Digitizing the Dollar: The Future of Central Bank Digital Currencies
Panelists discuss the future of central bank digital currencies (CBDCs), including their implications for traditional banking and financial sectors, concerns over privacy and public acceptance, and the likelihood of major economies adopting their own CBDC.
EISEN: Thank you so much and welcome, everybody. I am thrilled to be here with you today—Council on Foreign Relations Young Professionals Briefing on central bank digital currencies, which is such a hot issue, and one that is near and dear to my heart, coming—(laughs)—with a little bit of a forex background.
I am Sara Eisen. I co-anchor Closing Bell on CNBC every day three to five p.m., which has been especially eventful lately in the final hour of trade. And more importantly, I’m pleased to introduce our distinguished panel of experts on this topic for you.
Alana Ackerson is here. She’s the CEO of HQ, which is a subsidiary of Digital Currency Group, and they are focused on the world’s preeminent investors and companies related to crypto, decentralized finance, blockchain, and everything that goes with that.
Sean Creehan is from the San Francisco Federal Reserve. He leads the fintech team for financial health and inclusion there.
And Marion Laboure—hope I pronounced it right, Marion—is a senior economist at Deutsche Bank in London and also a lecturer at Harvard University, has worked extensively with central banks and governments around these issues and others.
So welcome to all of you. Thanks for joining the conversation.
I want to dive right in because we got so lucky on this conversation in getting a news peg. We got the long, highly anticipated—long-awaited, highly anticipated report from the Federal Reserve last week on the topic of central bank digital currencies. And Sean, I’m not sure whether we learned anything as far as commitment from the Fed towards a digital dollar, but there was a lot of good stuff in there as far as what they’re exploring. How would you summarize it? Set the table for us.
CREEHAN: Sure. And thank you, Sara. Good to see you again. And thank you to CFR for having us today. I’ve been a term member of the Council on Foreign Relations for the last two-plus years, so it’s nice to be speaking to the broader audience.
As Sara said, I’m based at the San Francisco Fed. I lead our program on financial health, inclusion, and technology, and previously worked as a(n) Asia-focused economist, including covering a lot of fintech developments in Asia. So this is right within my wheelhouse.
But yes, as you said, it’s good timing. I was—I was grateful that that report came out before this event. I was—I was hoping it would. It makes my job today a lot easier. But yeah, I’d encourage you all to check that out. It’s called Money and Payments: The U.S. Dollar in the Age of Digital Transformation. It came out last Thursday. As you said, Sara, a lot of people have been waiting for this for—since last fall.
I guess, you know, the question’s about is this a commitment. I think right off the bat, you know, there’s language in there that says that the broader U.S. government—the executive branch and Congress—would hopefully have some support in such an endeavor to issue a digital dollar, if we might call it that, ideally in the form of a specific authorizing law. So that language actually is in the paper. So there is a nod here to the broader public stakeholders.
I think the paper is really interesting. I mean, for people that have been following CBDC—like Alana, Marion, and yourself—for a while, like you said, a lot of this is fairly known, but I think it’s a good distillation of the key issues. And so it’s acknowledging a variety of those questions, design choices that would confront the United States if we did decide to issue a digital dollar, and then welcoming comment from a lot of other stakeholders in the private sector, amongst think tanks. Really, I mean, it’s not an exaggeration to say that everyone in the world would be impacted by this. Everyone is impacted by the dollar. It is the preeminent currency around the world. So truly looking for public comment from all of these different stakeholders.
You know, I can get into more on how it would work maybe a in bit after everyone else has had a chance to introduce themselves.
EISEN: Sure. Well, and I was curious, Alana, your perspective on this because I was wondering if you thought we needed a central bank digital dollar coming from your world, where we have bitcoin and so many other cryptocurrencies, which are like—you know, they sort of function that way, although you can’t really buy stuff with them. Do you think central banks need to have their own digital currencies?
ACKERSON: Thank you, Sara. You can’t buy anything with them just yet, but I think we’re seeing some interesting work being done around sats and ways to have more adoption.
But you know, I—first, it’s a really exciting year. I think there are about sixty-four central banks that are exploring a CBDC right now. There’s so much activity. And I think that that is, obviously, phenomenal confirmation for the technology behind, you know, what’s being done more broadly in blockchain and in different digital assets.
But you ask the right question, which is: Is the right path forward for, you know, the Fed to pursue a digital dollar? And I think that there are good arguments to be made for why they don’t have to do it themselves. You know, I don’t think that a Fed-driven currency changes things like the inflationary aspect, you know, of currency or the government’s ability to print money at a faster pace. It doesn’t solve for some of the problems that other digital tokens are designed to do. And so, you know, what I would say is it’s worth, you know, the Fed exploring supporting, you know, public blockchain and really looking at stablecoins, which are currently quite prolific, right, because a CBDC would take years to be rolled out. You know, and a stablecoin is a fantastic way to settle in and out of currencies right now, whether it’s bitcoin or USD.
And so I think from a policymaking perspective, you know, the Fed can have a role in auditing whether the reserves are there, right? And in some cases, as with Tether, there should be concerns. But with a stablecoin like USDC, CircleCoin, you know, the backing is much more stronger and you can send money cheaply, almost instantaneously, right? So wire transfers become—you know, are expensive and take several days to settle, so using a stablecoin can make financial transactions much more convenient as well as being able to earn higher yields, right? So I think that there are multiple paths to explore right now, and a coin like USDC is essentially a programmable dollar, right, that unlocks a whole world of applications within financial services.
