Speaker 1: Hello, and welcome to another episode of the ad Thoughts Podcast.
Speaker 1: I'm Tracy Allaway and I'm Joe Wisen't thal Joe. I
Speaker 1: feel like it's uh an interesting time to be a
Speaker 1: central bank. I mean, yeah, it always is, but I
Speaker 1: think particularly interesting right now because the scope of new challenges,
Speaker 1: new economic conditions, new forces on sort of like how
Speaker 1: banking and money and markets work. Lots of new stuff
Speaker 1: right now, lots of new territory. Yeah. So, not only
Speaker 1: are central banks responding to an exceptionally unusual economic crisis
Speaker 1: in the form of a global pandemic, which basically led
Speaker 1: to you know, the shutdown of the entire economy last year,
Speaker 1: but they're not now all reacting sort of differently to
Speaker 1: the recoveries. For instance, we saw the FED coming in
Speaker 1: more hawkish than expected last week, but it's still basically
Speaker 1: on hold for the foreseeable future. You have Brazil delivering
Speaker 1: successive rate hikes to deal with inflation. China's sort of
Speaker 1: winding down some of its easy monetary policies. The ECB
Speaker 1: hasn't even started tapering or you know, even talking about
Speaker 1: tapering at this moment in time. So you have all
Speaker 1: these central banks sort of going off and doing their
Speaker 1: own thing, trying to respond to this very new environment.
Speaker 1: And in the meantime, you also have some very interesting
Speaker 1: ideas floating around on the nature of money, so sort
Speaker 1: of like the very fundamentals of being a central bank. Yeah,
Speaker 1: that's true. I hadn't really like thought about it, and
Speaker 1: the sort of those kind of cross winds, I mean,
Speaker 1: you're absolutely right, like sort of like unprecedented, you know,
Speaker 1: I guess there's a sense in which the COVID crisis
Speaker 1: hit everyone the same way at the same time, basically,
Speaker 1: like it kind of had this big shutdown effect, but
Speaker 1: the recovery is very different with different conditions. So it's like, Okay,
Speaker 1: everyone turns off everything for a few months, and now
Speaker 1: we're trying to turn it back on again. And some
Speaker 1: countries have had different fiscal policies, some countries have had
Speaker 1: different trajectories of the virus itself. Some countries have like
Speaker 1: different underlying economic conditions that change the nature of the recovery.
Speaker 1: So there's that, and so then you get the splintering
Speaker 1: of policy outcomes as you talk about. Plus again, you know,
Speaker 1: the the rise over the last year of like different
Speaker 1: thoughts about money, particularly cryptocurrencies. We have the Chinese digital currency,
Speaker 1: which is like people talked about for a long time,
Speaker 1: but there's actually out that's raising all kinds of new questions.
Speaker 1: So yeah, just numerous things all hitting at the same time. Yeah,
Speaker 1: it's a lot for central bankers to wrap their heads around,
Speaker 1: but we are going to try to do exactly that today,
Speaker 1: and we have the perfect person to discuss these broad
Speaker 1: themes with, you know, the outlook for central banks and
Speaker 1: also how central banks are dealing with new approaches towards money,
Speaker 1: including cryptocurrencies. We're gonna be speaking with Human Song Shin.
Speaker 1: He's the economic advisor and head of Research at the
Speaker 1: Bank for International Settlements and also a previous All Thoughts guests.
Speaker 1: So thank you so much for coming on. It's really
Speaker 1: great to be back. So I guess just to begin with,
Speaker 1: I sort of wanted to zero in on the central
Speaker 1: bank digital currencies idea because it does feel like over
Speaker 1: the past year this is an idea that is gaining
Speaker 1: a lot of momentum. We've seen a lot of banks
Speaker 1: issue papers about it, including the b I S. One
Speaker 1: of the things I want to ask is are we
Speaker 1: seeing more talk about c b d s because of
Speaker 1: the economic environment that we're in, has the pandemic sort
Speaker 1: of accelerated interest in central bank digital currencies because we're
Speaker 1: perhaps not using as much cash and we need a
Speaker 1: whole lot more liquidity in the financial system. I think
Speaker 1: it's a bit broader than that, Tracy. I think, you know,
Speaker 1: there has been a broad trend um in the thinking
Speaker 1: about the monetary system at central banks. I think it's
Speaker 1: been accelerated, certainly by the pandemic and the the advent
Speaker 1: of touch list systems and so on, contactless systems and
Speaker 1: so on. But I think it's it's broader than that,
Speaker 1: and I think it's um it's a result of the
Speaker 1: of the importance of I would say, the importance of
Speaker 1: data in the digital economy. Um. I think the vast
Speaker 1: troves of data that's probably the most important feature of
Speaker 1: the digital economy, and that you know, poses a couple
Speaker 1: of questions on the way that the monetary system works.
Speaker 1: I think one has to do with, you know, competition.
Speaker 1: I think here the discussion about big text in finance
Speaker 1: you know very much dovetails into this. So if you
Speaker 1: have network effects, you know, whereby the more or users
Speaker 1: flocked a particular platform, the more incentive there is for
Speaker 1: others to flock to that platform. You know, then data
Speaker 1: then the data has this has this property that it
Speaker 1: actually is a very important resource, and the payment system
Speaker 1: itself is you know, can be prone to concentration. For example,
Speaker 1: in China, the two big companies have have a nine
Speaker 1: share of the of the mobile payment market. If you
Speaker 1: then combine that with the issues to do with data privacy,
Speaker 1: the importance of maintaining financial inclusion while guarding against the
Speaker 1: entrenchment of market powerents on, I think all these uh
Speaker 1: considerations point to the importance of a kind of a
Speaker 1: a public interest case for a well functioning payment system.
