Speaker 1: Welcome to Kobe Time, a podcast series on Markets and
Speaker 1: Economies from Devious Group Research. I'm Tambe, chief economist. Welcoming
Speaker 1: you to our 105th episode. Our guest today is a
Speaker 1: return guest is Raad Tolani, senior uh senior professor of
Speaker 1: Trade Policy at Cornell University first came to Coby Time
Speaker 1: 2.5 years ago on episode 36. And in that episode,
Speaker 1: we talked about the global economic outlook and major developments
Speaker 1: in the currency world.
Speaker 1: Since then, I has published a book called The Future
Speaker 1: of Money. How the digital revolution is transforming currencies and finance.
Speaker 1: He has also continued to publish on China's economy, central bank,
Speaker 1: digital currencies, us dollar dominance or like thereof and cryptocurrencies.
Speaker 1: So much to talk about Iras. Welcome back to Kobe time.
Speaker 2: It's so nice to be back on your show and
Speaker 2: certainly things have changed a little bit in the last
Speaker 2: 2.5 years. So we have much to talk about
Speaker 1: just a little bit. All right. So uh I want
Speaker 1: to start with the broad macro initially, I uh how
Speaker 1: has the global financial system held up around the pandemic?
Speaker 1: The policy response around the pandemic and its inflationary aftermath.
Speaker 2: So remarkably, the global financial system by and large did
Speaker 2: hold up quite well in the initial phase of the pandemic.
Speaker 2: And we did not see major banking system stresses um
Speaker 2: emerge in any part of the world. And I think
Speaker 2: that speaks to the increased resilience. Um that was um
Speaker 2: you know, put in place by the regulatory changes that
Speaker 2: took place after the global financial crisis and
Speaker 2: um some crises that occurred after that including the eurozone
Speaker 2: debt crisis. Um
Speaker 2: More recently, of course, things have begun to change. There
Speaker 2: are parts of the world where we are beginning to
Speaker 2: see certain elements of stresses pop up in China, for instance.
Speaker 2: Um there are some banks that are quite exposed to
Speaker 2: the real estate sector and while they don't see a
Speaker 2: major financial panic uh um or crash emerging,
Speaker 2: there are certainly some property developers that are highly leveraged,
Speaker 2: some banks, especially some of the small, medium uh medium
Speaker 2: sized banks, uh small to medium sized banks that are
Speaker 2: quite exposed to the property sector and that are already
Speaker 2: facing some stresses. And then there are other parts of
Speaker 2: the world like the US, of course, where we had
Speaker 2: these uh um couple of uh uh banks that um
Speaker 2: uh faced a fair amount of. But there again,
Speaker 2: um things seem to have been contained to a relatively
Speaker 2: small sliver of the banking system. So there is a
Speaker 2: sense that there are elements of fragility in the banking
Speaker 2: system um in many parts of the world. But by
Speaker 2: and large things seem to be holding up.
Speaker 2: Although um the period of rising interest rates in many
Speaker 2: of the advanced economies, you know, in some ways, it
Speaker 2: um helps banks in some ways, it puts some of
Speaker 2: their balance sheets and their stress especially. Um if as
Speaker 2: was the case with uh um uh Silicon Valley Bank
Speaker 2: and the First Republic, we see some stresses building up
Speaker 2: on the
Speaker 2: asset side of um bank balance sheets as um interest
Speaker 2: rates on government bonds in particular, um, start rising. So
Speaker 2: I don't think we've seen the end of banking system troubles,
Speaker 2: but by and large, the financial system, especially the banking
Speaker 2: system seems to have held up reasonably well in most
Speaker 2: countries for the last few years.
Speaker 1: Sure. One of the reasons arguably is the fact that
Speaker 1: we basically have a financial sector put in place that
Speaker 1: if you have banks experiencing runs, it seems like the
Speaker 1: regulators will come and give you a blanket guarantee. Is
Speaker 1: that an issue
Speaker 2: that is certainly an issue that we're going to have
Speaker 2: to grapple with the sense that even in countries um
Speaker 2: including the US where there isn't a blanket full uh
Speaker 2: deposit insurance system that basically covers the entire banking system
Speaker 2: in its entirety. What we are seeing is that when
Speaker 2: trouble erupts, especially if that trouble
Speaker 2: looks like it could spill over to the rest of
Speaker 2: the banking system, the regulators step in and you end
Speaker 2: up with uh you know, any sense of market discipline
Speaker 2: being lost now, countries like China where there is um
Speaker 2: um where there was a sense that there was an implicit,
Speaker 2: full uh insurance of the entire banking system in place.
Speaker 2: Um was something that was a concern.
Speaker 2: Um China has been moving towards an explicit uh deposit
Speaker 2: insurance system, but what we're seeing is that across the world,
Speaker 2: um that notion of market discipline through limited deposit insurance
Speaker 2: that um prevents bank runs, but still um gives depositors
Speaker 2: an incentive to look into the books of their banks
Speaker 2: more carefully. I don't think that is holding up and
Speaker 2: that is going to have some longer term repercussions uh
Speaker 2: for the banking system, soundness and stability. If we have
Speaker 2: a situation
Speaker 2: um where almost uh um by construction, we're going to
Speaker 2: have forces that uh feed into more concentration that lead
Speaker 2: to potentially more risk taking and so forth.
Speaker 1: Um Any view on the state of heavily indebted emerging
Speaker 1: markets economies which are facing ever rising, you know, dollar debt,
Speaker 1: servicing costs and some of them are an outright crisis.
Speaker 2: Now. It is true that there are some economies in crisis.
Speaker 2: But what is more striking to me is that during
Speaker 2: the last three or 44 years, we haven't had any
Speaker 2: systemically important emerging market economies facing um major crises. Now,
Speaker 2: to some extent, this is because I think many emerging market,
Speaker 2: um policymakers did learn the right lessons um from the
Speaker 2: Asian financial
Speaker 2: crisis, the Russian crisis, the Mexican tequila crisis and so on.
Speaker 2: And in the global financial crisis, of course, we had
Speaker 2: many emerging markets holding up reasonably well. Unfortunately, in the
Speaker 2: last few years, I think some of those lessons have
Speaker 2: been unlearned. Many emerging market economies, particularly some of the
Speaker 2: frontier economies have taken on large amounts of foreign currency,
Speaker 2: external debt.
Speaker 2: And there is a mix of this sort of lack
Speaker 2: of policy restraint and um political and economic instability in
Speaker 2: many of these countries such as um Sri Lanka, uh Pakistan, Venezuela,
Speaker 2: Turkey and so on which have put them under very
Speaker 2: significant uh uh duress. Um But the major emerging market
Speaker 2: economies do seem to be holding up um quite well
Speaker 2: uh so far. So there is this bifurcation that has
Speaker 2: emerged even among the emerging market and developing economy uh class.
