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Ep 13: Mirror on the wall, what does the CBDC future hold?
47 Plays1 year ago
Join Russell Klein and a panel of experts in a captivating discussion on Central Bank Digital Currencies (CBDCs) in our latest Owl Explains podcast episode. Mai Santamaria (Department of Finance, Ireland), Jannah Patchay (Digital Pound Foundation), and Varun Paul (Fireblocks) dissect the potential impact of CBDCs on modern finance. Discover the implications, risks, and revolutionary prospects of digital currencies as we delve into whether they're a necessity in our increasingly digital world. Tune in for an insightful journey into the evolving realm of digital finance and CBDCs.
Find out more in our explainers at owlexplains.com
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Transcript
Introduction from Avalanche Summit
00:00:06
Speaker
Hello and welcome to this Owl Explains Hootenanny. I am Silvia Sanchez, Project Manager of Owl Explains, and I am super excited to share this special episode with you. This episode comes from one of the panels we recently hosted at the Avalanche Summit in Barcelona, our first in-person event as Owl Explains, in which we gathered many wise owls from all over the world, seeking to build a better internet. We hope you enjoy it as much as we did.
What are CBDCs and their Global Implications?
00:00:37
Speaker
Hello. We're going to be talking about CBDC, Central Bank Digital Currencies. I'd say virtually every central bank right now is doing some sort of research pilot program or actually working to introduce some variation of a central bank digital currency.
00:00:58
Speaker
As someone in crypto we're very conscious of how that is going to interplay with the private style public cryptos that we have and what it means for the kind of autonomy and freedom and privacy and just how
00:01:16
Speaker
what we've been seeing lately, at least in the US, with a lot of the regional banks and collapse in the wholesale and retail versions of it. So basically, we're going to get to the bottom of the future of CBDCs. So would the panel like to introduce themselves?
Perspectives on Digital Currency Ecosystems
00:01:35
Speaker
Sure, I'll go first. I'm Jana Pache. I'm the policy lead and one of the originating team members behind the Digital Pound Foundation, which is a not-for-profit corporate membership organization in the UK.
00:01:52
Speaker
We advocate for the implementation of what we call well-designed digital pound in both publicly issued, so CBDC, and privately issued, so all the different stablecoins and tokenized commercial bank money and all that interesting stuff, forms, and a diverse, effective, and competitive ecosystem for these new forms of digital money.
00:02:15
Speaker
Hello, my name is Tara, the key. But I work for the department of finance in Ireland, so I've actually lived abroad for a few years. My name is my Santa Maria. It's a dream come true to be in Barcelona, talking about blockchain, so two of my loves together. I started looking at blockchain a few years ago. I tried to advise governments not to do silly things, but to pay attention to reality and to private sector.
00:02:42
Speaker
I just want to point out I'm speaking for myself today, so don't be saying any of my silliness or comments actually on behalf of the Finance Minister or you get me fired. Yeah, and I'm looking forward to your questions. Thanks. Hi everyone, I'm Varun Paul. I'm Director for Central Bank Digital Currencies and Market Infrastructures at Five Locks. I've been at Five Locks for a year and before that I spent my career at the Bank of England. So as a Central Banker, I started my career
00:03:11
Speaker
I've worked on financial stability, I've worked on monetary policy, and I've worked on central bank digital currencies from a central bank perspective as well. Great.
Why Are CBDCs Needed?
00:03:20
Speaker
So let me just start with, let's try to sell me on what's the pros and cons starting with the pros of a CBDC. So like, Jen, tell me about why we need the digital pound and what kind of
00:03:35
Speaker
benefits it would have at least for retail that isn't currently being served by our credit card system or the digital currency and payments.
00:03:44
Speaker
That's a really good question. When we start talking about CBDCs or digital pound, one of the first questions many people ask is, well, why do we need a CBDC or a digital pound? Isn't the money that we use today, after all, digital in itself?
00:04:07
Speaker
Most of us are not regularly transacting with cash anymore and so most of our transactions involve digital movements from one ledger to another effectively between our banks.
00:04:23
Speaker
The answer is yes, that's true. At the end of the day, wheelbarrows full of cash are not being exchanged between banks, and yet all of the payments infrastructure that we have today has evolved organically over decades.
00:04:42
Speaker
and fundamentally at the outset was based on assumptions that wheelbarrows full of cash for being exchanged at the end of the day and many of the processes the assumptions and the
00:04:56
Speaker
the kind of inhibitions of this stuff have the limitations have been introduced or have been have been carried over through these kind of legacy assumptions.
