1 00:00:06,079 --> 00:00:08,959 Speaker 1: Welcome to COI time, a podcast series on markets and 2 00:00:08,960 --> 00:00:12,920 Speaker 1: economies from DBS Group Research. I'mangbeke, chief economist, welcoming you 3 00:00:12,920 --> 00:00:18,719 Speaker 1: to our 160th episode. Today, it's all about stablecoins. The 4 00:00:18,719 --> 00:00:21,709 Speaker 1: idea and practice of which have been around for a while, 5 00:00:21,959 --> 00:00:24,559 Speaker 1: but a few things have happened this summer, uh, that 6 00:00:24,559 --> 00:00:27,399 Speaker 1: have made this matter catch major momentum. 7 00:00:28,040 --> 00:00:32,479 Speaker 1: To parse through these developments, outlook and risks, we have 8 00:00:32,479 --> 00:00:36,759 Speaker 1: with us Ishwar Prasad, Tulani professor of trade policy and 9 00:00:36,759 --> 00:00:38,680 Speaker 1: professor of economics at Cornell University. 10 00:00:39,319 --> 00:00:42,540 Speaker 1: Ishwar is also a senior fellow at the Brookings Institution, 11 00:00:42,709 --> 00:00:46,750 Speaker 1: where he holds the new century chair in international economics. Ishwar, 12 00:00:46,790 --> 00:00:48,750 Speaker 1: a warm welcome back to COVID time. 13 00:00:50,139 --> 00:00:51,818 Speaker 2: Nice to see you, Temur, and I guess we should 14 00:00:51,819 --> 00:00:54,779 Speaker 2: also let your audience know that we used to be 15 00:00:54,779 --> 00:00:56,580 Speaker 2: colleagues at the IMF. Those were good days 16 00:00:56,580 --> 00:00:57,860 Speaker 1: indeed. Those were 17 00:00:57,860 --> 00:00:59,779 Speaker 1: very good days, and I look forward to running into 18 00:00:59,779 --> 00:01:02,650 Speaker 1: you in Washington in April and October during the IMF 19 00:01:02,650 --> 00:01:05,690 Speaker 1: spring and annual meetings when we invariably are there. 20 00:01:07,430 --> 00:01:11,629 Speaker 1: Um, sure, ah, what is the Genius Act and why 21 00:01:11,629 --> 00:01:12,589 Speaker 1: is it consequential? 22 00:01:14,099 --> 00:01:17,709 Speaker 2: So stablecoins um have been around for a while, Tur, 23 00:01:17,760 --> 00:01:20,400 Speaker 2: and maybe it's good to start off with what um 24 00:01:20,400 --> 00:01:23,959 Speaker 2: they are. So when we think about the cryptocurrency revolution 25 00:01:23,959 --> 00:01:29,190 Speaker 2: that started um in 2008 with the creation of Bitcoin, 26 00:01:29,480 --> 00:01:33,069 Speaker 2: the idea was to create a payment mechanism that could 27 00:01:33,069 --> 00:01:38,589 Speaker 2: um avoid having to use banks such as your bank, uh, 28 00:01:38,639 --> 00:01:42,800 Speaker 2: credit card companies, or other traditional financial services providers. 29 00:01:43,569 --> 00:01:46,290 Speaker 2: Now, it turned out that the Bitcoin technology was really 30 00:01:46,290 --> 00:01:49,559 Speaker 2: very cool and actually worked in some ways, but unfortunately, 31 00:01:49,589 --> 00:01:53,809 Speaker 2: Bitcoin has not proven to be a great medium of exchange, 32 00:01:53,849 --> 00:01:57,370 Speaker 2: a payment mechanism because of its very volatile value. So 33 00:01:57,370 --> 00:02:02,529 Speaker 2: stablecoins essentially provide that stability. Um, they are typically backed 34 00:02:02,529 --> 00:02:08,139 Speaker 2: up by stores of fiat currencies, either government bonds or 35 00:02:08,139 --> 00:02:11,449 Speaker 2: cash or other types of liquid securities that allow them. 36 00:02:12,000 --> 00:02:15,709 Speaker 2: To maintain value at par relative to some major fiat 37 00:02:15,710 --> 00:02:20,839 Speaker 2: currencies such as the US dollar. Now stablecoins operated in 38 00:02:20,839 --> 00:02:24,800 Speaker 2: a somewhat gray area for a while, and this was 39 00:02:24,800 --> 00:02:29,918 Speaker 2: a problem for stablecoin issuers and even traditional financial institutions 40 00:02:29,919 --> 00:02:31,880 Speaker 2: that wanted to consider using them. 41 00:02:32,770 --> 00:02:36,449 Speaker 2: What the Genius Act has done is basically, in my view, 42 00:02:36,649 --> 00:02:42,589 Speaker 2: legitimize stablecoins while giving them the benefit of light touch regulation. 43 00:02:42,929 --> 00:02:47,440 Speaker 2: So essentially, stablecoin um promoters have for a long time 44 00:02:47,850 --> 00:02:51,250 Speaker 2: been clamoring for regulation that would give them a lot 45 00:02:51,250 --> 00:02:52,289 Speaker 2: more legitimacy. 46 00:02:52,929 --> 00:02:55,589 Speaker 2: Now, it's worth thinking about one of the key functions 47 00:02:55,589 --> 00:02:59,440 Speaker 2: of stablecoins. Stablecoins, of course, work well as a a 48 00:02:59,440 --> 00:03:04,600 Speaker 2: payment mechanism in decentralized finance that takes place on blockchains 49 00:03:04,600 --> 00:03:06,329 Speaker 2: outside the traditional financial markets. 50 00:03:06,910 --> 00:03:12,520 Speaker 2: But stablecoins also play useful roles for cross-border payments, and 51 00:03:12,520 --> 00:03:18,270 Speaker 2: especially as a bridge between traditional finance and decentralized finance. 52 00:03:18,520 --> 00:03:22,359 Speaker 2: Now this was a problem for stablecoin issuers and those 53 00:03:22,360 --> 00:03:25,960 Speaker 2: who wanted to use them, which is that without the 54 00:03:25,960 --> 00:03:31,239 Speaker 2: legitimacy provided by government regulation, traditional financial institutions like commercial 55 00:03:31,240 --> 00:03:35,119 Speaker 2: banks are very uh hesitant to have any sorts of 56 00:03:35,119 --> 00:03:36,369 Speaker 2: dealings with stable coins. 57 00:03:36,789 --> 00:03:41,059 Speaker 2: So what the Genius Act does is basically to legitimize 58 00:03:41,059 --> 00:03:42,509 Speaker 2: table coins by 59 00:03:43,509 --> 00:03:47,029 Speaker 2: Laying down the rules about what um sort of banking 60 00:03:47,029 --> 00:03:50,399 Speaker 2: stablecoins should have, what sort of instruments are going to 61 00:03:50,399 --> 00:03:53,949 Speaker 2: be considered, who's going to regulate them, and also who 62 00:03:53,949 --> 00:03:54,869 Speaker 2: can issue them. 63 00:03:56,990 --> 00:03:59,520 Speaker 1: Right, I want to sort of break those things down 64 00:03:59,520 --> 00:04:02,509 Speaker 1: a bit. Um, so of course, Genius Act is about 65 00:04:02,509 --> 00:04:07,479 Speaker 1: stablecoins backed by US Treasuries, mostly issued by US companies 66 00:04:07,479 --> 00:04:11,800 Speaker 1: under some degree of supervision by US regulators. How do 67 00:04:11,800 --> 00:04:15,600 Speaker 1: you see the weeks or a couple of months since 68 00:04:15,600 --> 00:04:19,000 Speaker 1: the Genius Act was passed the ripples that uh this, 69 00:04:19,079 --> 00:04:22,600 Speaker 1: this act is creating across the global financial and regulatory landscape? 70 00:04:24,290 --> 00:04:27,829 Speaker 2: It's creating a great deal of fear around the world, Temore, 71 00:04:27,880 --> 00:04:29,599 Speaker 2: and the reason for that is simple. 72 00:04:31,019 --> 00:04:36,380 Speaker 2: One of the key elements of um um what stablecoins 73 00:04:36,380 --> 00:04:41,260 Speaker 2: are doing is basically showing how you can use new technologies, 74 00:04:41,500 --> 00:04:46,359 Speaker 2: especially blockchain-based technologies, to make payments much more efficient either 75 00:04:46,359 --> 00:04:51,940 Speaker 2: within a country or particularly across borders because cross border 76 00:04:51,940 --> 00:04:55,579 Speaker 2: payments um tend to be quite expensive, tend to be. 77 00:04:55,880 --> 00:04:59,160 Speaker 2: Um, very slow to um to be done. They tend 78 00:04:59,160 --> 00:05:03,399 Speaker 2: not to be very efficient or user friendly, and stablecoins 79 00:05:03,399 --> 00:05:07,399 Speaker 2: make it very easy to use this method of payment 80 00:05:07,399 --> 00:05:11,409 Speaker 2: that is going to hold stable value relative to a 81 00:05:11,410 --> 00:05:15,549 Speaker 2: currency like the US dollar very easily for cross-border payments 82 00:05:15,839 --> 00:05:20,238 Speaker 2: that basically gets settled within practically an instant. 83 00:05:20,869 --> 00:05:23,470 Speaker 2: So this is creating a lot of fear for a 84 00:05:23,470 --> 00:05:27,320 Speaker 2: variety of reasons among central banks around the world, it 85 00:05:27,320 --> 00:05:31,868 Speaker 2: is creating the concern that this might be a way 86 00:05:32,200 --> 00:05:36,000 Speaker 2: that the dollar indirectly becomes even more dominant than it 87 00:05:36,000 --> 00:05:40,670 Speaker 2: already is in payments. Take even a very advanced uh 88 00:05:40,670 --> 00:05:45,130 Speaker 2: um economic areas such as the Eurozone, um, which of course, um, 89 00:05:45,519 --> 00:05:48,760 Speaker 2: has very high per capita incomes as a common currency. 90 00:05:49,149 --> 00:05:52,779 Speaker 2: But what it lacks is a unified payment system across 91 00:05:52,779 --> 00:05:56,480 Speaker 2: the entire zone. So if you want to use uh 92 00:05:56,480 --> 00:05:58,988 Speaker 2: a German bank account to make a payment in Germany, 93 00:05:59,029 --> 00:06:01,829 Speaker 2: it's easy. If you want to make a payment in Greece, 94 00:06:01,859 --> 00:06:02,910 Speaker 2: it's a lot harder. 95 00:06:03,529 --> 00:06:07,109 Speaker 2: So for cross border payments, you know, traditionally Europeans have 96 00:06:07,109 --> 00:06:10,219 Speaker 2: had to rely on credit cards that are of course 97 00:06:10,220 --> 00:06:15,649 Speaker 2: linked to their bank accounts but are issued by American companies. Now, 98 00:06:15,910 --> 00:06:19,219 Speaker 2: if you have stablecoins becoming very easy to use across 99 00:06:19,220 --> 00:06:22,630 Speaker 2: the entire Eurozone, there is a real concern that dollars 100 00:06:22,630 --> 00:06:25,390 Speaker 2: could start playing a bigger role even in the eurozone. 