Speaker 1: It is interesting and it, I just want to share
Speaker 1: with you one insight that we run for emerging and
Speaker 1: developed markets. A, you know, sort of a cross country
Speaker 1: exchange rate, misalignment analysis and the biggest misalignment cases we
Speaker 1: find are actually in developed markets, not in emerging markets,
Speaker 1: but to your point about the countries like the Pakistan
Speaker 1: and Sri Lanka, I think the debt sustainability issue still
Speaker 1: such a big question even though they have extensively IMF
Speaker 1: programs in place.
Speaker 1: Um If for the other big development over the last
Speaker 1: couple of years is the war in Ukraine and with
Speaker 1: Western sanctions on Russia, in particular, we have seen wide
Speaker 1: ranging weaponization of the US dollar, so to speak, what
Speaker 1: will be the legacy of that?
Speaker 2: The fact that the US has been, um, so willing
Speaker 2: to use sanctions, of course, has been taken note of
Speaker 2: by policymakers around the world and certainly for a while now, um,
Speaker 2: you know, it's not just US rivals but also traditional
Speaker 2: allies of the US, including Europe that have been very
Speaker 2: eager to get away from a dollar dominated the global
Speaker 2: financial system.
Speaker 2: The sanctions have given an edge uh to that uh
Speaker 2: um to that effort because what we've learned is that
Speaker 2: the US is willing to bend or even break the rules.
Speaker 2: Um in certain cases, now, one can see that the
Speaker 2: US has been aggressively using sanctions on international payments and
Speaker 2: while Swift is supposed to be um you know, in principle,
Speaker 2: um a nonpartisan um
Speaker 2: uh group, the reality is that um American banks are
Speaker 2: so important to swift that the US does maintain a
Speaker 2: bit of a chokehold over swift as well. So cutting
Speaker 2: off a country from access to the swift messaging system
Speaker 2: and from the international payment system is certainly a very
Speaker 2: pot uh threat. So there are countries around the world
Speaker 2: trying to find their ways around it. China has set
Speaker 2: up the cross-border interbank payment system that could more directly
Speaker 2: communicate with the payment systems of other countries, both in
Speaker 2: terms of messaging and also in terms of payment and
Speaker 2: settlement um of international transactions. But where the US is really,
Speaker 2: um I I think broken what had come to be
Speaker 2: seen um as a set of uh widely accepted rules
Speaker 2: was that it even
Speaker 2: um attempted to freeze um Russia's foreign exchange reserves now.
Speaker 2: Um it did not technically really freeze the reserves, but
Speaker 2: it made it very difficult for Russia to get access
Speaker 2: to those rainy day funds and for emerging market policymakers.
Speaker 2: This is a real concern because after all, um if
Speaker 2: you store away a lot of um
Speaker 2: your rainy day funds in the form of foreign exchange reserves,
Speaker 2: put a lot of them in the US and um
Speaker 2: other advanced economy, um government bond markets. And then when
Speaker 2: the storm comes, you cannot use those rainy day funds.
Speaker 2: That is a real concern.
Speaker 2: However, the difficulty that countries that want to step away
Speaker 2: from the dollar face is the following. There aren't any
Speaker 2: clear alternatives in terms of either payment currencies or in
Speaker 2: terms of reserve currencies. I'll take those one by one
Speaker 2: on the payment currency front. One can well imagine a
Speaker 2: shift taking place. I refer to China's cross-border interbank payment
Speaker 2: system or SS one can well imagine that when China's
Speaker 2: trading partners have payment systems that reach a similar level
Speaker 2: of maturity
Speaker 2: that you could have em emerging market currency pairs being
Speaker 2: directly traded for each other, say Renminbi versus uh um
Speaker 2: uh the Rupe without having to go through an intermediate
Speaker 2: currencies such as the dollar or for that matter, the euro.
Speaker 2: Um You could also have China and Russia trading directly
Speaker 2: in their pairs of currencies. So new technologies, financial market
Speaker 2: developments in the emerging market countries are I think reducing
Speaker 2: the need for vehicle currencies.
Speaker 2: Now, what is interesting is that it is not obvious
Speaker 2: that the dollar is going to suffer the most here.
Speaker 2: In fact, what we've seen in the last four or
Speaker 2: five years is that the euro has if anything suffered
Speaker 2: a little more than the dollar in terms of the
Speaker 2: share of payments that are intermediate through that currency, at
Speaker 2: least based on data that we have um on
Speaker 2: um payment transactions where the messaging runs through swift. Um
Speaker 2: There is also the prospect of uh certain types of
Speaker 2: cryptocurrencies like stable coins a subject. I suspect we will
Speaker 2: turn to later in our talk um gaining traction in
Speaker 2: international payments. But there again, it is really stable coins
Speaker 2: that are backed up by us dollar reserves
Speaker 2: that seem to be gaining the most traction. So the
Speaker 2: US dollar might indirectly gain even more prominence as a
Speaker 2: payment currency. So it is possible that the dollar will
Speaker 2: face some erosion in its role as a payment currency
Speaker 2: that even emerging market currencies will take on larger shares.
Speaker 2: But I think the dollar will remain by far the
Speaker 2: most important payment currency
Speaker 2: as a reserve currency. Likewise, the dollar share has eroded
Speaker 2: somewhat in the last few years. Um Now, um before
Speaker 2: the euro came into being the dollar share of global
Speaker 2: foreign exchange reserves was about 71 72%. Um After the
Speaker 2: euro came into being, that share fell by about 10%
Speaker 2: points and then it fell to about, you know, 62%
Speaker 2: just before the global financial
Speaker 2: financial crisis. But since then, the dollar share has eroded
Speaker 2: only marginally to about 59%. Right now. What is interesting
Speaker 2: is that in the last four or five years, the
Speaker 2: Euro share of global foreign exchange reserves has taken a
Speaker 2: real hit down to less than 20%.
