Exploring the Risks of Central Bank Digital Currency

thank you all for joining us both in person and online my name is Norbert Michelle I am the vice president and director of Cato's Center for monetary and financial alternatives we're going to have opening remarks from majority whip ember in just a second and then we're going to follow up with the panel moderated by me that includes managing partner of sustain the capital Chris come here Wharton's Christina Skinner and Bank policy Institute CEO Greg bear and then last my colleague ikato Nick Anthony Congressman emmer will have time to take maybe just one question and our panel will take a few as well when we get to the end of the discussion and when we do get to the Q a I would only ask please that you do ask a question if you're called upon not not give us a statement but really do get quickly to a question and one that is related to the policy topic that would really be our that's our goal here and also up front please be sure if you haven't double checked that your phone is on silent that would be very much appreciated if you are following us on social media please use Kato econ okay our first Speaker today is representative Tom Ember it's a member of the U.S House of Representatives since January of 2015 where he's represented Minnesota's sixth district in the new 118th Congress he's a fellow Republican colleagues elected him to be House Majority Whip he's a very well respected member of the House Financial Services committee and he is both on the digital assets and capital markets subcommittees most relevant for our event today he was the first member of Congress to introduce legislation that would prohibit the Federal Reserve from issuing a retail Central Bank digital currency or cbdc so please help me and welcome Congressman Tom emmer [Applause] appreciate it hello hello yeah that's right I want to thank Cato for inviting me to provide a few we okay all right just want to make sure I'm not breaking everything when I got up here that's where we're accused of all the time I want to thank Cato for inviting me to come today and give you a few uh remarks obviously it's a pleasure to be with all of you because the alternative which I'll experience just a few minutes is driving back up to the hill and being with all of them so it's really good to be with all of you now when I joined Congress eight years ago a staffer gave me a book that discussed the promises of blockchain and crypto to disintermediate economic and social Frameworks and to restore control to the individual I've come to refer to this concept today as the ownership economy but eight years ago and by the way that comes from some of you I'm just referring what you people are saying but eight years ago I just saw this technology as a solution to the mismanagement of our monetary policy and a restoration of vital American values privacy individual sovereignty and free markets the United States leadership in the global economy is propelled by our ability to leverage innovations that make markets and communication more efficient for example the United States responded to the emergence of the internet a decentralized digital infrastructure upon which anything can be built by advancing policies that prioritize these American values privacy individual sovereignty and free markets as a result the internet stands today as an infrastructure that any American can access freely without the permission of public officials which is very important unlocking an abundance of economic activity and opportunity America Remains the Techno technological leader not because we force Innovations to adapt our values under regulatory duress but because we allow technology that holds these values at their core to flourish the next phase of the digital economy the ownership economy consists of a trusted immutable mechanism for transferring value in real time over the Internet enter crypto a technology that can shift economic power from centralized institutions back into the hands of the people it's transformational and it can be threatening yes it can be very threatening to unelected bureaucrats right here in Washington as the federal government seek to maintain and expand the financial control to which it has grown accustomed the idea of the Central Bank digital currency has gained traction within the institutions of power in the United States as a government-controlled programmable money that can easily be weaponized into a surveillance tool the very ethos of Central Bank digital currencies is everything I would argue that Bitcoin and crypto in general stands against it's everything the United States of America stands against decentralized cryptocurrencies such as Bitcoin cbdc's are a digital form of sovereign currency that are designed and issued by the federal government and transact on a ledger on a ledger that is controlled by the federal government not only significant tracks transaction level data down to the individual user but also the ability to program the cbdc to choke out politically unpopular activity for this reason I introduced the cbdc anti-surveillance state act to Halt the effort of unelected bureaucrats here in Washington DC from issuing a central bank digital currency that strips Americans of their right to financial privacy our bill would one prohibit the fed from issuing a cbdc directly to anyone two it would bar the fed from using a CBD cbdc to implement monetary policy and control the economy and three it would require the fed's cbdc projects to be transparent to Congress and the American people recent actions from the Biden Administration make it clear that they are not only itching to create a digital dollar but they are willing to trade Americans right to financial privacy for surveillance style cbdc we don't make trade-offs with Americans rights through a series of executive order directive focused on cbdc research and development and a mindset that the United States has fallen behind other nations like China in when it comes to crypto development think about that we should never emulate China that is not what this country uh this country is the in Freedom we don't chase a communist style top-down uh surveillance uh economy that the Chinese have more importantly the Chinese Communist Party I look the uh the crypto development that it's the Federal Reserve it's the treasury the White House and others uh Within These uh bureaucracies are working frantically to uh in their minds keep up with our competitors but nothing could be more dangerous than adhering to a manufactured sense of urgency like this and ultimately developing a cbdc that is not open permissionless and private so as other countries like China develop cbdc's that fundamentally omit the benefits and protections of cash it is more important than ever to ensure the United States digital currency policy upholds our American values of privacy individual sovereignty and free market competitiveness with that it goes without saying that the challenges behind us and the challenges ahead of us in ensuring the United States welcomes the ownership economy that Bitcoin and crypto are significant however I'm confident that American values will always Prevail against the power hungry whims of unelected bureaucrats enshrined within our American values crypto should be fostered and developed right here in the United States of America just like the internet so the future of our Global Financial system embodies our values again of privacy individual sovereignty and free markets just like the internet rather than the values of the CCP I am grateful for the opportunity again to join all of you here today not just for the Forum but also in our daily fight to equalize and capitalize on the enormous opportunity for the growth that crypto and blockchain presents and I again I thank you for having me here today and uh it when they start waving and jumping up and down I gotta go but if you want to do something Norbert I'm happy to answer whatever thank you very much you want stage right out if the audience I do have one online that I will I can read