101 00:06:25,799 --> 00:06:28,440 Speaker 2: But now when you start looking at countries that have 102 00:06:28,440 --> 00:06:33,049 Speaker 2: less credible central banks, less credible currencies, there is a 103 00:06:33,049 --> 00:06:37,609 Speaker 2: real concern that those could be swamped or basically swept 104 00:06:37,609 --> 00:06:41,839 Speaker 2: out of existence by people who far prefer to use dollars, 105 00:06:42,250 --> 00:06:44,929 Speaker 2: and it's stablecoins that could be issued not just by 106 00:06:44,928 --> 00:06:49,760 Speaker 2: the existing stablecoin companies like Tether or Circle, which are 107 00:06:49,760 --> 00:06:52,440 Speaker 2: the major players in the stablecoin territory right now. 108 00:06:52,738 --> 00:06:57,510 Speaker 2: But through the Genius Act, it could be American financial companies, 109 00:06:57,549 --> 00:07:03,119 Speaker 2: American banks, even potentially one day American corporations like Amazon, 110 00:07:03,160 --> 00:07:06,869 Speaker 2: for instance, that have a worldwide reach, very deep pockets, 111 00:07:07,119 --> 00:07:10,559 Speaker 2: and might be much better trusted than the central banks 112 00:07:10,559 --> 00:07:14,559 Speaker 2: of many countries. So essentially, a lot of change is 113 00:07:14,559 --> 00:07:18,320 Speaker 2: coming and it's forcing central banks and commercial banks to 114 00:07:18,320 --> 00:07:19,579 Speaker 2: basically respond. 115 00:07:19,920 --> 00:07:22,649 Speaker 2: Um, in ways that they should have a long time ago, 116 00:07:22,899 --> 00:07:25,730 Speaker 2: and what I think is a real benefit of stablecoins, 117 00:07:26,019 --> 00:07:29,260 Speaker 2: their true legacy is going to be that they're forcing 118 00:07:29,540 --> 00:07:32,619 Speaker 2: central banks and commercial banks to improve their game. 119 00:07:34,290 --> 00:07:37,290 Speaker 1: Sure, if you and I were discussing the digital asset 120 00:07:37,290 --> 00:07:39,369 Speaker 1: space a few years ago, we probably would have spent 121 00:07:39,369 --> 00:07:42,609 Speaker 1: more time discussing CBDC, central bank digital currencies, as opposed 122 00:07:42,609 --> 00:07:46,170 Speaker 1: to stablecoins. Um, now, the Genius Act is basically ruling 123 00:07:46,170 --> 00:07:49,209 Speaker 1: out the US government being in the CBDC business and 124 00:07:49,209 --> 00:07:51,670 Speaker 1: allowing the US private sector to go forth and multiply 125 00:07:51,929 --> 00:07:54,529 Speaker 1: as many stablecoins as they want, provided they have some 126 00:07:54,529 --> 00:07:57,529 Speaker 1: degree of, you know, oversight and backing by US Treasuries. 127 00:07:57,989 --> 00:08:03,079 Speaker 1: Um, haven't we seen this movie before? Uh, wasn't China, um, 128 00:08:03,309 --> 00:08:05,708 Speaker 1: you know, allowing the private sector to issue a great 129 00:08:05,709 --> 00:08:10,149 Speaker 1: deal of, ah, ah, credits and advances like I'm thinking 130 00:08:10,149 --> 00:08:14,380 Speaker 1: about Tencent and Alibaba and, uh, so on that, um, 131 00:08:14,549 --> 00:08:16,750 Speaker 1: at some point about 56 years ago, they got nervous 132 00:08:16,750 --> 00:08:19,269 Speaker 1: about losing control of money supply and they clamped down 133 00:08:19,269 --> 00:08:19,940 Speaker 1: very hard. 134 00:08:20,320 --> 00:08:22,390 Speaker 1: Is there a risk that the US would go in 135 00:08:22,390 --> 00:08:24,750 Speaker 1: that direction? I mean, would the Fed lose control of 136 00:08:24,750 --> 00:08:28,279 Speaker 1: money supply if it were to allow all these stable 137 00:08:28,279 --> 00:08:29,070 Speaker 1: coins to proliferate? 138 00:08:31,160 --> 00:08:34,239 Speaker 2: Directly, perhaps not, if you think about money creation in 139 00:08:34,239 --> 00:08:36,439 Speaker 2: a modern economy, um. 140 00:08:37,299 --> 00:08:41,699 Speaker 2: Some of that is created by central banks, what the 141 00:08:41,700 --> 00:08:45,340 Speaker 2: economists call outside money. There is money that is a 142 00:08:45,340 --> 00:08:49,780 Speaker 2: net positive supply outside the private sector. However, in most 143 00:08:49,780 --> 00:08:53,940 Speaker 2: modern economies, it's really commercial banks through the issuance of 144 00:08:53,940 --> 00:08:57,739 Speaker 2: credit who create the most amount of inside money, and 145 00:08:57,739 --> 00:09:00,650 Speaker 2: it's called inside money because it's created by one part 146 00:09:00,650 --> 00:09:02,530 Speaker 2: of the private system. 147 00:09:02,799 --> 00:09:05,348 Speaker 2: Um, where it is an asset and it is used 148 00:09:05,349 --> 00:09:08,580 Speaker 2: by another part of the private system, where it is 149 00:09:08,580 --> 00:09:11,739 Speaker 2: a debit, so it cancels out on net within the 150 00:09:11,739 --> 00:09:12,488 Speaker 2: private system. 151 00:09:12,880 --> 00:09:15,419 Speaker 2: But it is a creation of credit by commercial banks 152 00:09:15,419 --> 00:09:19,979 Speaker 2: that really um powers modern economies. So there are some 153 00:09:19,979 --> 00:09:22,900 Speaker 2: interesting sub questions that come up from your question time 154 00:09:22,900 --> 00:09:26,859 Speaker 2: or one is, um, will the emergence of stablecoins in 155 00:09:26,859 --> 00:09:30,429 Speaker 2: some sense be a new mechanism for the creation of 156 00:09:30,429 --> 00:09:36,219 Speaker 2: outside money? And second, will stablecoin issuers threaten commercial banks 157 00:09:36,219 --> 00:09:39,729 Speaker 2: in any way, and will that affect the creation of 158 00:09:39,729 --> 00:09:40,340 Speaker 2: outside money? 159 00:09:40,809 --> 00:09:43,909 Speaker 2: And this is where things get a little wonky, because 160 00:09:44,200 --> 00:09:47,880 Speaker 2: one can think about stablecoins at one level as essentially 161 00:09:47,880 --> 00:09:51,880 Speaker 2: narrow banks. They're not creating new credit, but they are 162 00:09:51,880 --> 00:09:57,020 Speaker 2: taking what are effectively zero interest deposits from customers, um, 163 00:09:57,080 --> 00:10:01,039 Speaker 2: and then um lending them out to be used for 164 00:10:01,039 --> 00:10:04,479 Speaker 2: payments and so on. So they're not really creating new credit. 165 00:10:05,049 --> 00:10:10,809 Speaker 2: Now, could one argue that these stablecoin issuers, um, whoever 166 00:10:10,809 --> 00:10:15,599 Speaker 2: they might be, um, are in some sense creating outside money? 167 00:10:15,849 --> 00:10:18,080 Speaker 2: Now this is where things get very interesting. If you 168 00:10:18,080 --> 00:10:22,010 Speaker 2: think about what the backing of stablecoins is, then it 169 00:10:22,010 --> 00:10:25,848 Speaker 2: turns out to matter. Stablecoin issuers in principle could hold 170 00:10:25,849 --> 00:10:27,890 Speaker 2: any liquid security or cash. 171 00:10:28,469 --> 00:10:31,760 Speaker 2: So if you think about literally as a stablecoin issuer 172 00:10:32,070 --> 00:10:36,469 Speaker 2: um backing up a unit of a stablecoin with cash, 173 00:10:36,760 --> 00:10:39,669 Speaker 2: that doesn't really expand the use of cash in the economy, 174 00:10:39,880 --> 00:10:43,229 Speaker 2: although it does mean that cash is essentially being put 175 00:10:43,229 --> 00:10:47,760 Speaker 2: on a blockchain-based financial system. But what if that stablecoin 176 00:10:47,760 --> 00:10:50,119 Speaker 2: is being backed up by Treasury Security? 177 00:10:50,650 --> 00:10:54,099 Speaker 2: Now, essentially what you've done is you're taking a treasury 178 00:10:54,099 --> 00:10:59,510 Speaker 2: security and converting it into a means of payment. Now, traditionally, um, 179 00:10:59,520 --> 00:11:02,659 Speaker 2: in the US and elsewhere, you don't use um treasury 180 00:11:02,659 --> 00:11:05,569 Speaker 2: securities issued by the US government as a means of payment. 181 00:11:05,900 --> 00:11:09,299 Speaker 2: It is a store of value, but now stablecoin issuers 182 00:11:09,299 --> 00:11:14,090 Speaker 2: could essentially be tokenizing, and that is converting into digital tokens, 183 00:11:14,500 --> 00:11:18,739 Speaker 2: US Treasury securities. So now you're creating a new payment mechanism, 184 00:11:18,780 --> 00:11:20,859 Speaker 2: which does not, did not quite exist. 185 00:11:21,609 --> 00:11:24,950 Speaker 2: But again, things get even wonkier when you think about 186 00:11:24,950 --> 00:11:27,468 Speaker 2: whether we should consider this money or not. It is 187 00:11:27,469 --> 00:11:30,869 Speaker 2: certainly a means of payment. Now the question is, who 188 00:11:30,869 --> 00:11:35,270 Speaker 2: is um whose liability is this? If you think about 189 00:11:35,270 --> 00:11:39,909 Speaker 2: traditional payments in a modern economy, you have currency um 190 00:11:39,909 --> 00:11:42,469 Speaker 2: issued by the central bank, that is a liability of 191 00:11:42,469 --> 00:11:44,669 Speaker 2: the central bank that can be used for payments. 