Corporate Meeting

Corporate Virtual Roundtable: Central Bank Digital Currencies and the Future of Finance

Thursday, August 6, 2020
Dado Ruvic/Reuters

Senior Fellow for Economics, Council on Foreign Relations; Thomas D. Cabot Professor of Public Policy, Harvard University

Nathan Sheets

Chief Economist and Head of Global Macroeconomic Research, PGIM Fixed Income; former Undersecretary for International Affairs, U.S. Department of the Treasury

Saket Sinha

Global Vice President, FSS Blockchain, IBM Corporation

Seema Mody

Global Markets Reporter, CNBC

Corporate Program Virtual Roundtable

Panelists discuss the opportunities and risks of adopting a national cryptocurrency, including keeping pace with Chinese financial technology, encouraging broader financial inclusion, the threat of cyberattacks, and potential disruption of traditional banking systems. 


MODY: Thank you and welcome to today's Council on Foreign Relations virtual roundtable on central bank digital currencies. I'm Seema Mody, global markets correspondent at CNBC Business News. I'm pleased to say I'm joined by Kenneth Rogoff, senior fellow for economics at the Council on Foreign Relations and professor of public policy at Harvard University; Nathan Sheets, chief economist and head of global macroeconomic research at PGIM Fixed Income. He's also the former undersecretary for international affairs at the U.S. Department of Treasury. And Saket Sinha, global vice president of FSS blockchain, at IBM Corporation. Welcome everyone to today's discussion.

The adoption of digital currencies has certainly prompted a debate on the global stage. Technology experts referencing the benefits of digital currencies, while larger institutions, especially central banks, have been perhaps a bit more reluctant to embrace digital payments. Ken, I'll start with you. I'm curious is today's current scenario, the pandemic, accelerating the shift towards a cashless society? Do central banks have no choice but to invest and create their own digital currencies?

ROGOFF: Well, I don't think the pandemic is the driver of this. I think there was a big change when Facebook came in with proposing Libra, it's evolved. That was a game changer. That was a real wake-up call. If Facebook's coming in and doing this, central banks said we better look at it. Of course, the central bank of China has a nascent central bank digital currency and that's quite a wake-up call. But for sure, the pandemic is having an impact on the use of cash. Maybe a lot of cash is being horded, but much less is, it's much less used in transactions, raising issues of financial inclusion, etc. You know, it's like in many things, the pandemic is accelerating a transition that was happening already.

MODY: Nathan, what are the potential benefits of a central bank digital currency? Because there are digital currencies already out in the market right now, one of course being Bitcoin, but the idea of a central bank backing their own digital currencies, the benefits and the key risks.

SHEETS: Yeah. So I think your, your questions are right on. I think we are at a place where central banks need to invest in better understanding this space, and they need to invest in developing the regulatory capacity and expertise to be able to function in this space. I think the big debate is well, does that mean that they should be the issuers of a digital currency or act more like a regulator.

I think those that are arguing in favor of this, of this CBDC, would point to several advantages. First, I think that these technologies have the capacity to really increase the efficiency of the payment system, particularly for small value retail kinds of payments, make it fast, reliable, and affordable. Another huge advantage to these kinds of currencies is they are likely to bring in parts of our society that are unbanked. Folks that might feel comfortable making a transaction on a cell phone, but are not going to feel comfortable going to the bank and trying to open an account. They may not have documents, etc., etc. So I think that there's really a great capacity for financial inclusion here. And then I think the unique use-case here, the unique role of the central bank, which a private system couldn't do is that the central bank can issue a currency in the name of the state, the central bank has the seigniorage power. So there is a fundamental credibility associated with that, with that issuance, and a capacity to operate as a lender of last resort as well.

I think there's a legitimate debate as to how important those aspects are in the development of the system. But those are some of the arguments that the proponents of this are putting forward.

MODY: That's great. Saket, you are responsible for growing IBM’s blockchain business and financial services. What are you seeing right now and over the last three months amidst this pandemic? Is this move towards digital payments creating more opportunity for you in the seat you hold?

SINHA: Yeah Seema, that's a great question. What we are seeing is a definite uptick, in the, in this area of interest in central bank digital currency. Especially during the pandemic time as many economies across the globe are trying to inject fiscal stimulus into the economy central banks are increasingly gravitating toward the notion of issuing digital currency or dealing in digital currencies. One of the benefits that comes from this is that is the traceability of the currency or the money that is injected into the society and trying to create a lineage between where the money is being used and how it is being spent, and eliminate the middleman in the process. So, yes, we are, we are seeing that uptick across many, many places in Latin America, Middle East, Africa, as well as ASEAN countries. And yes, we are engaged in many conversations right now. The early stage of conversation from policymaking to advisory as well as experiments with some technology, but the noise and conversation has certainly increased many fold during the pandemic. That's what we are seeing.

