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The Macro Brief – Understanding digital money
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Daragh Maher, Head of Digital Assets Research, discusses which of the competing visions for digital money could become the most dominant.
Disclaimer: https://www.research.hsbc.com/R/101/rQFq99n
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Transcript
Introduction to HSBC Global Viewpoint series
00:00:01
Speaker
Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
00:00:13
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto today's show.
The Macrobrief on Digital Finance Transition
00:00:24
Speaker
Hello, I'm Piers Butler London, and welcome to The Macrobrief.
00:00:29
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this episode was recorded for publication on the eighteenth of september twenty twenty five by hspc global investment research all the disclosures and disclaimers associated with it must be viewed on the link attach your media player and remember to like and subscribe to the macro brief wherever you get your podcasts
00:00:47
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and i'm pierce barle naan and welcome to the macrorief Here at Global Investment Research, we don't just focus on traditional forms of finance, we're also tracking digital finance and how it is transitioning from niche to mainstream.
00:00:59
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Now, this is a new topic for many people and we're here to help you out. So today we're looking at the various types of digital money, how they work and what they do. as well as one of the key technologies behind digital assets, blockchain.
00:01:12
Speaker
Darren Ma is Head of Digital Assets Research, and he joins me in the studio. Darren, welcome back to the podcast. Thanks, Bruce. Lovely to be back. So the last time you were on the podcast, we talked about crypto and why we should be thinking less about Bitcoin and more about stablecoins.
00:01:26
Speaker
So I thought today we would broaden the discussion and talk about digital money.
Categories of Digital Money
00:01:31
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Bitcoin, Ethereum, Tether are all essentially one type of digital money. And there are two other categories. So firstly, tell us about those.
00:01:40
Speaker
Sure. Well, like I guess that first grouping is what we you might collectively call it private digital money. Then the other two groupings are if like central bank digital money, central bank digital currencies, CBDCs, as generally how they're referred to.
00:01:54
Speaker
um So that's, if you like, legal tender issued in digital form by a central bank. It is what it does what it says on the tin, if you like. The third form are tokenized deposits, which sounds complicated, but essentially that's commercial bank money.
00:02:09
Speaker
Now, commercial banks already issue money. When you go and get a loan off a commercial bank, they're issuing money. This is saying, and then you can, course, if you're not spending it, Pierce, you can put it back as a deposit for a while. Unlikely, but... Unlikely. and And essentially what this form of money would be, you tokenize, you digitize, if you like, those deposits so they could be used for payments and moved quickly and cheaply around the world. So there are the three big blocks, private money, central bank digital money, and in a way, commercial bank digital money.
CBDCs: Hype and Challenges
00:02:40
Speaker
Okay, so let's start with central bank digital money. It wasn't that long ago that there was a lot of talk about that type of digital money. And in a way, there was an argument that um Bitcoin would fall by the wayside if central bank digital currencies existed. Because why would you hold Bitcoin when you could hold a central bank digital currency that was essentially guaranteed by the central bank and on which there would be no credit risk? And yet, they don't really seem to have...
00:03:07
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come through that strongly. I mean, is there an actual central bank digital currency in existence? ah there There are a handful, um but literally just that, like two or three, and and not in kind of, if you like, significantly large economies.
00:03:20
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um Yeah, and it was, I guess, 2020, 2021, CBDCs were like all the talk. yeah But then so was sourdough bread, right? At the end of the day, and I know some people are still making sourdough, but it's not the thing it was.
00:03:33
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And in a way, I guess CBDCs have gone through a similar cycle. Part of that, I guess, was the rise of Bitcoin. You know, you had this digital form of money that was already out there. So what would a CBDC solve for? That was part of the problem.
00:03:47
Speaker
There was issues for central banks about whether if they introduced them, would that undermine the banking system? and Would there be costs associated? Would the population think it was Big Brother watching? course, yes. That's right. The privacy issue was yeah yeah that you'd be overly monitored. Yeah.