off but if anybody see this was a setup I got it no no I'm good I'm good whatever you guys want to talk about okay okay I'm going to read one that was submitted online anonymously and and then that's going to be the one question quota that I was given um this is I find I think I like this one here we go um the FED is clearly I'm just reading this okay the vet has clearly indicated that a decision to issue a cbdc would be a decision for Congress and that it has no intention of issuing a cbdc without authorization from Congress therefore why do we need a bill to tell the FED to do something to tell I'm sorry to tell the FED to not do something it was never planning on doing it was never planning on doing whoever sent that in I I really appreciate it and I understand their logic but they are assuming that there are good actors in this space and that what they are hearing from these unelected bureaucrats who are saying there's nothing to see here it's all good we need to have permission it's interesting the Federal Reserve issued some documents recently that my staff was provided I just showed up at one of their events and they have a uh a slide I would say or in this deck where it lists what the Federal Reserve is responsible for it's responsible for the money Supply it's responsible for the two-tier rails of the banking system the overnight window those types of things that we're used to right you know what the bullet point was at the bottom Central Bank digital currency they're putting it out in their own materials today and they have no Authority they have not been directed by Congress to do a thing let's understand that what they say is not necessarily what they're doing you are dealing with Central Bankers around the world which I am not opposed to the central banking system but the idea and I think these people literally looked at this more than a decade ago and said oh look at those kids that are playing with this Satoshi white paper and isn't that fun it's kind of like a it's kind of like gaming right virtual gaming it's virtual money it's never going to go anywhere and oops then it started gaining some traction because people don't trust the way our money supply has been handled they don't trust our monetary policies they're worried about what our government is failing to do to ensure stability and a prosperous future so what do they do it starts to grow and one of these bureaucrats do they go and by the way bureaucrats with their Partners in the private sector who are using the existing two-tier banking system and want to protect it because that's their market share they went well now we got to kill it and so they started taking actions to try and knock this train off the tracks and they found out much what the Chinese found out by the way Chinese you can't mine they haven't been able to shut it all down if they can't shut it down nobody's going to shut it down so they realized at some point I can't one it's here and it's not going away two I can't shut it down so guess what I'm going to do now I'm going to swallow it up and make it part of what we run because then we will control it that's the innocent way of looking at it the not so innocent way of looking at it is when people say to me yeah I know what you keep saying about the digital Yuan and how they use that to control the population they turn your cart on they turn your card off you have the outbreak in Wuhan you can't pay for a hotel room you can't buy transportation out of there in fact they will tell you when you can go to the grocery store because they'll turn on your your card that will never happen here in the Western Hemisphere anybody familiar with Justin Trudeau and what he did to shut down the protests up in Ottawa he did exactly that I and again I appreciate the question I appreciate uh that somebody is asking what is legitimate you know if Congress has the authority and they're they're the only way that this can happen well if you want to just assume people are going to do the things that you expect them to do you do that at your own risk I look at it this way they are already moving in this direction they already have friends of ours people who believe in individual liberty and Freedom the right to self-determine who think this is a good idea it's I just want to remind you uh two different things but in the early 1970s they created something called fisa courts these were special courts that were created by Congress for what to surveil foreign Nationals that might be up to no good on American soil and you know what the argument was made back in the 70s I wasn't there I was a kid I was actually having fun the argument back then was made it will never be used to spy on American citizens I rest my case thank you guys enjoy it I do remember the 70s as well thank you very much congressman and and we may get to some of that that same question uh depending on how things go I have I have very similar feelings on that one but we'll see how it goes um so to start off I'm going to go straight to my colleague Nick um just want to make sure we kind of set the stage and everybody understands exactly what we're talking about Nick would you please give us a quick description what exactly are we talking about here what is a retail Central Bank digital currency or a retail cbdc sadly the the name does not help by any means when it comes to raising awareness around this issue granted that's a double-edged sword because it doesn't help proponents either but when we boil down what a retail Central Bank digital currency is I want you to think about it a little bit like the the cash that might be in your pocket for a second that is a liability of the Federal Reserve that is a direct tie to the Federal Reserve to the central bank now I said I only want you to think about that for a second though because it's a mistake to say that this is digital cash because we start thinking oh all the things that we get with cash are going to be produced one for one so the congressman brought up privacy cash is probably one of the most private if not the most private options that we have at least widely on the market a cbdc is not going to offer that same level of protection because of the way it's set up being on a digital database and in the same in the same sense it's also not going to offer the finality that cash offers where all payments are final like he brought up there's opportunities for intermediaries to step in right now we have that largely restricted because the government has to go to the private sector to then make that happen but you can have cases where like in Canada they ended up freezing the bank accounts you can end up stopping payments undoing payments making payments happen without your say so it's a little bit like having the the paper dollars that might be in your pocket digitized but I want to be very clear that we shouldn't think of this as digital cash by any means thank you Nick all right now with that as sort of our Baseline here I'm going to start with Greg and then for a slightly different take on the same question go to Christina we hear keep in mind what Nick is just describing and we hear sort of all the time we hear okay so we already have digital dollars the cbdc thing this is it's just another form of the digital dollar what's the big deal this is this is silly Greg is that the right way of looking at this you know you're coming from the banking industry but in general is that how close is that to Accurate um well again just sort of an extension of what a cbdc is which I think sort of gets to this so again if you have a dollar in your pocket um and always teach us at my law school class you've let money to your government right that's their liability and they use that for their assets the government's assets if you have an account at a bank you have lent money to your bank and they take that and they turn that into their assets which are loans if you take that money and deposit it at a money market mutual fund they take that and they turn that into their assets which are things like commercial paper right so to the extent that