Rethinking Money with Digital Forms
00:05:08
Speaker
And so what new forms of digital money and I'm not going to say just CBDCs because new forms of digital money in all forms whether they're stable coins or CBDCs what they represent is an opportunity to
00:05:25
Speaker
re-look at what the requirements that we have today of money and of payments are to kind of tear up the assumptions that we have and to say what can we do using the technology that we have available today to meet those requirements both now and into the future as we transition to a digital economy.
00:05:47
Speaker
in a digital native manner. And that's basically what digital money is. And CBDC in this context is the publicly issued, so the central bank issued form of digital money.
00:06:00
Speaker
I was just going to say, it's funny you asked that question, right? Why do we need CVDCs? If I turned to this room and said, why do we need crypto? What a stupid question, right? Huge opportunities. Why wouldn't you explore them? Different types of payment, different types of ways of transacting. For me, just to add on to Jana's point, CVDCs are just part of that ecosystem. And they can build a platform for further innovation. And that's an opportunity you can't miss.
00:06:24
Speaker
But, and just maybe be, it's not just about payments if that's okay. I agree with both of you, but maybe I'll go a bit further and maybe be controversial. And I think that's in honor of being today the 4th of May.
00:06:40
Speaker
Clearly, and for those who may have seen Clone Wars, Dutchess, Kirste did say that money is the most dangerous weapon in the universe. This is not just about payment, this is about really money and who's entitled to actually own that money. I mean, payments, yes, they have evolved slowly over the last 20, 30 years, so have regulation.
00:07:03
Speaker
But intermediation costs have not reduced one cent over that period of time. So it's definitely primed, I think, for challenging and for a revolution in the aspect.
Retail CBDCs: Privacy and Control Issues
00:07:15
Speaker
Right. So, like, I understand we have the they're working on the Fed now and these more wholesale versions of, you know, how are you going to move money? We've seen recently with these bank failures, they couldn't bail them out in time. They had to wait for like 9 a.m. to get the boring old system going.
00:07:30
Speaker
My question is about when it's like the retail CBDC stuff. And because I look at it from, oh, well, I believe in, what do I like about cryptocurrency? It's that you have the power, the autonomy, are you the privacy? You control the funds. There's no centralized permission party doing it. So I'm wondering how you respond, those that are in favor of this kind of retail CBDC.
00:07:59
Speaker
You can see right now, the two opposition candidates in the US, the Governor of Florida and Robert F. Kennedy Jr., they're both coming out really, it's like a big political thing now. You wouldn't even think it'd be such a big deal, but they're making a lot of political hay out of being anti-CBDC, putting these laws in place, saying, oh, we're not going to adhere to this because they're
00:08:23
Speaker
they're running on this fear of a China-style central authority saying, you know, this is what you can do with your money, this is what you can't, here's the limits, so we're going to prevent a bank run by limiting how you use it. So is that a justified fear? And are we looking to do these retail versions of CBTCs where the citizens are going to be beholden to the central government, it's going to be telling them what they can do with it and not even getting into the privacy and the security of
00:08:53
Speaker
what they're purchasing with their own money. It's funny when you ask that question, and people ask this all around the world, and take a total perspective here. The US is quite specific in this respect. There's a real lack of trust for the government, a real concern from citizens about the state spying on them. And some countries really have that issue. When you have this debate in Europe, in the UK,
00:09:18
Speaker
There feels like people trust the guardrails a little bit more, whether it is because of GDPR and the conversations we've had in the last decade over privacy of data and the responsibilities of any financial institution, any entity, including the government, to protect citizens' data.
00:09:34
Speaker
I think we can have a really a much more advanced way. The UK's CBDC consultation paper hit this head on and it basically says the reason to have a retail CBDC one is because you need something at the base of the economy and anchor between all different types of money.
00:09:51
Speaker
to ensure that when you're exchanging from one type of money in a private bank or a crypto, it is based on one central form of money that is uniform. So uniforms with money. The second thing they said is the risk is as we move from cash, which is provided by the state, to money that is provided by institutions with incentives to monetize your data,
00:10:13
Speaker
as we've seen in the web2 world from the social media giants, we're moving to a world in which they have an incentive to take that data and use it.