192 00:11:45,250 --> 00:11:48,460 Speaker 2: Um, if you think about bank deposits, which are traditionally 193 00:11:48,460 --> 00:11:51,969 Speaker 2: used for payments as well, those are a liability of 194 00:11:52,289 --> 00:11:55,819 Speaker 2: the commercial bank, but those two trade at par because 195 00:11:55,820 --> 00:11:59,580 Speaker 2: most commercial banks are covered by deposit insurance, and we 196 00:11:59,580 --> 00:12:00,580 Speaker 2: trust in most. 197 00:12:00,760 --> 00:12:05,059 Speaker 2: Countries that these two instruments, bank deposits worth a dollar 198 00:12:05,059 --> 00:12:08,859 Speaker 2: and currency worth a dollar are going to trade at part. 199 00:12:09,270 --> 00:12:13,789 Speaker 2: Now you have this new element appearing stable coins that 200 00:12:13,789 --> 00:12:16,260 Speaker 2: we believe are going to trade at par with money, 201 00:12:16,669 --> 00:12:22,229 Speaker 2: but the question of whose liability um they constitute becomes 202 00:12:22,229 --> 00:12:24,869 Speaker 2: very tricky, and it depends on what sort of backing 203 00:12:24,869 --> 00:12:25,309 Speaker 2: they have. 204 00:12:25,719 --> 00:12:29,549 Speaker 2: So now we're getting into quite uncharted territory in terms 205 00:12:29,549 --> 00:12:33,049 Speaker 2: of what is going to happen to the money supply. 206 00:12:33,429 --> 00:12:35,819 Speaker 2: But there is certainly a concern about what could happen 207 00:12:35,820 --> 00:12:37,460 Speaker 2: to commercial banks because 208 00:12:38,000 --> 00:12:42,630 Speaker 2: Right now, stablecoin issuers are not allowed to offer any 209 00:12:42,630 --> 00:12:47,359 Speaker 2: interest on stablecoins. So essentially, one can think about it 210 00:12:47,359 --> 00:12:50,959 Speaker 2: as a zero interest bearing deposit account that you can 211 00:12:50,960 --> 00:12:54,718 Speaker 2: then use for payments. So obviously commercial banks, which can 212 00:12:54,719 --> 00:12:57,479 Speaker 2: offer a positive rate of interest, are going to have 213 00:12:57,479 --> 00:13:00,119 Speaker 2: an advantage, but in a low interest rate and 214 00:13:01,195 --> 00:13:04,395 Speaker 2: or if the Trump administration were to decide that it 215 00:13:04,395 --> 00:13:08,075 Speaker 2: wants to be even crypto more crypto friendly than it 216 00:13:08,075 --> 00:13:12,164 Speaker 2: already is and allow stablecoin issuers to start paying interest, 217 00:13:12,635 --> 00:13:16,025 Speaker 2: then you could have commercial banks facing a real challenge, 218 00:13:16,275 --> 00:13:20,194 Speaker 2: and commercial banks are already facing a challenge because one 219 00:13:20,195 --> 00:13:22,335 Speaker 2: element that gives them a fair amount of fun. 220 00:13:22,789 --> 00:13:27,039 Speaker 2: Um, you know, revenue is, uh, payments, especially cross-border payments, 221 00:13:27,119 --> 00:13:29,929 Speaker 2: where they collect fairly significant fees and all of those 222 00:13:29,929 --> 00:13:33,119 Speaker 2: are being whittled away by this new competition. So commercial 223 00:13:33,119 --> 00:13:36,400 Speaker 2: banks are under real threat right now. Some of them 224 00:13:36,400 --> 00:13:40,039 Speaker 2: are responding by tokenizing their own deposits, making them easier 225 00:13:40,039 --> 00:13:43,450 Speaker 2: to use, but now you could enter a situation where 226 00:13:43,840 --> 00:13:46,359 Speaker 2: stablecoin issuers start displacing. 227 00:13:46,880 --> 00:13:50,469 Speaker 2: commercial banks, at least to some extent, and that could 228 00:13:50,729 --> 00:13:54,400 Speaker 2: raise this interesting question who is going to start creating 229 00:13:54,400 --> 00:13:58,280 Speaker 2: credit in an economy. So there are lots of ripples 230 00:13:58,280 --> 00:14:03,020 Speaker 2: and indeed tremors coming to both domestic finance and also 231 00:14:03,020 --> 00:14:04,840 Speaker 2: to the international financial system. 232 00:14:05,880 --> 00:14:09,150 Speaker 1: I remember in the aftermath of the global financial crisis 233 00:14:09,150 --> 00:14:14,590 Speaker 1: when generally the regulators were deeply aghast by the banks 234 00:14:14,590 --> 00:14:16,989 Speaker 1: sort of overextending some of the structured product area, there 235 00:14:16,989 --> 00:14:19,429 Speaker 1: were calls for just creating the banks as narrow banks 236 00:14:19,429 --> 00:14:21,390 Speaker 1: that the banks should only be allowed to behave like 237 00:14:21,390 --> 00:14:22,989 Speaker 1: utilities where they only take. 238 00:14:23,469 --> 00:14:26,270 Speaker 1: Deposits which have been invested in government securities and that's 239 00:14:26,270 --> 00:14:29,429 Speaker 1: about it. Anything beyond that, like a fractional resource system-based 240 00:14:29,429 --> 00:14:33,070 Speaker 1: banking was considered again a source of inherent source of 241 00:14:33,070 --> 00:14:35,950 Speaker 1: instability and as you know, I mean in banking literature 242 00:14:35,950 --> 00:14:40,190 Speaker 1: going back to diamond that issue is there. Um, sure, the, um, 243 00:14:40,219 --> 00:14:42,630 Speaker 1: one another, uh, I don't know if it's as wonky 244 00:14:42,630 --> 00:14:45,619 Speaker 1: as the scenarios that you laid out that in my mind, 245 00:14:45,669 --> 00:14:46,869 Speaker 1: I want to hear your view is that. 246 00:14:47,539 --> 00:14:51,460 Speaker 1: If indeed on the margin issuance of stablecoin generates additional 247 00:14:51,460 --> 00:14:54,659 Speaker 1: demand for US treasuries and pushes down US interest rates, 248 00:14:54,750 --> 00:14:57,580 Speaker 1: I mean, I've heard Scott Besson talk about it, then 249 00:14:57,580 --> 00:15:00,219 Speaker 1: if we did have a functional credit channel, we could 250 00:15:00,219 --> 00:15:03,320 Speaker 1: see additional money demand coming from the lower interest rates. Uh, 251 00:15:03,380 --> 00:15:07,409 Speaker 1: so could we actually see expansion of money, uh, demand 252 00:15:07,409 --> 00:15:09,179 Speaker 1: on the back of stable coins issuances? 253 00:15:11,070 --> 00:15:15,820 Speaker 2: Again, um, it, it, uh, as with most things in economics, um, um, 254 00:15:16,109 --> 00:15:19,510 Speaker 2: it depends, and it's going to depend on, um, you know, 255 00:15:19,549 --> 00:15:21,989 Speaker 2: the sort of interest rate environment we're in where the 256 00:15:21,989 --> 00:15:26,190 Speaker 2: stablecoin insurers are allowed to um offer interest and right 257 00:15:26,190 --> 00:15:29,419 Speaker 2: now those are not in the cards, but again, um, 258 00:15:29,429 --> 00:15:33,390 Speaker 2: under the Trump administration, anything can change um on a dime. 259 00:15:33,869 --> 00:15:37,090 Speaker 2: But certainly there is some legitimacy to the notion that 260 00:15:37,090 --> 00:15:41,130 Speaker 2: um because we we have a very crypto-friendly administration in 261 00:15:41,130 --> 00:15:45,570 Speaker 2: Washington and given that stable coins, as I mentioned earlier, 262 00:15:45,650 --> 00:15:49,890 Speaker 2: are a very useful bridge between traditional finance and decentralized 263 00:15:49,890 --> 00:15:54,289 Speaker 2: finance and the different areas of decentralized finance, we could 264 00:15:54,289 --> 00:15:57,289 Speaker 2: see greater demand for stable coins a rising just 265 00:15:57,804 --> 00:16:01,604 Speaker 2: Um, from the US financial system, but then if the 266 00:16:01,604 --> 00:16:05,484 Speaker 2: accessibility of stable coins leads people in other countries to 267 00:16:05,484 --> 00:16:09,765 Speaker 2: start demanding stable coins for payment or even potentially a 268 00:16:09,765 --> 00:16:12,325 Speaker 2: store of value, um, because at least it doesn't fall 269 00:16:12,325 --> 00:16:16,195 Speaker 2: in value in dollar terms relative to their own currencies, 270 00:16:16,484 --> 00:16:20,554 Speaker 2: then you could end up with heightened domestic as well. 271 00:16:20,890 --> 00:16:25,599 Speaker 2: As foreign investor demand for um for stable coins. And yes, 272 00:16:25,679 --> 00:16:29,830 Speaker 2: this is going to have two important secondary effects. One 273 00:16:30,200 --> 00:16:33,440 Speaker 2: is that it's going to make the dollar even more dominant, um, 274 00:16:33,719 --> 00:16:37,559 Speaker 2: as a payment currency and potentially even as a, as 275 00:16:37,559 --> 00:16:40,440 Speaker 2: a store of value. Um, and second, it is going 276 00:16:40,440 --> 00:16:44,400 Speaker 2: to increase the demand for US Treasuries, which at some 277 00:16:44,445 --> 00:16:48,955 Speaker 2: is a good thing because right now the Fed, you know, 278 00:16:48,994 --> 00:16:53,135 Speaker 2: is continuing to roll off US Treasury securities from its 279 00:16:53,135 --> 00:16:56,885 Speaker 2: balance sheet. The US is going to have very large 280 00:16:57,484 --> 00:17:02,875 Speaker 2: deficit financing requirements, so it is quite likely that this 281 00:17:02,875 --> 00:17:05,035 Speaker 2: is going to be good for the US in terms 282 00:17:05,035 --> 00:17:08,915 Speaker 2: of generating additional demand for US Treasury securities. It does 283 00:17:08,915 --> 00:17:12,875 Speaker 2: create some potential fragilities in the US Treasury securities market. 284 00:17:13,188 --> 00:17:17,848 Speaker 2: Um, as a result of stablecoins, stablecoin issuers holding a 285 00:17:17,848 --> 00:17:21,529 Speaker 2: lot of them, because one could start thinking about concerns 286 00:17:21,529 --> 00:17:24,687 Speaker 2: about what happens if sort of like a bank run, 287 00:17:24,769 --> 00:17:28,288 Speaker 2: you have a run on a stablecoin issuer. In principle 288 00:17:28,288 --> 00:17:30,808 Speaker 2: it should not happen because stablecoins are supposed to be 289 00:17:30,808 --> 00:17:34,399 Speaker 2: fully back, but one can well imagine scenarios in which 290 00:17:34,398 --> 00:17:35,248 Speaker 2: that happens. 