At an event at the NYU Stern School of Business, Christopher Giancarlo, former CFTC Chairman and co-founder of the Digital Dollar Foundation, discusses his proposal for a US central bank digital currency (CBDC), and how that fits into the broader geopolitical environment. We cover:
- Why he has focused on pushing for a US digital dollar after leaving the CFTC
- How a US CBDC would be different from other stablecoins
- How the proposal is designed to build off of the traditional banking infrastructure
- What pilot programs would look like
- How a digital dollar would foster economic inclusion even though using the digital dollar requires owning a smartphone
- How it would handle privacy
- How the network would be secured
- Whether the US is falling behind China in terms of central bank digital currencies and blockchain exploration
- Whether Libra will be a proxy for the digital dollar
- How COVID-19 has affected the discourse around a digital dollar
- Whether the election will affect the future of the digital dollar
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Chris Giancarlo: https://twitter.com/giancarlo
Digital Dollar Project : https://www.digitaldollarproject.org
Previous Unchained interview with Chris: https://unchainedpodcast.com/christopher-giancarlo-on-the-craziness-of-becoming-crypto-dad/
Chris and Daniel Gorfine’s WSJ op-ed advocating for a digital dollar: https://www.wsj.com/articles/we-sent-a-man-to-the-moon-we-can-send-the-dollar-to-cyberspace-11571179923
Digital dollars in stimulus bills — March: https://www.coindesk.com/house-stimulus-bills-envision-digital-dollar-to-ease-coronavirus-recession
Pew Research on smartphone adoption: https://www.pewresearch.org/internet/fact-sheet/mobile/
FDIC survey on the unbanked and underbanked: https://www.fdic.gov/householdsurvey/2017/2017execsumm.pdf
Banks keeping some of customers’ stimulus money: https://www.nytimes.com/2020/04/16/business/stimulus-paychecks-garnish-banks.html
Why a digital dollar is politically more feasible at this moment than before: https://www.coindesk.com/the-overton-window-opens-for-a-digital-dollar
Ohio Senator Sherrod Brown also proposes digital dollar: https://www.coindesk.com/us-senate-floats-digital-dollar-bill-after-house-scrubs-term-from-coronavirus-relief-plan
Philadelphia Fed paper: https://www.philadelphiafed.org/-/media/research-and-data/publications/working-papers/2020/wp20-19.pdf
Receptivity in Congress to the idea of a digital dollar: https://www.coindesk.com/how-a-flurry-of-digital-dollar-proposals-made-it-to-congress
Libra white paper: https://libra.org/en-US/white-paper/#cover-letter
Congressional hearing on using FedAccounts and for stimulus: https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=406612
Hi, everyone. This is a fireside chat I had with Christopher Giancarlo titled Why the US Needs to Have a Digital Dollar at an event hosted by NYU Stern Chris is Senior Council to Willkie Farr and Gallagher and former Chairman of the Commodity Futures Trading Commission, and he is also affectionately known as Crypto Dad. It was an engaging discussion about what is certainly going to be a bigger story over the next several years, a quest to create a digital dollar. Enjoy the show.Crypto.com
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Chris, it’s so nice to see you again, and I know we have limited time and a lot to discuss so I’m actually going to, and this I swear I’m not trying to promote my own podcast, however I did an interview with Chris back in the fall which goes over a lot of his history. He was involved in many of the pivotal moments in the trajectory of bitcoin and its rise and adoption by Wall Street, frankly even you know, in its classification as a commodity which that was I think you know, something that a lot of people in the industry were concerned about. However, so despite all that history we don’t quite have time to go into all of it because there’s just so much more to discuss right now.
Chris has been working on something really big since leaving the CFTC which is the digital dollar project which is a partnership between the Digital Dollar Foundation, which Chris, you founded with your brother, Charles Giancarlo, and with Daniel Gorfine who’s the CEO of Gattaca Horizons which is a fintech advisory firm, and Daniel also is the former Chief Innovation Officer of the CFTC, and Accenture is also part of this partnership.
So what are you proposing?
We’re proposing a full-blown US central bank digital currency, a tokenized decentralized form of the US dollar that would be a bearer instrument but in digital format that would be as valuable on your mobile device wallet as is in your leather wallet in your pocket.
So after doing all these things like you know, working on bitcoin futures and bitcoin and ether, whether or not they’re commodities or securities, etcetera, how did you decide that this is what you wanted to work on next?