EISEN: I’m excited because I think we’re going to get disagreement on this point. Marion, why do central banks need to issue their own digital currencies if we have things already out there like stablecoins?
LABOURE: Yeah, no, that’s a good question. And thank you very much for having me. I’m very glad to be here.
Yes, as Sean and Alana mentioned, this is becoming a big issue. And in my personal point of view, it’s no longer whether or not it’s going to be issued, but when. We have almost 90 percent of central banks which are working on a CBDC and there are several reasons for that, to answer your question, Sara.
I mean, first, it provide a cash alternative. So, as we have seen during the pandemic, cash as a mean of payment has been declining, and it’s a good way to provide a cash alternative.
It’s also good for financial inclusion. As we know, we have 1.7 billion inhabitants on Earth which are financially excluded, without a bank account, and half of them have a smartphone. So it could be a nice way for people to be able to save and invest money.
There are also some competing—competition with other private currencies and CBDC. It can be also a good way to modernize payments, and I’m thinking especially here cross-border payment improvement. It could be much more efficient and cheaper.
It can so link payment to identity, contrary to cash. We know that cash is also used for illicit activity and money laundering, and if we are able to link payment it can be a nice way to trace and avoid illicit activity. So it’s not necessarily what we have to know, and there are a lot of questions about anonymous transactions versus being able to link every payment and to trace every transaction. But maybe we’ll come back to that.
And it’s also a nice way to enhance international currency status—and it was mentioned, by the way, in the Fed paper—especially given that China is about to release its CBDC for the Olympics Games.
EISEN: No, so, Sean, you’ve looked into the China central bank digital currency experiment. They’ve launched it. They’re about to try to put it into a more sort of prominent international place with the Beijing Olympics. How is that going? And should the U.S. feel threatened by that?
CREEHAN: Thanks for the question, Sara. And I should add, as I—as I start to kind of answer with my personal comments, that they reflect my own personal opinion, not necessarily those of the San Francisco Fed or the Federal Reserve System.
Yeah. So great question. And getting to that comment from—
EISEN: Way to protect yourself.
CREEHAN: (Laughs.) Getting to that comment from Alana about competition from stablecoins or elsewhere, I would kind of set some context here, which is the Chinese have been working on this for a while but they did really start to announce more progress after Facebook announced libra.
So if we really think about all these different actors at play here, I would agree I think it’s good to have a lot of innovation in the space from a variety of different parties. You know, I agree with a lot of what Marion just said in terms of the importance of central banks being involved in all of this.
As far as how it’s going in China, I think the way I would describe it is it’s a—it’s a pretty substantial pilot. It’s an experiment, right? So the latest data that we’ve seen as of October of last year, maybe about 10 billion U.S. dollars’ worth of transactions have taken place using CBDC over these pilots. To put that into context, the number of non-cash—or the value of non-cash digital payments in China in 2020 was over $600 trillion. So we’re talking about 0.0001 percent, maybe. So it’s definitely a pilot.
So I would say as far as we can tell it’s going well. I think we’re probably—the world is going to learn a lot about important design choices, the technology here. Some of it is, of course, proprietary. In my view, other central banks that might be interested in issuing their own CBDC will be able to learn and respond from China’s work here.
I mean, I think there’s some extent to which this was a—sort of interpreted as a Sputnik moment, right? China announces this CBDC and everyone says, oh gosh, you know, what’s the U.S. going to do? The dollar is going to be disintermediated. I think one point I would make there—and this is particularly relevant for this CFR audience—is until China were to liberalize its capital account and really open up its financial sector in the way that the U.S. financial sector is opened up, that puts a limit on the utility of a yuan, whether it’s a paper yuan, whether it’s—whether it’s transferred using an existing payment rail—digital payment rail, or whether it’s using a CBDC. So I think that’s really important context as we watch the evolution of China’s own CBDC, is, you know, what’s going on with their—with their capital account and with their financial system liberalization, because I think that’s a really important prerequisite for any currency becoming anything close to the dollar.
EISEN: There’s also safety questions, right, Alana, with some of these—China’s, with the cryptos, with all of them—which is if they’re going to replace cash and be a real means for payment and savings for people, how do we make sure that they are safe and privacy protected?
ACKERSON: Right, and that goes both ways, right? I mean, Sean mentioned design decisions being made. And with any new piece of technology, any new process, right, there’s intention embedded in that as we create. And you know, one of the things to always wonder is about, is the moves that China’s making, you know, are they enabling, you know, the Chinese government to have more surveillance and more control over capital movements, right? Whereas, you know, I think in the U.S. you would see a lot of support for a public blockchain that isn’t controlled by any single entity but, rather, supported, you know, by minors all over the world. And that, you know, I think would be far more effective in accomplishing the objective of distributing capital to American citizens broadly, particularly in the last couple of years as we’ve seen challenges around that on the back of various shocks and events.
And so, you know, I think that oversight is always an important design question, right? You’d want something that is publicly auditable, right? We need that transparency. And you want to not have concern over surveillance when it comes to privacy sort of in both directions. So the main questions, I think, for us are about, you know, can you audit; what is behind, you know, the token; and you know, what type of surveillance is embedded; in order for there to be broader adoption and trust.
EISEN: Marion, how do you think about it? Do you think about it as a competitive race for these central banks, or how do you think about the Fed’s role and timing of launching a digital dollar—and Europe, for that matter, as the second most widely held reserve currency?
LABOURE: Yeah, no, that’s a good point. And I think, yes, there is a competition.