291 00:17:36,489 --> 00:17:39,160 Speaker 1: Uh, it's interesting you mentioned scenarios. A couple of years ago, 292 00:17:39,250 --> 00:17:42,208 Speaker 1: I had a conversation with Augustin Carstens, who was then 293 00:17:42,209 --> 00:17:45,540 Speaker 1: the general manager of Bank for International Settlements, and Augustin 294 00:17:45,540 --> 00:17:47,869 Speaker 1: was telling me that stablecoins is a half a millennia 295 00:17:47,869 --> 00:17:51,569 Speaker 1: old concept. So I sort of was a little quizzical, 296 00:17:51,609 --> 00:17:53,169 Speaker 1: and he said that you know the Dutch East India 297 00:17:53,170 --> 00:17:57,729 Speaker 1: Company used to issue copper backed paper, which basically acted 298 00:17:57,729 --> 00:18:00,050 Speaker 1: as a stablecoin. It went on pretty well for about 80, 299 00:18:00,060 --> 00:18:01,329 Speaker 1: 90 years, and then the governor. 300 00:18:01,540 --> 00:18:04,260 Speaker 1: Around holding the right amount of copper to issue the 301 00:18:04,260 --> 00:18:09,520 Speaker 1: right amount of claims uh sort of started getting a little, 302 00:18:09,780 --> 00:18:12,979 Speaker 1: you know, undone, and then once the question around whether 303 00:18:12,979 --> 00:18:15,229 Speaker 1: they actually were holding that much copper or not came 304 00:18:15,229 --> 00:18:17,979 Speaker 1: about the stablecoin experiment which lasted a century. 305 00:18:18,359 --> 00:18:21,619 Speaker 1: Uh, went, uh, sort of fell apart. So I, I 306 00:18:21,619 --> 00:18:23,579 Speaker 1: want to, you know, sort of talk a little bit 307 00:18:23,579 --> 00:18:26,139 Speaker 1: about BIS because they've written a couple of papers on this, 308 00:18:26,180 --> 00:18:29,020 Speaker 1: and I believe if I'm getting it right, 3 tests 309 00:18:29,020 --> 00:18:33,349 Speaker 1: of a currency, um, ubiquity that if a monetary authority 310 00:18:33,349 --> 00:18:33,939 Speaker 1: issues a dollar. 311 00:18:34,000 --> 00:18:38,149 Speaker 1: Uh, you know, backed by the treasury, uh, every dollar 312 00:18:38,150 --> 00:18:41,180 Speaker 1: is the same interchangeable. Second is the elasticity that a 313 00:18:41,180 --> 00:18:45,109 Speaker 1: monetary authority can do open market operations or any other 314 00:18:45,109 --> 00:18:48,709 Speaker 1: form of, uh, uh, tools that they have to deploy 315 00:18:48,709 --> 00:18:49,689 Speaker 1: to change the 316 00:18:50,390 --> 00:18:52,968 Speaker 1: Scope of money demand and so on and finally security 317 00:18:52,969 --> 00:18:56,688 Speaker 1: that you know they have the power to legislate the 318 00:18:56,689 --> 00:19:00,540 Speaker 1: integrity of the currency regime and go after various sort 319 00:19:00,540 --> 00:19:05,879 Speaker 1: of breaches of illicit usage of the currency. So ubiquity, elasticity, 320 00:19:06,170 --> 00:19:10,170 Speaker 1: and security, do stablecoins meet these three tests? 321 00:19:11,750 --> 00:19:16,170 Speaker 2: That again, depends on who you ask, um, stablecoin issuers 322 00:19:16,489 --> 00:19:21,010 Speaker 2: will tell you that uh um they do ensure that 323 00:19:21,010 --> 00:19:24,569 Speaker 2: they are fully backed, in fact, um uh um one 324 00:19:24,569 --> 00:19:26,800 Speaker 2: of them, the largest issuer of stablecoins. 325 00:19:27,449 --> 00:19:30,770 Speaker 2: Has argued in some context that it is over collateralized, 326 00:19:30,849 --> 00:19:34,089 Speaker 2: meaning every unit of tether is backed up by a 327 00:19:34,089 --> 00:19:38,800 Speaker 2: little more than $1 worth of liquid securities, but in fact, 328 00:19:38,810 --> 00:19:41,929 Speaker 2: that used to be the biggest concern about stablecoins because 329 00:19:41,930 --> 00:19:42,260 Speaker 2: um 330 00:19:42,609 --> 00:19:45,500 Speaker 2: Um, you were left to take tether's word for it. 331 00:19:45,750 --> 00:19:48,149 Speaker 2: What the Genius Act passed in the US has done 332 00:19:48,150 --> 00:19:54,390 Speaker 2: is to systematize the way in which stablecoin issue is 333 00:19:54,390 --> 00:19:58,629 Speaker 2: supposed to report and get their holdings audited in order 334 00:19:58,630 --> 00:20:01,729 Speaker 2: to build more confidence in the sector. But the interesting 335 00:20:01,729 --> 00:20:05,229 Speaker 2: thing is that even though many people, including myself, had 336 00:20:05,229 --> 00:20:07,659 Speaker 2: some doubts about the backing of tether. 337 00:20:08,310 --> 00:20:10,718 Speaker 2: The markets seem to take them at face value for 338 00:20:10,719 --> 00:20:14,159 Speaker 2: a number of years now. Tether has traded it pretty 339 00:20:14,160 --> 00:20:20,449 Speaker 2: much on par, except for very minor, very temporary deviations. 340 00:20:20,719 --> 00:20:22,959 Speaker 2: No one might argue just the fact that there are 341 00:20:22,959 --> 00:20:27,439 Speaker 2: minor and temporary, but still deviations from par suggest that 342 00:20:27,439 --> 00:20:31,280 Speaker 2: these are not fully secure, so I think there are 343 00:20:31,280 --> 00:20:33,599 Speaker 2: still some questions about that. 344 00:20:33,949 --> 00:20:36,640 Speaker 2: Um, the other issue worth thinking about, uh, I should 345 00:20:36,640 --> 00:20:41,510 Speaker 2: mention that the second largest issuer of stable coins, which is, um, um, 346 00:20:41,640 --> 00:20:44,680 Speaker 2: a circle, which issues USD coin, but also coins in 347 00:20:44,680 --> 00:20:46,050 Speaker 2: euros and Japanese yen. 348 00:20:46,719 --> 00:20:49,969 Speaker 2: has been much more transparent about its reserve holdings and 349 00:20:49,969 --> 00:20:52,719 Speaker 2: so on, and in fact they've been much more eager 350 00:20:52,719 --> 00:20:55,430 Speaker 2: to get this sort of regulation because they feel that 351 00:20:55,430 --> 00:21:01,729 Speaker 2: it would bring all stablecoin issuers in line with with 352 00:21:01,729 --> 00:21:04,849 Speaker 2: the need to be very transparent about their reserves. 353 00:21:05,239 --> 00:21:11,329 Speaker 2: Um, there is one question implicit in what you just mentioned, 354 00:21:11,660 --> 00:21:14,369 Speaker 2: which is that um when you think about um the 355 00:21:14,369 --> 00:21:17,369 Speaker 2: central bank issuing um money that is in use as 356 00:21:17,369 --> 00:21:20,139 Speaker 2: the system of payment, you know, that is a liability 357 00:21:20,140 --> 00:21:23,810 Speaker 2: of the um a central bank and the central bank, 358 00:21:23,849 --> 00:21:25,770 Speaker 2: of course, is in a sense backed up by the 359 00:21:25,770 --> 00:21:27,449 Speaker 2: taxing authority of the government. 360 00:21:27,969 --> 00:21:31,369 Speaker 2: If you think about a commercial bank deposit, um, that 361 00:21:31,369 --> 00:21:35,369 Speaker 2: is a liability of the commercial bank. The commercial bank 362 00:21:35,369 --> 00:21:39,329 Speaker 2: is backed up by the deposit insurance system, but more importantly, 363 00:21:39,369 --> 00:21:43,329 Speaker 2: the commercial bank does have access to liquidity facilities from 364 00:21:43,329 --> 00:21:46,170 Speaker 2: the central bank. So commercial banks in the US do 365 00:21:46,170 --> 00:21:49,290 Speaker 2: have access to liquidity backstop from the Fed. 366 00:21:49,589 --> 00:21:54,520 Speaker 2: A stablecoin issuer doesn't quite have that backstop. So if 367 00:21:54,810 --> 00:21:57,530 Speaker 2: there were to be a concern about a stablecoin issuer, 368 00:21:57,550 --> 00:22:00,650 Speaker 2: if people were to start getting a little concerned about 369 00:22:00,650 --> 00:22:01,729 Speaker 2: whether in fact, 370 00:22:02,349 --> 00:22:07,050 Speaker 2: The securities of that stablecoin issuer says it holds are 371 00:22:07,050 --> 00:22:09,879 Speaker 2: in fact um there in the world, or if they 372 00:22:09,880 --> 00:22:12,880 Speaker 2: are high quality assets or if they're liquid assets, one 373 00:22:12,880 --> 00:22:17,750 Speaker 2: can well imagine a run on a stablecoin issuer. Um, 374 00:22:17,760 --> 00:22:21,958 Speaker 2: this could have two sorts of effects. Number one, it 375 00:22:21,959 --> 00:22:25,040 Speaker 2: could create a problem in the Treasury securities market. If 376 00:22:25,040 --> 00:22:27,958 Speaker 2: in fact a stablecoin issuer has a lot of backing 377 00:22:27,959 --> 00:22:31,359 Speaker 2: in the form of US Treasury securities, those securities have 378 00:22:31,359 --> 00:22:32,239 Speaker 2: to be redeemed. 379 00:22:32,640 --> 00:22:35,489 Speaker 2: And right now the amounts we're talking about in terms 380 00:22:35,489 --> 00:22:39,679 Speaker 2: of stablecoins, you know, somewhere around 280 to $300 billion 381 00:22:39,689 --> 00:22:42,810 Speaker 2: and not that much, but if that number grows to 382 00:22:42,810 --> 00:22:45,849 Speaker 2: a significant amount, if a stablecoin issuer is trying to 383 00:22:45,849 --> 00:22:50,329 Speaker 2: redeem treasury securities to a significant extent at a time 384 00:22:50,770 --> 00:22:53,560 Speaker 2: when the government in the US is trying to 385 00:22:53,604 --> 00:22:57,474 Speaker 2: Issue a lot of new treasury securities to finance its 386 00:22:57,474 --> 00:23:01,265 Speaker 2: debt and given all the liquidity problems that have already 387 00:23:01,265 --> 00:23:04,114 Speaker 2: been in the Treasury securities market in the last few 388 00:23:04,114 --> 00:23:09,155 Speaker 2: years because of changes in the market maker structures, suddenly 389 00:23:09,155 --> 00:23:12,984 Speaker 2: you could have a potentially adverse liquidity event in the 390 00:23:12,984 --> 00:23:14,474 Speaker 2: Treasury securities market. 