00:10:23
Speaker
And what the central bank is saying is that actually we want to deliver a token, a currency that is devoid from that risk. And we're saying we're going to provide you with a privacy coin. And we're going to say this is not anonymous, but it protects your privacy. And it is going to be simple and basic. It's not going to do clever stuff, but it's going to ensure that you trust this thing. And then the clever financial institutions and innovators out there can build much smarter things on top of that.
00:10:50
Speaker
But the responsibility of the government and the central bank is to provide that basis. Yeah. So going back to you, first of all, I agree with everything Burns just said. But also, I mean, I think the concerns that people have around privacy and about the extent to which
00:11:13
Speaker
a central bank digital currency, especially if it's programmable, could be used as a means of controlling their access to finance or to benefits or to society in general, are valid. I mean, that's exactly pretty much what's happening in China at the moment. But it's also reflective, I think, of the Chinese state.
00:11:35
Speaker
and the system of government that exists, and the degree of control that it wants to exert. In many ways, the design of CBDC is a kind of manifestation of a jurisdiction's values and stuff like that, and its political values.
Political Values in CBDC Design
00:11:51
Speaker
That's why we expect to see in a digital euro or a digital pound a reflection of privacy protections, of individual control over finances and things like that. And in a lot of cases as well, I think that some of the concerns that people have arise from not fully grasping how the existing financial system works.
00:12:13
Speaker
and I really don't mean that in a patronizing way because until I started diving into a lot of this, I didn't really know how it all hung together in terms of money and payments and things like that and what commercial bank money is versus central bank money and things like that. I think that
00:12:30
Speaker
The way, for example, the digital pound is proposed to be designed and the level of access that the government versus the central bank would potentially have to the data attached to that would be very much reflective of the existing system that exists today for commercial bank accounts and stuff like that.
00:12:51
Speaker
Also, it always surprises me that people are incredibly suspicious of what the government might get up to. But, you know, when it comes to private companies, you know, if Facebook had large Libra, I bet actually a surprising number of people in this room might be using it.
00:13:07
Speaker
On that point, sorry, I mean, this is obviously a UK. You're not ganging up against me. I know it's just happened this way. There's a UK point, there's a US point of view. Just a quick roll of hands, how many people here actually are based in Europe and have a Europe bank account?
00:13:24
Speaker
Quite a few, right? Okay, that's great. In Europe, and that's, I'm speaking from experience and see what I've seen. Yes, it's about money. Yes, it's about payments. Yes, it's about privacy. Yes, it's about our data.
CBDCs and Monetary Sovereignty
00:13:37
Speaker
Really, and make no mistake, it's about power. And it's about monetary sovereignty. Because, and very clearly, we don't have a European credit card supplier. It's either Visa or MasterCard, right? They are not European-based.
00:13:54
Speaker
We don't have large social media providers that control our data in Europe. They are US-based. Mika, as you know, has a regulation to actually control stablecoins. This was a monetary sovereignty power protection play to actually not have a private company issuing money in Europe. So I understand, and I think those are peripheral and important, but I think in terms of seeing it through,
00:14:22
Speaker
Will a retail digital euro exist? It will, maybe. Is there a need for it? I would say at our citizens level, I'm sure you guys pay with your Revolut accounts and your bizums and whatever else. Maybe we don't need them, but we might need them from a power monetary sovereignty just to protect that purchasing power European level, which sometimes is not spoken about.
00:14:49
Speaker
What do you think is the aim to replace cash? Can it coexist with stablecoins and decentralize?
Coexistence of Digital Currencies
00:15:00
Speaker
The conspiracy theory that the Florida kind of point of view that I'm coming from, it feels really like
00:15:08
Speaker
the US government has been trying to delegitimize and push crypto to the side, maybe in an attempt and even doing it to regional banks to kind of push them away so that they can come in and have control over the system with a CBDC style federal, you know, Federal Reserve style control, the central banking control that
00:15:30
Speaker
Is taking the decentralized and smaller regional banks out of pictures this is that is there any truth to this is this just kind of how it feels. I have a theory that my theory that i'm trying to think about anyway that.
00:15:46
Speaker
We have evolved in our transport system because we've adapted the needs of transport to the distance and the speed to which we want to get to, right? If you wanted to get an electric scooter and go from here to New York City, you could do it. I'm not saying you couldn't do it, but you're more likely to jump on a plane, right? Because it's faster.