Yeah. So I came away from five years serving in government service with really sort of three observations. The first is that just as so much of our physical infrastructure, our bridges, our tunnels, our airports, our mass transportation systems that were once state-of-the-art in the 20th century have sadly been allowed to decay, decline, and some cases become obsolete in the 21st century. The same is true sadly about a lot of our financial market infrastructure and even our financial regulatory structure. What was once state-of-the-art has been allowed to age and decay.
The second observation is that we’re truly going into a new digital era. The first wave of the internet was an internet of information, this next wave is a wave of digitization, the internet of things of value and we’ve experienced that at the CFTC very early on, even before we got to bitcoin futures with the movement of some of the world’s major commodities into blockchain-based distribution systems, and then of course, recognizing bitcoin as a commodity and ultimately overseeing the launch of bitcoin futures and the bringing of institutional money.
But we really saw this new wave of the internet and its potential to render all things of value into a tokenized form, a digitized form, a decentralized form, a distributed form in some cases, and in fact a programmable form.
And that brought me to the third observation that nowhere is this clash between these antiquated systems and this new wave of digitization more critical than it actually our currency ourself, in the United States case that’s the digital dollar. If you stop and think about it most of the world’s things of value are priced in the dollar in international markets, whether they be agriculture commodities like corn, wheat, soy beans, cotton, whether they be precious metals, whether they be industrial metals, whether they be energy products, whether they be the world’s most important contracts and debt instruments are priced in dollars.
As all those assets move into a tokenized digitized form, how long can the dollar remain the world’s reserve currency if itself is not digital, programmable, tokenized alongside of them? Others see that opportunity and are taking rapid steps to explore this new wave of the internet as it applies to their sovereign currencies and I believe the United States needs to do the same thing.
So you know, this proposal actually exists in a landscape of some other…well, other proposals but also other existing digital assets that are like a dollar or pegged to the dollar. Some of those are for instance, people might have heard that in March and April some of the versions of the stimulus bills that were proposed originally did suggest disbursing funds via digital dollars, however that was via something entailing the creation of Fed accounts which they defined as “an account maintained by a Federal Reserve bank on behalf of any person that represents holdings in an electronic device or service that is used to store digital dollars that may be tied to a digital or physical identity.”
So that was actually not a blockchain-based form of a dollar, but then obviously in the blockchain world we also have things like Tether which is supposedly backed one-to-one by dollars, it’s a digital blockchain-based version of a dollar backed by actual dollars in banks, and then DAI is like a really different kind, it’s a decentralized version which is backed by crypto assets. Again, if they try to maintain that value on the dollar.
So how does your proposal differ from these, or how is it similar to any of these?
So I talked about that clash between old systems being challenged by this new wage of digitization. In the COVID crisis we actually saw the limitations of the centuries-old accounts-based financial system. We saw that for large portions of our population as much as 70 million people that were not fully included in the banking system or did not have bank accounts registered with the IRS. The only alternative in an accounts-based system to get them relief monies was through a traditional check-issuing process which raised all kinds of issues for people that didn’t have access to bank services.
So as any crisis does, it leaps for a search for solutions, in fact sometimes the best innovations come out of crisis time. Bitcoin itself you may say rose out of the last crisis. Some of the efforts to address this unfortunately confused the definition of digital dollar. The digital dollar was a term actually we coined in January for a full-blown US central bank digital currency, a CBDC. But some of those efforts use the term to refer to something that’s not a CBDC but is really an account-based distribution mechanism to reach under-banked populations by giving that population access to Fed accounts with the Federal Reserve to which monies can be sent on an accounts basis.
They use the phrase digital dollar wallets but it’s not what we’re talking about when we talk about digital dollars. We’re talking about full CBDC, those proposals, noteworthy of value because their objectives are the right thing is to address how do we get relief to under-banked populations, but make no mistake, that’s not a CBDC proposal, that is saying let’s extend even further the traditional account-based system.
You know, the account-based system goes back to renaissance Venice as a way of holding monies while ships were coming in. It’s an important system, it’s served well, but it’s based upon an analog experience that physical money is hard to transport and move around while you’re waiting for ships to come in so you might as well put it into a bank and record it on an account ledger, and we’ve expanded that and we’ve developed that and we’ve electronified that, and to some degree we digitized that, but we’ve still kept the double-entry bookkeeping account-based process.
That’s not a tokenized solution and my feeling is if we’re going to address issues of under-banked populations, let’s help bring that population into the 21st century and not just hook them up to a 20th century solution, let’s take this opportunity to explore the new frontier of tokenized money.