Speaker 1: So I think that's probably the best background to pose
Speaker 1: this particular question. So obviously, another thing we saw was
Speaker 1: this sort of like frustration at the speed and ability
Speaker 1: of authorities to get out stimulus. In the US, we
Speaker 1: saw a lot of issues with the unemployment insurance. There
Speaker 1: was frustration at the ability of central banks or the
Speaker 1: FED to be able to backstop large portions of the
Speaker 1: credit market, or being unable to do anything for smaller
Speaker 1: businesses or household How much of the CBDC discussion is
Speaker 1: informed by some of these disparities with the tools that
Speaker 1: we have for um policy and a crisis, I think, Joe,
Speaker 1: it's probably less to do with the tools, but rather
Speaker 1: UM I think the realization that the current payment systems
Speaker 1: still have a way to go. You know, when we
Speaker 1: talk about programmable money, this is sometimes how it's put.
Speaker 1: You know, you have very you know, clever contingent contracts
Speaker 1: in the disbursements. I think in a way, you know,
Speaker 1: programmable money is a bit of an oxymora. And if
Speaker 1: you think about it, because the whole point of money
Speaker 1: is that it's invariant, you know, its value is variant
Speaker 1: two changes and in circumstances, I would I would say
Speaker 1: that these kind of contingent contracts are more like vouchers.
Speaker 1: But I think it's worth actually thinking back, Joe to
Speaker 1: the discussion more broadly about financial inclusion. I think in
Speaker 1: many countries, I think once the political decision was made
Speaker 1: that the disbursements would take place. I mean, most of
Speaker 1: it was done in a very efficient way, very expeditious way,
Speaker 1: through the conventional banking system. You know, if you have
Speaker 1: pretty much everyone connected to the banking system, everyone has
Speaker 1: an account um and it's working efficiently, and the costs
Speaker 1: are very low. You know, you don't have to send
Speaker 1: out paper checks to people. You can just credit people's
Speaker 1: bank account. And I think it's important to think about
Speaker 1: the CBDC debate not as something which is fundamentally new
Speaker 1: and something which is you know, radically different from what's
Speaker 1: gone before. It's more of an evolution. I think it's
Speaker 1: important to better in mind. I think if we think
Speaker 1: about the the so called all the retail fast payment
Speaker 1: systems around the world. So these are now pretty commonplace,
Speaker 1: even in developing countries, and actually some of the best
Speaker 1: examples are in countries like India that's really managed to
Speaker 1: build up their systems. And it's um it's a payment
Speaker 1: system where there is a platform that's provided by the
Speaker 1: central bank or is operated by the central bank, and
Speaker 1: you have a pretty open system. And that if you
Speaker 1: want to be a member of the system, you have
Speaker 1: to you know, abide by data ownership data governance rules,
Speaker 1: whereby you know, you cannot simply form um you know,
Speaker 1: data silos or walled gardens where you simply have a
Speaker 1: proprietary network. You have to be open to the other
Speaker 1: entrance into the system. But in return for that, in
Speaker 1: return for playing according to those rules, you have access
Speaker 1: to an open marketplace. And the idea is that you
Speaker 1: can you know, turn these kinds of you know, the
Speaker 1: these attributes of network effects and activity begetting more data,
Speaker 1: which begets even more activity and so on. That kind
Speaker 1: of thing can be turned into a virtual circle where
Speaker 1: you have bigger markets, cheaper services, and just generally a
Speaker 1: more inclusive systems. I think, just to you know, kind
Speaker 1: of long story short, I think we probably overestimate how
Speaker 1: much there is new in this debate. I mean, there
Speaker 1: is a pretty long thread that goes back to these
Speaker 1: conventional payment systems. So maybe now is a good time
Speaker 1: to step back and ask what exactly the ambition is
Speaker 1: of CBDCs. So what are central pink digital currencies actually
Speaker 1: trying to do or what problem are they trying to solve?
Speaker 1: And if it's about making an improvement to the payment system,
Speaker 1: then why not just let private companies build payment technology
Speaker 1: on top of the existing system and the money provided
Speaker 1: by the central bank. I guess another way of saying
Speaker 1: that is, you know, what's the right division of labor
Speaker 1: between the central bank and the private sector when it
Speaker 1: comes to improving payments technology? Yeah, I think that's a
Speaker 1: great way of posing the question, um, so what are CBDCs.
Speaker 1: What our central bank digital currencis? I mean, you can
Speaker 1: think of them as um as a digital version of cash.
Speaker 1: I mean currently, if you want to make a digital payment,
Speaker 1: you make a transfer from your deposit to the receiver's
Speaker 1: deposit account, possibly as another bank or a payment service provider.
Speaker 1: The idea is that you can use a CBDC to
Speaker 1: make a payment digitally using your phone or some other device,
Speaker 1: just as you would by handing over cash and tracy
Speaker 1: as you put it, the the idea is not to
Speaker 1: displace banks and other financial service providers, but rather it
Speaker 1: is meant to serve as a kind of you know,
Speaker 1: base layer on top of which the the other payment
Speaker 1: service providers can can then serve customers better. So so
Speaker 1: so the idea is that CBDCs will still enable central
Speaker 1: banks to have a very small footprint in the financial system.
Speaker 1: I mean, cash typically is a very very small fraction
Speaker 1: of total deposits in the economy, and the idea is
Speaker 1: that CBDCs will similarly have a small footprint. But the
Speaker 1: idea is that this base layer can be um an
Speaker 1: enabling layer that brings you benefits to do with data
Speaker 1: data governance that uh, and we can go into the
Speaker 1: details on on on how exactly they would do this.