MODY: Ken, given the success of Alipay and WeChat in China, does that reinforce the need for U.S. companies to play an active role in defining the build out and the infrastructure of digital payments if they were to play a more mainstream role here in the United States?

ROGOFF: Well, I mean, a lot of technology comes out of the United States. But I think as Nathan said, I think there's a question of how to regulate it. In a way, the fact that the central bank of China is issuing its own currency, it's sort of pulling in what Alibaba and WeChat, WeChat Pay, were doing.

There's, of course, this digital divide between the United States and China which is, which is growing, and one of the issues here, is exactly information privacy. I think, as Saket was saying in a tactful way, cash is, there's a lot of underground economy that goes on with cash, a lot of things authorities can't trace. And I think we value privacy up to a point. And so the question is sort of try to, how to balance that privacy with the state's need to be able to tax and regulate, and digital currencies are likely to play a role in that. China's all over that issue.

MODY: Actually, to that point, Ken, do you think if digital currencies do gain a more active role here in the U.S. or from a consumer standpoint, from a government standpoint, could it actually displace the dollar and undermine the monetary policy objectives of the government right now?

ROGOFF: I mean, only if the government, the central bank mishandle it incredibly. They won't. There's a long history of the private sector inventing things and then the government regulating and appropriating. You can go back to standardized coinage, paper currency. The same thing here, the government makes the rules of the game. They may, you know, get set back for a little while but ultimately they end up on top. The doll-, the government currency will reign supreme. This sort of, these techno-evangelists who say no, you know, we can end around everything, no they can't. Everything ultimately depends on regulation. But that doesn't mean everything should be regulated out of existence. There's many good ideas, you know, here, and the role of the government should be to try to bring forward these innovations while balancing the public interest.

Nathan made a lot of good points at the beginning about the government needing to be a lender of last resort. I think for example, the stable coins which Libra seems to be evolving into, they're not going to last unless they get embraced into the system and the government stands as a lender of last resort. We'll see how that evolves.

MODY: Nathan, do you agree? Can the government be a lender of last resort but also embrace digital payments, given what you saw at the Treasury when you were there?

SHEETS: So I think that a critical question is, can we structure a digital currency? And I think that China's experience highlights the opportunities there. Can we structure a digital currency that is safe and secure and meets our financial stability objectives, and meets our objectives for being clean relative to illicit activities? Without the central bank being right at the center and the issuer of that, and acting explicitly as a lender of last resort. Are there other mechanisms that can be brought to bear to ensure the safety of the system and that the system has backstops without the central bank's involvement? My instinct is probably, but I'm not sure.

And I think that is, I think that is, the big question that I think central banks are struggling with. As they jump in, are they ensuring the development of the system in a safe and sound manner? Or by jumping in do they end up deterring a lot of innovation and technological development that other players will say, oh, don't worry, the Fed's got the space. They don't want to compete against the Fed and good ideas go by the wayside. So those are the considerations that the Fed is trying to balance.

One final point that I think is important is, I'm not sure that this world of CBDCs as it's structured at the moment, is really an existential threat of any meaningful kind to the dollar. I really see the CBDC as likely to operate most powerfully and relevantly for relatively small value retail transactions. I think the large value payments system is already working in a very efficient way. And then that large value payment system is tied in to our rich ecosystem of financial assets. And all of those are denominated in dollars. And in addition, I would expect that at the end of the day, people will need to pay taxes in dollars. I'm not sure that this is an existential threat for the dollar, but a way of facilitating access for broader parts of our society.

MODY: So whether it's the pandemic or geopolitics, you don't see the dollar losing its reserve status anytime soon.

SHEETS: No. You know, I think we're at a place where we need a, we need a concrete competitor out there. And of the list of possibilities, the euro is probably at the top. And I'll give the Europeans a lot of credit for what they've done in this pandemic. But every time we have a period of stress, the first question is, what does this mean for the existence of the euro? How is Italy going to respond? And so on and so forth. And I just don't think we're at a point where the euro is going to be the challenger yet. Maybe in a decade, maybe in two decades.