391 00:23:15,130 --> 00:23:18,569 Speaker 2: If that were to happen, and a stablecoin issuer typically 392 00:23:18,569 --> 00:23:21,930 Speaker 2: doesn't have the liquidity backs off from the Fed, you 393 00:23:21,930 --> 00:23:23,560 Speaker 2: could immediately set off. 394 00:23:24,209 --> 00:23:27,359 Speaker 2: A lot of trouble in the US Treasury securities market, 395 00:23:27,400 --> 00:23:31,229 Speaker 2: which is a benchmark of the entire US financial system, 396 00:23:31,520 --> 00:23:35,889 Speaker 2: which in turn is the underpinning of the global financial system, 397 00:23:35,959 --> 00:23:40,000 Speaker 2: so one can very easily see these risks spreading through 398 00:23:40,000 --> 00:23:44,680 Speaker 2: US financial markets into world financial markets. It's not a 399 00:23:44,680 --> 00:23:46,319 Speaker 2: clear and present risk yet. 400 00:23:46,839 --> 00:23:51,349 Speaker 2: But with the legislation in place with stablecoins likely to proliferate, 401 00:23:51,599 --> 00:23:55,680 Speaker 2: I think it's definitely worth keeping one's eye on these risks. 402 00:23:56,439 --> 00:23:57,869 Speaker 1: How would you solve for this risk? 403 00:23:59,050 --> 00:24:02,619 Speaker 2: It's a tough question. The legislation is supposed to do this. Now, 404 00:24:02,949 --> 00:24:06,540 Speaker 2: one way you could reduce the risk is do what 405 00:24:06,540 --> 00:24:10,030 Speaker 2: um commercial banks benefit from, which is having a liquidity 406 00:24:10,030 --> 00:24:12,589 Speaker 2: backstop with the Fed. But now you have the Genius 407 00:24:12,589 --> 00:24:15,228 Speaker 2: Act which doesn't give the central bank um. 408 00:24:15,640 --> 00:24:19,198 Speaker 2: The authority to regulate stablecoin, so we might actually be 409 00:24:19,660 --> 00:24:23,939 Speaker 2: in a worse situation if this legislation were to, um, 410 00:24:24,099 --> 00:24:27,680 Speaker 2: you know, develop in a way that stablecoin issuers get 411 00:24:27,680 --> 00:24:30,979 Speaker 2: even more of what they want, which is a liquidity 412 00:24:30,979 --> 00:24:33,569 Speaker 2: backstop from the Fed, which makes them look even safer 413 00:24:33,939 --> 00:24:38,938 Speaker 2: without being subject to the tight regulation by the Fed. 414 00:24:39,260 --> 00:24:42,579 Speaker 2: So I worry that given the political environment in Washington, 415 00:24:42,619 --> 00:24:43,890 Speaker 2: we could end up giving 416 00:24:44,229 --> 00:24:47,750 Speaker 2: You know, the entire crypto world, including stablecoin issuers, a 417 00:24:47,750 --> 00:24:51,459 Speaker 2: lot more if they want without the safeguards being in place, 418 00:24:51,709 --> 00:24:54,390 Speaker 2: and I think the BIS is right to caution us 419 00:24:54,390 --> 00:24:57,069 Speaker 2: about all of these risks, which might seem like they 420 00:24:57,069 --> 00:25:00,310 Speaker 2: are well off into the distant future, but I think 421 00:25:00,310 --> 00:25:03,349 Speaker 2: could start hitting us in the face sooner than we 422 00:25:03,349 --> 00:25:04,069 Speaker 2: might expect. 423 00:25:05,199 --> 00:25:09,229 Speaker 1: Absolutely. Uh, sure, you wrote a very, uh, sort of 424 00:25:09,229 --> 00:25:12,750 Speaker 1: insightful op ed in the Financial Times over the weekend. Uh, 425 00:25:12,880 --> 00:25:16,359 Speaker 1: I also saw yesterday Jean Tirole has written an article. 426 00:25:16,589 --> 00:25:19,069 Speaker 1: If I were to sort of push the two articles 427 00:25:19,069 --> 00:25:21,170 Speaker 1: through GNAI and ask them to sort of, you know, 428 00:25:21,270 --> 00:25:25,150 Speaker 1: create a sentiment indicator, they probably, I think, would say 429 00:25:25,150 --> 00:25:29,540 Speaker 1: that yours were more on the uh optimistic side about 430 00:25:29,540 --> 00:25:31,189 Speaker 1: the persuasive um. 431 00:25:31,630 --> 00:25:34,560 Speaker 1: Uh, use cases and Gins was a slightly more on 432 00:25:34,560 --> 00:25:39,069 Speaker 1: the worrisome side that, you know, governance around cryptos and 433 00:25:39,069 --> 00:25:43,469 Speaker 1: stable coins and the risk of breaking the bank of 434 00:25:43,469 --> 00:25:45,979 Speaker 1: a tokenized money market fund, which is essentially a stable coin, 435 00:25:46,189 --> 00:25:50,420 Speaker 1: those sort of risks could be quite substantial. So let's 436 00:25:50,670 --> 00:25:53,030 Speaker 1: first talk about Tro's argument and then I want to 437 00:25:53,030 --> 00:25:55,500 Speaker 1: come back to yours because yours has a more of 438 00:25:55,500 --> 00:25:57,699 Speaker 1: an international dimension. I want to talk about that later on. 439 00:25:58,060 --> 00:26:02,800 Speaker 1: So concerns about run, breaking the bank, and that sort 440 00:26:02,800 --> 00:26:07,680 Speaker 1: of stuff in an international setting, um, do we need 441 00:26:07,680 --> 00:26:11,359 Speaker 1: some sort of an international coordinating body that oversees the 442 00:26:11,359 --> 00:26:14,198 Speaker 1: blockchain-based transactions because if things sort of move from SWIFT 443 00:26:14,199 --> 00:26:17,639 Speaker 1: to the blockchain, uh, who has the oversight and how 444 00:26:17,640 --> 00:26:20,680 Speaker 1: do we then sort of enforce, uh, regulations? 445 00:26:22,369 --> 00:26:26,319 Speaker 2: This is one of the very complicated issues with cryptocurrencies 446 00:26:26,319 --> 00:26:29,880 Speaker 2: in general that they do not know any borders, and 447 00:26:29,880 --> 00:26:32,599 Speaker 2: they make it very easy in principle to get around 448 00:26:32,599 --> 00:26:38,280 Speaker 2: capital controls. There are ways that countries can limit their households, 449 00:26:38,400 --> 00:26:41,439 Speaker 2: their businesses, access to cryptocurrencies by limiting. 450 00:26:41,880 --> 00:26:47,149 Speaker 2: Um, the connections between traditional financial institutions in those countries, 451 00:26:47,619 --> 00:26:51,708 Speaker 2: especially banks, and having anything to do with crypto. The 452 00:26:51,709 --> 00:26:54,750 Speaker 2: Indian government, for instance, along with the Reserve Bank of India, 453 00:26:55,020 --> 00:27:01,869 Speaker 2: India's central bank had essentially banned um cryptocurrency dealings, um, 454 00:27:02,079 --> 00:27:08,000 Speaker 2: more broadly and then um banned um Indian banks from 455 00:27:08,000 --> 00:27:08,919 Speaker 2: having any sort of deal. 456 00:27:09,045 --> 00:27:13,035 Speaker 2: With cryptocurrencies. Some of those rulings were pulled back because 457 00:27:13,035 --> 00:27:16,554 Speaker 2: of a Supreme Court ruling, but, you know, um, government, 458 00:27:16,574 --> 00:27:20,074 Speaker 2: central bankers can make it a little harder for traditional 459 00:27:20,074 --> 00:27:23,984 Speaker 2: financial institutions where most people still keep their money um 460 00:27:23,984 --> 00:27:29,234 Speaker 2: to facilitate cryptocurrency transactions. Now, once you have a jurisdiction 461 00:27:29,234 --> 00:27:33,854 Speaker 2: like the United States, um, you know, legitimized stablecoin transactions, 462 00:27:33,915 --> 00:27:36,104 Speaker 2: it's going to be much, much harder to corral. 463 00:27:36,589 --> 00:27:40,219 Speaker 2: Um, so yes, in principle, it would make sense to 464 00:27:40,219 --> 00:27:44,520 Speaker 2: think about coordinating these um at the global level. But 465 00:27:44,520 --> 00:27:47,319 Speaker 2: given the state of global governance these days and given 466 00:27:47,319 --> 00:27:52,550 Speaker 2: the geopolitical um fissures, um, that are, you know, expanding 467 00:27:52,550 --> 00:27:56,180 Speaker 2: um in around the world, um, I think it's going 468 00:27:56,180 --> 00:27:58,119 Speaker 2: to be very difficult to come up with um. 469 00:27:58,420 --> 00:28:03,239 Speaker 2: A coordinated regulatory approach because you know, advanced economies, emerging 470 00:28:03,239 --> 00:28:07,000 Speaker 2: market economies have different perspectives on this, different levels of 471 00:28:07,000 --> 00:28:12,239 Speaker 2: regulatory expertise, exposure to different risks, um, even among advanced economies, 472 00:28:12,359 --> 00:28:14,879 Speaker 2: going back to the example of the euro I gave, uh, 473 00:28:15,000 --> 00:28:18,319 Speaker 2: the US and the euro may have very different views 474 00:28:18,319 --> 00:28:23,760 Speaker 2: about how to, whether to regulate um stable coins and 475 00:28:23,760 --> 00:28:26,198 Speaker 2: whether to coordinate on that. 476 00:28:26,739 --> 00:28:29,349 Speaker 2: Now, Professor Tyrole, in addition to some of the risks 477 00:28:29,349 --> 00:28:33,739 Speaker 2: that I mentioned and of course he um articulated them 478 00:28:33,739 --> 00:28:37,500 Speaker 2: much more effectively than I could. He also pointed out 479 00:28:37,500 --> 00:28:40,859 Speaker 2: one more important issue, which is that if you think 480 00:28:40,859 --> 00:28:43,939 Speaker 2: about the US where stablecoins are now seen as a 481 00:28:43,939 --> 00:28:48,689 Speaker 2: legitimate government approved or authorized form of payment, because after all, 482 00:28:48,979 --> 00:28:52,780 Speaker 2: there is legislation that uh um that legitimizes. 