFT did. It's a payment system innovation. It's about the movement of money, not the displacement of monetary sovereignity of nation states. The death match between CBDC and stablecoins will have to stop

AY: Caitlin, you're the peacemaker here. What is your vision for peace? If it is to be an evolution, if there is supposed to be coming to the table, all parties, all stakeholders, that includes us as the average citizen, what in your view is that?

CL: I'll close on an optimistic note. I believe that the issuing of the US dollar through the banking system with updated rails not FedWire or ACH but something based on open API cloud-based architecture that is open and permissionless on the backend, that's a powerful concept and it extends the US dollar's status as the global reverse currency. However, the DeFi world starting with bitcoin, is growing up independently. The challenge is that if you don't have ways for capital to move back and forth between the independent DeFi system and the TradFi system then it's not so easy for DeFi to catch on. There have to be rails to move back and forth. By trying to lock this industry out of the banking industry, what has happened is that 2 trillion dollars have left the US banking system and will probably never come back out of DeFi. The US should be embracing new payment technologies as a way to extend the United States dollar's reign as the world reserve currency. I think the regulators have missed the boat on this. Keep an eye on Wyoming and New York have created this new regulatory structure and handed it to Washington DC and let's see how patriotic Washington really is.


Transcript: Who should be allowed to issue digital dollars? https://diyhpl.us/wiki/transcripts/coindesk-consensus-2022/digital-dollar-issuers/ @CoinDesk @CaitlinLong_ @CustodiaBank @ddisparte @circlepay @AngieTVLau @Forkast_News @rohangrey #Consensus2022