MODY: Sure. And of course the Chinese are trying with the yuan as well. Saket, over to you, digital currencies as Nathan and Ken elegantly, eloquently pointed out. A lot of opportunity, but a lot of risks. Money laundering concerns, theft, privacy, what solutions are you working on at IBM to address those?

SINHA: Yeah, so that's an again, great question. And I wholeheartedly agree with Nathan and what he was talking about.

Let's look first of all, look at the digital currencies from two perspectives. One is a regulated digital currency and the other one is unregulated digital currency.

Now, the world has already seen many examples of unregulated digital currencies out there. And I think as technology survives, and it will survive in digital age, unregulated digital currencies will be there. You and me and this group tomorrow can decide to create our own currency of exchange of value. And that way, it will, it will still be there. The question of the risk that you highlighted out comes back when these unregulated digital currencies start getting into the mainstream of our economic transactions, and global trade, as a payment mechanism, as a value exchange mechanism. And that's where I agree, earlier said that the central bank and the government in order to exercise sovereignty and control will come and start regulating this innovation in this technology. And that's where the struggle is.

From a technology point of view, there is a lot of problems that has already been solved. It's about the policies related to risk and governance control. That still is a struggle by many central banks. Even if they adopt and embrace the concept of digital currencies, technology can allow them to convert the fiat currency like dollar or euro, into a digital currency and use that as a mechanism of exchange. So you're not talking about Bitcoin or Etherium, or anything of that sort, but regular digital dollar or a digital euro, for example, can exist in digital form, and can be used as an exchange. So that technology does allow.

But even in that, the policy making and governance and security and control comes into play in a sense that, you know, what if the network is hacked? What if somebody is able to print additional amount of money, or create additional amounts of money? That security envelope right now is still not a hundred percent evolved, and central banks are currently doing many experiments. I mean, if you look at ECB, for example, has just launched a series of experiments in investigating how these kinds of currencies can be issued and taken from cradle to grave through its entire duration of existence. Like how is it issued, who will it be issued to, who will be holding it, where the custody will be performed, and how will people actually use it? And in case, how can they redeem or how it can be withdrawn from the circulation. So all of that is currently being investigated, but from a pure risk and security point of view, the risk is, one is the hacking of the network.

Second is somebody comes in and starts printing additional digital currency. Somebody starts creating from thin paper an additional amount of value and somebody or, the transaction goes off, if there is a big disaster and the transaction gets wiped out. All of those things are under serious consideration as we, as we see and investigate how this can be brought into mainstream society.

The additional aspects that I would like to share is that we should separate between retail digital currencies and wholesale digital currencies. A retail digital currency is something that you and me will touch, pay for small things and other things. But wholesale digital currency is more where successes have been achieved. If you look at experiments being done and pilots being run in Middle East between Saudi Arabia, United Arab Emirates, also between Singapore and other places, they have more succeeded with wholesale concept where a group of banks who are involved in country to country cross border trade have come together and said that we will settle our trade balance using this wholesale notion of exchanging value or wholesale digital currency. So that in my mind is a little bit more secure and controlled than retail, and retail is where the challenge is from the respectability point of view.

MODY: Kenneth, clearly people are taking, those who are involved in this world of digital currencies and blockchain are evaluating the risks. The solution, though, to address those risks, quite complex. Your reaction and how that could hinder the development of digital currencies going forward?

ROGOFF: Thank you. Look, let me make a few points starting with that. I think a big question, of any transitions made is security. You want to make sure the previous system, the current system has a lot of flaws, but it's been around for a long time. You know, even longer than the digital part of it, the two tier system, the central banks, the banks, the retail customers. And I think, an important point that I sort of learned as I've looked into this is that it takes a very long time to harden a system. Neha Narula, who is the head of the MIT Digital Currencies Initiatives, has written about this. And it can take five to ten years before you really know something's not subject to attack. I mean, Bitcoin has a lot of problems, but it has proven relatively robust.

I want to pick up on a couple other points. I do think, at the end of the day, the central bank, or the government has to play a role in this. Particularly the dominant form right now of growth in digital currencies, so called stable coins, which are linked to the dollar or the euro. And let me tell you, as someone who's spent, you know, my life working on exchange rates and fixed exchange rates, nothing is stable without backing. And I think that's why ultimately they're going to need to be embraced.