00:04:02
Speaker
Which, you know, depending on your culture, you either you don't mind that. I mean, my wife always says, who cares if you're monitored so long as you're not breaking the law? So there you go. um So you're competing on that spectrum of kind of cultural expectations. And for some central banks, that privacy issue, it it reduced the appetite when they did polls of, hey, how popular might this be? So it's kind of stalled, but it's it's definitely coming back now as a conversation, maybe like sourdough.
Tokenized Deposits in Digital Money
00:04:27
Speaker
uh maybe it will rise like sourdough uh let's talk about the third category which to be honest i was really completely ignorant about and which we should all know about because apparently according to you it's a sleeping giant potentially yeah this is that that commercial bank digital money um the phrase used typically is tokenized deposits right and um First of all, they're big, right? if we If we look at the five major currency blocks, so what are we talking? Dollar, sterling, yen, euro, China.
00:05:01
Speaker
the The deposit base there is around $100 trillion. dollars Now, I'm going to give you a point of reference. $100 trillion dollars against stablecoins, which are a quarter of a trillion, or cryptocurrencies in total, which are $4 trillion. So you're four against 100.
00:05:16
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so Digital, or if you like, the deposit base is massive. So if you say it's your point that if you take that huge deposit base and you start to move it into a digital format, like got scale suddenly you've got a giant.
00:05:30
Speaker
You've got scale. So how is that starting to happen? how How long is it going to take? We start small, from acorns here, from acorns. and I think the other significant help is that, remember, this money already resides within banks, the normal banking infrastructure. So all that anti-money laundering,
00:05:48
Speaker
that you get around cryptocurrencies, and all the counter financing, all that kind of stuff, it's kind of covered, right? You're in that guardrail, that ecosystem already. That's a help. these tokenized deposits can also offer you yield. Stablecoins, you may remember from our previous conversation, issuers of stablecoins don't offer you yield because they want to keep the yield. yeah so' So there's a few advantages. I mean, at the moment, you do see them operate, but if you like, within a bank's own garden. So HSBC might have tokenized deposits for people operating within the HSBC ecosystem.
00:06:20
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We need to get these tokens speaking to each other across banks. So is that why you say that tokenized deposit dominance, so to speak, isn't guaranteed? It's not guaranteed. I mean, you know, 2020, we thought CBDCs were guaranteed to be the dominant play. um Partly that.
00:06:37
Speaker
Partly also, you know, will it be ah judicial? and and by the but I guess is is that the right word? Not in terms of law, looking at them, but if you're operating one jurisdiction, another jurisdiction, are you going to get conflicts there, regulatory conflicts?
00:06:50
Speaker
Plus, there's going to be stablecoins aren't going to take this lying down. CBDCs i'm going to take this lying down. And also, critically, incumbent financial pay rails of this world.
00:07:01
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They're not going to say, hey, we're doing nothing. We're just going to have our Kodak moment and let somebody else take over our business. So everyone's adapting. So there is competition in this area. Which actually brings me neatly to your recent report, um which intimates that it's not a harmonized digital money
Global Approaches to Digital Currencies
00:07:20
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world. In fact, it's a multipolar one where we have many digital ecosystems.
00:07:26
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ah So this is a bit probably forcing the analogy, but does that mean that there's going to be a cacophony before we all act in concert? Oh, nice. It's possible. It's possible. it's The problem we have here is like, okay, so we described those big blocks of money, right? um And so let's let's think in simple terms of stable coins, CBDCs, and tokenized deposits. right um Geographically, ah different jurisdictions have different views on, hey, this is the way forward.
00:07:54
Speaker
The U.S. is super keen on stable coins. and actually is aiming to ban CBDC. Yes, that's right. in your In your report, you have this fantastic chart that looks at the anatomy of digital currency ecosystems in the US, Europe, Japan, the UK, and China.
00:08:08
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And the difference between the US on one side and China yeah is really striking. how How has that come about? How does that happen ever? It's such a rarity. Right, it's such a rarity. Because there's different priorities here, right? So the US will look at their setup and they'll say, look, we've got stable coins. They're dollar denominated 99% of the time. So we can have use stable coins for our digital payment system.
00:08:31
Speaker
It ensures dollar dominance. Also for the Republican Party, privacy concerns are an issue. So central bank digital currencies were kind of a non-starter, if you like. and So that's that's kind of the US perspective.