Speaker 1: But if you can put down a layer that guards
Speaker 1: against the data silos and concentration of data in the
Speaker 1: hands of a few players that leads to entrenchment and
Speaker 1: monopoly power and safeguard data privacy, then that could be
Speaker 1: a very promising base on which you know, other private
Speaker 1: sector players can can really you know, maximize and you
Speaker 1: know display what they do best, which is, you know,
Speaker 1: used their creativity and ingenuity too to serve customers better.
Speaker 1: So it's very much a two tier sort of vision.
Speaker 1: But the base layer is such that it enables a
Speaker 1: more competitive and more sort of inclusive system where you
Speaker 1: can guard against you very high cost le entrenchment of
Speaker 1: of market power. That's that's a kind of in a
Speaker 1: short version. So this is one thing I kind of
Speaker 1: want to push on. But if if central banks are
Speaker 1: devoting all this time and energy to designing this new technology,
Speaker 1: why not go further? Why is stop at a layer
Speaker 1: that augments the existing financial system, and why not sort
Speaker 1: of go all the way and actually try to create
Speaker 1: a digital replacement for cash? Because the system that you're
Speaker 1: describing at the moment doesn't necessarily have the same autonomy
Speaker 1: that cash would. So you know, if I pay someone
Speaker 1: with cash, it can be an anonymous transaction the central
Speaker 1: Bank doesn't know about it. But most of the systems
Speaker 1: being discussed as CBDCs seem to veer much more towards
Speaker 1: a sort of traditional payments technology rather than designing something
Speaker 1: that's a little bit newer that maybe would preserve the
Speaker 1: anonymity of cash. Yeah, I think that's a very good
Speaker 1: uh goal to aim for. UM. The idea is not
Speaker 1: to replace the role of the private sector payment service providers,
Speaker 1: but rather to have an option where, you know, users
Speaker 1: can make payments digitally, just as if you were using cash,
Speaker 1: but but do so digitally. So the idea is that
Speaker 1: you know, rather than going through an intermediary, you would actually, um,
Speaker 1: you have a wallets on your phone and you would
Speaker 1: transfer a digital cash unit as it were directed to
Speaker 1: someone else. Now, how can we preserve privacy in that
Speaker 1: kind of context? And I think this is one of
Speaker 1: the big design challenges, you know, undoubtedly, because a digital
Speaker 1: version of money is a Ledger entry. I mean it's
Speaker 1: a it's an entry in a database that says so
Speaker 1: and so owns this unit, um at at what time?
Speaker 1: And then if you transfer that there has to be
Speaker 1: a Ledger entry that indicates that you know that transfer. Now,
Speaker 1: if that ledger was something that is like bitcoin, you
Speaker 1: would just have you know, this public ledger. Everyone has
Speaker 1: access to all the transactions. It's just that you are
Speaker 1: masking your true identity behind the address that you're using now.
Speaker 1: In in the conventional payment system, some notion of know
Speaker 1: your customer rules KYC rules so called I think you know,
Speaker 1: will be necessary to keep the integrity. But um, you know,
Speaker 1: there are ways of you know, minimizing the the unwarranted
Speaker 1: access to data. So just to give you a quick example,
Speaker 1: in the CIR called a p I S or Application
Speaker 1: programming interfaces that we use in in conventional payment systems.
Speaker 1: In some open banking jurisdictions, what you can do is
Speaker 1: you can open the app of one bank and you
Speaker 1: can check your balances in another bank using that you know,
Speaker 1: one banks app, And you can do that because, um,
Speaker 1: you know, when you log into your the first banks app,
Speaker 1: what you're doing is you're you're logging in using your password.
Speaker 1: Then your identities established and so when the actually goes
Speaker 1: to the other bank that says, please display the account
Speaker 1: details of this person. What you're doing is you're sending
Speaker 1: a secure message to you to this other bank, establishing
Speaker 1: who you are, and then retrieving only the information that
Speaker 1: is absolutely necessary for that kind of transaction. So for example,
Speaker 1: so you know, if if they know the name and
Speaker 1: your account number, I mean, that's all you need to establish,
Speaker 1: you know, that link and bring the necessary balance over.
Speaker 1: They don't need to know, for example, the payment history
Speaker 1: or your home address or phone number and so on.
Speaker 1: And the technology behind these API s, I mean, this
Speaker 1: is nothing other than public key cryptography. This is the
Speaker 1: technology that's underlying, you know, the digital signature technology and
Speaker 1: in many applications, including bitcoin, you you have this public
Speaker 1: key that's out there. You know, you can sign a
Speaker 1: document and convince the receiver that it's you without necessarily
Speaker 1: revealing your private key. So you know, there are these
Speaker 1: technologies available where you can, uh, you know, mask all
Speaker 1: the data other than the pieces that are absolutely necessary.