00:16:09
Speaker
There is coexistence in different forms of money. We've just been stuck with just cash and digital money to a certain degree with the commercial money. Why can we have a spectrum of different digital and cash needs to pay depending on the situation? I see more coexistence personally than a complete replacement because there's never going to be a perfect replacement. Do you know why you guys have other thoughts?
00:16:36
Speaker
Completely agree. It's a vibrant ecosystem in the future for me. There may be consolidation over time with some forms of payment and transaction and store value change, but we've had various types of payments and we've seen this shift in the last two or three decades significantly from cash to other forms. The beauty here is we've got an interaction between state issued, government issued CBDCs in the future.
00:17:02
Speaker
privately issued stablecoins, and they can be issued by a non-bank, FinTech. And then you can have bank issued monies that we're calling tokenized deposits these days. But that is essentially what the financial system looks like today. When a central bank issues money, the bank note in our wallets, if we have any, that is one type of money. And if you go to the government, go to the central bank and say,
00:17:24
Speaker
I want something in return for this. It is their responsibility, their liability. So if the whole banking system fails, you still go back to that central bank. As we saw in the runs of the banks in the last few weeks, when you're issued money, when you have money sitting in a bank account, that is a liability of that bank. And so all these different types of money have different risks associated with them and different benefits associated with them.
00:17:49
Speaker
And I genuinely foresee a future where these things do interact and they do provide different benefits. And I can see how they can build a layer on top of each other. And you can have private ecosystems where money floats around for settlement in certain subnets. And you can have stable coins that exist to access other DeFi pools and so on. And they will have different uses. But the beauty of it, ideally, is interoperability of these different types. And that would be great for the consumer.
00:18:19
Speaker
Yeah, going back to your original question, Russell, I mean, I think that, as my mentioned as well, different jurisdictions have very different drivers from a policy perspective as to why they want to introduce the CBDC. Like the world's first live CBDC was the sand dollar in the Bahamas.
00:18:38
Speaker
I think they've got something like 700 small islands. It's an incredible logistical challenge to distribute cash to ACMs across all of those islands. And so for them, it was like an important way of modernizing their payments infrastructure and giving retaining people's individual user like citizens access.
00:18:58
Speaker
to public money, so a digital form of cash, for example.
Regional Motivations for CBDC Adoption
00:19:03
Speaker
The Bakam in Cambodia, which is more of a synthetic CBDC, but let's gloss over that distinction right now. It was actually introduced because Cambodia is a heavily dollarized economy. The dollar is pretty much used in almost all day-to-day transactions, and Cambodia wanted to regain its own monetary sovereignty.
00:19:22
Speaker
by introducing something that was easy for the population to use in the same way as the dollar, and that was accessible. They hoped that this would be the outcome. So really different drivers. I mean, like the E-Nara in Nigeria was about financial inclusion. I would think if the US were thinking of introducing a CBDC so that it could control the fates of regional state banks, that would be a poor policy driver and possibly not a huge signal for success.
00:19:51
Speaker
i see a real difference in the names of the cbc for the big big countries like the u.s. and then the smaller ones that are trying to establish their own control that display, but it's kinda like so you got the el Salvador you know they had the dollar and they tried to introduce the bitcoin being being their version of the legal tender,
00:20:11
Speaker
But then the Nigerian example you just explained, when I was kind of researching this, it seemed like that was like a flop, like they had a real trouble getting adoption. And is there a reason that is that true? Is that something that wouldn't apply to these European style versions of it? Well, my understanding from looking at developments on CBDCs around the world is that the
00:20:38
Speaker
lack of huge success on the UNIRA was actually due to the lack of trust in the central bank. There was an update as well on the digital yuan and they were very open about how users has decreased just because maybe that trust isn't there. So it's quite interesting that in that particular case there was a lack of trust in what the central bank would do with the data.
00:21:04
Speaker
Yeah. And it seems like here, like they're saying, you know, one of the reasons I think there's it's an uphill battle in the US is they're saying, well, this will help, you know, bank the unbanked and provide. But the reality is the very few Americans that don't have bank accounts, whatever, they don't trust the banks as they are. And they're definitely not going to trust, especially now that it's being turned into a political. It's a political issue. And of course, like I said, it's the both the Republican challenger and the Democrat.
00:21:34
Speaker
Absolutely right. Let me just change that a little bit. There are 14 million Americans without bank accounts. It's not a small number. And they will have reasons for not doing that. Will they subscribe to a central bank issue, just currency? Probably not. But could you then have a stablecoin issued by FinTech that they might be willing to engage with?