you're holding cash in your wallet right now you're funding the government to the extent that you have a bank deposit you are funding loans to yourself and others in your community to the extent that you have a deposit at a money market fund you're funding basically commercial lending so that's really important to understand and in fact it's so widely misunderstood on the hill and elsewhere that we actually did a special blog post just on this point so it if you put a cbdc in a bike wallet and that's sort of what we're going to talk about a lot is if it's in a digital wallet whether that's at PayPal or Bank of America or wherever that does not become a liability of the bank that doesn't turn into a loan or any other asset that a bank holds it's just gone and that's really important because that means for every dollar that shifts out of a bank deposit or even a money market fund into a cbdc that is lost Lending it also just adds sort of relatedly in terms of how this all works and this gets to I think some of the privacy concerns there are different ways to administer this there is the possibility of doing a direct tokenized central-backed digital currency which would be like the dollar in your wallet it's a bearer instrument it's validated based on what it is not who owns it um really no central banks are talking about that it's certainly not the FED not the bank of England which had its announcement last week not not Europe all of them are talking about and this really sort of changes the equation on cbdc they're all talking about an indirect account where the central bank doesn't have to do a AML kyc they don't have to do customer service it's not their account it's an account held at a bank or a non-bank that's sort of like a bank so call it a PayPal but that that really sort of changes a lot of the value equation because now that's going to be monitored just the way Banks monitor for kycaml your deposit account they'd be monitoring your cbdc to the extent that you're spending that in in their account and this is I'm going to come one second Christina I'm gonna come right back to you this is I think in my mind this is relevant also to the question that we asked the congressman because you can read the Federal Reserve Act many different ways there is nothing as far as I can tell that would prohibit a an intermediated cbdc which is what Greg is talking about now people would argue about that I would me too I know you would I know you would I know you would but in in one at least manifestation uh I can Envision where that would happen and or happen without any Amendment to the Federal Reserve Act a simple appropriation from Congress and you would have an intermediated cbdc so I I this is one of the reasons that I believe it is important to have legislation prohibiting it because I think that you're actually much closer to the legal Authority this is this is a point of contention and Christina are going to tag team against you now that's okay we're good we can do that we can do that because let's say like actually I don't know if I was a co-author my colleague Paige barodon I think a year ago uh wrote a legal analysis of this very question about whether um Federal Reserve Act authorizes or any of the treasury acts authorized this concluded no they tend to refer to things like prints and dies when it comes to the currency of the United States and then more it's a procedural matter this was little noticed but in the administration's digital asset announcement they had actually sought an opinion from the office of legal counsel about whether they had this Authority and there's a footnote in that announcement that says we have received illegal opinion from the office of legal counsel period now if that opinion had said green light I suspect they might have released that opinion or at least said what it said and I think the fact that they were silent on its contents probably indicates that they were told they do not have the authority and I think that also dovetails with the remarks by the FED over the years as well but Christina you jump off the top rope the chief legal counsel here if you would like me to continue to the rest of my remarks so I mean so so first I think you know I'll just carrying on with this conversation Central Bank digital currency would be a new form of public money right so that's a very important distinction to bear in mind we've been talking about what cbdc is as a baseline And I want to add right that we have public money and we have private forms of money right so private forms of money would include demand deposits issued by Banks some would say that they would include money market instruments and so on and so forth right but there are fundamentally two kinds of public money that the state issues right one is cash and coins right so currency the stuff that you can hold in your hand and then the other are Central Bank Reserves right so only the banking system has access to Central Bank Reserves right those only flow to the financial system so the point is that cbdc would be a fundamentally new kind of public money so going back to this legal question and then I'll sort of elaborate a few if you want me to so you know I think as a as a baseline right the Constitution has given Congress the power to coin money right so the power to create new forms of public money belongs exclusively to Congress and in fact the framers of the Constitution went to Great length to pres to prevent the president the Executive Branch from having any part of that power so I find it a little bit interesting when people claim that treasury can decide this question the White House the Department of Justice I can't really fathom how that would be consistent with the Constitution so Congress has the exclusive prerogative to do that and it's delegated some of that power to the Federal Reserve right so it follows pretty basically that if the Federal Reserve wants to create a new form of public money it has to have permission from its principle right the Federal Reserve is an agent of Congress Congress is the principal and as Greg was saying there are a couple places in the Federal Reserve Act where Congress said to the FED okay you can create paper money right it's very specific think about the dies the kind of ink that would be used on the actual notes um the Federal Reserve Act also provides for very specific ways that the FED can get central bank money Central Bank Reserves to Banks and other components of the financial system during emergencies so the Federal Reserve Act is pretty specific about the kinds of money that the FED can create and so this is basically where I cash out on the legal analysis and now I've done some other work thinking about individual rights and money and I'm not sure if you want me to carry on with that or seed the floor for a bit no I want you to do that and then Christian's gonna get my back and we'll come right back but Christina has a new article we do yeah so I haven't used my legal degree in two decades so I want to present you with the perspective of someone investing in technology so to make sure that we don't kind of discuss a storm in here and assume a particular implementation that seems to be going around so I don't have a legal degree so currency that technologies that can be used as money right so you typically use it to exchange it for goods and services and from an economic perspective they're kind of the operating system of an economy and we haven't upgraded this operating system for quite some time so you have yes these paper implementation and then you of basically what we call database Solutions and the paper implementation is really great right because it settles instantly it's basically censorship resistance as it usually has no fees and so forth whereas 97 of all transactions today really happen in a digitally mitigated fashion using database Solutions and that's convenience but provides absolutely no privacy and is absolutely subject to censorship is absolutely subject to the terms and commissions of that intermediary that you're introducing in your private