Transitioning the consumer side, I just want to raise something, I'm sure Nathan's very familiar with it. There actually exists not a central bank digital currency, but a treasury digital bond. Now, we have Treasury direct, which you can go to the Treasury webpage. It's actually quite remarkable. I guess it's been around ten years or so. You can hold as little as $100. As much as $20 million, I think, per bond. You can trade within it. It's proof of concept I would say. It's actually you know, quite remarkable how well that's worked. I don't know, Nathan can answer but I think the reason the Treasury doesn't advertise it more is one of the risks of a centralized digital currency bond is disintermediation in the financial system, which may be fine over the long run, but if that happens very fast, that would really disrupt the payment system.

And last, let me say something about the dollar. Yes, there's no immediate risk to the dollar. But I do think the pandemic, digital currencies do bring it forward. Nobody's going to be using the RMB in the same way as the dollar for a long time, simply because of the information flow. Everybody's mad that transactions in dollars can be seen by the United States, but they'd be you know, a lot more mad about China. Albeit, I think Zoom that we're speaking on is kind of run from China. But that said, the world underground economy is pretty big. Africa, other countries, they could get a foothold with their digital currency. I think they probably aspire to do that and might leverage that into a faster challenge to the dollar. It's not happening in the next decade. I used to think it would be fifty to seventy-five years, you know, maybe just twenty, now. I do think this is significant.

MODY: Nathan, your response and it's an idea that certainly carries merit. A survey from link found that 75 percent of respondents are using less cash than before the crisis hit. Online sales have taken off jumping to 30 percent of total retail transactions.

SHEETS: So I think the decreased reliance on cash, in general, is true in spades in a number of countries, and has driven as you say, the interest in digital currencies. I think that's true in Sweden, as they're considering a digital currency. The Bank of England is considering one as well and it's citing the decreased use of cash.

In the United States, the discussion on this issue is much more complicated. On the one hand, I think, as Ken said, is that we are using cash a lot less as a transactions technology. But on the other hand, the demand for currency is growing robustly. In preparation for this panel, I checked some numbers that in 2007, at the onset of the global financial crisis, dollars in circulation in the United States were about $820 billion, or I should be more precise, Federal Reserve Notes in circulation in the United States and globally, were $820 billion. Today, it's about $2 trillion. And I think that a lot of people in the United States and abroad are using the dollar as a store of value. And there are enormous seigniorage benefits associated with that.

Now obviously some of it's also used for illicit purposes, and as vehicles for unsavory activities. But I think we're going to have those challenges regardless of what our payments vehicle is. And that's just going to be a fact of life. So I think that the path for getting rid of the physical dollar in the United States is, it's not a hopeful one in coming decades, maybe someday. But nevertheless, I think that while that part of the case is not compelling in the United States, these discussions we're having about how do we make payments more efficient, more accessible for a broader share of our population does push you into the digital world and the central bank there either as the issuer or as vitally involved as a regulator and as a, kind of a backdrop creator.

MODY: Yeah Ken I mean, there certainly seems to be a need for cheaper and faster cross-border payments. You know, currently the settlement of cross-border remittances is slow, if you speak to any major bank, and the burdensome to those least able to afford it. So does that really accelerate the need for a better solution here?

ROGOFF: Well, it certainly does. Certainly, I'd start with saying we need more financial inclusion, which I think would help some with this. Some of this is regulation, anti-money laundering, and you can find an end around it that's cheaper. But then we get back into the problem of all the illicit activity and money laundering. So I think one of the holy grails in the discussions among central bankers is to try to achieve inter-operability in their digital currency space, because right now some of the expenses, there's a bank, one side has a bank and a correspondent bank, the recipient has a correspondent bank and a bank, and there's just a lot of fees being collected. And there should be a better way within the system in order to do this, but right now it's, right now it's a regulatory mess. I don't think, I think digital is part of the solution, but you have to solve the regulation too.

MODY: Saket, does blockchain provide a solution, provide some type of opportunity here in cross-border payments?

SINHA: Yeah, it does. Definitely technology provides, the inherent nature of blockchain itself is about trust. It's about provenance. It's about traceability.

So imagine in today's cross-border payment infrastructure, if you want to send a payment from country A to country B, it goes through multiple hops within the country, then across the country before it reaches the final destination. And each of those hops are basically time consuming and then attract fees. Where then if you send certain amount of money a certain percentage is taken off just for transferring the money from one location to another location. Whereas if you use the technology principles of blockchain, those transfers would be peer-to-peer, note-to-note and involve very less of transaction fees that's taken up in those transactions.