And to go back on Sean’s point on China, I mean, China started very early, in 2014, and they started for two different reason: for financial inclusion and as a cash alternative. So they started very early, and I would say that three factors played to accelerate the effort and speed up the process. First, there was the trade war with the U.S. Second, as Sean mentioned, the Facebook announcement of libra, or diem, and cryptocurrency stablecoin. And the third reason is probably the pandemic as well, which accelerated the effort.
And yes, there is kind of competition between all the other regions in the world. China is clearly leading the race. We have a few countries which have already launched their CBDC, but they are definitely smaller. And China could propel CBDC into the mainstream—into the mainstream for four different reasons, I would say.
The first reasons that plays for China, it’s probably government intervention. The government heavily supports infrastructure and sponsors infrastructure in China.
A second sector that plays for China is demographics, the benefit from younger demographics, which is much more tech-savvy.
Cultural differences, as well. China started paying via phone early 2000s, while we just started in the U.S.
And the fourth reason is probably because in the U.S. and Europe we are heavily relying on cards, so we have, like, big leagues payment, I would say, while China basically transitioned directly from cash to smartphone payment. And cash is not very efficient to use, while in Europe or in the U.S. we are relying on cash payment and it’s very easy to take your card, take on that less, while it’s less efficient to pay cash. So the transition was more natural for China from cash to smartphone payment than it is in Europe or in the U.S., where we are used to pay with our credit or debit card.
And your third point, Sara, was for Europe. For Europe, so the ECB did—the European Central Bank did big consolidation projects. They have decided to move in a two-year exploration phase. Christine Lagarde, the governor, was pretty vocal, and I think a lot of research has been done and is—the ECB’s clearly working on the—(inaudible)—the ECB. And we might, if it’s successful, have a CBDC probably in ’25-’26, I would say. But nothing has been decided and it’s still unsure at this stage.
EISEN: It sounds like you guys all—I mean, it sounds like you all agree that this is where this—this is where it’s moving. And it sounds like you’re all kind of proponents of the idea of central bank digital currencies, although, Alana, I think you feel that stablecoins are a good alternative. What about the drawbacks? I mean, I get the point that they’re—the pros, there are a number of them. And financial inclusion is right at the top of the list. It’s what a lot of you focus on. But I’m curious about, for instance, what would happen to the commercial banking system, to the financial system, Sean, you know, if people weren’t—if they didn’t have those deposits then to make loans. If everyone just had their digital wallets from their Fed issued currencies. Like, what would happen to banking in America?
CREEHAN: Great point. And this is one that’s actually covered in the white paper. And the term that we use as central bankers and, more broadly, in the financial system is intermediation—the importance of intermediation. And so the Fed actually uses this language in the white paper, the idea of intermediated CBDC. And the point there is exactly what you’re saying, to consider the impact on relatively low-cost deposit funding, or banks. So, yes, if you imagined a world where there was an unlimited CBDC wallet that someone could hold an unlimited amount in, and there’s interest bearing on it, that would change the decision for an ordinary household of whether to store that money with that bank or with another provider, or is that even held at the Fed?
So I think what you’ll find when you read that white paper and other similar issuances by kind of international regulators, and for international settlements or other central banks, is really carefully considering the aspect of banks. Whether it’s a token-based—what we would call a token-based CBDC, or an account based. So an account-based CBDC would be held through some sort of supervised institution. Again, it’s possible, though, that it could be—it could not be a bank. It could be some sort of—some other sort of financial intermediary. And that would raise all sorts of questions about how do you assure the security of that—of that holding with that entity.
But, yeah, so I’d say that’s clearly an issue. All sorts of issues around security and prevention of criminal activities in the financial system. I think that’s one—another area that you see heavily in focus. The Chinese are also grappling with this issue. So how do you create some sort of privacy? I mean, putting aside whether or not we trust what the Chinese government may be saying about privacy and the use of CBDC, how do you—can you create anonymity in the use of CBDC to mimic cash, because that is an important driver, the use of cash around the world, let’s not kid ourselves, even here in the United States.
Some people may use cash because they get—the merchant takes cash because it costs them less to take it, and so the price might be lower for that consumer. But some people may be using cash because they don’t want the government to know that they’re doing something. Maybe they’re trying to avoid taxes. I mean, that’s not—that’s not legal, but it happens. And so let’s be real about that driver for cash. But so—but so thinking about government’s desire to kind of keep track of all of this financing activity while providing privacy perhaps for lower-level transactions. We’re seeing discussion of whether low-value transactions could be private using a CBDC, whereas higher-value transactions wouldn’t be. So those are other issues beyond the funding that you mentioned, but I think there is a lot there that we have to be thinking about.
EISEN: Yeah. I mean, these are issues, Alana, that the crypto world has been grappling with for a long time, right? Issues of privacy, issues of illicit activities, money laundering, criminal, terrorist financing, what ultimately it’s going to mean for the banks. (Laughs.) Like, these are issues that you guys talk about all the time, right?
ACKERSON: You know, and so much progress has been made, you know? And Sean hit on tax compliance, right, which is, you know, one expression of how the technology has used so quickly that, you know, sort of regulation of that technology is racing to keep up. And we’re learning new things every day. You know, I’m really encouraged by all of the infrastructure work being done on the back of the momentum you’re seeing into the digital assets base in just the last, you know, year or two. You know, it still is a fraction of what you see in traditional financial services, right? So I think maybe as of kind of mid-year last year, more than a billion a day was being sent via U.S. DC. And so when you think about the amount of transactions that would need to occur to displace sort of global financial services, it’s massive, right? And there needs to be a lot of infrastructure built up around that to be able to scale.