commercial transactions and that's simply inefficient so the point there being is everybody here in the room pays about four percent of the income from the average income level directly to the commercial banking system every good and service that you're buying is inflated by at least five six percent because of outdated merchant account system so the Legacy technology the technology that that the Legacy Financial system introduces basically exerts at least a 10 penalty on the real economy and real economy here's capital r capital e as in there's an economy and there's a conduit to that economy we call Financial Services they're supposed to facilitate the exchange of commercial Goods right so they're not part of the real economy as far as I'm concerned but really the damages are much larger so in 2021 Global GDP stood at 96 trillion 2021 was the best year for financial service providers who raked in 22 and a half trillion for me the entire amount is a damage to the real economy and so the point coming back to this that we should be discussing is entirely limited to the fact whether or not we're issuing a digital Bearer instrument that's US dollar denominated everything else is going to be limited to a storm in discussion if we're assuming a particular implementation I wrote very long articles we discussed these topics for a thousand hours including with Tom a year ago were explaining this in more detail okay uh so keeping in mind the digital Bearer aspect of this and and where we've gone now I'm going to come back to you Christina you have a new article uh out and you're looking at the legal aspects of the cbdc would you say that the cbdc is just a digital Bearer instrument it's just another form of the digital dollar is that a characterization that you would make so no it's it's not and so I want to preface so I'll tell you a little bit about the way that I'm thinking about cbdc in the context of my article but I also think it's important for us as a panel to discuss and to hear your thoughts on to my mind I think there is somewhat of a conflation between a payment system and a monetary instrument right so you can have a payment system that could be inefficient in some respects without necessarily needing to adopt new monetary instruments right which could mean stable coins it could mean cbdc right but I think in some ways it's important to separate the two the two issues and especially with the case of cbdc I mean some central banks most central banks will offer as one of their primary rationale for cbdc efficiency in in payment system but I think it's worth questioning that rationale right whether that's really the first place to jump if we're looking for improvements in in payments given all the other things that come along with cbdc so all of the other things that come along with cbdc so in the that some of the academic work that I'm doing right now on cbdc I'm trying to encourage the public to think about cbdc right not as just a substitute for a digital dollar but as sort of a constellation to borrow a legal phraseology a bundle of of Rights right so when we think about money and especially when we think about cbdc it helps us to think okay what are the component parts here and how is cbdc different from the dollars that we use today right so I start with this discussion of monetary sovereignty great so if you talk to a lot of academics and policy makers even really sort of on the Wonker side of things often what one hears is an argument made that the United States must maintain monetary sovereignty now this is different from the National Security aspect and we can come back to that later right but the implication is that a sovereign state must exert maximum authority over its currency and it is The Sovereign prerogative of a Nation to issue its currency control its currency and so on and so forth and that argument that terminology around monetary sovereignty is then used to say well of course then the United States has the right the obligation to create a cbdc to rival or overcome upstarts like Bitcoin or stablecoin or even for that matter in the limit sort of any other kind of privately created currency that the FED wouldn't be able to control with its monetary policy tools now what I do in the paper is I say you know this is this is a sleight of hand this way that people talk about monetary sovereignty is relevant only in the context of international monetary law right so in the context of international monetary law right around the time of the Bretton Woods agreements countries were really worried about what would happen to their Sovereign prerogative over monetary policy if they had to maintain and sustain a gold standard right but but monetary savagery means something completely different altogether when you're talking about it in the domestic context in their domestic context monetary sovereignty is all about who gets to issue money right so it one can't really use that term monetary sovereignty to say to sort of import it into the domestic context and say well the the state the fed the treasury has the soul or at least the dominant authority to issue money right so I do this long history and I go back and I say again if you look at the way the founding fathers set up the Constitution right set up the country and pretty much how we've carried on you know since that time we've never had a state dominant theory of monetary sovereignty we've always had a popular notion of monetary sovereignty where it's really important to have privately issued money check and rival the state issued currency basically to prevent the state from abusing the currency mostly that usually means debasing the currency or doing things that would arbitrarily cause inflation great and so that's the system that we have now cbdc I would argue would really shift the balance away from this popular version of sovereignty where we rely mostly on banks to issue money right that's most most of the money in circulation is Bank issued money not you know dollar bills um and and to the extent cbdc would disarm intermediate the banking sector which I'm sure Greg will talk about a little bit right that's going to shift the balance further toward the state and and unless so around popular monetary sovereignty I also talk about property rights and money right so it's really interesting to think about money as a type of property right because Nick was saying before the cash you have in your in your wallet is a liability of the central bank but it's a liability of the Central Bank only in an accounting sense you don't actually have a contract right with the government for anything right there is an economist that once said and Norbert was there when we were talking about this right that one said that cash is an IOU nothing right so so what is a relationship exactly that you have when you have a dollar bill with the state right and arguably again right if you look at this history around what the framers thought about money and property right there's some kind of inherent right in value in state issued or publicly issued money right which is not to say that Americans have a right to be protected from inflation but they certainly do have a right to be protected against arbitrary State action that would manipulate the value of money right cbdc is programmable so by definition if the state wants to use cbdc as a policy instrument to make it easier for certain groups to buy things and not others right then the value of money certainly could be adjusted with cbdc um I also talk about privacy but I think a lot of people have things to talk about privacy so maybe I'll stop there and let you keep going yeah I would just know sort of going back and somewhat related to what Christina was saying I mean if you're thinking about a potential benefit of a cbdc as having the ability to have a tokenized bearer instrument and transact privacy privately you are in for a huge disappointment uh because there is not a Central Bank in the world that is contemplating that including ours and the reason is very simple which is if you do that you can no longer have