00:21:54
Speaker
It's not a technology problem in the whole in the US. It may be a bit of internet connectivity. So are you going to go in?
The Role of Digital Identity in CBDCs
00:22:00
Speaker
And don't we need a good ID system? Is that required? And I'm wondering, do we have the developer tech talent to create this? Do the governments have that?
00:22:15
Speaker
This is really interesting. India is a really good example here. India is the biggest country in the world from population, and they rolled out a really world-class payment system built on an identity system and a data system in a matter of years. They did it from the center, and one way or another, everyone's got behind it. You've included a huge sway of the population that were otherwise unbanked and financially un-included.
00:22:40
Speaker
You could do these in countries where they have digital ids because they already have trust have been able to accelerate this adoption in europe in the uk what is in the uk and us there's no chance of having an id card but forms of digital id could really enable adoption if you use and i think you can use blockchain technology to do this.
00:22:59
Speaker
where you're sharing items, attributes of your identity in a way that the individual has more control over, can really enable you to say, I trust the data I'm giving up, and I can see what data I'm giving up, and there are reasons for that. And then you could build a financial system that doesn't require you to have a bank in order to have access to digital money. It does require testing technology, and maybe it's a smartphone. And that won't work in every country, but in the US, it would work.
00:23:29
Speaker
And equally, when you look at this around the world, developing countries trying to solve their own problems, some of them turn around and say, this isn't going to work for me. My biggest risk is natural disasters. And if I have no technology, no electricity, and no mobile phone signal, this just will not work. And then there's loads of innovation about offline payments. And actually, this is something that's really interesting.
00:23:51
Speaker
There's very little research in the crypto world and offline payments, as far as I'm aware. But the central bank world is focused laser sharp on this idea that it needs to be an alternative to bank notes. And in a world where there is a tsunami, there is a natural disaster. I need something that people can reliably play on, even if they don't have electricity or phone signal. That's a good point.
00:24:18
Speaker
Yeah, actually that tsunami point is around offline payments. Apparently that's been a big driver in New Zealand recently of them looking into CBDC because they had a really big storm, kind of wiped out connectivity in some local areas and stuff like that.
00:24:35
Speaker
They couldn't get into distributed cash or anything. So yeah, I think they're just bringing a load of things that we've been talking about together.
Future Impact of CBDCs
00:24:44
Speaker
Particularly in more in jurisdictions that have really well-developed payment systems and banking systems and stuff, there's a question of like, do we really need to be looking at this now? What kind of marginal benefit are we going to get out of it? Is it really worth the effort?
00:25:01
Speaker
are we just doing this because China's doing it? And I've given up on all the other arguments. It's like, actually, no, the benefits to our payment system today are probably quite marginal, but why should we be spending the money? Because China's doing it, because we should all be looking to the future and to what the jurisdictions who are putting a lot of effort into developing these technologies and these new forms of money will be able to do with their payment systems
00:25:27
Speaker
and their money in five or ten years' time that we won't be able to do today and how that's going to affect the geopolitical balance of the power in the world and stuff. On that happy note. All right. Any other 40-second last words?
00:25:44
Speaker
I agree with both. I do think that from a digital identity will be absolutely crucial. I always go back to the Twitter blue tick. We didn't think we needed it. Now we don't have it. We don't pay. We totally miss it. We don't trust that account anymore. And I think if there is to be a solution on a CBC level, we definitely will have to come up with a digital ID.
00:26:09
Speaker
form of trust and comfort. Whoever cracks it first, I think they're sitting on a gold mine. My final word is, it's a really exciting space to be in. There's so much going on all around the world, and I'm really excited by some of the, not the largest economies, but the kind of the G20 economies, which with massive scale, which are really second to seriously, there's a whole bunch of innovation. And the beauty of it is it's working with the crypto world and the governments and central banks. And I think that can be really exciting.
00:26:38
Speaker
Thanks so much. That was great. Thanks everyone. Thank you.
Conclusion and Call to Action
00:26:43
Speaker
We hope you enjoyed our Hootenanny. Thank you for listening. For more Hootful and hype-free resources, visit owlexplains.com. There, you will find articles, quizzes, practical explainers, suggested reading materials, and lots more. Also, follow us on Twitter and LinkedIn to continue wising up on Blockchain and Web3. That's all for now on Owl Explains. Until next time.