Speaker 2: Um Professor Barry Eire of the University of California Berkeley
Speaker 2: has made this other interesting observation that if you take
Speaker 2: many of the smaller reserve currencies like the Australian dollar,
Speaker 2: the Canadian dollar, the Swedish Corona and so on. Cumulatively,
Speaker 2: all of those small reserve currencies have increased their share,
Speaker 2: although each of them accounts for only
Speaker 2: very small share. So what is happening is sort of
Speaker 2: interesting right now, the distance between the dollar and the
Speaker 2: second tier of reserve currencies in which I'm going to
Speaker 2: include the euro that is actually increased. So there is
Speaker 2: a lot more jockeying for position, a lot more fragmentation
Speaker 2: among the 2nd and 3rd tier reserve currency
Speaker 2: so that um pound sterling the Japanese Yen, uh the
Speaker 2: Euro have all taken a bit of a beating in
Speaker 2: the last decade or so. So the distance between them
Speaker 2: and the dollar has increased and there is a lot
Speaker 2: more um uh coming up in the form of these
Speaker 2: smaller reserve currencies. So a lot more fragmentation
Speaker 2: and why is this fragmentation taking place? Because emerging market
Speaker 2: and other uh reserve managers desperately are looking for diversification options.
Speaker 2: But again, the paradoxical issue here is that while the
Speaker 2: dollar share may erode somewhat, it has weakened the rivals
Speaker 2: even more, putting the dollar at some level in an
Speaker 2: even more uh strong position.
Speaker 1: Absolutely fascinating. I want to stay on the subject a
Speaker 1: little longer if, if I may uh China. So China
Speaker 1: does swaps with various central banks around the world. All
Speaker 1: these petrol cny discussions, we hear about all the time
Speaker 1: that they want to have commodities coming from the Middle
Speaker 1: East invoiced in R and B. Uh And then the Chinese,
Speaker 1: these uh fintech companies have even like mobile wallets that
Speaker 1: are now interfacing with the ecny. So I do want
Speaker 1: to talk about CBD CS and other things later with you.
Speaker 1: But just in terms of China's desire to make the
Speaker 1: R and B more acceptable, is it even reasonably possible
Speaker 1: without capital economic liberalization?
Speaker 2: So I was in um China um after the 3.5
Speaker 2: year hiatus just a couple of weeks ago and this,
Speaker 2: of course, was uh a subject that I did uh
Speaker 2: discuss with the Chinese policymakers because there is something dear
Speaker 2: to my heart. Um And the um authorities seem very
Speaker 2: determined to continue uh with capital account liberalization and freeing
Speaker 2: up the exchange rate to be more uh market uh determine.
Speaker 2: In fact, over the last um
Speaker 2: um five or six years after the um 2014, 2015
Speaker 2: episode of Renminbi depreciation.
Speaker 2: It is true that the direct intervention in the foreign
Speaker 2: exchange market um has been quite limited. The amount of
Speaker 2: foreign exchange reserves held by the Chinese central bank has
Speaker 2: remained relatively flat in the range of somewhere between three
Speaker 2: and $3.1 trillion. There's been some marginal intervention using the
Speaker 2: balance sheets of commercial banks. But overall, they seem quite
Speaker 2: comfortable letting their
Speaker 2: in the um rise and fall in value um especially
Speaker 2: relative to the dollar on the capital account. Um I
Speaker 2: was told quite clearly that China is never going to
Speaker 2: have a fully open capital account. But for all practical purposes,
Speaker 2: as far as international investors are concerned, they do want
Speaker 2: to make it easy and they have opened up the
Speaker 2: bond and equity markets with very few restrictions on foreign investors.
Speaker 2: The difficult issue that China faces is whether foreign investors
Speaker 2: view that as a credible promise that the capital account
Speaker 2: will be kept open or whether if the Renminbi were
Speaker 2: to face depreciation pressures. Again, um the capital account might
Speaker 2: not be used as an exchange rate management tool essentially
Speaker 2: by limiting uh capital outflows by putting restrictions on them.
Speaker 2: So foreign investors don't seem to be buying it yet,
Speaker 2: but the government does seem committed to
Speaker 2: continue with capital account liberalization and exchange rate uh uh
Speaker 2: liberalization as well.
Speaker 2: Now, this is certainly going to go hand in hand
Speaker 2: with the um Chinese government's desire to um you know,
Speaker 2: to uh have the Renminbi play a larger role in
Speaker 2: um international finance, particularly um in order to um
Speaker 2: you know, escape the clutches of the dollar based uh
Speaker 2: global financial system. So I think China is trying to
Speaker 2: put in place the elements of the technical infrastructure that
Speaker 2: are necessary um to avoid um being subject to sanctions
Speaker 2: of the u wherever uh
Speaker 2: to use that as a threat against China. So it's
Speaker 2: not quite there yet. But China is clearly um using
Speaker 2: the Renminbi and using these various elements of the infrastructure,
Speaker 2: including its own payment system and um connection with other
Speaker 2: payment systems in order to move this forward
Speaker 1: since you were in China very recently. Actually, I haven't
Speaker 1: been there in three years. Uh I want you to
Speaker 1: ask uh I, I would ask you a slightly broader question,
Speaker 1: what was your sense on the sentiments? Because you know,
Speaker 1: we sitting outside are largely reading a pretty negative narrative.
Speaker 2: It depends on where the narrative uh is coming from.
Speaker 2: I was quite struck by the difference in tone between
Speaker 2: what I heard um from Beijing and from uh Shanghai
Speaker 2: and Beijing. Of course, I was largely meeting with uh
Speaker 2: um government um and um regulatory and financial officials um
Speaker 2: in Shanghai had a lot more meetings with the private sector.
Speaker 2: Um And this was a couple of uh um weeks
Speaker 2: ago before the recent uh um uh um Politburo meetings
Speaker 2: um where even the government seems to be expressing some
Speaker 2: concern about the um um the momentum that the economic
Speaker 2: um
Speaker 2: um recovery has had in China. So in Beijing, I
Speaker 2: got the sense that policymakers were a little more sanguine
Speaker 2: that um they did not need to unleash huge amounts
Speaker 2: of stimulus, that there was some amount of stimulus already
Speaker 2: in the system. Um Some of it through easing of
Speaker 2: constraints on local government borrowing um you know, reducing some
Speaker 2: of the restrictions they put on the property sector, uh
Speaker 2: some
Speaker 2: similar that was already in train, what I heard from
Speaker 2: Shanghai was a very different set of views. Um There
Speaker 2: seemed to be concern among private sector participants from a
Speaker 2: variety of sectors um that the government had not set
Speaker 2: a clear direction of policies yet. And in particular, the
Speaker 2: government's attitude towards the private sector was something that they
Speaker 2: did not fully find credible
Speaker 2: yet. Now, Beijing of course, has been trying to send
Speaker 2: a lot of signals that after the private sector crackdown
Speaker 2: um that took place in the late part of 2022
Speaker 2: and early 2023 that in fact, the government does view
Speaker 2: the private sector as playing a very important role in
Speaker 2: the economy. Um That message does not quite seem to
Speaker 2: have filtered through in a credible and durable
Speaker 2: sense uh to the private sector. And we've seen that
Speaker 2: um in the dismal um private sector investment growth that
Speaker 2: we had in 2022 and the fact that it's not
Speaker 2: really picked up yet, and it may also be feeding
Speaker 2: into the lack of household confidence that we've seen in
Speaker 2: very weak uh uh retail sales. So I think the
Speaker 2: government has a pretty significant task uh on its hand,
Speaker 2: both in terms of using
Speaker 2: some mix of macroeconomic stimulus, perhaps um uh with a
Speaker 2: little more weight on fiscal stimulus. Um but also trying
Speaker 2: to send a clear signal um in some uh credible
Speaker 2: way to the private sector that the government is um
Speaker 2: going to ease some constraints and move. Um you know,
Speaker 2: the entire policy making appetit us in a more positive direction.