So the system that you propose is a two-tier distribution model that basically retains the current structure where we have the Federal Reserve Bank, then we’ve also got these commercial banks that are kind of the regulated intermediaries between every-day consumers. Well first of all, why don’t you explain you know, how the digital dollars will be issued through this and then also why you chose to stick with the existing system.
So what I would say it’s the two-tier plus approach. It’s not limited to two tiers, it’s two tiers plus. So how does physical money, bearer instruments get into the public’s hands now? It’s produced by the Federal Reserve, it’s distributed through Federal Reserve banks and to commercial banks in return for reserves posted at the Federal Reserve. The money is made available to the public as a public good. It is seen by the government to be the basis for commerce, for activity, but as we’ve moved into a digital world we find it’s limitations. You can’t use it in eCommerce, you can only use it in an analog setting. Nevertheless, that is the way the money is distribute.
We’re proposing to distribute tokenized versions of the dollar in the same format, that is it would be minted by the Federal Reserve, digitally minted, recorded to a blockchain, distributed through the banking system, and the banks would be responsible for recording to the blockchain. But then that’s why I say it’s two plus. You could have third and fourth and other tiers. As the system builds you can have wallet providers be recipients and distributors of that digital money as well and could also record to the blockchain.There will be a minimum level of regulatory function so that those end points are not only building to the blockchain but provided AML KYC function, and it could be sort of a banking light extension. But we’ll have to develop that and that’s one of the reasons why we’re not polling for this to be drafted in a weekend legislative drafting session but to be built over a series of pilot programs over years as we explore the dimensions of this.
Why not do something more radical that dis intermediates the commercial banks? I did see that idea was floated in a recent paper that came out this month by the Federal Reserve of Philadelphia and in it the author said that the Fed could be “a central bank open to all,” and as you probably saw in the news with the recent stimulus checks there were some banks who also did not release the full funds of those checks to the customers who had overdrawn their accounts and as I’m sure we all know, also commercial banks oftentimes don’t have incentives to bank certain populations. So why would you want to continue relying on them as intermediaries?
So I’m a realist, Laura. You know, I’ve served in the private sector 30 years, 5 years in government. I’m old enough to have witnessed the space program and seen how the internet evolved, and I think when we do big things in the United States it’s generally a partnership between the private sector and the public sector where both sides come to the table feeling they’ve got a stake in the outcome and where the degree of disintermediation, it’s unquestionable but it’s done in a progressive iterative fashion, not done overnight, and so I think that the way we’ve proposed is a way that’s probably most readily pursued, but then I think over time there is opportunity for a healthy amount of creative destruction and healthy disintermediation as old forms are replaced with new forms.
But I don’t think a proposal that if it’s white paper form says let’s dis intermediate the existing incumbents in the financial system is going to be one that’s going to be readily accepted anytime soon.
Yeah, I think that would get a huge lobbying force by an industry that already has a lot of money. So anyway…
There’s an old joke that God created the world in six days but then again he didn’t have an installed base to deal with.
Right. And one other thing I wanted to ask about was in your white paper about your proposal, you did say that a CBDC could be made programmable and you know, I was just thinking about how for a lot of consumers to them their money already seems digital you know, through credit cards and PayPal and Venmo, so what differences or what new features do you think they would notice with a digital dollar?
So an accounts-based system is built upon messages telling financial institutions to update records of who holds what money, and what’s digital is the messages that go back and forth instructing the institutions to change and update records. In a tokenized version of currency the decentralized nature of a blockchain is what confirms identity. You don’t have a double spend problem and you don’t need all those messages because the consensus establishes ownership immediately without all of that message activity. So you go from basically a double-entry system to a unit entry system by consensus.
It’s really architecturally a radically different change and when I talk about how society needs to update its architecture of its bridges and it’s tunnels and its airports, similarly every so often society needs to update the architecture of its most fundamental value and that’s its currency and that’s what we’re talking about, moving to a new technological architecture underpinning the US dollar.
Right. I don’t think people would notice that, right?
Probably wouldn’t. So when you go into a vendor where you can use Apple Pay, right? What you’re doing is there’s a wireless message sent to record that account on a ledger. With a digital dollar there would be a wireless transfer of money, not a message to an account to some validator but actually a transfer of the money. It would be like going from…a Fax machine produces a digitally-generated image but it’s a Fax machine. It’s not the same thing as say an MP3 file which actually holds the thing itself, and that’s what we’re talking about is it’s going from a digital recording of something that represents the value to the value itself in digital format.