But overall, I’d say the fact that digital currencies are now part of the—you know, sort of the public vernacular, right? That the Fed is publishing reports like the one that just came out, we’re having this conversation about whether or not the Fed should be involved in creating, you know, any type of digital infrastructure, is really a vote of confidence for the overall sector.
EISEN: But what is it going to mean, ultimately, Alana, for a bitcoin, which right now—you know, it’s why we’re talking about a Federal Reserve-backed digital currency, because bitcoin has just halved in value in the last, I don’t know, few months—basically since November. And it’s been extremely volatile. Not necessarily on digital currencies, but the change in monetary policy. So I’m just curious what a further move into this space, the digital currency space from central banks, is going to mean for the assets that you invest in and that you cover.
ACKERSON: Yeah. I mean, I can’t imagine it’s anything other than a very stabilizing force. You know, one of the things that we forget is—you know, particularly when faced with short-term panic selling, as we’re seeing now—is for much of the world bitcoin equals, as we said on this, access to capital, right? Access to capital that wouldn’t otherwise exist. The introduction of a stable financial mechanism that otherwise wouldn’t exist. You know, in the U.S. when we hear crypto, we think of speculative investing. But when you go to other, you know, regions, it is really the only lifeline to a livelihood and to be able to safely transact any stored value, right? And it’s important to keep that in mind as we watch this industry mature.
EISEN: And there is the monetary policy question, Marion, which Alana brought up earlier. How does monetary policy conduct itself in an age of central bank digital currencies? Or even just increasing interest and investment in cryptocurrencies, and all of these other decentralized finance? Is that a threat to the way that monetary policy is done?
LABOURE: I will say it’s a threat. And the thing is, it really depends on the design of the CBDC. We don’t yet know if a CBDC will be treated as cash, so basically non-interest-bearing, or if the central bank will decide to apply a negative interest rate, positive interest rate. So it really depends on the design.
And, obviously, it depends as well how it is done in terms of wallet. For example, the European Central Bank is talking about a cap, stating that in your CBDC wallet you could get only 3,000 euros, in order to not destabilize the commercial banks.
And it also depends, as Sean mentioned earlier, the setup and the disintermediation it’s going to cause.
So, for example, you have, like, three different setup. The first setup is the one that we currently have. So, for example, consumers are holding their bank account at the commercial bank, and the commercial bank is liaising with the central bank.
The second setup that you could have, it’s basically consumers holding directly their bank account at the central banks. And in this case, we don’t need commercial banks any longer.
And the third setup that you can get—and this is the one which is the most plausible and the one adopted by the PBOC, the central bank in China—it’s where, basically, consumers hold their bank account at the central bank, but the relationship is intermediated by the commercial bank. And this is this kind of model that we are very likely to get in most countries. And one of the reason is probably, as Alana and Sean mentioned, it’s—the commercial bank is handing the QIC (ph) and all these kind of regulatory process, and it will add more responsibilities onto central banks.
EISEN: What do you think, Sean, as far as monetary policy relationship in a world of central bank digital currencies?
CREEHAN: Yeah. I think Marion nailed it there, really whether or not the design is to—the choice is to have interest-bearing or not, I think is a key characteristic. I also agree that there’s a lot of consideration going on beyond just EU on putting a cap on the amount that someone could hold in the wallet. And that would make a big difference in terms of the transition of monetary policy as well, in terms of bank funding. But, yeah, I would say, you know, of course I’m not a monetary policymaker. There’s a lot of complex factors here. But I think, again, keeping the banks involved in—or some other kind of supervised institution involved in the intermediation of CBDC is something that’s, I would guess, likely, but definitely unknown.
But, you know, getting back to your overall question of, like, are we all leaning towards this is something that’s useful, the way I look at this, there are a lot of different ways to conduct noncash payments. I think one question is, do we—with CBDC, are we looking to make something more like cash-plus? You know, what are the features of cash that we like, and how do we improve upon them? You know, for me personally, if I want a savings—if I want a decent savings yield, there’s other products out there in the existing financial system that offer that fairly securely. I can get a sense of the risk profile, if it’s a money market savings account, if I want to get up—take more risk in terms of equities.
Those options are there in the financial system, particularly in this country. So what are we really trying to solve for? And, you know, you mentioned inclusion. I think that’s a really big one. You mentioned before the concerns about privacy. I would broaden that to something more—something more akin to data rights in general. So, yeah, privacy is one of our data rights, but what are other potential data rights? To what extent do we have ownership or a right to use our financial transaction data to get access to other financial services? And so that’s one thing that I’m very excited about and bullish about in general, not just with something like a CBDC, but with other sorts of non-cash—or, yes, non-cash payment rails, to the extent that we can now more easily track our activity and use it to gain access to a loan, or something like that.
And let’s also acknowledge that FedNow is out there. You know, people want it to happen more quickly than it is, but it is coming. That’s for sure. And so there are other existing Fed efforts to provide close to real-time payments and to solve for cross-border problems. There’s lots of things going on there. And so to the extent that you can give a consumer, or a corporate, or a small business access to Fed-backed digital payment rail in FedNow, that may solve a lot of these challenges as well. So, again, coming back to do we want cash-plus? What are we really looking for here? So lots of questions.