Speaker 1: Well, let, let's hope that, you know, we, we see
Speaker 1: some concrete actions, I suppose in the part of your meetings,
Speaker 1: we heard some words that were welcome from market sentiment perspective,
Speaker 1: but in terms of actual action, whether it is debt
Speaker 1: restructuring or additional fiscal support, um we're still waiting for
Speaker 1: some concrete stuff. All right, if we uh time to
Speaker 1: talk about your book,
Speaker 1: um So this came out, I believe in 2021. But
Speaker 1: most of the reviews I read are from 2022. Uh
Speaker 1: And I highly recommend to the listeners of Kopi Time
Speaker 1: to read this book, Future of Money. How the digital
Speaker 1: revolution is transforming currencies and finance. Now, I will do
Speaker 1: this in an unorthodox manner. I will first ask you
Speaker 1: something that is not in the book. So there was
Speaker 1: a reviewer who seemed a bit disappointed by one part
Speaker 1: of your book. So the reviewer wrote and I quote,
Speaker 1: reading through the book is unlikely to provide any insights
Speaker 1: into how to value cryptocurrencies or how digital currencies such
Speaker 1: as Bitcoin are likely to replace government issued money as
Speaker 1: a store of value. I, why don't you take a
Speaker 1: crack at these issues?
Speaker 2: I was quite clear in the book that I cannot
Speaker 2: value uh decentralized cryptocurrencies like Bitcoin because um
Speaker 2: uh there is no clear valuation model in my mind
Speaker 2: that you can apply to a decentralized Cryptocurrency. So, you know,
Speaker 2: the um Bitcoin is a Marvel, um the fact that
Speaker 2: um whoever the creator was and you know, having written
Speaker 2: the book, I go to a lot of Cryptocurrency conferences
Speaker 2: these days that I have so far shared the stage
Speaker 2: with three people who've claimed to be
Speaker 2: the real creator of Bitcoin. I don't know if any
Speaker 2: of them really uh is. Um But you know, the
Speaker 2: fact that um we have a technology that allows you
Speaker 2: to undertake transactions um between parties who may not even
Speaker 2: know who each other are. That is just using their
Speaker 2: digital identities and without using a centralized trust mechanism. That
Speaker 2: is remarkable. And
Speaker 2: I think the technology is spawning some interesting developments in
Speaker 2: decentralized finance. But the reality is that Bitcoin has not
Speaker 2: functioned well in what it was supposed to be, which
Speaker 2: is a um uh trust, less or decentralized trust based
Speaker 2: um medium of exchange because it is very volatile value,
Speaker 2: it's not very efficient as a medium of exchange.
Speaker 2: So for something that does not have intrinsic value, um
Speaker 2: and where the entire value proposition seems to be in
Speaker 2: terms of its scarcity, um which is based on the
Speaker 2: fact that ultimately, there are going to be only 21
Speaker 2: million Bitcoins of which about 19 million have been created
Speaker 2: so far. And the supply is created on a very
Speaker 2: specific predetermined schedule that seems to give, you know,
Speaker 2: um Bitcoin maximalist confidence that Bitcoin's value is going to
Speaker 2: be preserved. But to me, just the fact that something
Speaker 2: is scarce um does not necessarily make it valuable. So
Speaker 2: I don't know what the valuation model is. And I'm
Speaker 2: quite explicit about that. In my book, there are other
Speaker 2: decentralized cryptocurrencies like Ethereum, which potentially have a lot more
Speaker 2: functionality
Speaker 2: because the Ethereum Blockchain uh does allow for a lot
Speaker 2: of smart contracting functions. Um So these are again ways
Speaker 2: in which we can, one can conduct a lot of
Speaker 2: more complex financial transactions without using uh trusted third party intermediaries.
Speaker 2: Um So for these other cryptocurrencies, I really don't see
Speaker 2: um a clear valuation model.
Speaker 2: Now, the interesting element of the Cryptocurrency ecosystem is that
Speaker 2: there are some cryptocurrencies that have stable value that do
Speaker 2: seem to be working quite well as mediums of exchange
Speaker 2: for transactions both within countries, but also for cross-border payments.
Speaker 2: These are of course the fiat currency backed stable coins
Speaker 2: now fiat currency backed stable coins. Um you know, are
Speaker 2: ironic in many ways, um the whole point of decentralized
Speaker 2: cryptocurrencies like Bitcoin was to get away from the dependence
Speaker 2: on fiat currencies. Stable coins get their stable value precisely
Speaker 2: by being backed up by stores of fiat currencies. Bitcoin
Speaker 2: was supposed to have a decentralized governance mechanism, a decentralized
Speaker 2: trust mechanism, stable coins are issued by particular companies or
Speaker 2: agencies which set the rules of
Speaker 2: the game which you decide who gets to use those
Speaker 2: stable coins which conduct the validation of all the transactions.
Speaker 2: So they are largely centralized. Um So that part of
Speaker 2: the uh ecosystem does seem to be working well. So
Speaker 2: do I see decentralized cryptocurrencies as um you know, displacing
Speaker 2: fiat currencies as store of value, not quite and stable
Speaker 2: coins are getting their fundamental value
Speaker 2: from being tapped by fiat currencies. So they too are
Speaker 2: not displacing um fiat currencies. Uh really the important thing
Speaker 2: about cryptocurrencies and I think their true legacy, other than
Speaker 2: the Blockchain technology. Is that what they have shown us
Speaker 2: is that there are lots of pain points, lots of
Speaker 2: inefficiencies in the traditional financial system. Now, I know that
Speaker 2: you will work for a traditional financial institution,
Speaker 2: but certainly your institution seems to be far ahead of
Speaker 2: many others in terms of taking these new technologies and
Speaker 2: adopting them uh to decrease many of these pain points.