Yeah, and I think within that you could program things like interest-bearing capabilities or even maybe controlling anonymity? I saw that in the white paper. We will discuss that more because I already see there’s a question on this topic and I have a number of questions, but actually before we get to that I just also wanted to ask, so you and I had discussed in like a pre-interview before this event about access and inclusion and at the time that we spoke I think I asked you oh, you know, are there more people who have smartphones than have bank accounts because in order for this to increase access you would have to you know, have a smartphone to access this.
But then I actually looked at the figures and I think you said to me oh, more Americans have smartphones than are unbanked, but actually that’s not true. So 81 percent of Americans have smartphones but only 6 percent of Americans are unbanked, so it actually seems to be the reverse that the number of people without smartphones is actually greater than the percentage who are unbanked. So you know, how could this increase access when you know, the basic requirement is a smartphone?
Right, so you’ve got to drill down to these numbers even further and look at demographics and look at age categories. You’ve got an interesting dichotomy here. At younger levels of the population the availability of smartphones is actually very, very strong and yet they are un or under banked to a considerable extent, and many of them will enter the banking system, it’s just that they can get by with Venmo at this point, or they may have a bank account but they don’t have a mortgage or an auto loan so they’d be considered under banked but still banked, and yet if you go to the other end of the age scale in seniors, a lot of them are extremely well banked and yet they’re still using flip phones and so they’re not using smartphones.
It’s very hard to get to the last elements, the very last percentage points of the population because there are other issues involved in being unbanked. Some of it has to do with identity. Many members of our society are unbanked because they don’t want to reveal identity for whatever reason. They may be undocumented, they may have other issues. There’s also a segment of society that is uncomfortable with banking generally and so just opening up banking to them it doesn’t necessarily mean that they’re going to engage in the banking system, and there are of course, minority populations, there are populations that don’t have access to broadband because they’re in rural areas, so there’s a lot of different teasing out to this to do.
We don’t say that a digital dollar is a panacea for the unbanked population, what we do say is that digital fiat may provide a much easier entry ramp into financial inclusion for a population that is for whatever reason been outside the banking circle. They may be very comfortable with Venmo because it’s easily understandable and the digital dollar would be as easily accessible if not more so than Venmo but without the information leakage that comes with Venmo.
All right. Yeah, why don’t we actually just jump into privacy right now because I feel like we’re already just talking about this. You know, I think a lot of people would immediately be wondering how private their transactions could be with a digital dollar, so how would you account for that?
Okay, so privacy, it’s a very, very important value and yet nowhere in the US financial system is it absolute. Now we tend to think about cash as anonymous but even there policy choices have been made so cash over 10 thousand dollars in uses requires reporting, receives AML KYC monitoring. So even cash is not an absolutely private feature.
So if we accept the point that I’m trying to make that privacy has a relative relationship, these are the issues of law enforcement which is why AML KYC is done, we then have to ask, where will society find a balancing point between privacy rights and national security or law enforcement rights? And on that regard I think if the United States does it right and designs a digital dollar right, it could have superior if not absolute privacy rights compared to central bank digital currencies or commercial crypto currencies offered by others.
And let’s imagine a world where you have a digital RMB, you have a digital Euro, you have a Libra coin, and you have a digital dollar. Well, the social expectations in China, the social expectations in Europe, and the social expectations in the United States about privacy are actually quite different. In China there’s a higher expectation of state security. In Europe, Europe is very sensitive to commercial exploitation of data, they have a law called the GDPR which protects people’s right to privacy against commercial exploitation of data but actually does not give them rights against government exploitation of data.
In the United States we’re the opposite. We’re actually relatively relaxed about commercial exploitation of our data but we’re very sensitive going back to the founding of the republic and the fourth amendment about government exploitation of privacy rights, and therefore if our cultural expectations are built into our sovereign currencies then you can imagine a world where use of say a digital RMB has a very low expectation of privacy vis-à-vis the government where a European sovereign currency would have a better but still not compared to the US right of privacy against the government, and where the US sovereign currency could have the highest right of expectation against government observation and would have no risk of commercial exploitation based upon what your commercial development is with your commercial vendors, but compared to say a Libra coin where there is an expectation that the data will be exploited for commercial purposes.