483 00:28:53,160 --> 00:28:57,390 Speaker 2: coins, one can well imagine that if a stablecoin issuer 484 00:28:57,390 --> 00:29:01,000 Speaker 2: were to, um, uh, were to do things like issuing 485 00:29:01,000 --> 00:29:03,719 Speaker 2: a lot of stablecoins that were not fully backed, but 486 00:29:03,719 --> 00:29:08,300 Speaker 2: people kept using those stablecoins, put a lot of money, um, in, 487 00:29:08,400 --> 00:29:12,160 Speaker 2: in those, and then the stablecoin issuer failed. Just like 488 00:29:12,160 --> 00:29:14,199 Speaker 2: the failure of a big bang because it could set 489 00:29:14,199 --> 00:29:18,599 Speaker 2: up broader problems, there is this huge issue of moral hazard, 490 00:29:18,719 --> 00:29:19,219 Speaker 2: which is 491 00:29:19,420 --> 00:29:23,689 Speaker 2: Say that everybody would expect the government to step in 492 00:29:24,300 --> 00:29:26,969 Speaker 2: because we know that if the government does not step in, 493 00:29:27,180 --> 00:29:30,020 Speaker 2: it could cause major financial problems, so it becomes a 494 00:29:30,020 --> 00:29:35,260 Speaker 2: self-fulfilling prophecy. People trust the stablecoins because they believe the 495 00:29:35,260 --> 00:29:38,209 Speaker 2: government will eventually step in if anything were to go wrong, 496 00:29:38,459 --> 00:29:42,939 Speaker 2: which allows stablecoin issuer to start doing even dodgier things 497 00:29:42,939 --> 00:29:45,459 Speaker 2: and some of them might already be doing. 498 00:29:45,920 --> 00:29:51,689 Speaker 2: Um, so yes, and a better regulatory approach, um, at 499 00:29:51,689 --> 00:29:56,530 Speaker 2: the domestic level, and a coordinated global approach would certainly 500 00:29:56,530 --> 00:30:00,010 Speaker 2: be better. I think the prospects of the latter are 501 00:30:00,010 --> 00:30:01,319 Speaker 2: pretty dim at the moment. 502 00:30:02,339 --> 00:30:05,489 Speaker 1: Indeed, indeed. Um, if we, at the beginning of this conversation, 503 00:30:05,650 --> 00:30:09,050 Speaker 1: you're talking about the fact that the cryptotech technology has 504 00:30:09,050 --> 00:30:12,329 Speaker 1: been around for 17 odd years and we have not 505 00:30:12,329 --> 00:30:16,060 Speaker 1: really seen a huge take up other than stores of value, um, uh, 506 00:30:16,250 --> 00:30:20,310 Speaker 1: because your point was that, you know, crypto prices are pretty, uh, volatile. 507 00:30:20,569 --> 00:30:23,369 Speaker 1: It doesn't really work that way, uh, whereas stablecoins can 508 00:30:23,369 --> 00:30:24,170 Speaker 1: offer a solution. 509 00:30:24,599 --> 00:30:27,150 Speaker 1: Uh, but I want to ask you about the ability 510 00:30:27,150 --> 00:30:30,619 Speaker 1: of the blockchain-based system to absorb a very sharp rise 511 00:30:30,619 --> 00:30:33,520 Speaker 1: in transactions, and we've seen in the past that 512 00:30:34,180 --> 00:30:37,550 Speaker 1: Blockchain, uh, services companies themselves have had to sort of, 513 00:30:37,579 --> 00:30:41,500 Speaker 1: you know, adapt to rise in usage. People talk about 514 00:30:41,500 --> 00:30:45,469 Speaker 1: the very brown nature of blockchain technology and as competition 515 00:30:45,469 --> 00:30:49,660 Speaker 1: intensity rises, energy usage also goes up. And I, I 516 00:30:49,660 --> 00:30:52,619 Speaker 1: also recall Ben Broadbent from Bank of England was talking 517 00:30:52,619 --> 00:30:55,530 Speaker 1: about how the conventional central bank to 518 00:30:56,224 --> 00:30:59,444 Speaker 1: commercial bank based, you know, real-time gross settlement system can 519 00:30:59,444 --> 00:31:02,494 Speaker 1: handle hundreds of billions of dollars worth of transactions on 520 00:31:02,494 --> 00:31:07,675 Speaker 1: a daily basis, intra-second or intrain, and very, very low cost. 521 00:31:07,844 --> 00:31:10,435 Speaker 1: So you, do you think that the technology is there 522 00:31:10,435 --> 00:31:14,344 Speaker 1: to remain stable, relatively cheap, and be able to handle 523 00:31:14,344 --> 00:31:16,324 Speaker 1: an extremely large number of 524 00:31:16,324 --> 00:31:17,045 Speaker 1: transactions? 525 00:31:18,510 --> 00:31:21,510 Speaker 2: As I've said, um, already the once or twice, I 526 00:31:21,510 --> 00:31:25,989 Speaker 2: think the real legacy of cryptocurrencies is basically in showing 527 00:31:25,989 --> 00:31:31,020 Speaker 2: us um how pervasive these inefficiencies in current financial systems are, 528 00:31:31,310 --> 00:31:34,469 Speaker 2: especially when it comes to payments and even more, especially 529 00:31:34,469 --> 00:31:37,109 Speaker 2: when it comes to cross-border payments and how you can 530 00:31:37,109 --> 00:31:41,709 Speaker 2: use technology to get around those inefficiencies. So is blockchain 531 00:31:41,709 --> 00:31:46,229 Speaker 2: the right technology to um to address those issues? That 532 00:31:46,229 --> 00:31:47,949 Speaker 2: is a lot less clear to me. 533 00:31:48,430 --> 00:31:51,910 Speaker 2: Um, now, uh, again, it's worth getting a little wonky 534 00:31:51,910 --> 00:31:55,189 Speaker 2: here because it is an important issue about um different 535 00:31:55,189 --> 00:31:58,989 Speaker 2: types of cryptocurrencies. You know, when one hears the word cryptocurrency, 536 00:31:59,030 --> 00:32:01,739 Speaker 2: you typically tend to think of Bitcoin, which is the 537 00:32:02,250 --> 00:32:06,030 Speaker 2: granddaddy of cryptocurrency, so to speak, and it did spawn 538 00:32:06,030 --> 00:32:11,859 Speaker 2: this entire new blockchain technology. Now the particular consensus mechanism 539 00:32:11,859 --> 00:32:14,229 Speaker 2: that is used by blockchain. 540 00:32:14,579 --> 00:32:18,660 Speaker 2: Um, by the Bitcoin blockchain in order to validate transactions 541 00:32:18,959 --> 00:32:23,579 Speaker 2: is hugely inefficient. It cannot handle a large volume of transactions, 542 00:32:23,880 --> 00:32:27,979 Speaker 2: especially at the base layer. Um, it is very slow, um, 543 00:32:28,239 --> 00:32:29,540 Speaker 2: and also it is quite 544 00:32:29,699 --> 00:32:33,979 Speaker 2: Uh, expensive with fairly large transaction fees. So it's really 545 00:32:33,979 --> 00:32:37,579 Speaker 2: not working very well. Um, uh, in addition, as you 546 00:32:37,579 --> 00:32:41,500 Speaker 2: pointed out, the energy requirements for um gaining consistent, the 547 00:32:41,500 --> 00:32:44,540 Speaker 2: Bitcoin blockchain are um pretty significant. 548 00:32:45,040 --> 00:32:49,089 Speaker 2: Now there are alternative consensus mechanisms that have been developed. 549 00:32:49,199 --> 00:32:54,040 Speaker 2: The 2nd largest cryptocurrency by market value, Ethereum, uses a 550 00:32:54,040 --> 00:32:58,229 Speaker 2: very different consensus protocol. It's called proof of stake versus 551 00:32:58,229 --> 00:33:01,310 Speaker 2: Bitcoin's proof of work, and proof of stake, it turns out, 552 00:33:01,319 --> 00:33:03,630 Speaker 2: is very efficient. It uses some. 553 00:33:04,000 --> 00:33:08,020 Speaker 2: Um, you know, tiny amounts of energy compared to Bitcoin 554 00:33:08,020 --> 00:33:11,420 Speaker 2: is much more scalable in terms of the volume of 555 00:33:11,420 --> 00:33:15,260 Speaker 2: transactions that can be processed, the latency that is the 556 00:33:15,260 --> 00:33:19,540 Speaker 2: speed with which transactions get processed. So those are not 557 00:33:19,540 --> 00:33:22,180 Speaker 2: the major considerations here. 558 00:33:22,599 --> 00:33:26,900 Speaker 2: Um, now, both Bitcoin and the cryptocurrency that I mentioned, 559 00:33:26,959 --> 00:33:31,800 Speaker 2: Ethereum are both decentralized, which means that um there is 560 00:33:31,800 --> 00:33:36,800 Speaker 2: no particular um institution or organization that runs them. They're 561 00:33:36,800 --> 00:33:40,770 Speaker 2: essentially run by the community as represented by the computer 562 00:33:40,770 --> 00:33:44,800 Speaker 2: nodes um that have an incentive, um, in the form 563 00:33:44,800 --> 00:33:47,839 Speaker 2: of fees or in the form of block rewards in 564 00:33:47,839 --> 00:33:48,800 Speaker 2: the context of Bitcoin. 565 00:33:49,530 --> 00:33:54,079 Speaker 2: Um, to undertake the validation of transactions and to maintain 566 00:33:54,079 --> 00:33:57,859 Speaker 2: the integrity of the network. If you think about a stablecoin, 567 00:33:57,920 --> 00:34:02,569 Speaker 2: which is also a cryptocurrency, it is completely centralized. So 568 00:34:02,569 --> 00:34:06,979 Speaker 2: all of the transactions um are validated by the stablecoin 569 00:34:06,979 --> 00:34:09,959 Speaker 2: issuer who also decides on the rules of the game, 570 00:34:10,169 --> 00:34:15,169 Speaker 2: who issues the stablecoins. Um, so it's a very different setup. 571 00:34:15,540 --> 00:34:19,000 Speaker 2: So it is a bit paradoxical at some level that 572 00:34:19,510 --> 00:34:25,290 Speaker 2: The Bitcoin revolution was basically intended to get us away 573 00:34:25,290 --> 00:34:27,919 Speaker 2: from all of the centralizations. It was supposed to be 574 00:34:28,250 --> 00:34:31,090 Speaker 2: people power or community power at its finest because there 575 00:34:31,090 --> 00:34:37,029 Speaker 2: is nobody who runs Bitcoin. It's run essentially algorithmically. Ethereum 576 00:34:37,030 --> 00:34:42,280 Speaker 2: does have a little more centralization, but it's still basically decentralized, 577 00:34:42,449 --> 00:34:46,760 Speaker 2: but a stablecoin, which really works quite well at what 578 00:34:46,760 --> 00:34:47,649 Speaker 2: Bitcoin was supposed. 