Speaker 2: But I think the sense that traditional finance is not
Speaker 2: working well in many respects is not working well for
Speaker 2: a lot of people that I think is what sparked
Speaker 2: the revolution. And certainly we are moving towards that now,
Speaker 2: whether it will be the decentralized finance ecosystem
Speaker 2: or traditional financial institutions, co-opting these technologies uh in order
Speaker 2: to catalyze changes is a little hard to read at
Speaker 2: this moment. Uh But I think they are moving towards
Speaker 2: a somewhat better financial future and that may or may
Speaker 2: not have a place for decentralized cryptocurrencies. But I'm very
Speaker 2: grateful for the Bitcoin revolution because I think it has
Speaker 2: pointed the way to a lot of uh much needed changes.
Speaker 1: Absolutely right. Uh I, but I want you to weigh
Speaker 1: in on the dramatic developments we saw around the private
Speaker 1: digital currency ecosystem last year, you know, all sorts of
Speaker 1: governance related issues came out massive price volatility. Um Is
Speaker 1: this just one of those things that happens with new technology?
Speaker 1: You know, some people take advantage or is it revealing
Speaker 1: that in a purely digital infrastructure, there are inherent
Speaker 1: opacities or cybersecurity risks that we haven't fully addressed and
Speaker 1: therefore can't really trust the system very well.
Speaker 2: There was this notion that because of its scarcity, something
Speaker 2: like Bitcoin might even service in inflation hedge. Now, it
Speaker 2: turns out based on what we've seen over the last
Speaker 2: uh um
Speaker 2: um few years and admittedly Bitcoin is a relatively short history.
Speaker 2: Um but it's had significant traction. Um You know, it
Speaker 2: turns out that Bitcoin basically behaves like a risky asset.
Speaker 2: And because there is no clear valuation model, um underpinning
Speaker 2: its value, it turns out to be a highly volatile
Speaker 2: risky asset which is buffeted by the sort of macro
Speaker 2: economic factors including monetary policy factors and that seem to
Speaker 2: drive other um similar um risky assets. So I think
Speaker 2: the lack of the valuation model is leading to these
Speaker 2: huge amounts of volatility. Now, certainly we've seen a very
Speaker 2: drastic fall in the overall market capitalization. Um If one
Speaker 2: might use that term
Speaker 2: somewhat guarded way for the uh market value of all
Speaker 2: these crypto assets taken together, which um at its height
Speaker 2: um towards the middle of 2022 was roughly $3 trillion.
Speaker 2: It's about one trillion right now. So that seems like
Speaker 2: a very big fall. But, you know, one trillion is
Speaker 2: still a pretty sizable chunk of money. So lots of
Speaker 2: people still seem to have their faith in the system.
Speaker 2: Um But the interesting thing that has been revealed, I
Speaker 2: think over the last year
Speaker 2: is this notion of decentralization um really has given way
Speaker 2: to a great deal of centralization if you think about
Speaker 2: FTX coin base and so on. Um these are very
Speaker 2: centralized um players where uh you know, you're getting the
Speaker 2: custody as well as trading of assets, which don't necessarily
Speaker 2: need to take place in centralized exchanges. Actually all migrating
Speaker 2: onto these centralized exchanges,
Speaker 2: partly because they're convenient, but partly also because users seem
Speaker 2: to really want to have an institution that they can
Speaker 2: rely upon. So the need for some sort of trust
Speaker 2: mechanism doesn't seem to have gone away completely. Um If
Speaker 2: you look at even something like Bitcoin, you know, the
Speaker 2: validation is undertaken in principle by mining nodes that are
Speaker 2: distributed around the world. But in fact,
Speaker 2: about 6 to 8 clusters of computers um um essentially
Speaker 2: mining pools control much of the hash rate. Um that
Speaker 2: is the computing power that powers the Bitcoin network. So
Speaker 2: even with Bitcoin, you see a lot of centralization and
Speaker 2: as I mentioned, stable coins are all very centralized. So unfortunately,
Speaker 2: many of the promises of decentralized finance that we will
Speaker 2: have a decentralized architecture that creates more robust uh financial
Speaker 2: systems that allow. So the democratization of finance by giving
Speaker 2: anybody easy open permission, less access to financial products and
Speaker 2: services allows developers to very easily provide these products and
Speaker 2: services
Speaker 2: at scale at very low cost those promises have not
Speaker 2: been realized yet. Instead, we've seen many of the fragilities
Speaker 2: of traditional finance essentially being imported into what was meant
Speaker 2: to be decentralized finance. We've seen a lot of speculative
Speaker 2: activity in financial engineering taking place in this ecosystem and
Speaker 2: a lot of
Speaker 2: investors who may not be fully aware of the risks
Speaker 2: that they're taking on uh being exposed to very significant risk. So,
Speaker 2: investor protection in that part of the ecosystem has taken
Speaker 2: a hit as well. So unfortunately, at this stage, all
Speaker 2: the wonderful promises of decentralized finance have not borne out.
Speaker 2: I still think that there is promise in this technology,
Speaker 2: but
Speaker 2: um it's going to have to require some regulatory guard
Speaker 2: rails that limit some of these risks both in terms
Speaker 2: of risk to retail investors spillovers to the traditional financial system.
Speaker 2: Um And uh finding a way to get a regulatory
Speaker 2: framework that allows for innovation without completely stifling this ecosystem
Speaker 2: is going to be a tough balance for regulators to strike.
Speaker 2: I want to stay on the
Speaker 1: regulatory issue a little bit because we've seen a few
Speaker 1: actions by us regulators in the past year, uh cracking
Speaker 1: down on exchanges and
Speaker 1: suing the very large exchanges um for um malfeasance. And
Speaker 1: also we've seen some rulings about what is a Cryptocurrency?
Speaker 1: Is it a security? Is it a currency? Uh are
Speaker 1: the US regulators? And let's just talk with the US
Speaker 1: regulators in this context? Are they doing a good job
Speaker 1: in getting investors incentive, the regular publics incentive and the
Speaker 1: need to sort of promote innovation. Are they getting that? Right.
Speaker 2: So, from a regulator's point of view, I think um
Speaker 2: one needs to take an enlightened approach to this um
Speaker 2: how to um get the benefits of these innovations um
Speaker 2: without um you know, impeding the traditional functions of a regulator,
Speaker 2: which is um trying to minimize um institution of product
Speaker 2: specific risk as well as systemic financial stability risks. Um
Speaker 2: trying to maintain integrity
Speaker 2: of payment and financial systems and uh maintaining investor protection.
Speaker 2: Um And I think um regulators in the US um
Speaker 2: are rightly asking the following question, which I think is
Speaker 2: very important in many of these issues, which is um
Speaker 2: are there alternative ways to get many of the benefits
Speaker 2: which crypto technology says that it will deliver to us?