economic sanctions you can no longer deter any money laundering you can no longer counter the financing of terrorism because that is who will use a tokenized bearer instrument and the reason they can't use cash is Cash is very bulky and people keep track of your cash and you can't really take a armored car across borders but it still happens a lot um yeah I think a majority of the US cash is actually overseas and a lot of it's being used illicitly but the last thing in the world the world central banks including ours want to sign up for is a tokenized bearer private cbdc that is why all of them including the bank of England last week have all said what we're going to do is an intermediated model where you're going to have a wallet at a bank or a non-back and they're going to administer it and they're going to monitor your transactions just the way they monitor your bank transactions now and it gets even worse because if you think about why do banks hold deposit accounts what's in it for them right why do they pay all the costs of administering it and answering the phone and doing all the kyc stuff which is incredibly expensive so if you're a bank why the hell would I hold a deposit Council it's so damn expensive well the reason is because you can lend the money out and earn a spread right and maybe you can also earn some interchange but with a cbdc you can't do that you can't lend the money out it's the Central Bank liability it's not your liability you probably can't charge interchange either so this account is a loser right so how are you going to make money on this account well you're going to be one of two things you're going to charge a fee so basically negative interest rates or you're going to sell the data I mean right now Banks don't sell data it's part of their core ethos is we don't sell data we want people to Trust Banks and we make our money by lending out the money so if you set up a central bank digital currency and it's successful which I don't think it would be I think it's a complete Fool's errand but if it were successful you would be sort of monitor you would be giving a massive incentive to everyone who holds these wallets to sell your data and and have you have even less privacy the reason I'll just say really quickly and we'll get maybe we'll get back to it the reason I don't think this is going to be successful particularly now is interest rates have risen is why would you hold Central Bank digital currency in a while or no interest when you can hold it in a bank deposit or a money market and or an interest and the great financial stability concern about cbdc which we'll get to is there's only one time you do that and that's if there's a financial crisis and you'd say well maybe just today I want to move out of my bank deposit and then I want to move into the cbdc and that implodes the banking system now not if you're probably a small dollar person but if you're a corporate Treasurer and you say well I got 10 million dollars here on account I'm just a little nervous so just for today I'm going to move it over to the cbdc well that becomes a rather massive Financial stability problem and I think that's why you've seen Bank of England saying we're only going to do this for retail and we're going to cap the amount at I think it was 15 20 000 pounds but once you do that well what's the benefit of cbdc if it's only retail and you've got to have a bank account account anyway and it really doesn't have any use case which is for me what a lot of this comes down to what's the use case for a cbdc and it's pretty hard to find thank you Greg Christian you wanted all right so we're here in Washington DC and we often tend to confuse laws and rules so lawmakers think of themselves as making laws laws are not being created laws are being discovered and rules you can ignore all day long whereas if you start to ignore the law of gravity but you will always fall flat on your face so technology only integrates with real world observable activities with actual reality the physicality of things so it's important to understand that the United States dollars and printed forms our most important export product almost a trillion dollars is circulating internationally obviously it's legally in IOU but practically in IU that's never called upon and it is exceeded by revenues only by refined oil products so the larger Point here being is it's been very successful in that particular facility as in there's a dozen other countries who started importing their particular technology if and when and where their own technology their own currency field I.E through hyperinflation so it's a foreground conclusion at this point in time that other countries will issue a program of digital Bearer instrument I think we can all agree upon that and we did a lot of research on that as everything uh online available at this point in time larger point there being is in order to be competitive we have to provide a similar product like a digital burnsman and from where we are sitting it really doesn't matter who is issuing it if it's issued correctly and in terms of deposits already 45 of all M1 deposits are actually stored by non-banks so the paypals of the world are moved by non-banks so the the primary objective and primary Money Maker for banks is actually lending which actually if you had the durable instrument could be improved upon because right now you can't actually lend to a lot of different constituencies because you don't have this granular data so when we think about lending right now or Banks commercial banks by and large do they're not lending they're creating new currency right so and so there's this whole Space of alternative Landing which is really the only form of lending in order for me to lend you something I have to actually have it from a legal perspective so again there's a lot of conflation that I don't actually project on what we can readily observe in in the data and in the technology well and I think we probably have some disagreement on a couple points there and then probably on whether we need to have the U.S issue a cbdc to compete with other countries that are issuing cbdc's I know we have disagreement on that um I do want to keep moving and I but I want to I want to try to tie back to this as best I can um we I mean we agree that there's a difference in a cbdc and a digital dollar as we know it now like that there's no disagreement appear on that right I mean that's I mean you really need to talk about the entire topology but I mean if it's one element of three factors right you need to consider but there's a difference you yes okay that's okay so yeah obviously no one supports a surveillance coin I think we all agree on that it's all in the actual implementation if we actually provide the censorship resistant and I think we I mean I think we're going to have an even longer probably another 45 or 50 minute discussion on on how that would or wouldn't happen because I think I know we've made the argument and I know I know where Greg is on this that although it's nice to talk about that digital Bearer instrument being issued by the Central Bank the truth of the matter is without getting rid of the fisa courts and the surveillance system and the bank secrecy Act and the AML regime they're not going to do that I mean I think now and and maybe that's an opinion and and maybe Christians in a slightly different spot than the rest of us but I think that's that's really the question right I mean that's would that happen and I think I mean all I could say on that front is the Bank of England is explicitly rolled it out the European Central Bank has explicitly ruled it out the bank for international settlements is explicitly ruled it out and the Federal Reserve has explicitly ruled it out right no I Christina did you no no I mean yes I think you have to think about this in the context of what the U.S sanctions regime means for our foreign policy I mean since 9 11 using the dollar to reinforce and to exert sanctions is one if not the most powerful foreign policy tool that we have so I think it's completely