00:08:43
Speaker
China, rightly or wrongly, perhaps doesn't have as much angst about surveillance and and that and privacy. and And they were more interested in the democratization, access to finance, to digital payments.
00:08:55
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um And so they've gone down the route of promoting central bank digital currencies. And they were a pioneer and and a massive pilot scheme already underway. But... they didn't particularly like cryptocurrencies, including stable coins, because they're mindful of wanting to control capital flows.
00:09:12
Speaker
And also they're wary of, I guess, more the Bitcoins of this world that you could get destabilizing speculation in Bitcoin and other cryptocurrencies as an asset. So they wanted us to kind of limit that. so you But you end up yeah with this polarization, not for any weird reason, just for, in a way, domestic policy considerations. Underlying cultural issues, I guess. Yeah, definitely part of the mix.
00:09:36
Speaker
How long does it take before it becomes a less multipolar world? Or is that something that we're going to just have to accept?
Need for Regulation and Interoperability
00:09:42
Speaker
I mean, sometimes with emerging technologies, and you do see a competition to be who's going to be the dominant, who who is going to be last man standing. um For those of us old enough, and sadly we are there. Do you remember VHS and Betamex? And it wasn't even necessarily the best technology that wins out. It's right, who who gets critical mass, who gets traction?
00:10:02
Speaker
I think in this situation though, we can see, you we talk about multipolar, I think you can end up with an infrastructure where there's a place for everyone, yeah which sounds beautiful and hippie-ish from the 70s, but I think that's the reality.
00:10:14
Speaker
There is a place for stable coins, for tokenized deposits, for central bank digital currencies. um It's a question of who will be dominant, but what will be critical is that they can all speak to each other. Well, that's right, yes. that that's And that comes back to your point about regulation, I guess.
00:10:30
Speaker
Yeah, regulation helps because then you say, OK, we know the rules of the game and therefore, you know, we can accept payment in different formats across different jurisdictions. And that that all works out well. um But also a word I think we've used before, interoperability, which sounds very long, but all it is essentially one blockchain. Can they speak to each other? Can they speak to each other?
00:10:51
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And I think where I fall back here, particularly tokenized deposits, is the wonderful profit motive. it can be in everyone's interest to get this stuff working, particularly for commercial banks.
00:11:02
Speaker
And so that might be a catalyst and what gives them, it in a way, a competitive competitive advantage is that they'll want to pursue interoperability, talking to each other in order to ensure that these things work.
00:11:15
Speaker
But that relies, of course, as we say, on but getting the blockchains to speak to each other. So in our last conversation, one of the things we talked about in the context of regulation was this analogy that there was sort of like piping in the proverbial house, that you can have this fantastic six bedroom house and what have you, but if you don't have good piping, yeah it ain't gonna work. And you were saying that regulation was key and was kind of analogous to to effective
Blockchain Technology Explained
00:11:43
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piping. But there is another form of piping underlying ah um digital money money. In fact, you you talk about it as the cornerstone technology of the digital ecosystem, and it is, trump torah, blockchain.
00:11:56
Speaker
Right. But if I was at dinner party and somebody turned around to me and said, what is blockchain? I'm not sure I wouldn't be able to explain it properly. So your challenge. Yeah. And again, a terrible pun, but don't make a hash of it, which is nice.
00:12:12
Speaker
um Yeah, look, I can't imagine you're at a dinner party where you wouldn't have answered that question anyway, even if you didn't know what blockchain was. The... the So blockchain is essentially ah very elegant technology that allows you to store data um in a way that is very hard to change the history of.
00:12:32
Speaker
And you're able the other ah key advantage of blockchain is the technology, ah which involves a lot of mathematics, cryptography, including hashing, which is a form of cryptography.
00:12:43
Speaker
um It allows this data to be held without a central party controlling it. So it's not like a bank account where your bank knows what your, if you like, your ledger is.