Speaker 2: So the US has put in place for instance, um
Speaker 2: fed now,
Speaker 2: which is this um suite of retail and wholesale payment
Speaker 2: services that are supposed to make the US payment system,
Speaker 2: which um until recently has been very antiquated to move
Speaker 2: it into a more efficient realm. So, in that circumstance,
Speaker 2: do you really need, for instance, stable coins which in principle,
Speaker 2: take fiat currencies, um convert them into tokenized form and
Speaker 2: allow them to be used more efficiently. Do you really
Speaker 2: need that? Um And
Speaker 2: then if you think about this promise of democratizing finance,
Speaker 2: are we really getting the benefits of democratizing finance without
Speaker 2: just creating grounds for um you know, uh promoters of
Speaker 2: uh a variety of crypto products to take advantage of
Speaker 2: uh um uninformed retail investors. Um So I think regulators
Speaker 2: are asking the right questions, but there is a risk
Speaker 2: that they face that if you put up regulatory barriers,
Speaker 2: um that could make the system a lot safe.
Speaker 2: But you limit innovation and in particular, you sort of
Speaker 2: foster centralization because regulations are good in terms of keeping
Speaker 2: things safe. But they are essentially also act as barriers
Speaker 2: to entry. And one of the promises of this decentralized
Speaker 2: finance space is that you could have much easier entry.
Speaker 2: Um So we might end up with even more centralization,
Speaker 2: which again breeds a whole new set of risks. Now,
Speaker 2: having said all this, um
Speaker 2: I think it's a very difficult task for um regulators
Speaker 2: because even enlightened regulators, and there are many of them
Speaker 2: here in Washington, despite what the crypto industry might uh
Speaker 2: might uh might suggest. Um but they understand also that
Speaker 2: the crypto industry doesn't seem to be delivering all the
Speaker 2: promise that it suggested um it would
Speaker 2: uh deliver in terms of benefits to customers, businesses and
Speaker 2: so on. And then even if you take something like
Speaker 2: stable coins, which have certainly shown a lot of lacking
Speaker 2: in the existing payment systems, the risk that you could
Speaker 2: have a redemption run on stable coins where they end
Speaker 2: up having to liquidate a large number of Treasury securities
Speaker 2: which ends up roiling the Treasury securities market is a
Speaker 2: real concern.
Speaker 2: So from a regulatory perspective, I think we are in
Speaker 2: a very uncertain phase right now. Um The Cryptocurrency industry
Speaker 2: says it is clamoring for regulation because it wants the
Speaker 2: regulatory guidelines. But I think what they really want is
Speaker 2: the legitimacy of regulation with very light touch regulation. And
Speaker 2: I think regulators are rightly concerned about arriving in that
Speaker 2: halfway point, which could actually be very destructive. Um So
Speaker 2: at the
Speaker 2: moment, I think we have a mishmash of regulations which
Speaker 2: are really creating a lot more uncertainty. You referred to
Speaker 2: this issue about the definition of crypto assets. The latest
Speaker 2: ruling against ripple, um which was partly in favor of ripple,
Speaker 2: which was partly not in favor of ripple as I
Speaker 2: think created even more cons uh confusion because basically what
Speaker 2: the judge said is that the native tokens issued by this,
Speaker 2: a Cryptocurrency called uh Ripper, if they are sold to
Speaker 2: uh institutional investors, those do count as securities. Um but
Speaker 2: if they are sold on open exchanges to retail investors,
Speaker 2: they are not. So uh we have even less clarity
Speaker 2: right now on what exactly a crypto crypto asset uh
Speaker 2: should be defined as and therefore how it should be regulated.
Speaker 2: So I think at a minimum, some clarity is going
Speaker 2: to be essential,
Speaker 2: right? It was like
Speaker 1: a crypto quantum moment. It can be both at the
Speaker 1: same time depending on who's holding it. Um If were
Speaker 1: a large part of your book, uh you do this
Speaker 1: masterful job of chronicling the wave of innovations we have
Speaker 1: seen in the financial technology area, not just in the
Speaker 1: last few years, but over a much longer period of time.
Speaker 1: Um from your perspective, which innovation has been the most
Speaker 1: consequential and transformative.
Speaker 2: You know, that is a tough question to answer because
Speaker 2: if you think about new technologies, I think the Blockchain
Speaker 2: technology has certainly um um
Speaker 2: it has transformative potential. I don't think it's quite there yet.
Speaker 2: But you know, if you think about transformation in a
Speaker 2: different sense, uh transforming the lives of ordinary people, there
Speaker 2: are very basic technologies that go on the rubric of fintech,
Speaker 2: you know, mobile payments, for instance, which have really made
Speaker 2: a dramatic difference um to the lives of uh um
Speaker 2: you know, consumer,
Speaker 2: um small businesses, merchants in many um low income economies
Speaker 2: which had very underdeveloped financial systems to begin with. So
Speaker 2: if you think about something very basic like mobile money,
Speaker 2: um and how that has made a huge difference um
Speaker 2: in um uh low to um lower middle income um
Speaker 2: economies in Africa and Asia and so on.
Speaker 2: Um those I think are transformative in a very different way.
Speaker 2: So uh I mentioned being in China, you know, uh
Speaker 2: on my trip, I literally felt like I was the
Speaker 2: last person in China still um using uh cash. I
Speaker 2: tried to pay for some of my camp rides using
Speaker 2: cash and I was stunned uh first that I would
Speaker 2: pull out a ¥50 note and of course, didn't have
Speaker 2: any change to um uh to give me. Um So
Speaker 2: the fact that you have these digital payments um
Speaker 2: available at low cost um uh with easy access with
Speaker 2: a great deal of efficiency that I think is much
Speaker 2: more transformative Again, not just in terms of digital payments,
Speaker 2: but also serving as a porter uh for basic banking
Speaker 2: products and services.
Speaker 1: Uh It short to your point on China, I mean,
Speaker 1: I have had a hard time using credit cards there.
Speaker 1: And initially, my view was this was a platform of
Speaker 1: a barrier to entry by the Chinese authorities. But it
Speaker 1: turns out that because the Chinese modes of payment are
Speaker 1: so cheap, vendors have no interest in being charged 2% 2.5%
Speaker 1: by Visa or mastercard. And that's why they don't accept them.
Speaker 1: Um So, so to me, uh my bias was that
Speaker 1: perhaps this was some sort of a barrier to entry,
Speaker 1: but actually turns out that it's the vendors who don't
Speaker 1: carry those credit cards. And I also felt like you
Speaker 1: and I was actually trying to use a card. Um
Speaker 1: uh If we're in the world of CBD CS, uh
Speaker 1: you again, you know, have been writing about this for
Speaker 1: a while. Of course, the book does a great job
Speaker 1: at that as well. So I have a few questions
Speaker 1: in the areas of CBD CS. But let me ask
Speaker 1: you first, like uh
Speaker 1: 36,000 ft question. Uh where will we end up with
Speaker 1: CBD CS by the time this decade is over?