So imagine, in use-cases like remittance, for example, or even in cross-border payments, large settlements, if you don't have to go and hop through all those payment infrastructure networks, there's a lot of saving of time and a lot of saving on the piece itself. We have heard in recent times, you know, somebody moved millions of dollars, for example, from Bitcoin from one node, to one node, to another node paying like fraction, fractions of cents in fees in moving large volumes of money.

The same concept applies to any blockchain network that people put together and that's the, one of the major incentive for banks and corporates to come together and align and explore how this cross-border payment can work with lower fees.

ROGOFF: But if I can interject something -

MODY: Please do.

ROGOFF: - I mean, I think the KYC, know your customer rules, actually is quite complicated to do in this space. And Facebook ran up against this and their early version of their Libra as they started to discuss it with regulators. And yes, in principle, you know, you can get some traceability, but actually, as regulators have looked at it, it's not very satisfactory. And I think this, my impression, Saket, you're much more on top of this, but my impression is, this is still being worked out.

SINHA: You're right Ken, just a great point that you raised and this is where we think that, you know, a public-private partnership is very, very important. If a private sector just introduces this concept and works with it there will be an element of trust and trust that always will be in question. But if public and private come together, then that trust element can be brought in and the issues regarding KYC and other things, at least can have some guarantee in sense that it is endorsed by the public institution in providing that level of truth and honesty behind the entities registering to do these kind of services.

MODY: Private-public partnership sounds great, but Nathan, we've seen attempts to do so and unfortunately, they have either failed or they, we just haven't seen progress truly been made. I mean, you see the pushback Facebook's Libra received a couple months ago.

SHEETS: So, my feeling is, on this issue, that if a CBDC is to be successful, the central bank is going to need some kind of support from the private sector. That the central bank, its expertise, its capacity, isn't about retail interactions. And there are many other providers that would be far superior to a central bank in that space. So I think, you know, recognizing that public-private partnerships in general are challenging, and that they've been challenging in this space, I don't see how that CBDC is ultimately successful, at least in the retail space, where I think there are the biggest gains to be made without private sector involvement of some stripe.

The other point that I wanted to make was on this, being a former central banker, on this term of interoperability that Ken mentioned, that I think that is the place where a global digital currency as Libra was envisioned, a global digital currency can really be a game changer. It hops straight through all those different nodes in the transactions chain that Saket was talking about, and allows people to transact with each other in relatively inexpensive ways. The problem is how do we do that in a way that ensures the safety, the soundness, the reliability of the system? And in a way, as Ken pointed out, that's relatively free, not absolutely free, but relatively free of illicit activities. And those were the kinds of issues that Libra couldn't answer. And I think that's one reason why the official sector responded as negatively as it did. Not that there wasn't a fantastic germ of an idea there.

MODY: At this time, I would like to invite participants to join our conversation with their questions. A reminder that this virtual meeting is on the record. If there are any questions, Operator please flag them to me.

STAFF: (Gives queuing instructions.)

MODY: In the meantime, Nathan as we discussed, sort of the opportunities and key holdups for digital payments, do you think from a foreign policy perspective, the United States could be left behind if a central bank digital currency is not introduced in the next two to three years, especially as we see China really push forward with their own.

SHEETS: So I'm, I would hesitate to want to frame this in a foreign policy context. You know, from a, from a dollar diplomacy perspective, we want our financial system to be state of the art. We want it to be cutting edge, we want it to be reliable and sound and free of bad actors to the extent possible. I think those are all objectives. And I think that the development of this digital infrastructure is probably a subset of that. I think that China's experience definitely highlights that there are opportunities. But I think that the, the future of the U.S. financial system, its role in the global system, and the implications of that for foreign policy, I think that's a much broader set of issues. And if I were still at the Federal Reserve, I would suggest to them that they not feel stampeded into doing that, just because everybody else says our system is different or differently placed and the pros and cons of it are going to look very different.

MODY: We have a question.

STAFF: We will take our first question from Nick Hill.

Q:  Yes. Good afternoon. Can you hear me okay?

MODY: Yes.

Q:  Okay. Great. Thank you. Thanks for the discussion, which is really interesting. Professor Rogoff, you mentioned that one of the risks of central bank digital currencies was the disintermediation of the financial system and if that were fast, that would be disruptive. And I think, yes, one of the clear risks is that, what purpose do commercial banks have if retail savers can simply access the central bank directly. So I wonder if you could talk a little bit more about that risk and actually is that likely to be a bigger break on central banks’ decisions regarding digital currencies than the security question that we've spent most of the time talking about, in fact.