EISEN: Good questions. Yeah, I mean, because, like, we all have credit cards, right? We have things like Venmo. We have—I mean, we don’t use cash that much anymore, to Marion’s earlier point. So what—so how would this—what would this be? Would I have an app on Square where I can have my digital Fed-backed dollars? Like, how would it work, Sean?
CREEHAN: Yeah, I think—I think that’s right. Again, there’s a lot of design choices. I think another interesting question is could it work offline? And I think, particularly from the perspective of financial inclusion, or really just utility in general, you’d want something that could work if you’re buying a hotdog on a subway platform where there’s no cellphone connection, right? Then there’s security concerns. How do you prevent double spending of one CBDC? But, yeah, I think the idea is generally we would imagine it would be working on a smartphone. And you’re right, today, particularly in the United States—I think Marion alluded to this one reason why this may be not as widely adopting quickly as it is in other countries is because we don’t have—we already have these existing tools that work well, whereas in China they didn’t have them.
But I’d say another angle to think about—and this is—when you think of financial inclusion, you often think of unbanked consumers. But we also have small businesses out there that pay a fairly hefty interchange fee to use the existing payment card networks, right? So they’re accepting a payment card, and it could be as high as 3 percent. All of us on this call probably use a rewards credit card. We’re playing that credit card game, trying to get rewards back. And that comes from a place of privilege, but that costs money to the small businesses. And if you think about that reward you’re getting back, that’s a rebate on your use of a digital payment system. Can we lower that cost? That would be something that would be another feature of all of this. So, sorry, I went a little bit farther than how would this actually work, but I think it’s—it would work on your phone.
EISEN: No, that’s very interesting. No, but I think it gets, Alana, to this point about what problem are we trying to solve for here when it comes to CBDCs?
ACKERSON: Yeah. When we talk about, you know, what the future of finance should look like, I think we all are excited about the promise of financial transactions being faster, cheaper, more transparent, inherently less risky for everyone. And that has implications for everything from, you know, running payroll to, you know, being able to have more transparent and stable donations to nonprofits, to cheaper payments, right, you know, as Sean was saying. And so there’s—you know, the implications are far-reaching. And it makes, you know, this conversation all the more exciting.
LABOURE: Yeah, I’d like just to jump on Sean and Alana’s point about the end of cash. Yes, I mean, cash has been declining, and especially since the pandemic. I mean, the pandemic has probably accelerated the end of cash or the decline of cash by three and five years. Just to give you one number, in the U.K. currently, we estimate, and Square estimates that 40 percent of businesses are cashless. So definitely we see the decline of cash as a means of payment, but it doesn’t mean that it’s the end of cash. It’s not the end of cash because cash has a stored value. It’s clearly there.
And just to give you one number, so we conducted a big survey. We have interviewed 3,600 people for a Deutsche Bank survey. And we have over 60 percent of people—and it’s true for the U.S., but for Europe and for China as well—who believe that cash will always be there. And when we look at cash in circulation—it’s true for the U.S., it’s true for the eurozone, it’s true for Japan—cash in circulation has been multiplied by two over the past twenty years. So we need to distinguish cash as a store of value, as a safe haven, which has been clearly on the increasing side, with cash as a means of payment.
And to answer your last question, Sara, that will CBDC replace cash? I would say not yet, for two reasons.
The first one, it’s because, again, we have 1.7 billion unbanked people relying purely on cash, which are unbanked. So half of them have a smartphone, so a CBDC could help, but half of them don’t have a smartphone. So we still need cash for the unbanked people.
And the second reason, which is probably more realistic as well, it’s CBDC—there are a couple of countries—(inaudible)—for example the Bahamas, Eastern Caribbean, Nigeria, very soon in China and Jamacia, but we are still far from there in the U.S. and in Europe.
EISEN: What is the timeframe here? What are you looking at? How long is this going to take, Sean, to get a U.S. digital dollar? Is this, like, in the next year or in the next twenty years?
CREEHAN: That question, I think, goes well beyond my paygrade. (Laughter.)
EISEN: As spokesperson for the Federal Reserve.
CREEHAN: (Laughs.) Well, I think a lot of the technology exists. You know, you see the Boston Fed has an ongoing collaboration with MIT. They’re doing a lot of interesting work there. So I think a lot of this comes down to what’s said in the paper, which is, is there direction and support from the broader U.S. government? It’s there in the paper, it’s asking for Congress and the executive branch. So I think that’s a broader question. Again, probably beyond all of our expertise, and, you know, where that—where the politics and policy environment goes around this. But certainly, I think, to the extent that this is viewed through the lens that a lot of people in the Council on Foreign Relations tend to view the world, which is international competition, maintaining the strength of the dollar. But that pressure point is not going away. And the pressure from stablecoins and crypto is not going away, despite that decline in the market that you mentioned earlier, Sarah.
So I wouldn’t want to predict a timeframe. But I think where there’s a will it could probably go more quickly than you think. But, again, let’s talk about China. Again, I said 0.001 percent is that pilot. Out of the total of 2020 now cash payments. And that’s after working on this, as Marion said, since 2014. So it’s not going to happen overnight. And it’s also an interesting question. Like, let’s acknowledge and be grateful for cash as it exists today. I live in Oakland, California, where we’re in earthquake country. And it’s encouraged that I have a certain amount of cash in my emergency go-bag because if power’s out I can’t use my bitcoin. I don’t know, maybe I could use my CBDC with a QR code. I don’t know how that might work. But, you know, cash is still going to be—have to play a valuable role.