So these are all design choices that need to be built into our sovereign digital currency which is one of the reasons why I’m so insistent that the United States starts experimenting now so we make sure that these social values are built into the development from the beginning. I’m a big believer that the government should have very little ability to monitor transactions except for as appropriate for national security and law enforcement. We’ve got to get that development right, but remember it’s going to be done on a relative basis versus other sovereign and other commercial currencies that develop in a new digital way.Kelman Law
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Well, so what you’re describing then, it seems like the digital dollar would have kind of built…I mean, you referenced this before but I just want to know what it looks like to have kind of built in, or I guess you were saying that it could even be some of the commercial entities that help distribute the digital dollar but you know, in terms of the KYC, the know your customer anti-money laundering, anti-terrorist financing, anti-fraud, all those things, what would that look like? When I want to use it you know, do I have to give my full identity and then frankly well, let’s not get to that. We’ll talk about that in a second, but just answer that.
So we would see that at the point of the wallet, so as you would open up a wallet account there would be a degree of disclosure of information to establish that account and then they would perform the KYC, or we could even envision that that would be done on a white label service by a well-established banking institution on behalf of a wallet provider.
Okay. Okay, and at what level of identity would people need to give because you know, as you were saying for like an undocumented person, like how would they establish their identity?
Look, identity is a difficult set of choices. We’ve been grappling with that in the United States for a long, long time and again, one of the reasons why we advocate a series of pilot programs is to find out where the balance is. We need to make this accessible, and so the identity necessary to use a digital dollar has got to be fairly basic but at the same time we’ve got to balance AML KYC requirements and you know, we’ve made a policy choice with regard to currency itself, we’ll need to make policy choices with regard to digital currency itself. And I can’t tell you offhand where that is. We’re only at this a few months, Laura, and there’s a lot to be thought about here.
Yeah, and I do think that you’re right, that in the US people are perhaps more concerned about government overreach in this situation because I you know, was reading some of the articles that have been written on this and already I see people saying things like oh, you know, I could see this leading the Fed to, or the government to do asset seizure without warrants and you know, so it’s interesting because you’re right, in Europe it does seem to be more they have that concern about commercial overreach. But these…
A currency’s got to reflect the values of its society and if the government designs something that doesn’t reflect the values of a society it won’t fly and it won’t work. If you look at the course of human history currencies in international commerce have always competed against each other for the patronage of people in commerce. You get the details wrong, they will go to another currency. We have to get this right. We’ve got to design this with the right policy choices that reflect the values of American society in this if it’s going to see broad implementation. Even in physical fiat we’ve seen what coins are mis designed, they don’t get used. Designing this right is critically important to attract a user base.
Okay, so there’s so much to discuss in terms of the global space race, but just one last question about what you’re proposing here which is that obviously we know the history of blockchain technology and digital assets is littered with hacks, thefts, phishing, SIM swaps, it’s so easy to lose this form of money or for these systems to be hacked, and you know, with what you’re proposing where it’s essentially kind of…I mean, tell me if I’m incorrect but it sounds like a private blockchain where there’s a limited set of nodes and the actors are somewhat either known or at least you know, kind of maybe predictable, so the security of something like that seems like it would be easier to compromise than the security of something like bitcoin or Ethereum where you know, there’s just thousands of nodes all over the world, so how would you make something like this secure?
Well, look, if the standard for a financial system is it can’t be hacked, then we might as well shut down the existing accounts-based system now because it’s hacked all the time, right? That can’t be the standard, otherwise we’ll never move forward, right? We have to recognize, and the breakthrough of this technology is its consensus structure, its ability on a consensus basis, distributed basis to get beyond the single point of failure verification process that we have in place now.
But you’re right, it probably will be the most hacked structure on Earth and that’s again why this cannot be cobbled together in a you know, in a weekend Congressional drafting session and launched you know, three weeks later. This is something that you know, the analogy is the decision to put a person on the moon that was taken in the 1950s and it didn’t take place ‘til the end of the ‘60s, and between the decision to go and the successful landing was a whole series of pilot programs called Mercury and Gemini and Apollo, and each one of them had a dozen or more missions and each one learned from the other, and they learned from the failures as much as they learned from the successes and that’s why we advocate a series of pilot programs. We’re going to have to explore our way through this, but the standard can’t be un hackable because it will be and that’s what we got to learn
But the beauty of what Satoshi Nakamoto came up with is the notion of a consensus distributed approach that if it’s done right is virtually impossible to hack.
So thank you for mentioning the race to get on the moon because that is also in a way what we’re facing right now with the central bank digital currencies and of course, China already has a pilot, or actually it’s three I think geographies of its digital Yuan and payment system which is called DCEP, so do you feel like the US is already falling behind when it comes to a CBDC?