um fallacious to think that there would be any concession on that point um in exchange for what is very difficult if not impossible to identify as a use case right now okay and also just said sort of parenthetically I mean again use cases for central-backed digital currencies are really hard to find usually you hear people saying things like it will democratize finance it will lead to innovation without any real use case the use case you hear the most is it will improve cross-border payments um but again when you drill down and say well how would it do that if you think about a cross-border payment you're taking a fiat currency you're doing a currency transaction to convert it to another currency and then you're using the equivalent of the ACH Network overseas as you've used the ACH Network here to put it into the system but mostly what you're doing the largest cost in any cross-border financing transaction is AML kyc sanctions right so a cbdc is no answer to that it just puts another step in that process so you go from your bank account to your cbdc to the currency transaction to another currency and you still have to do AML kyc sanctions and so what has it really added I mean I think to Christina's point because no one's going to give up on that and and Christian did a good job of talking about some of the inefficiencies in the payment system Christina's making a good point as well that we need to distinguish between these I'm I'm going to come back to both of the those points in a way here um is it not the case or any of you feel as though it may is it the case or is it not the case that that some of these inefficiencies that we're talking about are the Christians bringing up are actually inefficiencies that exist partly because of the the legal framework that we have the government framework that we have um particularly in the payment sector as well as maybe in the banking sector so it what I'm what I'm really getting at is with some tweaks or changes to those to that framework could is it possible that the private sector could solve some of these inefficiencies without a cbdc I'll give a short answer and then maybe we'll get a longer one um there's going to be the one word all right there there are real benefits potentially and actually to using distributed Ledger networks um to facilitate transactions so you can facilitate transactions without a cbdc using blockchain-based deposits using distributed Ledger technology over the last year I think uh JP Morgan has cleared and settled over 300 billion dollars in repo trades using a tokenized deposit and then a tokenized version of a security so you can do interesting things like that without a cbdc similarly there's a group called The regulated liability Network that we've commented on which also has the idea of well look you don't have to change the nature of as Christina would put at public money versus private money you can have tokenized private money that is blockchain based deposits or ledger-based deposits and you could also tokenize fed wire payments right that's how Banks transact in central bank money and you can imagine a system where you tokenize that so again you can use these Technologies to make a lot of things more efficient certainly Securities transactions but you don't have to have a cbtc to do that because the the private sector can do that uh I want to address a common confusion here um distributed Ledger Technologies are not blockchains so the the two are mutually exclusive so the the only purpose for decentralized software solution blockchain has been one example is to change control over a set of bytes from One controller to another dlts don't do that that's a different technology altogether so point there being um these Solutions have existed for a long time I wrote some of the deregulation papers for the European telecommunication markets we had something called a prepaid calling card on International telecommunication networks for 30 years they instantly settle in nanoseconds so the technology has existed for some time even before the Bitcoin white paper Etc is just a matter of implementing those in a useful fashion but it always comes back to what we're using right now as Ledger technology like these are the oldest Technologies been around so we need to replace larger Technologies to change the default the default right now is surveillance to the default right now is third party control so to give you a simple metaphor because I talk about these topics quite a lot they're hard to understand from a technology perspective as if everybody here had the choice between a safety deposit box and an account and you had a digital safety deposit box providing you all the same features where the bank doesn't become an intermediary anytime you buy bread which one would you choose right and the the answer is pretty obvious but then ultimately again these are Network Technologies and you cannot uninvent Technologies there will be least cost routing around any friction that we keep in the system and that we to will be to the detriment of everybody here when we invented things like voice of YP solution there were countries that are trying to attack these Solutions they're still countries today that Outlaw voice of Ip yet obviously people downloaded these clients and started making free phone calls and you probably use it every day right now and that's the reason why you're not meeting by the minute but right now we're treating the Legacy Financial systems like it's okay to put stamps on emails there's absolutely no technical reason for that and again I don't care if it's a cbdc or a Fed coin or something else what I care about that people understand this is just technology debt that we should address so the actual call to action here is uh provide convertibility of this particular Federal Reserve no to a digital bearing instrument create reverse ATMs start your process there then you can test it there's no new issuance needed and immediately you get a much better system the technology exists and has existed for a very long time and we wrote very long articles outlining how it can be adopted so I want to make sure that we don't address any things that are kind of red herrings and straw man because you really have to understand the technological capabilities that are readily available to banks that they don't want to adapt because there's value to be had in in capturing data kind of a typical example is Google and then I stop ranting that you think your Google user you're not right you're a non-player character in a game called Google right so Google is not a search engine Google is selling social engineering as a service to the highest bidder and to some extent Banks do that too whenever you get an email that says just pay the minimum amount what is that exactly so they are not your Steward usually anyway I'm gonna stop here because I give very long talks on this I know I know no no I've known Christian for a little over a year now I think and before you leave today I'm going to convince you that you should care about whether it's fedcoin or not though that's my whole goal today I'm going to switch gears we're winding down closer to the end and I I want to go in a slightly different slightly different direction when the FED solicited public comments on the cbdc Nick did a painstaking work to go through pretty much every single comment that they posted not pretty much um it will overwhelmingly negative these were just public comments that the FED received they were two-thirds were negative in some fashion they showed concerns about risk to financial privacy Financial Freedom as well as stability of the banking system so why are we here why are we still talking about this and you and we can even throw in what wood Powell's chairman Powell said yesterday and I know what I think about that but let's uh let's I'm gonna throw that open to everybody Nick do you wanna why why is this still a concern I think the two worst reasons for why this is on the table one is this General fear of China's doing it so the United States has to respond and that has