579 00:34:47,770 --> 00:34:53,169 Speaker 2: to do is in fact centralized in every aspect. So 580 00:34:53,169 --> 00:34:56,279 Speaker 2: even when we think about blockchain technology, you know, it 581 00:34:56,280 --> 00:35:01,850 Speaker 2: spans the spectrum from very decentralized to very centralized. The 582 00:35:01,850 --> 00:35:06,050 Speaker 2: very decentralized version, especially as epitomized by Bitcoin, is not 583 00:35:06,050 --> 00:35:09,609 Speaker 2: the solution to more efficient payments. Stablecoins, which are very 584 00:35:09,610 --> 00:35:14,040 Speaker 2: centralized but which are blockchain-based payments, are in fact quite efficient, 585 00:35:14,239 --> 00:35:15,810 Speaker 2: and Ethereum is somewhere in the middle. 586 00:35:16,979 --> 00:35:21,580 Speaker 1: Fantastic. Um, if we're, ah, you have touched upon use 587 00:35:21,580 --> 00:35:24,279 Speaker 1: cases a few times, so let's go there a little bit, 588 00:35:24,620 --> 00:35:30,259 Speaker 1: correspondent banking, trade finance, remittance, ah, as well as, you know, 589 00:35:30,530 --> 00:35:34,620 Speaker 1: institutional cross-border frames, not just retail remittance. Among these use cases, 590 00:35:34,739 --> 00:35:38,139 Speaker 1: which one do you find the most persuasive, uh, in 591 00:35:38,139 --> 00:35:41,379 Speaker 1: terms of being able to take advantage of the stablecoin 592 00:35:41,379 --> 00:35:42,209 Speaker 1: uh framework? 593 00:35:43,850 --> 00:35:47,929 Speaker 2: Now, the question again is um why one needs stablecoins 594 00:35:47,929 --> 00:35:48,959 Speaker 2: at all, um. 595 00:35:49,439 --> 00:35:53,178 Speaker 2: Uh, you mentioned the BIS, uh, um, earlier, and let 596 00:35:53,179 --> 00:35:56,929 Speaker 2: me make a plug for a BIS uh um initiative, 597 00:35:57,179 --> 00:36:00,100 Speaker 2: which I, I, I have no part in, but I 598 00:36:00,100 --> 00:36:02,360 Speaker 2: think it was a useful initiative to try to think 599 00:36:02,360 --> 00:36:05,879 Speaker 2: about how to bring central banks together to use not 600 00:36:05,879 --> 00:36:09,939 Speaker 2: retail central bank currencies, but wholesale central bank currencies in 601 00:36:09,939 --> 00:36:14,149 Speaker 2: order to create more efficient conduits for cross-border payments. Now, 602 00:36:14,219 --> 00:36:17,290 Speaker 2: those could be based on blockchain technology, but they don't. 603 00:36:17,840 --> 00:36:22,959 Speaker 2: have to be one can think about tokenized versions of 604 00:36:22,959 --> 00:36:26,759 Speaker 2: wholesale central bank digital currencies which are already digital in 605 00:36:26,760 --> 00:36:30,600 Speaker 2: nature and are used for right now um for payment 606 00:36:30,600 --> 00:36:34,830 Speaker 2: and settlement across financial institutions, something that most of us 607 00:36:34,830 --> 00:36:36,908 Speaker 2: don't see all the your time or given your position, 608 00:36:36,919 --> 00:36:40,840 Speaker 2: the DBS might well actually see, but this all happens 609 00:36:40,840 --> 00:36:43,399 Speaker 2: in the background, so one can think about this international 610 00:36:43,399 --> 00:36:45,639 Speaker 2: layer being added to that. 611 00:36:45,939 --> 00:36:48,860 Speaker 2: Um, right now, the way correspondent banking is set up 612 00:36:48,860 --> 00:36:53,100 Speaker 2: is really not terribly efficient. You have the messaging being 613 00:36:53,100 --> 00:36:57,100 Speaker 2: done through SWIFT and then corresponding banks would actually have 614 00:36:57,100 --> 00:37:01,300 Speaker 2: to um provide the pipes through which these transactions take place. 615 00:37:01,580 --> 00:37:03,459 Speaker 2: So if you're, you know, sitting in a village in 616 00:37:03,459 --> 00:37:07,419 Speaker 2: India want to send a payment to your cousin in um. 617 00:37:07,502 --> 00:37:10,492 Speaker 2: Say Idaho or typically it may go the other way, um, 618 00:37:10,613 --> 00:37:12,372 Speaker 2: you know, you have to go to your bank, your 619 00:37:12,373 --> 00:37:15,212 Speaker 2: local bank, which then has to, um, you know, send 620 00:37:15,212 --> 00:37:17,971 Speaker 2: the money to a correspondent bank in the US which 621 00:37:17,972 --> 00:37:20,292 Speaker 2: then might have to send the money to a correspondent 622 00:37:20,292 --> 00:37:23,613 Speaker 2: bank in India that it has, uh, dealings with, which 623 00:37:23,613 --> 00:37:26,212 Speaker 2: then transfers the money to the local bank. This adds 624 00:37:26,212 --> 00:37:29,042 Speaker 2: a lots of steps, um, it's really very 625 00:37:29,285 --> 00:37:32,365 Speaker 2: inefficient, so one can think about cutting out some of 626 00:37:32,364 --> 00:37:35,325 Speaker 2: these links so that even smaller banks are able to 627 00:37:35,325 --> 00:37:38,756 Speaker 2: more directly transact with each other or at least making 628 00:37:38,756 --> 00:37:44,325 Speaker 2: the correspond correspondent banking function a lot more seamless. And 629 00:37:44,325 --> 00:37:47,045 Speaker 2: you know, one of the key elements that this new technology, 630 00:37:47,206 --> 00:37:50,645 Speaker 2: blockchain based technology can deliver um is 631 00:37:51,350 --> 00:37:55,959 Speaker 2: Speed, um, and when we think about uh transacting between countries, 632 00:37:56,010 --> 00:38:00,050 Speaker 2: that is inherently complicated because we're talking about two different 633 00:38:00,050 --> 00:38:02,169 Speaker 2: monies and there is an exchange rate between them. 634 00:38:02,659 --> 00:38:06,540 Speaker 2: Which introduces an element of risk, in addition to other 635 00:38:06,540 --> 00:38:09,340 Speaker 2: types of risks like the liquidity risk, the counterparty risk, 636 00:38:09,350 --> 00:38:12,379 Speaker 2: and so on, but a lot of these typical operational 637 00:38:12,379 --> 00:38:17,609 Speaker 2: risks can be substantially reduced if you have practically instantaneous settlement, uh, 638 00:38:17,620 --> 00:38:22,610 Speaker 2: payment and settlement. And I think again, what the um 639 00:38:22,810 --> 00:38:24,830 Speaker 2: uh pervasiveness of 640 00:38:24,879 --> 00:38:28,270 Speaker 2: Cryptocurrencies is showing us is that there is no reason 641 00:38:28,270 --> 00:38:30,549 Speaker 2: in this day and age why payments should not be 642 00:38:30,550 --> 00:38:36,609 Speaker 2: settled practically instantaneously at the speed of an email, for instance. 643 00:38:37,149 --> 00:38:38,870 Speaker 2: So I think they're getting to that point and that 644 00:38:38,870 --> 00:38:43,860 Speaker 2: will certainly make a lot of this much easier. So, um, 645 00:38:43,870 --> 00:38:46,149 Speaker 2: in the Financial Times piece that you referred to, I 646 00:38:46,149 --> 00:38:47,209 Speaker 2: spoke about why 647 00:38:47,520 --> 00:38:52,959 Speaker 2: Um, cryptocurrencies are really, especially stablecoins are catalyzing changes in 648 00:38:52,959 --> 00:38:56,600 Speaker 2: payment systems, both domestic and international. So even if they 649 00:38:56,600 --> 00:39:00,600 Speaker 2: are not necessarily the solution, even if blockchain is not 650 00:39:00,600 --> 00:39:04,310 Speaker 2: necessarily the solution, I think stablecoins are doing all of us, 651 00:39:04,469 --> 00:39:08,989 Speaker 2: and financial systems a great favor in giving commercial banks, 652 00:39:09,040 --> 00:39:12,159 Speaker 2: central banks a real kick in the backside to do 653 00:39:12,159 --> 00:39:12,759 Speaker 2: things better. 654 00:39:14,399 --> 00:39:18,229 Speaker 1: So well done perfect, you know, transition to my next question, 655 00:39:18,270 --> 00:39:21,219 Speaker 1: which was I was going to talk about your FDR. Um, 656 00:39:21,260 --> 00:39:24,040 Speaker 1: if you're in that article, um, you shouldn't be suggesting 657 00:39:24,040 --> 00:39:26,870 Speaker 1: in addition to the, you know, very healthy and timely 658 00:39:26,870 --> 00:39:31,310 Speaker 1: kick in the backside that countries that are worried about 659 00:39:31,310 --> 00:39:35,899 Speaker 1: either banks getting disintermediated or losing control of their own currency. 660 00:39:36,350 --> 00:39:39,270 Speaker 1: Of to basically try to have a banking system and 661 00:39:39,270 --> 00:39:42,138 Speaker 1: a currency that is stable, does not lose its value, 662 00:39:42,149 --> 00:39:43,909 Speaker 1: and then people would be happy to hold on to 663 00:39:43,909 --> 00:39:44,510 Speaker 1: their currency. 664 00:39:45,520 --> 00:39:50,340 Speaker 2: Yeah, that's exactly right. You summarized it very nicely, Timor. 665 00:39:50,469 --> 00:39:55,819 Speaker 2: The point is that rather than this knee-jerk defensive mechanism, um, 666 00:39:56,310 --> 00:39:58,830 Speaker 2: the right approach would be to ask why is it 667 00:39:58,830 --> 00:40:01,699 Speaker 2: that stablecoins are getting so much traction in my country. 668 00:40:01,949 --> 00:40:05,620 Speaker 2: So when the eurozone, for instance, uh, expresses great fear 669 00:40:05,989 --> 00:40:09,549 Speaker 2: about stablecoins being a way for the dollar to start 670 00:40:09,550 --> 00:40:11,550 Speaker 2: playing a role in European financial systems. 671 00:40:11,850 --> 00:40:15,810 Speaker 2: The question is why is it so many years, more 672 00:40:15,810 --> 00:40:19,010 Speaker 2: than 2 decades after the formation of the Eurozone. The 673 00:40:19,010 --> 00:40:23,649 Speaker 2: eurozone still doesn't have a unified payment system. The European 674 00:40:23,649 --> 00:40:28,090 Speaker 2: Central Bank is trying to um put in place a 675 00:40:28,090 --> 00:40:32,090 Speaker 2: digital euro, which would essentially be a digital payment mechanisms 676 00:40:32,090 --> 00:40:36,860 Speaker 2: that would in principle work seamlessly across um the Eurozone. 