Well, look. I have a great deal of respect for what China is doing. This is an enormous project and they are determined, they are marshalling an enormous amount of resource and enormous amount of brain power and it’s impressive to behold. But China comes at this from a different place in the global economic system. Their currency is not a reserved currency, it doesn’t have the role today that the dollar has today in the global economic system. They’ve probably got more to gain than they have to lose by doing this experiment and if they get it wrong it’s not going to have the same impact that it would for the US if we get this wrong and if we rush into this.
I’m of the view that winning and losing is not a question of who goes first, winning and losing is a question of which society successfully brings their values to bear on the design of digital currency. If our values are the right balance of privacy rights against state surveillance, if our values are the right role for a public and the private to work together, if our values are that the money should be a public good on which a free market economy is built, if we can agree those values and the rule of law, if we can agree those values and if we can design those value into the next form of the dollar then I think we’ll have achieved our purpose and it won’t be a question of winning a race or you know, landing a lunar module, it’s a question of values and a question of making sure that the values that we expect in our currency are built into the next form of that currency, a digital form of that currency.
So I agree with you that just the fact that they’re first out of the gate doesn’t necessarily mean that they’ll succeed or become the dominant CBDC, however you know, the phrase first mover advantage exists for a reason and I do think that with money that kind of thing applies because you know, money tends to have network effects, and in China’s case they have this very comprehensive vision for blockchain technology, not just applied to money but applied to all different kinds of things and they’re going to be using it in a lot of developing countries that they deal with, especially around their Belt and Road initiative, so when you kind of put all that together you know, and you play this out, what impact do you think this could have on the global balance of power, especially if the US continues to lag?
Yeah. Well again, I tip my hat to what China’s doing, it’s impressive and exactly as you say, when you combine what they’re doing with currency with their Belt and Road initiative with the billions of dollars they’re putting into a large engineering projects and large public infrastructure projects in what is becoming a zone of influence, it’s an impressive combination.
Again, I think the United States is in a different place. I don’t see the United States…again, for better, for worse, I’m not making a value judgement but I don’t think where the United States is right now is in doing large government-sponsored investments in large infrastructure projects in the developing world. Again, for better, for worse, for right or wrong I don’t see that happening.
So if the US were to compete it would have to compete in more just a currency but also in its own Belt and Road initiative and everything that goes with it. I just don’t see that happening. Again, I think the United States uses soft power around the world and again, there’s many viewpoints on that and I really don’t want to get into debating US foreign policy, I think there’s both things to praise and things to criticize in that. I do believe, though, that at heart the last three generations of dollar dominants in the world has seen more rising living standards and more of the human population move out of poverty into the middle class with better health outcomes, with longer lives, and with aspirations to better education and more human rights than at any other point in human history and I think that has been to some degree a consequence of the values that have been built into the dollar and its role in the world.
And so I for one would like to make sure that those same values are built into the next version of the dollar. I think the United States will ultimately have no choice but to create a CBDC. I think the time to get started on that is not later in time but now, take our time, get it right, build those values in to serve into the future and with that, that’s about my deepest foray into foreign policy. It’s an area where I know more about markets than I do know about foreign policy so I don’t want to pronounce too far on that.
Well, so we’ve been discussing the threat from China but then on the other hand we have this Libra coin that’s going to be coming out and they’ll be issuing different stablecoins that are pegged to the values of various fiat currencies, including the US dollar that will be called the Libra USD. So do you think that the threat then could come in that direction because Facebook has a user base even larger than the population of China and it already has a very easy way to open digital wallets for lots of people in not just the US but across the globe. So you know, do you think that the Libra USD could end up being the proxy for this digital dollar and sort of be a future CBDC?
In dollar terms probably the only bigger user base than that is the dollar itself. Look, I think Libra has done us all a service by what they’ve done and I think they have demonstrated the, reminded us of what money is. You know again, it’s only the last few generations where sovereign currencies, in fact the US dollar has been so ubiquitous as it has. If you look at the course of human history more often than not you’ve seen many different sovereign currencies competing, but also competing with commercial currencies.
During the period of the European exploration of the East Coast of North America in the 16th and 17th centuries it was a series of currencies that were competing, whether they be Dutch guilders or French francs, but the currency that was most preferred was the dollar, but it wasn’t the American dollar, it was the Spanish dollar and the reason why the Spanish dollar was the preferred coin was because it actually had technological advantages over the others. It was minted using new world silver which was purer than the other silvers in use and therefore was lighter when it was carried in a trunk for transportation, but it was also more consistently pure which meant that the coinage itself was more consistent.