Speaker 1: So it's so I think of this lot, you know,
Speaker 1: rather like a jigsaw puzzle. Um, you know, everyone has
Speaker 1: a little bit of the jigsaw puzzle, but no one
Speaker 1: has the full picture, you know, other than the individual concerns,
Speaker 1: and no one needs to know the big picture, and
Speaker 1: that of course includes the central bank as well. And
Speaker 1: central bank doesn't need to know everything, It only needs
Speaker 1: to know the absolute minimum that will enable the central
Speaker 1: bank to actually execute the you know, the change in
Speaker 1: the ledger. Well, let me ask you another sort of
Speaker 1: like reframe the question a little bit. Because even before
Speaker 1: the digital currencies discussion started heating up, we've done there
Speaker 1: was criticism of cash was growing, and of course there
Speaker 1: was Ken Rogoff's book. He was largely focused on large
Speaker 1: denomination bills, but still like this idea that cash is
Speaker 1: kind of a scourge for various reasons and crime and
Speaker 1: money laundering and so forth. Set I guess side the
Speaker 1: technical capabilities, do you perceive that transaction privacy, at least
Speaker 1: on some level, is of value that central bankers or
Speaker 1: regulators around the world want to preserve. Is it something
Speaker 1: that they care about preserving as the world gets more
Speaker 1: digital or more or less Do they see this as
Speaker 1: an opportunity to sort of fix what was a sort
Speaker 1: of flaw in the monetary system. I think central banks
Speaker 1: put a great deal of value to privacy and maintaining privacy,
Speaker 1: and I think cash is a very valuable medium in
Speaker 1: that respect. I mean it's um. Not only is it
Speaker 1: a direct claim and a very tangible you know, link
Speaker 1: to the central Bank, but it guarantees a certain minimum
Speaker 1: level of privacy, which I think is you know, has
Speaker 1: attributes of a basic right. Um. I think what Ken
Speaker 1: was talking about was much more to do with the
Speaker 1: implementation of monetary policy and how to implement deeply negative
Speaker 1: interest rates and so on. So I think that's a
Speaker 1: slightly different discussion, and certainly among central banks, the need
Speaker 1: to preserve privacy, I think it is a very important
Speaker 1: strand in the discussion. And you may have seen the
Speaker 1: various notes that central banks have published. The ECB has
Speaker 1: recently published a note about this. Now, even with a
Speaker 1: system which is based fundamentally on digital identity and you
Speaker 1: know and and real name that enables you know, know,
Speaker 1: your customer type of requirements for the payment service providers,
Speaker 1: you can achieve some level of anonymity. I mean it's
Speaker 1: you know, you can think of it as a kind
Speaker 1: of anonymity overlay. You can actually you know, have an
Speaker 1: overlay on the system that guarantees this. The the system
Speaker 1: that the ECB has floated. Is this idea that there
Speaker 1: is a separate privacy registrar which is separate from the
Speaker 1: Central Bank, and then you would, you know, registering real name,
Speaker 1: but the registrar would grant you a kind of credit
Speaker 1: of how much you can spend anonymously and then so
Speaker 1: so when you use a CBDC, you can use some
Speaker 1: of this credit. Now, whether you like that particular scheme
Speaker 1: or not, um, I think the fact that these schemes
Speaker 1: are being discussed, I think it's very much a sign
Speaker 1: that maintaining uh, you know, this minimum level of anonymity
Speaker 1: is a very very important part of the monetary system.
Speaker 1: I wanted to ask you how central banks are thinking
Speaker 1: about stable coins at the moment, we keep thinking along
Speaker 1: the exact same line. I'm glad you went there. All right,
Speaker 1: we finally reached the ultimate melding of minds. But I mean,
Speaker 1: stable coins are an interesting development in many ways, but
Speaker 1: sometimes people talk about them as sort of impinging on
Speaker 1: conventional money or conventional monetary policy in the sense that
Speaker 1: you know, you're sort of creating um something that's supposed
Speaker 1: to be relatively stable. Obviously, the clue is in the name,
Speaker 1: but it's still backed by fiat currencies, it's still backed
Speaker 1: by a central bank or government, and that maybe that
Speaker 1: has the potential to to sort of splinter the monetary system.
Speaker 1: So I'm just curious, is this viewed as a challenge
Speaker 1: to the existing financial system or is it sort of
Speaker 1: overblown currently? I think, Tracy, this is this is a
Speaker 1: very good question and it is occupying minds at the moment.
Speaker 1: Just to be clear, when you talk about stable coins,
Speaker 1: I think you're referring to the stable coins that are,
Speaker 1: you know, that have been proposed as a means of payment,
Speaker 1: rather than all the all the defy stuff that's going on.
Speaker 1: So I'll assume that and correct. Yeah. Yeah, so I
Speaker 1: think you know, we we had the discussion about liber
Speaker 1: two years ago, which which really concentrated minds. Um uh,
Speaker 1: and that plan has been you know, somewhat modified. Um
Speaker 1: Now it's a single currency proposal that's being let's being
Speaker 1: prepared under a new name of of them. I think
Speaker 1: the stable coin idea is a very interesting idea, and
Speaker 1: that it is it is going back to the history
Speaker 1: of money in a way. Is the the I think
Speaker 1: last time we even possibly talked about the Bank of
Speaker 1: Amsterdam where in the seventeenth century, you know, merchants would
Speaker 1: bring the gold and silver coins and then the Bank
Speaker 1: of Amsterdam would would then write up a ledger entry
Speaker 1: you'd have a deposit, and then you would transfer those
Speaker 1: deposits to other merchants as a means of payment. And
Speaker 1: that's essentially what a stable coin is. You know, you
Speaker 1: can buy into a a payment means, you know, by
Speaker 1: transferring fiat currency if you like, you know, this would
Speaker 1: be you know, used as a as a means of payment.
Speaker 1: Um you know. I think one issue that was present
Speaker 1: with with Libra, which is not present now I think
Speaker 1: is the it's a multi currency aspect, but more broadly,
Speaker 1: just leaving aside that, you know, the particular proposals, um
Speaker 1: you know, one issue I think is to what extent
Speaker 1: will will stable coins allow a system that's going to
Speaker 1: be interoperable with the conventional payment system. So, for example,
Speaker 1: can I, as a customer of a bank make, you know,
Speaker 1: make a payment or receive payments from a stable coin
Speaker 1: account holder? I think for that kind of system to work,
Speaker 1: you know, there would have to be some kind of
Speaker 1: settlement you know, underneath it. Typically, what would happen in
Speaker 1: the current system is the central bank would be you know,
Speaker 1: at the at the base, and so when a payment
Speaker 1: is made from one bank's customer to another bank's customer,
Speaker 1: the ultimate settlement happens on on the central banks balance sheet. Um.