so many problems with it just from the start the second I actually think is worse though because it's this fear about Libra or DM and Facebook or meta where I encourage you all you don't have to take my word for this go on Google Trends and just look up cbdc and see what the activity has been like and you're going to notice that right after the summer of 2019 the views and the trend activity just Skyrocket with activity and it's really important to be clear here what happened did Facebook introduce a stable coin did it put one on the market did it integrate it into into Facebook on social media no it published a white paper talking about the idea and this got officials both in in central banks and international agencies and ones in Congress so scared about what might happen if Facebook goes through with it that suddenly I mean cbdcs are we're not new at the time if I'm not mistaken China had been looking at it since about 2014 if not earlier and yet suddenly it it changed the game for them that this might be a real thing and unfortunately despite so many people being concerned about it despite it really not offering a solution to the table despite any of the many promises that have been offer just failing to stand up to scrutiny I think those two reasons have really held strong there's really deep claws on that and when we get to the end of the day of looking at there's a lot of problems with the existing system one of my favorite things that Chris has said before is that the existing Financial surveillance operates like we're we're trying to catch tuna but we're catching dolphins in the mix and sadly it's not just one or two dolphins it's millions of them and we need to fix those problems and instead we're just looking at the shiniest new toy in Central Banking um yeah I'd throw in a couple more I totally agree I mean I think the Facebook thing just caused a collective Panic around of central Bankers around the world because it got to their Central concern which is we need control of our currency and our monetary policy and what if Mark Zuckerberg sets up a Walled Garden with Zach coin or Libra or diem or whatever it is and all this activity occurs outside of our control I I think that's a bad justification for two reasons first obviously it hasn't happened and I don't think it will happen and second if it did happen how is the Central Bank digital currency and answer to that why would you not participate in Zuck world the metaverse and get all these benefits because you can have a non-interest bearing cbdc instead unless you're just going to require people to have it but then you could just outlaw Zuck world so that didn't really make any intuitive sense to me I think a second reason which is a little cynical is this is a really interesting thing to talk about I mean look at us right and if you're a central bank Economist and there are a lot of them um what a cool thing to debate and think about like what's money what's the Central Bank digital currency and then you have a bunch of Technology people like we can do a project and think about how cool this is and it's also interesting every article you read by a central bank Economist about studying cbdc has a chart or graph talking about how many other central banks are studying cbdc and I think that came up even today so the reason we're studying is because everybody else is studying it and so it's become this it's its own little industry the third and I think maybe most interesting but most subtle justification which I have I understand at least is is a notion that you that people have a sort of natural right to a a a a currency issued by their government and right now that's cash right you can look at it and it's got the eagle on there and a bunch of Latin words but like that's the government and I've got my money directly from the government and it's not JP Morgan's money or truest money it's the government and I got that I could see that Eagle right and the notion is well if people stop using cash and it continues to decline do people just sort of have this natural right to have that in a digital form and like a cbdc and maybe the image in your wallet would be an eagle um now I don't think that makes a lot I mean I can understand that I don't think it makes a lot of sense particularly maybe they should have their own Eagle if the deposit in your deposit account is actually guaranteed but guaranteed by the full faith and credit of the United States in the form of the FDIC what's really the difference between holding that with the legal eagle picture of the FDIC and holding an eagle picture of a cbdc but I do think for some that is a motivation and it's very sort of Central banker-ish and it's very what is money-ish so I think that becomes a sort of a lure that there's sort of this natural right there Christine and I well she's just trying to yeah so I'll just I think that has been said since turns about China have waned a bit as sort of the full scale of what dystopian possibility is is out there has been made uh clear to the American public and I think this you know the concern about the surveillance stays like the most tangible thing that most people can grasp on to and probably you know unless it's the most visceral reaction but from a policy perspective I think the one thing that hasn't been mentioned is the cbdc I think is very attractive to treasury departments particular and some administrations in particular because it could potentially give the executive branch more power for doing things like circumventing Appropriations or leaning on the Federal Reserve right because as a cbdc increases the liabilities of the central bank right that's also going to give the Central Bank more Headroom to purchase more stuff right so that could mean that the central bank can buy more treasuries right kind of loosens things up in terms of disciplining yourself over over the debt issuance if you think the fed's going to have more room to stop that up you know maybe it means that one day the FED can get a little bit more creative and and might you know feel some pressure incoming to buy corporate bonds start getting into some fiscal activity and I think that the cbdc could just create a lot more sort of policy creativity for doing things even like fiscal transfers or you know people's QE right let's print some more cbdc during Co vid 2.0 hopefully that won't happen right and we can sort of get money to certain groups more more efficiently and so I think that's part of the reason why why you know the the from the policy side cbdc looks quite tantalizing and Chris wrap that one up again I'll go to a question so Congressman Emma and I had uh did a forum last year exactly at the same time incidentally so his demand earlier if you paid attention more said we should all have property rights to to these and I call this to these type of bytes that's exactly the right demand but the important thing is we're discussing one-third of the actual technology because really the most important thing is really government issued credentials so if you have an iPhone right now and you open up your digitally needed wallet that Apple provides and you live in one of four states you can already import your digital driver's license into that so these are digitally native credentials they are stored on The Enclave on your iPhone so they already give you a primitive that you can exchange right now with law enforcement and TSA in a particular way that's privacy preserving so that's the right instrument to to be looking at and then the obvious other one is is just wallet technology so when you look at your wallet your physical wallet you see certain instruments there so you've got a driver's license you got credit cards and you got cash in there so it's important that we discuss the entire Spectrum so actually just discussing cbdc's is rather vacuous you've got to understand the real topology and overall Network topology that we're creating right now what you're using today is not the World Wide Web that's the commercial web that's what we are fixing and the value transfer layer is the