Speaker 2: So retail CBD CS uh um and let's stick to
Speaker 2: that uh uh for the moment. Um So retail C
Speaker 2: BT CS would essentially be the digital equivalent um of
Speaker 2: uh physical currency, the bank notes and coins that at
Speaker 2: least some of us uh still use and love. Um
Speaker 2: The um advent of retail C BT C si think
Speaker 2: is an inevitability because um
Speaker 2: um cash is disappearing very fast in some economies like
Speaker 2: China and Sweden. Um it's already practically non-existent. And if
Speaker 2: you think about the convenience of um digital payments for
Speaker 2: um businesses, consumers for governments, um the advantages that it
Speaker 2: has in pulling economic activity out of the shadows. Um
Speaker 2: The advantages are very clear. So uh I think we're
Speaker 2: going to get a shift towards digital currencies by any
Speaker 2: central bank
Speaker 2: that wants to keep its money relevant for retail transactions.
Speaker 2: There is a broader question about whether you need central
Speaker 2: bank money at all for retail transactions because central banks,
Speaker 2: you know, can do their job of managing monetary policy
Speaker 2: perfectly well, even if they were not issuing um currency
Speaker 2: either in digital or physical form. Uh And if the
Speaker 2: private sector is doing a good job of providing digital payments.
Speaker 2: Maybe you don't even need a retail CBD C. So
Speaker 2: why are central banks continuing with this? The um
Speaker 2: reason seem to be manifold in some countries. The idea
Speaker 2: is to give um you know, everyone who wants it
Speaker 2: easy access to a digital payment system no matter what
Speaker 2: your income or net worth. Another idea is to provide
Speaker 2: um a backstop uh to a purely private payments uh
Speaker 2: um uh infrastructure and the third is to ensure some
Speaker 2: payment innovation. Uh So, for instance, um
Speaker 2: both uh uh China, India and other countries that are
Speaker 2: expanding CBD CS talk about CBD CS being interoperable. So
Speaker 2: if you take China, for instance, Alipay and wechat pay
Speaker 2: work very well, but they are not um uh mutually compatible.
Speaker 2: So they don't have interoperability. So digital um or digital
Speaker 2: yuan uh could you know, set up this interoperability? But,
Speaker 2: you know,
Speaker 2: I handed in the manuscript for my book in early 2021.
Speaker 2: The book eventually came out, as you said in late 2021.
Speaker 2: I was much more positive about CBD CS. But I
Speaker 2: look around the world right now, I see much less
Speaker 2: um strong a case in terms of the value proposition
Speaker 2: for users. Uh take China again, Alipay and wechat pay
Speaker 2: are working perfectly well.
Speaker 2: Um The question is why does China need a digital
Speaker 2: um yuan uh India is going to face the same issue.
Speaker 2: Sweden undertook extensive CBD C trials. But the parliamentary committee
Speaker 2: that was set up by the, but they were set
Speaker 2: up by the government to evaluate the need
Speaker 2: for a digital corner, basically decided that Sweden doesn't really
Speaker 2: need a digital corner. Um Right now, so what are
Speaker 2: central banks doing in order to make sure that the
Speaker 2: retail CBD CS might still be um useful to um
Speaker 2: to the end users
Speaker 2: interoperability is one thing that might give CBD CS a
Speaker 2: bit of an edge of the margin. But then many
Speaker 2: central banks that I've spoken to recently talk about using
Speaker 2: the programmable features of money. And these are very exciting
Speaker 2: from the point of view of economic policies.
Speaker 2: So if you could actually um provide, you know, uh
Speaker 2: units of money which have expiry dates, you know, if
Speaker 2: uh you have a period of extreme economic distress or
Speaker 2: even a garden variety recession, giving people money with expiry
Speaker 2: dates would incentivize them to spend that money rather than
Speaker 2: save that money.
Speaker 2: Um You could imagine um helicopter drops of money which
Speaker 2: um you know, the economists fantasize about where basically you
Speaker 2: give everybody in an economy uh in a lump sum fashion,
Speaker 2: a certain amount of money to stimulate economic activity. These
Speaker 2: are all very powerful tools, but I've grown increasingly concerned
Speaker 2: that if all of these programmable features are put in place,
Speaker 2: you might actually start affecting
Speaker 2: the integrity of central banks and the very credibility and
Speaker 2: legitimacy of central banks central banks around the world are
Speaker 2: already under a lot of pressure. They have to manage
Speaker 2: exchange rates in some countries. They have to manage monetary policy,
Speaker 2: financial stability, maintaining economic activity. So they have a huge
Speaker 2: amount of political pressure on them.
Speaker 2: Now, what if a central bank starts being seen as
Speaker 2: the agent of the government in terms of undertaking surveillance?
Speaker 2: Um either broadly speaking or to make sure that the
Speaker 2: digital money is issued is not falling afoul of government regulations.
Speaker 2: Second, if you start seeing the central bank as a
Speaker 2: tool of the government, in terms of implementing fiscal policy,
Speaker 2: as I mentioned with these uh um helicopter drops of
Speaker 2: money and so on, then the central bank could become
Speaker 2: subject to a lot more pressure
Speaker 2: and then think about a world in which we have
Speaker 2: some units of central bank money that aren't just like cash,
Speaker 2: they have paid zero interest, they have no expiry dates,
Speaker 2: other units of central bank money that have expiry dates
Speaker 2: or potentially have negative nominal interest rates. Now you could
Speaker 2: imagine secondary markets where you might want to give away
Speaker 2: your units of uh uh money with the expiry dates
Speaker 2: um because you don't want to spend it, you want
Speaker 2: to save it. So
Speaker 2: we have secondary markets with different units of central bank
Speaker 2: money trading at different prices. I really worry that this
Speaker 2: could all affect the integrity of central bank money and
Speaker 2: of central banks. Now this seems a little dystopian at
Speaker 2: one level. But, you know, technology has taken us from
Speaker 2: what seemed like very promising outcomes to some very dark places.
Speaker 2: So I've gotten
Speaker 2: concerned a little bit about CBD CS and the notion
Speaker 2: that you could start using them as instruments of economic
Speaker 2: policy or potentially even social policy, you know, allowing CBD
Speaker 2: CS to be used for certain purchases and not for
Speaker 2: other things that a government might determine um are not
Speaker 2: desirable uh for central bank money to be used. So
Speaker 2: I worry a great deal about where CBD CS might
Speaker 2: be taking us.