ROGOFF: Well, thank you for that question, Nick. No, I mean, it's certainly a big consideration with central banks. They don't want to rock the system. It's something come from the, from the outside, they'll deal with it, but they don't want to do it themselves. That China, what China did is very smart. I mean, sort of playing it halfway for now.

By the way, there's a G30 report out recently where there's a box on how the Chinese currency is going to work that's, I think, a little more detailed than previously available. And basically, they make very clear they don't want to throw out the system. There's all this infrastructure that exists and it works. We don't just want to bring in a central bank digital currency and have to junk all the existing infrastructure which is working okay. So they have preserved, and forgive me for the technical speak, but the two-tier system, the banks bank with a central bank, and the bankers interface with people. But it's a twist, which is that when you go to the bank and withdraw cash to claim on the central bank, you get something digital that actually the central bank has. And they're trying to sort of finesse the fact that the banking system might lose a cheap source of revenue deposit, by paying zero on their currency, which in China is a disincentive. Of course, they could change their mind later. But yeah, I think the disintermediation is one of the first things you hear coming out of central banks when they worry about this. It sounds very abstract. Actually, they worried about this in the 1930s when we had a banking crisis and somebody said, well, why don't we just make banks hold, you know, U.S. government debt? Why don't we solve the problem that way? And as I said, well great, who is going to lend to hardware stores and everybody else? And you're just going to move all the rest of the system. There's something parallel here.

Q: Right, thank you. But is that a fundamental block that is just really, really hard to solve? Or is it something that actually is more of a timing issue and a management issue, which can be worked around over, you know, maybe fifteen, twenty, fifty years or something, but, I mean, is it more of an existential issue or is it more of a management or tactical one.

ROGOFF: Well there are two points of view on it. One is the creative intermediation will evolve over time. Another is what I would describe it as the point of view that, so what? There is a, Rick, I think Rick Watts at Vanderbilt has a proposal out there that's gotten a lot of traction, particularly in progressive circles, where everybody holds their deposits at the central bank, the central bank re-lends the money out to the banking sector. And you know that, that's a plan. Now, that's the way I think a lot of systems work fifty years ago in a way, with that kind of central bank control. I mean, I think some of us might have concerns with giving the government that much power over where funding goes in society, but it's a matter of perspective. This is a much debated question. So, how much of it is, how much of it isn't fundamental obstacles is perhaps a matter of perspective.

SHEETS: You know, I think I'll defer to Ken on the macro of this, but sort of my sense is that in some deep way that there will, regardless of whether or not we have CBDCs, there will be in the economy folks who are net savers. And there will be folks who will be, want to be at least, net borrowers. And that there will be incentives for these folks to be able to find ways to come together. And in our current system, the banks do that with efficiency. Our markets also do that efficiently. And if we were to move into this kind of digital ecosystem, it would require bank business models to evolve. But my sense is that it would happen. And then the question I take, which is embedded in your follow up, is well does that take three years, five years, ten years, or twenty years? And how long it takes could matter quite a bit in terms of how smooth the transition was.

MODY: Thank you. Next question.

STAFF: We'll take the next question from Adam Hemphill.

Q: Hi, everyone, thank you for the, thank you for the session. It's been really, really helpful. I was particularly taken by the comments on the opportunities for financial inclusion and making payments more efficient and accessible. I just wondered if you had any thoughts on maybe the overlap or intersection with open banking and perhaps how, you know, some of these issues can be addressed by open banking and where the two, open banking and digital currencies, might work hand in hand.

MODY: Ken, is that a question you'd like to take?

ROGOFF: Well, actually, what is open banking? I'm not sure I know that term.

Q: My understanding is open banking is the use of sort of digital APIs to give access, more digital access to financial institutions, data allowing different interfaces to -

ROGOFF: - be able to transfer your funds as well. I mean, I first want to say about financial inclusion, it is not needed for financial inclusion. Most advanced countries provide very widespread financial inclusion. As in health care, the U.S. is somewhat of an exception to this. It would cost nothing to provide financial inclusion in the current system. I discussed that in my 2016 book. There's, you know, it's certainly, India has provided financial inclusion. They did it at a phenomenally low cost. Admittedly, you have to give them your fingerprints and retinal scan, which may not go over so well here.