Speaker 1: And the question is, how would that kind of system
Speaker 1: work when you have a stable coin working alongside a
Speaker 1: you know, alongside the conventional payment system. I think if
Speaker 1: it's if it's interoperable, I think, you know, then we
Speaker 1: can reap you know, many of the benefits that are
Speaker 1: there in an open payment system. If, on the other hand,
Speaker 1: if it's going to be more of a of a
Speaker 1: data silo, more of a silos system where you have
Speaker 1: a walled garden, then I think, you know, there there
Speaker 1: are issues to do with you know, to what extent
Speaker 1: will there be a fragmentation of the monetary system where
Speaker 1: the whole point of the monetary system is the more
Speaker 1: people use that particular system, the more useful it becomes,
Speaker 1: and so more people want to use the system. There's
Speaker 1: a kind of you know, virtuous circle there. If you
Speaker 1: have a fragmented system, Uh, the question would be how
Speaker 1: much that virtuous circle, how much that fit of that
Speaker 1: feedback loop is going to be you know, on the
Speaker 1: mind by the fragmentation. Are you satisfied with the level
Speaker 1: of regulation of stable coins right now? I mean they're
Speaker 1: currently they're about a hundred billion dollars in market cap
Speaker 1: or how many have been issued, some of them are
Speaker 1: continue to be questioned about what's backing them and so forth.
Speaker 1: How much does the current sort of immunitic in a
Speaker 1: an exploding area, how much does the current environment resemble
Speaker 1: what you think the ideal environment should look like. Well, Joe,
Speaker 1: I think you've hit upon a very topical issue. As
Speaker 1: you know, this is something that is being discussed among regulators.
Speaker 1: The traditional answer has been that this space is really
Speaker 1: too small to pose financial stability risks, and I think
Speaker 1: that that is probably has been the case. If they
Speaker 1: become much larger, and I think if, in particular, you know,
Speaker 1: we have points of contact with the the conventional financial system,
Speaker 1: in particular with the conventional banking system, then that kind
Speaker 1: of assessment may need to be you know, may need
Speaker 1: to be reassessed. But as long as the you know,
Speaker 1: the activity is very much you know, within the you know,
Speaker 1: within this crypto sphere, probably the dangers of financial instability
Speaker 1: probably are going to be going to be less. These
Speaker 1: ues I think may have more to do with the
Speaker 1: usual kinds of conduct issues, um consumer protection. Uh, you
Speaker 1: know another conduct issues. So um, that's more the area
Speaker 1: of financial regulators rather than central banks wearing their hats
Speaker 1: as as the guardians of the monetary system. But clearly
Speaker 1: this is something that we need to be UM, you
Speaker 1: need to be monitoring very closely. So I mentioned earlier
Speaker 1: that the b i S is one of a number
Speaker 1: of economic institutions which has been writing about central bank
Speaker 1: um digital currencies, and in fact you're out with a
Speaker 1: new report this week as part of your annual review.
Speaker 1: It's called CBDCs An Opportunity for the Monetary System. There's
Speaker 1: a bit in there that caught my eye and you know,
Speaker 1: advanced apologies to any bitcoin maximalists who might be listening,
Speaker 1: but the exact quote was by now it's clear that
Speaker 1: cryptocurrencies are speculative assets rather than money, and in many
Speaker 1: cases are used to facilitate money laundering, ransomware attacks, and
Speaker 1: other fine anentral crimes. Bitcoin in particular has few redeeming
Speaker 1: public interest attributes when also considering it's wasteful energy footprints.
Speaker 1: So that's pretty damning from the b I s in
Speaker 1: my mind, do you want to perhaps walk us through
Speaker 1: your thinking around you know, the original cryptocurrency bitcoin and
Speaker 1: why it's not necessarily applicable to you're thinking when it
Speaker 1: comes to wider central bank digital currencies. Well, Tracy, I
Speaker 1: think you've you've caught the one paragraph on on bitcoin
Speaker 1: in the whole report, so we hold down on that.
Speaker 1: I think so we were we were not going to
Speaker 1: spend so we're not spending that much time on on
Speaker 1: bitcoin and cryptocurrencies in this report because the focus of
Speaker 1: the report is very much on how can central bank
Speaker 1: digital currencies you know, build on on the current payment
Speaker 1: system to to make it, you know, to make it better.
Speaker 1: But the idea behind that particular paragraph was just to
Speaker 1: point out that that you know, bit coin isn't that
Speaker 1: much useful transactions. It's you know, there was a time
Speaker 1: when there was a discussion about whether this were that
Speaker 1: where the bitcoin would be used for transactions, um on
Speaker 1: a daily basis. I think that that debate, I think
Speaker 1: it's probably you know closed. It's much more about you know,
Speaker 1: whether bitcoin can serve as as a crypto asset as
Speaker 1: it were, and and all the focuses on how much
Speaker 1: you know, you know, they can be bought and sold
Speaker 1: using using conventional money. So that was the point that
Speaker 1: we were making. You know. Of course, we devoted a
Speaker 1: lot more space to this a couple of years ago
Speaker 1: when we wrote about cryptocurrencies, and and back then we
Speaker 1: pointed out that, you know, there were problems of scalability,
Speaker 1: problems of finality that would probably you know, render these
Speaker 1: uh you know, these you know, very clever instruments, um
Speaker 1: less than suitable as payment media. You know, I'd love
Speaker 1: to just pivot a little bit, with a few more
Speaker 1: minutes to some of the broader macro questions. Actually, I
Speaker 1: think a good way to sort of like sag a
Speaker 1: little bit between the discussion of currency itself to the
Speaker 1: broader macro is to talk a little bit about the dollar.