You talk to Fed cash folks all the time, they’ll point to examples like Puerto Rico, where there’s a natural disaster and they all just kind of bring a lot of cash into that market because it’s just necessary for the economy to keep functioning, for society to keep functioning. And I have trouble seeing that going away in our lifetimes. You know, in a Star Trek future 300 years from now, I don’t know, maybe electricity just comes through our kinetic energy, and the sun is shining down on our phone, and we don’t have to worry about power outages. But until that point, I think cash is at least going to be some share of a wallet.
EISEN: While we’re on the predictions portion, Alana, what do you think is going to play out here in the next year or two, from your vantage point?
ACKERSON: I think certain stablecoin rails have a significant head start and can add real value now. I think in general, you know, in the private sector we’ve seen the ability to move at a really good clip ahead of a government institution in building out broader technology infrastructure systems. And so obviously, you know, I am always a huge proponent of significant partnerships in that area. And so what I would predict is very real traction on the sort of public blockchain infrastructure side of things, because I think that’s where we’re going to see the best outcomes.
EISEN: And what about you, Marion? What should we watch in the next year or two? Before we open it up, because I think we’re getting some good audience questions.
LABOURE: Yeah, so just to follow up on what Alana mentioned, I would say two, probably, indicators to watch in 2022, especially when it comes to cryptocurrencies.
The first one is inflation, who could play on the downside role. I mean, if central banks raise rates, bonds are becoming safer to invest with their yield.
And on the positive side for cryptocurrency, I would say regulation. Regulation is clearly coming. It’s coming in the U.S. It’s coming in Europe as well. And if we have regulation, my personal point of view—again, I should have mentioned that, as Sean, I work in research, so my view is a personal view. It doesn’t represent Deutsche Bank view. But we should expect to see a robust framework next year in most advanced economies. And if we have a robust framework, I would expect more corporates, more people to invest in it, to accept it, to buy it, to sell it. And if we have more people, we have, like, adoption rates increasing, and we should have higher liquidity and more price stability.
Because one of the issue of bitcoin, I think Sean mentioned that, is price stability. It’s not very stable. It happened quite frequently that bitcoin dropped or increased by 10 percent in a day, basically, sometimes. And one of the reason for that, it’s probably that it’s a niche market. So even if the market cap is very high, the volatility is high because the average bitcoin exchange is very small.
EISEN: Yeah. Well, I do want to get to some questions from our audience. Alexis, I think we’ve got a few. Go for it.
OPERATOR: (Gives queuing instructions.)
We will take the first question from Shirin Mohammadi, who asks: Are blockchain-based CBDCs as environmentally destructive as cryptocurrencies?
EISEN: Good question. Anybody want to take it?
ACKERSON: So I’ll—yeah, I’ll jump right in, because I think, you know, perspective is important. When you think about bitcoin’s electricity consumption, and we read headlines where it seems like it’s a lot, if you compare it to what the traditional financial system uses, it pales in comparison, right? I think the entire bitcoin ecosystem probably uses less than half the energy of our traditional banking system, and all of its infrastructure. So it’s important just to kind of have context of the work that’s being done.
That being said, as with all industries, it’s important to be thoughtful. And it is—it is an energy-intensive part of the ecosystem. And so, you know, the Crypto Climate Accord is doing some good work in advocating for alternative sources of energy. You see a lot of leaders in this space. Foundry, another DCG subsidiary, which is one of the top mining pools in the world, you know, has been doing quite a bit of work here as well. So I think it’s—I think that we’re seeing some real progress, but it’s important to contextualize the headline numbers.
CREEHAN: So I’m not a technologist, so I can’t fully explain the kind of computing power necessary versus a bitcoin. I think generally my understanding would be because it—most of what we’re imagining is not a trust-less network, it’s trusted intermediaries that would be involved, it would just be a very different set of requirements. But just on the—on the context setting for bitcoin and others, I mean, it may be true that it’s roughly have of the energy expenditure of the banking system, but it’s nowhere close to even half of the social utility of the banking system, just in terms of what the global banking and financial system actually does for billions of people—you know, putting aside how everyone feels around bitcoin.
It just—I don’t think it’s a really—I don’t think it’s comparable in that sense. And to the extent that the world has a finite amount of greener energy or computing power generally, there’s a lot of other challenges that need to be solved. And so I think there’s a—there are real claims on that energy as well. And so that’s something that I think is definitely important as we consider the tradeoffs in the use of a crypto versus a CBDC. But, yeah, on the environmental impact, I think generally because it would mostly be on a trusted network, it would just be a different requirement in terms of the computing power and the energy used.
LABOURE: Yeah. And just to follow up on what Alana and Sean mentioned, to be on the positive side, there are some possible solutions for decarbonizing crypto. And just to sit of a couple of them, I mean, first, we can transition to renewable energy sources. And this is what El Salvador is trying to do. So it’s not easy, but it’s what they are trying to do in short term, add energy from volcanoes. There are also some ways to impose taxes to incentivize carbon-free crypto mining. Like, for example—(inaudible). One possible way to do that is probably to switch from proof of work to proof of stake for the course.
So, as we are currently seeing for Ethereum, given that it’s supposed to create transition by mid this year, we can also verify transaction of the blockchain, for example, with the right network. I mean, it’s what El Salvador is doing. And one—I mean, another way to do that is probably also to pre-mine the tokens. We can issue (mine order ?) tokens, so no more energy is required to mine a new token. And it’s what, for example, XRP is doing.
EISEN: Great. Alexis, did you have more questions for us?