But, you know, most countries imagine, Japan's an example where there's 99.9 percent financial inclusion. The banks are regulated monopolies. And they're basically forced to provide basic accounts to everybody. The Scandinavian countries have done this, many have. This is, there are many aspects of the backwardness of the financial system which are actually unique to the United States. The cost of credit card transactions. It's ridiculous. This is the United States, it's not the world. The speed at which transactions are cleared. It's way slower in the United States than everywhere else. You could do a lot to upgrade the existing infrastructure and deal with these problems. It may be just too hard and the digital payments may, you know provide a better platform to happen faster, even in the United States.

SHEETS: So Ken is a little -

SINHA: Yeah –

SHEETS: There's a little more -

SINHA: I was, I was just going to comment -

SHEETS: Go ahead.

SINHA: One thing, Adam, as you were saying and Ken getting you on financial inclusion, you mentioned India, yes, they have done a remarkable thing. And so is many other countries, especially Indonesia and many developing countries that have been challenged to bring financial systems to the masses and get that financial inclusion done.

One of the things where we are seeing digital currency and we have to, I'm coining a different word, but it's very prevalent, it's called programmable money. And in combination with, you know, biometric authentication and biometric ways of handling money, authentication and issuance. That's where we are seeing some countries experiment in terms of how financial inclusion can be scaled and stretched in remotest part of the country that lacks technology, lacks infrastructure, and other things.

Take a look at example, for example, in China today in most cities, towns and you know, smaller towns, people can pay just by retina scan. You don't need to carry card, you don't need to carry a wallet, and you don't need, and that's programmable money. I mean, I can say that you know, money exists in a programmable digital format.

Now, when we come to central bank digital currencies and retail digital currency, government can create these kind of value-based currency, programmable money that can be made accessible to masses, in a way where biometric authentication allows them to use the money where they want to use it, in direct dissemination to the people who really need it without involving the middleman, as well as people when they are going to spend, government or private companies can facilitate the ecosystem where people can go and actually spend money for variety of subsistence or a variety of usage depending on you know, wherever they want to, they want to use it. It becomes more controllable, more traceable, and more effective and avoids loss of money in transmission, as well as you know, the value of the money extends much more and retains its value for a larger portion of GIR that actually helps in the financial inclusion case.

MODY: Thank you. Next question.

STAFF: We'll take our next question from Jeff Kaplan.

Q: Hi, this is Jeff Kaplan, GLP. It's been a very stimulating discussion so thank you. I have a question for Nathan. During an environment where U.S. government and the Fed continue to print dollars to a potentially limitless degree and have effectively communicated a willingness to continue to do so as we weather the virus, does this dynamic potentially have the unintended consequence of accelerating the relevancy of unregulated cryptocurrencies?

SHEETS: It's a really good question and we are seeing through this episode, alternatives to traditional currencies like gold and silver and Bitcoin rise significantly in value. And whether that is a reflection of the policies that are being pursued by governments or instead is a broader reflection of just the general environment of uncertainty. I think it's very much an open issue. And of course, those two explanations are compatible, both of those things can be going on.

But when I look out over a longer horizon, you know, the risks that I see for the United States and for at least the other developed markets isn't so much currency debasement as challenges in getting inflation up to 2 percent targets. I think many of the powerful forces, the world, we're holding back inflation, and causing people to want to hold financial assets of all kinds, including dollars. I think that many of those forces are likely to be at work. But nevertheless, I think the central banks, the policymakers must be vigilant and watch carefully that their behavior is instilling confidence. And I think on balance that has through this period, that there has been a reassuring sense from the public sector that they will do what's necessary to support the economy, to make sure that their actions are instilling confidence and not undercutting confidence in the currency and in the economy.

MODY: Thank you, Nathan. Actually, on that note, I wanted to shift to data privacy. Ken, you know looking at your paper that you coauthored, the G30 report, and in there you address data privacy. What do you think are the protocols for acquiring and sharing data that's collected in domestic payment transactions, if that is where society in this ecosystem is going towards?

ROGOFF: Tough question, Seema, and there are several issues at work here. First, the domestic, then the international.

So in the domestic, let's just say there's a central bank digital currency or the central bank requires whoever the private provider is to share the information for various reasons. There's a question of what barriers can you put up that prevent everyone in the government from using it? There are, we do do that with many things now but I think you know, that's obviously an issue.

There are technological solutions for allowing low value transactions. The European Central Bank actually put out a position paper on this. And, you know, very precisely trying to capture the idea which I have tried to deal with in a crude way for a few decades about worrying about large denomination notes, saying, you know, they'll allow certain kinds of non-tokens and cards, you can only use up to a certain amount. And if you want to do a larger thing, everyone's going to know about it. So that's, that's a very important set of questions within the larger privacy issue.