Speaker 1: Because the dollar itself, the good old green bag, is
Speaker 1: always sort of seen as being stressed or people are
Speaker 1: predicting its demise, or that maybe somehow a crisis might
Speaker 1: test it somehow. We've obviously seen like price weakness. Um,
Speaker 1: just admit this sort of like big risk on move
Speaker 1: that we've seen an asset markets over the last uh
Speaker 1: several months, But from like a standing perspective, the dollar's
Speaker 1: role in the world looking compared to a year ago,
Speaker 1: Has anything changed? Is there any like stress on the
Speaker 1: role of the dollar itself or changing its position? From
Speaker 1: your perspective, I don't think there's been much change there, Joe.
Speaker 1: I think we were on we were discussing pretty much
Speaker 1: almost exactly a year ago. We were discussing financial markets,
Speaker 1: physical space, as I recall, and the dollar. I think
Speaker 1: the the long term, you know, structural features are still
Speaker 1: very much, you know, very much intact. You know, there
Speaker 1: are of course the short term fluctuations, and you know,
Speaker 1: we have seen a shift in the dollar, you know,
Speaker 1: in in the last few days. I remember when we
Speaker 1: had the last conversation that we ended off by saying
Speaker 1: that everything would depend on the on the trajectory of
Speaker 1: the pandemic. And I think I think that's that's been proved,
Speaker 1: right um um. You know, since we last talked, there
Speaker 1: has been, of course the rollout of the vaccines, which
Speaker 1: has been a real game changer. It's not sufficiently distributed
Speaker 1: worldwide yet, so so we're not out of the woods.
Speaker 1: I think economies have opened up a lot faster than
Speaker 1: you know when we were last discussing this, and and
Speaker 1: this is meant that you know, as well as the
Speaker 1: dollar to talk about, inflation has really taken off. And
Speaker 1: you know, we've seen some some interesting you know movements
Speaker 1: in the treasury market with the flatting of the yield
Speaker 1: curve and so on. So there there's plenty for us
Speaker 1: to to think about. You know. I suppose what we
Speaker 1: need to do though, is is not to you know,
Speaker 1: read too much into the you know, day to day
Speaker 1: movements in in market prices and not to interpret these uh,
Speaker 1: day to day changes in terms of some sort of
Speaker 1: some kind of deeper economic rationale. I mean, sometimes it's
Speaker 1: just you know, we sometimes use the shorthand the market's
Speaker 1: expectations too to denote the expectations of of of some
Speaker 1: kind of mythical individual. But it is just a shorthand
Speaker 1: about you know, about prices. And it's important to bear
Speaker 1: in mind that the market is not actually a person.
Speaker 1: It's prices just the outcome of individual actions. Um. So
Speaker 1: you know, when you have unwinding a various positions, you know,
Speaker 1: steeping the positions or on on the reflation trade using
Speaker 1: you know, break evens, you would see this kind of action, um,
Speaker 1: you know, in the in the iiell curve, so I
Speaker 1: think we shouldn't, you know, read too much into the
Speaker 1: day to day changes. I think what we have seen
Speaker 1: is that as the economy is opened up, inflation has
Speaker 1: become more of a topic. You know, we're we're of
Speaker 1: the view that a lot of the recent take up
Speaker 1: in inflation have to do with the base effects, and
Speaker 1: I think there is a lot to be said for
Speaker 1: the for the argument that this is mostly transitory. When
Speaker 1: we talk, you know, possibly if we have another chance
Speaker 1: to talk a year from now, whatever, time to reflect.
Speaker 1: Since you mentioned, um, the steep inner trade just then,
Speaker 1: since the FED meeting earlier this month that came in
Speaker 1: more hawkish than a lot of people had expected, we
Speaker 1: did see a pretty significant bond market reaction, with the
Speaker 1: curve flattening significantly and a lot of these steep in
Speaker 1: our trades that had become basically the reflationary trade getting
Speaker 1: stopped out, and a lot of whiplash in the market.
Speaker 1: I know the b I S has been concerned with
Speaker 1: liquidity in the treasury market overall ever since the big
Speaker 1: drama that we saw in March of I'm wondering how
Speaker 1: you're thinking about that issue now, whether or not you
Speaker 1: feel the market is more robust given FED interventions over
Speaker 1: the past year. Uh, and what the market reaction might
Speaker 1: actually be um, as we sort of prepared to normalize
Speaker 1: monetary policy. I guess that's a really long way of asking,
Speaker 1: are you concerned about a tape per tantrum fueled by
Speaker 1: market structure issues? You know that there has always been
Speaker 1: the you know, there has always been I think the
Speaker 1: short term movements in the market, especially you know, even
Speaker 1: a very liquid markets like to you know, like the
Speaker 1: treasury market. UM. I shouldn't really go into the details
Speaker 1: of the specific you know, montrea actions of specific central
Speaker 1: banks on this. I think it's enough to say probably
Speaker 1: that you know, when we think about the market functioning issue,
Speaker 1: there are you know, there are these episodes when the
Speaker 1: positioning of market players can lead to you know, very
Speaker 1: sharp movements. But even you know, during normal day to
Speaker 1: day movements, UM, you know, there can be some big
Speaker 1: changes if the positioning can also you know, lead to uh,
Speaker 1: you know, a revision of those kind of beliefs. But
Speaker 1: let me leave it there, Tracy, Okay, fair enough. I
Speaker 1: think this has been really good one sort of thing
Speaker 1: that interested me, And this is not about any sort
Speaker 1: of specific central bank per se. But one of the
Speaker 1: things that we saw last year that I'm sure are
Speaker 1: interested in during the crisis is that various e ms
Speaker 1: they engaged in forms of QUEI that people didn't necessarily
Speaker 1: think they had the tools available to them. We saw
Speaker 1: a lot of fiscal expansion, not just in the US,
Speaker 1: but even say in Brazil, we saw fiscal expansion, much
Speaker 1: of it perceived to be effective. Has the has the
Speaker 1: crisis changed anyone's view about what is capable of that
Speaker 1: maybe from a policy space perspective that e ms had
Speaker 1: had more latitude to fight downturns on their own than
Speaker 1: we thought. I mean we think of like e MS
Speaker 1: is like, oh, they have to tighten in a downturn,
Speaker 1: unlike developed markets where they can loosen in a downturn.