OPERATOR: We will take our next question from Andrew Abrudescu, who asks: What would CBDCs mean for existing cryptocurrencies, such as bitcoin and Ethereum?
EISEN: Alana, you think it would be good, right, for everybody?
ACKERSON: CBDC currencies? You know, I think it come back to the question of surveillance, trust, how it’s being structured and setup, which would lead to how much adoption we would see. You know, I think depending on execution, some CBDC currencies would have little impact on bitcoin, how prolific bitcoin is in a particular use case or region of the world. So it’s very much about execution.
LABOURE: Yeah. Just to follow up on what—on what Alana said, I think there is similar things. I don’t think there is much impact on that. I would tend to see it as it depends how successful it’s going to be. As long as Ethereum/bitcoin had a very low market cap, innovation was considered as good by governments. Given that now the market cap is very high, close to 0.73 (on this day ?), regulators, central banks, governments are clearly monitoring it. If it’s becoming extremely big, I mean, at some point I think it could compete. And I wouldn’t be surprised if they are harshly regulated or even banned, as is the case in China for example.
CREEHAN: I would just add I think it, again, comes back to what we think bitcoin, and Ethereum, and other crypto are used for. So to the extent you believe that bitcoin might be digital gold and a kind of an alternative asset as part of a broader allocation in a portfolio, then to the—it might be eating away from gold share, but I don’t think it necessarily is impacted by the rise of CBDCs that are meant to be used in the economy for transactions and other sorts of value in a savings account. So the extent that that’s the vision for bitcoin, maybe not as much of an impact. But to the extent that you’re thinking that bitcoin is going to be used in small-dollar—or, small-bitcoin transactions, then that’s a totally different conversation.
EISEN: Alana, is bitcoin going to be used in transactions eventually?
ACKERSON: Yeah. So I think I, in passing, mentioned this idea of sats becoming more popularized. And so, you know, for those who—
EISEN: What is that?
ACKERSON: Yeah. For those who aren’t as familiar, so sats or satoshis, are a fraction of the bitcoin. One of the biggest challenges in using bitcoin as a substitute for fiat right now is you can’t really transact in a bitcoin to buy a cup of coffee, right? So holding for some of the things that Sean talked about in terms of structural challenges around always having Wi-Fi or internet, and, you know, that’s a whole ‘nother discussion, you really need to be able to have smaller increments of payment, right? Much like we use pennies to the dollar. And so if one bitcoin equals 100 million satoshis, you can begin to transact in sats for regular commerce, right? Buying a sandwich for lunch. So I think we have to see more innovation in how we think about using bitcoin and other digital, you know, assets for, you know, sort of more regular payments.
EISEN: Alexis, do you have more questions for us?
OPERATOR: We will take our next question as a written question.
Is there a role at all for international organizations, like the World Bank or IMF, in helping countries develop policies or facilitate cross-border policies surrounding digital currencies?
EISEN: Good one. I was going to ask that too. The IMF is gearing up for this, for whatever it’s worth. They say that more than 100 of their members have plans for digital currencies. Do you think there’s a role there, anyone?
CREEHAN: Marion might have thoughts as well. I think so. The Bank for International Settlements is also facilitating dialogue amongst major central banks. So I think there’s certainly, to the extent that there already is existing multilaterals that provide technical assistance to countries that are trying to develop their financial systems in a variety of ways, this is just one other topic that will be part of that. There’s so much attention paid to financial inclusion in developing countries. It’s only been reinforced by the pandemic, where we’ve seen that those countries with more functioning digital infrastructure were just better able to respond to provide, you know, basic stimulus and relief to ordinary citizens. There’s all sorts of potential gains to improving your digital infrastructure as a developing country, digital financial infrastructure. So I think a lot of multilaterals like the World Bank and IMF will be—will be really interested in this topic.
LABOURE: Yeah. I think exactly the same that Sean mentioned. Yes, the World Bank is looking at this topic on the financial inclusion side. The IMF—International Monetary Fund—is also looking at that, at this topic, currently more on the stability/monetary policy side. And the Bank of International Settlement is clearly looking at this topic very deeply, actually. The G-20 is also looking at this topic. And more probably to—they are trying to set up international groups, bodies to work on that on that topic to foster cooperation/collaboration between central banks with the best practice.
EISEN: OK. I think we have a few more to get to.
OPERATOR: We will take our next question from Tope Odunsanya with Houlihan Lokey.
To utilize existing stablecoins instead of CBDCs what obstacles are top of mind as we think about distributing tokens from existing holders into the wider economy?
EISEN: Alana, you’re the proponents of stablecoins, I think.
ACKERSON: You know, I think access to more secure infrastructure is always going to be sort of what will democratize the use of various digital assets. And that’s true for any new technique that’s being introduced. So distribution to the wider economy, I think it’s education, it’s continuing to build up infrastructure around storage and exchanges. But I don’t have thoughts beyond that.
EISEN: Anybody else want to take up stablecoin?
CREEHAN: I think generally, to summarize it, I would say just issues of trust as a consumer. So, you know, worrying about the issuer. Are there reserves, some sort of stable security held against that stable coin? In my mind, I kind of think of this as similar to, like, a money market mutual fund. There’s been a lot of reform and different regulatory approaches since the 2008 crisis, and then more recently in the pandemic, a lot of different activity there. For those that are interested, the president’s working group did issue a paper on this late last year. So I would advise checking it out. But, yeah, just—I think the barrier is probably not technical. It’s just the issues of trust, which gets into some of the broader topics we’ve already been covering.