Then there is sharing across countries. And let me tell you, the rest of the world does not like the status quo, where the United States can see a lot of the world's transactions. Not everything, but if it's clearing in dollars, we're going to see it because you really can't set up a framework for doing major-level, big-scale dollar clearing that doesn't involve the U.S. with the Federal Reserve as the lender of last resort. So one of the incentives driving innovation in the rest of the world is precisely so that we can't see it. And now we're worrying about the Chinese. Like, what if the Chinese get to see everything and we don't. So there needs to be a global solution, but there are difficult political economy questions of how we're gonna solve this. Maybe we'll end up with a digital divide, but the Europeans don't like the current system, it's not just the Chinese.

MODY: That's certainly evident Saket, data privacy has become such a hot tech topic as witness with TikTok, the pushback from the Trump administration and now potential acquisition by Microsoft. But to Ken's point, how do you think governments should address international sharing of transactions data?

ROGOFF: Let me leave it to Nathan or Saket to try that.

SHEETS: Let me just briefly echo what Ken said, is that when I think of risks of fragmentation in the global financial system, and specifically, in this world of digital currencies, the differing views about the privacy of information seem to me to be a key nexus or access in which we would see that kind of fragmentation. You know, for the Chinese I think they're pretty relaxed about it. On the other end of the spectrum, you have the Europeans who are very concerned, and I'd say United States is probably somewhere in between, and are these differing attitudes about data privacy, just such a divide that is going to get in the way of a globally integrated payment system and maybe a globally integrated financial system more broadly. I think this is a huge, a huge question that international policy makers still have a lot of work to do on.

MODY: Saket, your thoughts?

SINHA: So, yeah, I was going to say, Nathan that on the privacy side, what I mean, we have been interviewing and talking to central banks, bankers on policy formulation and privacy comes up as the number one topic on this. And one of the ways to look at it is that, you know, the data on transaction is already there, whenever a transaction happens. It's a question of what you want to share and how much you want to share. And that's a policy issue. If it is strictly controlled, you can create policy framework that allows what to be visible and not to be visible. So, from a cross-border global trade perspective that information can be as an, as a group set of countries can agree in terms of what needs to be shared and what needs to be kept private and things like that. The more challenges on the priv– on the retail side of digital currencies is where privacy issues becomes a big thing, because today, if you look at cash, cash is anonymous. If you, if I have cash, I spent $20 anywhere else, I mean, that's anonymous to me as my transaction. But when you have digital currency, when that level of transaction is visible, where you're spending and how frequently you are spending, and that's what you know, people are a little bit worried about or want that level of control from a privacy point of view. Whether that level of anonymity can be provided in retail central bank digital currencies, which is under big consideration as we speak.

MODY: We are less than ninety days from an election. Given how extensive this industry is, digital payments, digital currency: Nathan, do you think the candidates that presumptive Democratic nominee Joe Biden, or current President Trump should be addressing this in their economic agenda?

SHEETS: Yeah, I think that facilitating development of this digital payment space is critical for the future. And I think that it needs to be part of their broader economic agenda. I think it's only a part but I think it is an important part and it is important for the United States to be, at a minimum, be part of the conversation on these topics.

MODY: Ken, do you agree or disagree? Should digital payments come up in, if we have virtual debates or not, in the agenda?

ROGOFF: I mean, it's pretty esoteric, to be honest. I am not sure you know, the signal to noise ratio is already pretty low in the conversation. I'm not exactly sure. You know, I think it's actually a little bit dangerous to put a very specific idea out there which could be misinterpreted. And I think particularly in the United States, people are not that attuned to it. I mean, a lot of young people trade in Bitcoin and if you said something about it, they'd salivate. But I would steer clear of it if I were either of the candidates, at least for now.

MODY: Nathan, last question to you. Do you think Bitcoin has longevity?

SHEETS: You know, I'll say yes. I think it will be around. I think it was designed in a clever way. And I think that that means it will be, it will be durable. I think the tougher question is what its price is going to be. And I think that huge uncertainty about its price over the medium to long term kind of highlights its limitations and why we're not talking about Bitcoin being at the center of the global system, that it's some other quote unquote stable coin kind of, structure.

MODY: Makes sense. Well, we are at the time to conclude today's virtual meeting. A big thanks to Nathan, Ken, and Saket for joining us today to discuss the future of finance and digital currencies and I hope we can continue the conversation.


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