Speaker 1: Has the last year brought any sort of change in
Speaker 1: thinking about what kind of policy space might exist on
Speaker 1: the e M front. That's a very good question, Joe,
Speaker 1: and I remember discussing this with you last time I
Speaker 1: was on I Mean, one issue was the extent of
Speaker 1: fiscal space that even emerging economies found during the pandemic,
Speaker 1: and it was a kind of, you know, a very
Speaker 1: unique crisis, and that it was you know, it was
Speaker 1: an economic sudden stop as you know, as as well
Speaker 1: as being a health crisis, and the and the fiscal
Speaker 1: response was really key. And I think what enabled emerging
Speaker 1: markets to deploy fiscal policy very effectively was that they
Speaker 1: discovered that they could actually you know, deploy fiscal resources,
Speaker 1: even to the extent of intervening, you know, in the
Speaker 1: bondom market, mainly for for market functioning purposes rather than
Speaker 1: for quei as traditionally you know depicted. But I think
Speaker 1: that was primarily because the FED and other advanced economy
Speaker 1: central banks were able to really um deploy their liquidity,
Speaker 1: you know, very expansively, so they really opened the open
Speaker 1: the tabs. What that meant was that actual conditions were
Speaker 1: kept very accommodative. The dollar, which you know strengthened briefly
Speaker 1: at the height of the pandemic, the initial phase of
Speaker 1: the pandemic, you know, then went into this downward trajectory,
Speaker 1: and I think that gave a lot of space to
Speaker 1: the emerging markets. So I think that's been a very
Speaker 1: important lesson. Now it's been now over a year since then,
Speaker 1: the question is how much more space the emerging markets have.
Speaker 1: I think phisical space has narrowed because of debts of
Speaker 1: emerging markets have have grown relative to whether we're you know,
Speaker 1: last year, and not all of these emerging markets have
Speaker 1: international currencies. UM, and so you know, there is an
Speaker 1: issue about the extent of fiscal space, and I think
Speaker 1: it's an area where where we need to keep a
Speaker 1: very close eye on how well emerging markets can cope
Speaker 1: if there were to be another tightening of global conditions.
Speaker 1: So I just realized there's a question that we should ask,
Speaker 1: which probably threads the needle between the beginning of this
Speaker 1: discussion on CBDCs and uh the end of the discussion
Speaker 1: that's more on macro and the role of the dollar
Speaker 1: and emerging markets. But there is a perception out there
Speaker 1: that central bank digital currencies could amount to an effort
Speaker 1: to get away from the U. S Dollar as the
Speaker 1: dominant currency of the financial system. UM. I won't mention
Speaker 1: any specific country names, but I think there are fears
Speaker 1: over a specific one. How credible are those concerns? And secondly,
Speaker 1: if we're talking about building a new payment system that
Speaker 1: involves central bank digital currencies, it feels like you need
Speaker 1: some sort of consensus among different countries, different international players.
Speaker 1: How do you go about building that consensus given these
Speaker 1: different interests in the way the financial system functions. That's
Speaker 1: a very important issue. I think it's worth starting out
Speaker 1: by saying that the payment system, you know, it doesn't
Speaker 1: float separately from the underlying economic transactions, and currencies don't
Speaker 1: become international currencies, you know, just because it's digital, just
Speaker 1: because it's in digital form. But rather, you know, they
Speaker 1: become international currencies because there is a user demand for it,
Speaker 1: you know, for instance, for for the settlement of trade transactions.
Speaker 1: And I think that's probably you know, important to bear
Speaker 1: in mind. Um, you know, with regard to the discussions
Speaker 1: about you know, whether China is using the you know,
Speaker 1: the rollout of its E C and Y for for
Speaker 1: those kind of circumvention you know, purposes. The idea of
Speaker 1: cash circulating in briefcases in the black market is probably
Speaker 1: not a good analogy for cbdc s because the kind
Speaker 1: of CBDCs we are envisaging typically in in most banks
Speaker 1: are based on digital I D. You know, they are
Speaker 1: account based. Um So, if someone were to use a
Speaker 1: CBDC that's issued in in one country, but it's but
Speaker 1: it's being used outside the issuing central bank has to
Speaker 1: know about it and has to you know, give you know,
Speaker 1: has to consent to to that use taking place. And
Speaker 1: of course the host jurisdiction central bank will also have
Speaker 1: a lot of say in what kind of transactions take place,
Speaker 1: you know, within the domestic financial system. So I think
Speaker 1: we can overestimate the extent to which you know there
Speaker 1: will be this kind of currency substitution where a foreign
Speaker 1: CBDC will be encroaching on the on the domestic financial system.