00:12:56
Speaker
Everyone sees the ledger and everyone has a copy of the ledger. And what you all agree is we add a new block. We all agree in that block. and the block changes gets longer and longer. That's the simplified version. If you want to listen to it for longer, I'd say go and find one of our explainers. Yeah, which, are by the way, they're great. And I learned a lot in the process, which hence the allusion to hashing, because I didn't know what that was about before I listened to your explainer.
00:13:18
Speaker
But that's critical, because because what works here then is it allows all these payments to be made without it necessarily having an intermediary. You can have an intermediary. but you don't necessarily have to have one. And it it makes for very fast, swift payments and settlements. And of course, that's a large part of the appeal here.
00:13:36
Speaker
Yes, this is the thing. ah Blockchain is is often associated with cryptocurrencies like Bitcoin and Ether, but its applications extend far beyond digital currencies. So can you give us an example? Can you illustrate what what it means in in practical terms?
00:13:51
Speaker
Sure, I think the easier way to think about blockchain is is just a store of data. um for the Often it's a store of transactions, right? So, you know, you've sent Bitcoin from address A to address C, that will be recorded on the Bitcoin blockchain and it will forever be held as a fact.
00:14:09
Speaker
and But it can hold any form of data. It can hold voter records, medical records. and It could hold who owns a house. know, we see a lot of talk, for example, recently in the UK about how long it takes to sell a house.
00:14:20
Speaker
Imagine a blockchain environment where all the records are held for your property, including council surveys, all the kind of rigmarole that you go through to sell, and bang, you put an offer in front of it. Oh my goodness. I can't conceive it. know. sounds like nirvana, doesn't it? You still pay the stamp duty, though. Yeah. um But... Yeah, so just think about it as a data store, um a transactional data store.
00:14:43
Speaker
And the other key advantage of a blockchain is that it can also host smart contracts. don't know if you want to go down that particular rabbit hole, but that again is another way of improving the flexibility of this technology to to give very good commercial outcomes.
00:14:57
Speaker
Very powerful. But obviously that implies a huge amount of data being
Quantum Computing and Blockchain Security
00:15:04
Speaker
stored. It does. um But that's the world we're in, right? um And actually, interestingly, one of the challenges, you know, we talked about hashing cryptography as being part of the blockchain technology.
00:15:13
Speaker
um Quantum computing, which is another great word out there, and that's ah a way, of course, a means to a storing vast amount of data, but it also poses a challenge to that. cryptography right can you know will the code breaking um power of quantum computing undermine but the whole blockchain thesis and of course that's a whole other conversation but what an elegant way of holding data and sharing data and i think that's why people can dispute the merits of bitcoin or whatever but the merits of blockchain as a technology i think is wonderfully elegant to finish could we say that the future is bright the future is blockchain
00:15:49
Speaker
Yeah, I think itd be a nice cliche. um And the question is, what will sit on that blockchain? And you that question is perhaps more Still very much in development. Very much, very much.
00:16:00
Speaker
ah Well, no doubt we will have you back to talk to us about that. But in the meantime, Dara, thank you very much for joining us. Cheers, Beers. Nice to speak.
Global Investment Insights
00:16:10
Speaker
Before we finish, here are a few highlights from global investment research this week. In our monthly currency outlook, Paul Mackel and team outline why the US dollar faces a sliding doors moment, look at what the autumn budget could mean for sterling, and explore how domestic political developments are impacting the Japanese yen.
00:16:28
Speaker
Elsewhere, Paul Bloxham, our chief economist for Australia, New Zealand and global commodities, has been assessing the drivers of commodity prices. Paul argues that GeoEconomics, where national security policy drives and interacts with economic policy, is becoming a more important factor and contributing to price volatility.
00:16:48
Speaker
And finally, did you know that our mobile app can now read out our research to you? So wherever you are, you can listen to all our research summaries hands-free. If you're an HSBC Global Investment Research client, download our app on Apple's App Store or Google Play.
00:17:10
Speaker
So that's all from us this week. Don't forget that you can get in touch with us by emailing artsresearch at hsbc.com. And please like and subscribe to The Macro Brief wherever you get your podcasts.
00:17:22
Speaker
From all of us here, thanks for listening and please join us again next week.
00:17:52
Speaker
Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.