But the most interesting aspect was it was minted in a special way that it could be broken into eight equal-size pieces and therefore it could be fractionalized, and when we think about technological advantages to a currency we need to remember that we’re competing for the patronage of that currency and having technological modernization is part of maintaining the importance and the patronage for that currency, and that’s exactly the way I think we need to think about the dollar today. How do we modernize it for use in a new digital era?
Yeah. I actually just realized earlier when you said the user base for USD is bigger than the user base of Facebook, I actually didn’t realize, though, that I think what maybe is concerning is the fact that Facebook is a platform and you know, I’ve seen this working in media for more than 20 years that the platforms can really pull the rug out from existing players. I actually don’t want to go too far down this hole because we’re limited on time and we need to get into COVID and all kinds of stuff, so let’s just talk about COVID now
How do you think COVID will play into all this, do you think that it will hasten the competition among countries to establish CBDCs or do you expect it to generally hasten along development?
So it certainly showed the shortcomings in the accounts-based system when you have a large under-banked population, and I think that there’s nothing like a crisis to put a spur to action, but I view the need to create a US CBDC as more than just a crisis response but it’s really a response to changing technological innovation. You know, the first wave of the internet changed all our lives and that was just the first wave, that was an internet of information.
This next one is going to change all our lives as well and you know, the dollar’s role could be undermined if it doesn’t evolve with it. So I think the COVID crisis is a good spur to action and I’m actually testifying tomorrow at a hearing in the House Financial Services committee that’s to look at the use of digital technology as a financial response, and I’ll be talking about my proposal for a US CBDC, but that hearing perhaps might not have taken place but for the COVID crisis, so it provides an opportunity to talk about the shortcomings in the system as crisis response but it also talks about how infrastructure sometimes just needs to be modernized because it needs to be modernized, because infrastructure is a public good for economic activity and the social benefits that economic activity brings to all of our livelihoods.
And do you think that this does provide a good opportunity to start one of your pilots? I have seen some other you know, blockchain people make calls for that. What do you think about that?
Absolutely. Absolutely. I think now is the time, and we can start with financial inclusion. We can start with looking at how readily some of the under-banked populations could see digital wallets as a onramp into financial inclusion. You know, there’s a lot of discreet populations that I think could benefit from this immediately. One area would be service men and women. If you’ve ever visited an Army base you’ll see surrounding it a whole series of check cashing centers and when they check their cash they may be overseas, they may be far from home, they then need to get the money home so they actually may go then to a cash transmission bureau and each step along the way they’re paying something. Well, why couldn’t they just send that money home in a text message? And that’s what a CBDC would allow for.
And can you give us a preview of what you plan to say in tomorrow’s testimony?
Well, it’s along the lines of what we’re talking about today. You know, people that have followed me, I tend to…I’m not a technologist. My background, although I’ve always been fascinated by how technology can improve our ways of life, and I tend to talk in general terms about why I think this is the time to get serious about exploring the next iteration of the dollar. We know people abroad are doing it, we know our economic competitors are doing it, we know that our economic allies are doing it, we know that commercial entities are doing it. We know the dollar plays a critical role in the world’s economy and yet how can we not say we also need to explore its digital potential?
And do you have any insight into how those couple of stimulus bills did have the suggestions for additional dollar? It looks like some of the Congress people who suggested were Rashida Tlaib of Michigan, Pramila Jayapal of Washington, and Ohio’s Senator Sherrod Brown. I don’t know, have you been in touch with any of them or can you give us a sense in general of how well-versed lawmakers in these proposals for a digital dollar?
What I can say is having served 30 years in the private sector and 5 years in the Federal government, people in the public sector are not actually terribly different than people in the private sector. You have early adopters, you’ve got late adopters, and you’ve got the broad bell curve in the middle of middle adopters. There are people in the official sector at some regulatory agencies, at cabinet agencies, and on Capital Hill that are really very switched on, understand the potential of the technology, and working right alongside them you’ve got people that are…I don’t even know if they’re beyond flip phones, but their appetite for technological innovation is not keen, and then you’ve got the broad middle.
That’s why we formed the digital dollar project primarily as a think tank. Our goal is to…if we go back to the analogy of the space race, we’re still in 1958 trying to get the word out that the space is the next frontier. And if we can build that consensus, then we can decide whether the lunar module uses aluminum foil or whether it’s powered by what mixture of fuel, and all of those details that we’ll need to work out, but first we’ve got to create a national consensus that we need to move beyond what we’re doing now.
That’s what I’m hoping to do tomorrow, Laura, is get the word out.
And how do you think the election, not only for President but also in both houses of Congress, how do you think that will affect the chances for a digital dollar to be adopted, like are you finding that this is a partisan issue or a bipartisan?