Speaker 1: Needless to say, if you want to use CBDCs for
Speaker 1: the transactions that will you know that that will facilitate
Speaker 1: the legitimate kind of make transactions. And of course that's
Speaker 1: something that is very amenable to monetary cooperation. And indeed
Speaker 1: one of the things that you know will surely come
Speaker 1: out as CBDC has become much more commonly discussed, our
Speaker 1: discussions on connecting CBDC systems across countries so that we
Speaker 1: can you know, simplify the monetary architecture where you know,
Speaker 1: typically we will need to go through correspondent banks in
Speaker 1: this very complicated chain, you know, adding costs and adding
Speaker 1: delays to payments. If you have a simple system like
Speaker 1: a CBDC based system, you could potentially, you know, simplify
Speaker 1: that monetary architecture. You could make cross border payments much
Speaker 1: cheaper and simpler. You know, that would be a very good, uh,
Speaker 1: you know development for for both migrants sending money back home,
Speaker 1: for tourists, um, and for travelers. So I would see
Speaker 1: this much more in this positive light of Yes, there
Speaker 1: are pretty significant control as you can apply to make
Speaker 1: sure it doesn't you know, serve purposes other than the
Speaker 1: intended purposes. But then you know, then the intended purposes
Speaker 1: could be you know, pretty broad, and you know those
Speaker 1: are very desirable outcomes in any case, Thank you so much,
Speaker 1: really appreciate you coming on all lots and um explaining
Speaker 1: all these new ideas and central banking to us. So
Speaker 1: thank you, Thanks very much. Thanks that was fantastic, So Joe,
Speaker 1: it really does feel like there's a lot going on
Speaker 1: if you're a monetary policymaker at the moment. But one
Speaker 1: of the things that sort of stood out from that
Speaker 1: conversation was a how quickly the CBDC discussion is sort
Speaker 1: of moving on, but be just how dead that narrative
Speaker 1: around bitcoin is a transaction mechanism actually is like the
Speaker 1: central banks barely even mentioned it. Now, it's yeah, right,
Speaker 1: I mean, I think the perception among regulators is still
Speaker 1: like this is like this like highly speculed of vehicle
Speaker 1: and so forth. But in terms of like actually like
Speaker 1: a thing that gets sort of used in the conventional
Speaker 1: sense of used. I mean, I guess holding is a
Speaker 1: form of usage, but beyond it's just like not really
Speaker 1: a thing that's on their mind. No, not at all, um,
Speaker 1: But I did find that conversation interesting. I also found
Speaker 1: um Huan's distinction between the idea of CBDCs as. By
Speaker 1: the way, every time I say CBD C, I think
Speaker 1: of cb D oil. Now there's like a thousand CBD
Speaker 1: shops that have cropped up in Hong Kong there on
Speaker 1: every corner. I didn't realize it was big there. Yeah,
Speaker 1: it's huge, Like it seems to have suddenly all come
Speaker 1: over in the past year. But anyway, sorry, um so
Speaker 1: if I mess up, if I mess up the two terms,
Speaker 1: that's why. But one of the weird things about c
Speaker 1: B D c S is it sort of goes to
Speaker 1: Huan's point about this being a augmentation of the existing
Speaker 1: monetary system rather than a wholesale redesign. And I think
Speaker 1: when a lot of people think about cryptocurrencies, they generally
Speaker 1: think about a revolution of the financial system, a major,
Speaker 1: um sort of technological upgrade, whereas the way central banks
Speaker 1: are seemed to be thinking about a lot of this
Speaker 1: is is a sort of, um, I guess platform upgrade
Speaker 1: around the edges. Yeah, I feel like this like cb
Speaker 1: d C. I mean, because bitcoin came along and so
Speaker 1: we have this idea of this sort of like cryptographic thing,
Speaker 1: this sort of barr asset that that is the mental
Speaker 1: model that people still think of when they think of
Speaker 1: a CBDC. But for the most part, it sounds like
Speaker 1: a lot of the effort is still more generally towards
Speaker 1: doing a better job of just the core digital infrastructure
Speaker 1: of money, which is not very good. Um it's even
Speaker 1: the traditional systems are kind of slow. They're all kinds
Speaker 1: of problems with it. There's perhaps not sufficiently inclusive, transfers
Speaker 1: are expensive. So I think a lot of this conversation
Speaker 1: is still about just like how can the payment system
Speaker 1: be better than currently is now? And it's something that's
Speaker 1: sort of like more resembles just like an upgrade of
Speaker 1: the system rather than sort of like a new kind
Speaker 1: of central bank money. Yeah, I think that's the right
Speaker 1: distinction to be making um. All right, Well, we'll happen
Speaker 1: in on um in another year and see he's always great,
Speaker 1: He's always great to talk to. I just like find
Speaker 1: like talking to him to be like the sort of
Speaker 1: like fount of insight. And because he's at the b
Speaker 1: I S and so well connected, just like a great
Speaker 1: way to like sort of like sense where the world
Speaker 1: is going totally and I have a feeling it's going
Speaker 1: to get very interesting from a sort of macro bond
Speaker 1: market perspective. So um, good times ahead for for markets,
Speaker 1: content for financial journalists. All right, shall we leave it there? Yep,
Speaker 1: let's leave it there. This has been another episode of
Speaker 1: the All Thoughts podcast. I'm Tracy Alloway. You can follow
Speaker 1: me on Twitter at Tracy Alloway and I'm Joe Why
Speaker 1: Isn't All? You could follow me on Twitter at the Stalwart.
Speaker 1: Follow our guest on Twitter, Unsong Shin, the economic advisor
Speaker 1: and head of Research at the Bank for International Settlements.
Speaker 1: His handle is at Unsong Shin. Follow our producer Laura Carlson.
Speaker 1: She's at Laura M. Carlson. Followed the Bloomberg Head of
Speaker 1: podcast Francesca Levie at Francesco Today and check out all
Speaker 1: of our podcasts at Bloomberg unto the handle at podcasts.
Speaker 1: Thanks for listening, a