EISEN: Yeah. Good. Alexis, one more?
OPERATOR: We will take our next question from Will Barnes.
How far do you expect that wholesale CBDCs could replace conventional financial market infrastructure for applications such as settling securities trades or making cross-border interbank payments?
EISEN: That’s a good one. Marion, I mean, this is a big part of why some people see the need for CBDCs, especially the cross-border issue. But what about the rest of the financial markets and the system?
LABOURE: Yeah, no, that’s a good question. And actually, we mostly talked about retail CBDC, but wholesale CBDC, it’s a big topic.
Just to set up the context, I think from the latest statistics released by the Bank of International Settlement(s) we have definitely more central banks working on retail than wholesale. But this is a big topic. This is something which is actually advancing. For example, the Banque de France is actively working on this. They have issued the first digitalized bonds last year. So this is clearly something which is—which is under scrutiny. The European Investment Bank also has issued a bond as well. So, yes, it’s something which is definitely looked at, and which is advancing rapidly.
ACKERSON: Marion mentioned the Bank for International Settlements. And, you know, as an umbrella group for central banks, it’s interesting to watch what its focus is. And you see it going all-out on CBDCs this year. Tons of research initiatives across central bank digital currencies and DeFi applications, you know, it’s lined up for 2022. So I think we’re going to see an incredible amount of activity there.
EISEN: I think we have time for one more question.
OPERATOR: We will take our next question as a written question.
How do we get the average citizen to understand this kind of technology? And do they actually need to understand it in order to use it?
EISEN: That’s a good one.
CREEHAN: Yeah, it’s a good question. Sorry, go ahead, Alana.
ACKERSON: What I was going to say—you know, I think that, you know, sort of financial literacy is always an incredibly important area for us to focus on as a, you know, sort of broader community. It’s important for everyone to understand, you know, how they can get access to capital, how they can get access to means for saving and transacting, to be able to engage in any number of economic activities. I think, you know, the onus is somewhat on, you know, sort of the key innovators in this space to continue to be very transparent about what’s being developed, how it can be accessed, the choices being made—coming back to intentions that I talked about earlier. Everything from sort of how various sort of protocols are securing, you know, their infrastructure, to who strategic partners are. So the more transparency, the more financial, you know, literacy resources, the better. And I do think, you know, if you are going to use a piece of technology, there is a responsibility to understand it and to engage with it responsibly, always.
CREEHAN: So—
LABOURE: Yeah, no, I’m going to—sorry, Sean.
CREEHAN: Go ahead. Go ahead.
LABOURE: Yeah, I’m going to echo what Alana just mentioned. And I think financial literacy is key, especially when we see the low level of financial literacy in OECD countries. And I think education has a big role to play here. I’m going to push for it, given that, I mean, part of my job is to teach finance. But we really need to democratize finance, to make it accessible for everyone. And I think there is also a push for the financial sector, financial industry there, to make sure when they are expressing themselves and they are writing about finance, it’s feasible to understand for everyone because, I mean, when you take a mortgage these days it’s not easy to understand the numbers. It’s not easy—the language is not easy to understand. And I think we need to push for that. And Christine Lagarde actually is probably making sure that the ECB is moving towards that direction, making ordinary things which are online accessible for everyone much more understandable, and we need to go into that direction.
And I also think that we need probably more data, better data, more transparent data than what we have currently, in order to have—to make sure we really understand. And especially for cryptocurrencies, there is a lack of data. When we talk about energy, you have, I mean, many surveys, many papers on energy in terms of cryptocurrencies, but they are not very comparable in terms of what they are doing and collecting. And we need to have a much more clearer, better, and transparent data.
CREEHAN: So very quickly, just to piggyback, definitely agree. Financial literacy is important. I would say it’s probably more important for more sophisticated financial services. I think a payment tool should be pretty easy for a citizen to understand. And if it’s not, then maybe there’s some issues there. But I think you should be able to trust it. It should be safe and secure, fast, low-cost. So to the extent that that’s the kind of features that these alternative competing—competing alternatives are offering, then hopefully there’s just a lot of great options for people. And as long as they’re asking those basic questions, like does it meet this minimum standard, then it’s good to go.
EISEN: And final one from me, just to wrap it up, what if Congress doesn’t understand it? But what if, Sean, they don’t pass it? Does that threaten the U.S. dollar’s role as the international reserve currency, if everybody else is moving in this direction?
CREEHAN: I think something like FedNow, I think other rails can continue to run a lot of these features that we’re looking for. So I don’t think that’s the case, but certainly, you know, to the extent we want to pursue CBDC, it would be helpful to have everyone aligned, from a public-sector perspective.
EISEN: Marion, did you have a thought on that?
LABOURE: Yeah. No, I fully agree with what Sean mentioned. And basically, that was also China’s—(inaudible)—because the bill that the U.S. issued I think it was two years ago, a year-and-a-half ago, did mention the digital wallet, but we didn’t pursue it.
EISEN: Well, I think we’re out of time. That wraps it up. Thank you guys all for all the great audience questions and participation. A special thanks to Alana, Marion, and Sean for the excellent commentary, and for having me here today, on a very timely conversation, which we will pick up, and seems like will only get more exciting. Thank you guys all for joining us today. And thanks to CFR.
CREEHAN: Thank you, Sara.
LABOURE: Thank you.
ACKERSON: Thank you. Bye-bye.
(END)
Virtual Event
by Alana Ackerson, Sean N. Creehan, Marion Laboure and Sara Eisen
January 25, 2022
Council of Councils
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