In my experience in Washington I never found technological aptitude to be Republican or Democrat, I just don’t see it. I think there’s people on both sides of that political divide who are pro innovation, there are people on both sides of that political divide who are anti innovation, and then there’s a broad middle. At the end of the day you put those political labels aside, they’re people like you and me.
And so when you look at your kind of maybe future ideal roadmap for getting this adopted, who are all the entities that you feel you would need to get on board and what would some of those pilot programs that you talked about look like?
Well, so China does big things as they’re doing with the digital RMB or as they’ve done with the blue-water navy, it’s directed from the very top and then an order goes out to 43 million Communist party members to read the same book and on Monday go to work and instruct everybody to proceed in the same manner. I’m not faulting that, that’s a great system for big projects.
That’s not how we roll in the United States, it never has been, right? When we do big things it’s a messy process, they’re trying to build a consensus of showing leadership, and then when we do launch it’s I think a beautiful blend of public and private. That’s what built the space program, that’s what built the internet. The public sector lays down broad core principles, policies, but it’s the private sector that does the engineering, that brings the finance, that brings the technical talent, that does the project management that the private sector can do, and having been in the government that it’s very hard for the public sector to do.
Something as big as this needs to be a traditionally American public/private partnership and so I’m hoping that those pilot programs call for the best and the brightest from the private sector. Some companies you know, I don’t want to…seems like I’m endorsing anybody, but there’s so much good work being done right now. I’ve met with many of the companies in the space, in the blockchain space are building things. I would like to see let’s try you know, Ethereum in one area, let’s try Corda in another, let’s try digital asset in the third, let’s work with Paxos. Let’s have a beautiful explosion of innovation, and ultimately even if we go back to the analogy of a race which I don’t like to use, even if we’re starting late, with that explosion of talent, with that explosion of creativity, I think we could create a dollar that would be the killer app in terms of sovereign digital currency.
Okay, so you don’t want to describe any kind of particular pilot that you already have in mind?
I think that military and service compensation, salary is a good one. I think veteran’s benefits may be another one. I think rural area distribution that have difficulty accessing banks, I think inner-city areas with some populations. We’re going to have to explore a lot of things. We’re going to have to explore digital identity which is a subject that’s been very controversial in the United States. Do we have a central identity system, do we use other means of authentication, so there’s going to be a lot of work to get done there.
This is not something that’s going to be done overnight, it’s not something that’s going to be done in a few years, this is something that’s a multi-year exercise. The more pilot programs we can get going both in sequence but also perhaps simultaneously, the faster we can learn and therefore perhaps the better our design building can be to get something that we can ultimately launch in a universal fashion.
Okay, so we have two questions from listeners I just want to get to. One is, do you see a currency exchange rate between the US dollar and a digital US dollar?
No. It would be critically important that there be no arbitrage, that if it’s got the full faith and credit in physical form it has full faith and credit in digital form, there should be no arbitrage.
And then the last one which this is a great question, I should have asked this before. So for somebody who doesn’t have access to a smartphone, how can they get a hold of a US digital dollar?
So that’s something we’re going to have to explore. I mean, it may be that we have a program of smartphones for some sectors of the population to make sure they’re financially included. You know, a low-cost smartphone is probably 10 dollars a month. That may be actually a bargain compared to the notion of the Federal Reserve going into the retail banking business for which they are not set up at all now and would have to restructure probably the entire Federal Reserve, so we may be better off creating a system of government-sponsored smartphones for sections of the population that might not otherwise have access to it and something that’s certainly worth exploring.
Great. Okay. Well, where can people learn more about you and the digital dollar project?
Thank you for asking, digitaldollarproject.org. We’ve got everything on the website. My testimony will be posted there. Recent white paper is there. We’ve got a great advisory board of 30 experts in a range of fields from privacy to AML KYC to banking, their names are all there, and you have an opportunity to write to us there, if you have thoughts and ideas we’d like to hear from you.
Perfect. Well, thank you so much for this interview and thank you to NYU Stern, Dean Naomi Diamant, Renee Liber, and Janet Vitebsky for organizing. Thanks so much for joining us today. To learn more about Chris check out the Show Notes inside your podcast player. Don’t forget, you can now watch video recordings of the podcast on the Unchained YouTube channel. Go to YouTube.com/C/Unchainedpodcast and subscribe today.
Unchained is produced by me, Laura Shin, with help from Fractal Recording, Anthony Yoon, Daniel Nuss, Josh Durham, and the team at CLK Transcription. Thanks for listening