Speaker 1: These are such fascinating discussion points. If were a couple
Speaker 1: of years ago, it seemed like, you know, we were
Speaker 1: only focusing on all the revolutionary possibilities uh to your
Speaker 1: point of, you know, programmable money. I was about to
Speaker 1: say that, you know, we have them in Singapore, they're
Speaker 1: called coupons from the government. Um But uh but all
Speaker 1: of those points that the Big Brother aspect, the capriciousness,
Speaker 1: the diluting of the role of central bank versus Mr Fit.
Speaker 1: And uh all of those are, you know, questions that
Speaker 1: I'm glad that, you know, we are asking before we
Speaker 1: have gone ahead and rolled out CBD C's Willy Nilly
Speaker 1: and I'm glad that people like you are thinking about
Speaker 1: it really, really hard. Um I wanted to ask you
Speaker 1: a couple of questions you touched on the financial inclusion
Speaker 1: issue briefly. Um Just the experience with uh the whole
Speaker 1: digital ecosystem in parts of Africa
Speaker 1: and parts of Asia. Um, it seems to me that
Speaker 1: a lot of these technological solutions use cases are better
Speaker 1: suited in poorer countries with less developed infrastructure than say,
Speaker 1: a country like Singapore where everybody has a bank account
Speaker 1: and everybody has a certain level of education and access
Speaker 1: to smartphones and perhaps it's not that compelling in a
Speaker 1: place like here.
Speaker 2: That is certainly true. I mean, change is much more
Speaker 2: needed and change has been much more dramatic in countries
Speaker 2: with less developed financial systems where um much of the population,
Speaker 2: um you know, is close to substance levels of uh
Speaker 2: um income. Um and those are areas where, um you know,
Speaker 2: um the lack of very basic financial services has provided
Speaker 2: a real um boost to these kinds to the adoption
Speaker 2: of these new kinds of technologies. And certainly um some
Speaker 2: degree of regulatory forbearance has certainly helped as well. Um
Speaker 2: Plus the fact that there aren't
Speaker 2: um uh strong legacy players who have uh an incentive
Speaker 2: to keep things um the way they are. Uh so
Speaker 2: the fact that credit cards are very easy to use
Speaker 2: uh in the US has certainly made it much harder
Speaker 2: for the US to move forward with alternative um uh
Speaker 2: digital payment uh options. Um So we are seeing um
Speaker 2: a great deal of leap frogging by
Speaker 2: developing and emerging market economies and of course, the demand
Speaker 2: for financial services um has also been um rising very
Speaker 2: fast in many of these economies because in um many
Speaker 2: of the um middle to upper income emerging market economies,
Speaker 2: in particular, there is a rising middle class that wants
Speaker 2: um better financial services delivered um in a more efficient
Speaker 2: way and the new technologies are certainly providing ways uh
Speaker 2: to make that happen. So yes, um I think we
Speaker 2: are seeing um the transformative potential of these new technologies
Speaker 2: uh um taking shape much more clearly um in the
Speaker 2: parts of the world um where financial systems are already
Speaker 2: not well developed
Speaker 1: is where I had promised you a 45 minute conversation.
Speaker 1: We've gone past that because just so many interesting things
Speaker 1: to talk about. But I do want to add one
Speaker 1: more question as apo with apologies. Um capital account convertibility
Speaker 1: and digital currencies. I mean, is there a contradiction for
Speaker 1: say a country that wants to have capital controls but
Speaker 1: also want to have
Speaker 2: digital money?
Speaker 2: So the world we are moving to is one where
Speaker 2: money is going to be much more um fungible across countries.
Speaker 2: Um
Speaker 2: um Now, stable coins are already um providing ways to
Speaker 2: um move money across national borders. And of course many
Speaker 2: central banks um recognizing that this is a real pain
Speaker 2: point in international finance because international payments right now are costly, expensive,
Speaker 2: difficult to track in real time. They are integrating their
Speaker 2: um wholesale CBD S
Speaker 2: in some cases into their retail CBD CS and trying
Speaker 2: to set up these cross border um bridges or multiple
Speaker 2: uh wholesale central bank CBD C approaches to provide more
Speaker 2: efficient conduits for international payments. Now there are those official channels,
Speaker 2: but I think they're also going to have a lot
Speaker 2: more unofficial channels for money to flow across national borders.
Speaker 2: And this is some level is going
Speaker 2: to be great for reducing frictions in international payments. It
Speaker 2: means for instance that economic migrants sending remittances back to
Speaker 2: their home countries can do so much more cheaply. If
Speaker 2: you have practically instantaneous settlement of cross border settlements rather
Speaker 2: than T plus two T plus three or even longer,
Speaker 2: you don't need to hedge against the exchange rate risk
Speaker 2: over those short horizons
Speaker 2: for uh payment and settlement uh are concluded. So this
Speaker 2: is all going to be good. In principle, you could
Speaker 2: have um low income households, low network households, having access
Speaker 2: to international portfolio diversification opportunities, small and medium enterprises being
Speaker 2: able to access global pools of capital. This is all good.
Speaker 2: But unfortunately, it's also going to mean
Speaker 2: that the more conduits for um capital flows, you have
Speaker 2: the more capital flow volatility and potentially more exchange rate
Speaker 2: volatility that emerging market economies in particular might be subjected
Speaker 2: to and the smaller open economies in particular, I think
Speaker 2: face um pretty serious macroeconomic but also um existential crises
Speaker 2: for their currencies because you can
Speaker 2: you imagine a digital version of the dollar or a
Speaker 2: digital version of the Renminbi or stable coins issued by
Speaker 2: major corporations displacing their domestic currency. So you could get
Speaker 2: a real shake up in terms of the international monetary
Speaker 2: system at the lower tiers of that monetary system as well.
Speaker 2: Um But more specifically on capital controls, those are going
Speaker 2: to become very difficult to sustain over time. That
Speaker 1: that sentiment was echoed to me by the central bank
Speaker 1: governor of India. Recently.
Speaker 1: I can't thank you enough. Uh This was a fantastic conversation.
Speaker 1: Thank you so much for your time and your very
Speaker 1: valuable insights.
Speaker 2: Thank you so much for having me again on your show.
Speaker 2: That was a really fun conversation. I enjoyed it very much.
Speaker 2: Thank
Speaker 1: you and thanks to our listeners as well. Copy time
Speaker 1: is for information only and does not represent any trade recommendations.
Speaker 1: All 105 episodes of the podcast are available on youtube
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Speaker 1: As for our research publications, webinars and live streams, you
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Speaker 1: Have a great day.