677 00:40:36,929 --> 00:40:39,879 Speaker 2: So the question is why did it take so long? 678 00:40:40,209 --> 00:40:42,959 Speaker 2: And then of course one can ask other questions about 679 00:40:42,959 --> 00:40:47,129 Speaker 2: the euro, you know, um, if there are centrifugal forces 680 00:40:47,129 --> 00:40:50,199 Speaker 2: that are still, you know, pulling apart the eurozone, how 681 00:40:50,199 --> 00:40:52,929 Speaker 2: much confidence can people have in the euro? I mean, 682 00:40:52,989 --> 00:40:57,209 Speaker 2: at a time like this, as Madame Christine Lagarde, the 683 00:40:57,209 --> 00:40:59,610 Speaker 2: head of the European Central Bank, has correctly pointed out. 684 00:40:59,899 --> 00:41:03,689 Speaker 2: It should be a fantastic opportunity for the euro because 685 00:41:04,040 --> 00:41:06,870 Speaker 2: many of the elements of the institutional framework that have 686 00:41:06,870 --> 00:41:10,919 Speaker 2: inspired foreign investors' trust in the dollar, the independence of 687 00:41:10,919 --> 00:41:12,479 Speaker 2: the central bank, the Fed. 688 00:41:12,899 --> 00:41:16,840 Speaker 2: The system of checks and balances, um, uh, the rule 689 00:41:16,840 --> 00:41:20,388 Speaker 2: of law, all of these are being undercut in the US, 690 00:41:20,840 --> 00:41:24,010 Speaker 2: but we don't see the US substantially losing share, although 691 00:41:24,010 --> 00:41:28,199 Speaker 2: by all logic it should simply because other currencies, other 692 00:41:28,199 --> 00:41:32,239 Speaker 2: financial systems have even greater weaknesses. So I think this 693 00:41:32,239 --> 00:41:34,000 Speaker 2: is a good moment for 694 00:41:34,314 --> 00:41:38,264 Speaker 2: Those countries, those central banks, those governments to ask why 695 00:41:38,445 --> 00:41:42,915 Speaker 2: do our financial systems, why do our banks still have 696 00:41:42,915 --> 00:41:45,915 Speaker 2: all of these fragilities and what can we do to 697 00:41:45,915 --> 00:41:48,475 Speaker 2: fix them. So maybe that should be another kick in 698 00:41:48,475 --> 00:41:51,715 Speaker 2: the backside, you know, to try to get their domestic 699 00:41:51,715 --> 00:41:55,034 Speaker 2: financial systems, regulatory systems, and so on in order. 700 00:41:56,310 --> 00:42:01,149 Speaker 1: Countries like China and India have capital controls. Uh, they 701 00:42:01,149 --> 00:42:04,629 Speaker 1: have both uh regulators have shown quite a bit of 702 00:42:05,110 --> 00:42:10,459 Speaker 1: pushback and skepticism about the blockchain-based payment system. Uh, would 703 00:42:10,629 --> 00:42:18,060 Speaker 1: a ubiquitous world of stablecoins undermine PBOC and RBI's continued 704 00:42:18,389 --> 00:42:20,510 Speaker 1: fight to keep these capital controls in place? 705 00:42:21,570 --> 00:42:25,929 Speaker 2: No, it's worth making um um an initial point about 706 00:42:25,929 --> 00:42:30,120 Speaker 2: both China and India. I mean, China and India have leapfrogged, um, 707 00:42:30,209 --> 00:42:33,449 Speaker 2: you know, major advanced economies, especially the US, which still 708 00:42:33,449 --> 00:42:37,290 Speaker 2: has somewhat antiquated payment systems with their own digital payment 709 00:42:37,290 --> 00:42:40,448 Speaker 2: systems in China, Alipay and WeChat Pay are doing a 710 00:42:40,449 --> 00:42:44,779 Speaker 2: fantastic job of providing very low cost, easily accessible, convenient. 711 00:42:45,149 --> 00:42:50,469 Speaker 2: Uh, payment systems for even the smallest of microtransactions in India, 712 00:42:50,550 --> 00:42:53,699 Speaker 2: the unified payments interface has done a very good job 713 00:42:54,149 --> 00:42:58,870 Speaker 2: of providing seamless payment systems that are, um, and that 714 00:42:58,870 --> 00:43:02,750 Speaker 2: had the added benefit of interoperability, which the two major 715 00:43:02,750 --> 00:43:06,500 Speaker 2: payment systems in China do not quite have yet. Um, 716 00:43:06,510 --> 00:43:09,509 Speaker 2: so domestically, things are in much better shape in these 717 00:43:09,510 --> 00:43:11,100 Speaker 2: two countries. However, 718 00:43:11,455 --> 00:43:14,754 Speaker 2: As you pointed out, Temur, um, both of these countries 719 00:43:15,864 --> 00:43:20,584 Speaker 2: have currencies that do occasionally suffer from bouts of loss 720 00:43:20,584 --> 00:43:24,745 Speaker 2: of investor confidence. So the two central banks, the Reserve 721 00:43:24,745 --> 00:43:27,024 Speaker 2: Bank of India and the People's Bank of China, have 722 00:43:27,024 --> 00:43:32,344 Speaker 2: been reluctant to completely free up their capital account regimes 723 00:43:32,344 --> 00:43:36,544 Speaker 2: by keeping in place some capital controls, and that again 724 00:43:36,544 --> 00:43:37,705 Speaker 2: speaks to some extent. 725 00:43:38,050 --> 00:43:42,750 Speaker 2: To two things. One is the fragility of the financial systems, 726 00:43:42,790 --> 00:43:46,510 Speaker 2: whether it's perceived or real, is open to debate. I 727 00:43:46,510 --> 00:43:50,830 Speaker 2: think there is some legitimate concern about safe deposit flight 728 00:43:50,830 --> 00:43:53,300 Speaker 2: from either of these countries if there were to be 729 00:43:53,969 --> 00:43:56,179 Speaker 2: some major financial peroxen. 730 00:43:56,729 --> 00:44:01,350 Speaker 2: Um, but it also speaks to, um, uh, some concerns 731 00:44:01,350 --> 00:44:05,489 Speaker 2: in both countries that um while they're willing to allow 732 00:44:05,489 --> 00:44:08,569 Speaker 2: for some flexibility of the exchange rate, they don't want 733 00:44:08,570 --> 00:44:12,250 Speaker 2: the exchange rates to become too volatile, um, because I 734 00:44:12,250 --> 00:44:16,589 Speaker 2: could create a host of other problems. So the unwilling 735 00:44:16,643 --> 00:44:20,552 Speaker 2: to let their exchange rates be truly flexible, which of 736 00:44:20,552 --> 00:44:23,902 Speaker 2: course is aided by having some capital controls in place, 737 00:44:24,152 --> 00:44:28,232 Speaker 2: I think does limit the ability of both countries to 738 00:44:28,232 --> 00:44:32,943 Speaker 2: have their currencies, the Chinese renminbi and the Indian rupee, 739 00:44:33,193 --> 00:44:36,602 Speaker 2: be seen as true international currencies, and that. 740 00:44:37,016 --> 00:44:42,025 Speaker 2: Creates an opening for stablecoins, especially in dollar-backed stablecoins. Again, 741 00:44:42,344 --> 00:44:44,375 Speaker 2: not that I think that these stablecoins are going to 742 00:44:44,375 --> 00:44:48,055 Speaker 2: get any traction in terms of domestic payments, but in 743 00:44:48,055 --> 00:44:52,885 Speaker 2: terms of cross-border payments, certainly they could pose some risks 744 00:44:53,135 --> 00:44:56,575 Speaker 2: to the ability of the central banks to maintain capital controls. 745 00:44:57,540 --> 00:44:59,580 Speaker 1: Absolutely, I think we have already seen this play out 746 00:44:59,580 --> 00:45:02,580 Speaker 1: in Nigeria where the authorities did try to stop uh 747 00:45:02,580 --> 00:45:06,979 Speaker 1: digital forms of payment and uh app-based peer to peer settlements, 748 00:45:07,260 --> 00:45:09,739 Speaker 1: and I don't think they've been very successful. And if 749 00:45:09,739 --> 00:45:12,540 Speaker 1: we have a bunch of Indian and Chinese entrepreneurs start 750 00:45:12,540 --> 00:45:15,479 Speaker 1: offering all sorts of solutions around stablecoins, on ramp, off 751 00:45:15,479 --> 00:45:19,020 Speaker 1: ramp to fiat system, it would be very challenging, I think, 752 00:45:19,040 --> 00:45:22,049 Speaker 1: for their monetary authorities to step in. Uh, it's for 753 00:45:22,620 --> 00:45:25,169 Speaker 1: such an insightful conversation, I can't thank you enough. 754 00:45:26,729 --> 00:45:28,850 Speaker 2: That was really fun, Temo. I really enjoyed it. You 755 00:45:28,850 --> 00:45:30,770 Speaker 2: had all the right questions and I think we covered 756 00:45:30,770 --> 00:45:31,629 Speaker 2: a lot of ground. 757 00:45:32,090 --> 00:45:34,610 Speaker 1: I, my, my curiosity will remain unsatiated, so when I 758 00:45:34,610 --> 00:45:36,649 Speaker 1: see you in Washington next month, hopefully we can have 759 00:45:36,649 --> 00:45:37,399 Speaker 1: one more chat. 760 00:45:38,449 --> 00:45:39,928 Speaker 2: That would be great. Thank you so much for having 761 00:45:39,929 --> 00:45:40,469 Speaker 2: me on. 762 00:45:40,810 --> 00:45:43,770 Speaker 1: Thank you to our listeners as well. Uh, this podcast 763 00:45:43,770 --> 00:45:46,489 Speaker 1: was produced by Ken Delbridge at Spice Studios. Violet Lee 764 00:45:46,489 --> 00:45:50,009 Speaker 1: and Daisy Sharma provided additional assistance. Kobe time is for 765 00:45:50,010 --> 00:45:53,489 Speaker 1: information only and does not constitute any investment advice. All 766 00:45:53,489 --> 00:45:56,770 Speaker 1: 160 episodes of the series are available on YouTube and 767 00:45:56,770 --> 00:46:00,370 Speaker 1: on all major podcast platforms, including Apple and Spotify. For 768 00:46:00,370 --> 00:46:02,649 Speaker 1: our research content and webinars, you can find them all 769 00:46:02,649 --> 00:46:06,000 Speaker 1: by Googling Devious Research Library. Have a great day.