most important element that we're fixing right now and to simplify this because again I give three hour talks about this is we're reversing the topology from this push Paradigm where you are basically the buyer of your first self-driving con that decides where you should go and how to get there to a pull Paradigm to where you are actually getting back into control of all your digital dust not just things that we call currencies that are stored in databases and ledgers and we agree there's more pieces to this uh the the event that we had last week with representative Rose and Kat temp where we talked about the bank secrecy act also a big piece of this and we have lots of these pieces that are also in line um so I if we could if we have a question in the audience we'll we'll do that now we'll go to q a if anybody has an off a question in the raise your hand if not I do have one that I want to do online but if anybody's got one we can do that no I don't think that's ever happened yeah okay all right I'm gonna I'm gonna read one that was submitted online from the money Apprentice um for the mat for the vast majority of users of our money systems today how might a change to cbdc's solve any problem or make their money and banking experience better that's and we'll that's that's forever anybody and everybody who wants to it's again a bifurcated question it all depends on the implementation if it's programmable programmable digital balance someone makes things better if it creates a surveillance time a coin no one should be using it's kind of binary from Downstream from that I mean the FED in that paper that we discussed at length might declared that they want to create something that that's analogous to cash so if they did that that'd be all fine so we just should focus on the actual implementation rather than creating the straw man assuming that's going to be a civilians come and talk about that right and there are so many solutions to pick from writers over the last six years over the last six years we reviewed about 1200 Solutions in the realm of value transfer and there's so many problems in the Legacy system again these are database Solutions that's the important part to understand it's a national security risk we cannot use database solutions for anything you cannot protect databases we need to create a network of Mac cryptographic Primitives it's all in infrastructure at large but it's also our banking system at large right now you're already using cryptography that's important part to understand when you communicate your with your bank you're using the same encryption algorithm to send a message to your bank but these are not payment systems that you're using right now you're using messaging systems you're sending a message to your bank who's sending a message to another bank who's sending messages to another bank so the difference with digital Baron cement is that you're actually transferring the value in instead of doing this messaging system and again we should have had this a long time this is not optional cyber security so cyber crime was a six trillion dollar industry in 2021 upon Global GDP of 96 trillion and it's not optional okay no no your point is taken Chris but let me let me let me I'm going to push a little harder and I'm going to ask somebody else to jump in because I I don't hear how the cbdc itself helps change that I think I mean I think if you're a retail customer right now you're sending money to your friends with venmo or the vastly Superior Bank upsell for free you're getting your direct deposit for free you're paying with your debit card for free the retail the merchant pays not the I'm talking about the individual um so you're doing that for free you're spending money with your credit card probably more than your debit card because you're getting miles um and and benefits and so with regard to all of those transactions it is difficult to see a use case where you would say oh no I would vastly propose in say my Apple wallet instead of having my bank card and my credit card in that wallet I would like to have a non-interest bearing cbdc that I would use to spend where I get no benefits and I think that's sort of the central challenge is again if we're talking about retail wholesale is a different equation but it seems like it's retail today if you are a retail human being it's hard to see anything that you can do with the cbdc that you can't do better now and pretty easily now you can get into merchants and because they're the ones who pay interchange and the whole vast you know payment System payment system actually works pretty well you tap you know you wave your phone whatever um and and that's really to me the the biggest downside you can read for example all the bank of England releases of last week and and they just don't talk about use cases they don't talk about again to me the biggest problem is who's going to administer this wallet for free without selling the data or charging and that's where I think the the esoterics of the Central Bank economists don't really come sort of come to ground in the real world of how are people paying each other right now is anybody else before we go back to Chris does anybody else want to okay go quick so it's obviously never free it's always built in right so every time you've got when was is not not for profit neither as Bank of America or any of the it's always built in to whatever you're doing in the price what you're buying or otherwise yeah it could be that the entity is actually selling your data if it's a non-bank which again 45 of All Digital mitigated values are being mitigated by non-banks today and these other memos of the world so it's never free it can't be free in the Legacy system that's kind of the point but it's really infrastructure technology that I guess suppose the cbdc won't be free either because somebody's going to do the AML kyc you can answer the phone I can't give you a five dollar note and there's no cost for either of us right but there could be a cost has right there's a different kinds of fee there's transaction costs right those are fees right but then there's also the inherent value you're throwing off when you're engaging in monetary transactions right I mean we can't be sure that the state won't eventually monetize that and how will that look different from how the private sector monetizes it right they could monetize it in terms of policy outcomes right that people find inconsistent with their views of personal Liberty right that's that's slightly different from surveilling you right it's more like using your data to tailor policy preferences about when we should have lockdowns or where you can do X and Y right but to see that there's no cost to it I think sweeps with quite a broad brush and we are going to have to end we're we went a little bit over uh I want to keep going I I'm going to sneaky in a way sneaky sneakily kind of keep going I'm just going to throw one thing out there that's where we're going to stop I I it's a it's sort of a question and we'll just kind of let it hang I'm not so sure that the idea is a straw man in terms of what we're talking about what kind of cbdc we're talking about them coming out with because I from my take on that and people can go online and check uh whether it's us or somebody else but we have a very long list of quotes from officials at the IMF at the bis Laurel Bank um the Fed many uh talking about what kind of cbdc they should come out with and why they want to do that and why they want to program it so that you can buy certain things and not buy other things and and so on and so on and so on so I'm um I'm a little bit less uh in the it's a straw man camp on that one but I mean I think that's unfortunately we're over and we are going to have to end there we'll keep talking about it um and we thank you for coming and for joining us both in person and online thank you very much [Applause]

Channel: The Cato Institute

Views: 6,976

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Id: fpMuriR458M

Length: 68min 10sec (4090 seconds)

Published: Thu Mar 09 2023