16. Central Banks & Commercial Banking, Part 2

the following content is provided under a Creative Commons license your support will help MIT OpenCourseWare continue to offer high quality educational resources for free to make a donation or to view additional materials from hundreds of MIT courses visit MIT opencourseware at ocw.mit.edu so we're going to we're going to sort of come back to central banking I I thought it was appropriate to have two classes on this when I was laying out the whole semester and in August thinking about how to build the class in part because central banks but play such a significant role to the world of Finance but it's really about their role in money I mean money and central banking have been so intertwined for three or four hundred years and they are the [Music] custodians of essence of what fiat money is and of course this course is blockchain and money and many of the things we're talking about here actually do relate to Bitcoin and crypto finance even though a central bank digital currency doesn't have to be tied to a blockchain technology so I'm going to do a little bit a little bit back to what we talked about Tuesday partly because Rob Ali was with us on Tuesday I moved up some of the content from today to that as well just to go through that and of course if we do end up and early we can always talk about Tuesday's election – that's all right so we're gonna do is always sort of touch on the readings I'm gonna be asking you all bunch of questions about things like Ecuador and Senegal and Sweden and maybe the Philippines that were in in the readings and so forth but you know it's all it's all experimentation by those four countries and others we're gonna we're going to talk a little bit of that I'm just gonna try to come back to what we were talking about Tuesday and why again I think it's relevant to any course in blockchain technology and particularly if you're interested in Bitcoin and crypto finance introduce a new subject really which is stable value tokens which are a significant part of experiment Station right now again in the world of crypto finance but relate them back to the world of private banknotes because I see in the current approach to stable value tokens something similar that we saw in the past central bank digital currency which we introduced on Tuesday and that's gonna be the folk of what we talk about today and you're gonna hopefully will have a nice discussion to see what all of you think of these Sweden and Senegal Ecuador and the Philippines a bit and so that's that's what we're gonna try to do and again we're going to sort of dive into these questions as we go through those four countries we talked a little bit about MasterCard when shreya was with us right Priya's husband was with us because he was with MasterCard but we can touch back that was really a reading for today and MasterCard took a out of a patent on fractional banking so central bank goals and functions anybody remember we talked about Tuesday as to what what what are central bank's about and what what their main goals are and their functions anybody want to there's an economic function that central bank's in almost every country have taken on some role to promote the economy but dominantly it's about price stability and how does price stability relate to money anybody James is that a hand up no but I can give it ghost that's cost of money right so price stability and and money relate because what's the three functions of money Hannibal unit of account it's right in that so the third function of money store value meaning of exchange a unit of account so stable pricing is about making sure that unit of accounting that unit of pricing has some stability so price stability is really about money and it also promotes an economy they sit at the center of the money system central banks at first at chekalin the King to make sure that the King didn't overspend when he was at war with another King in another country that's where it kind of all started but it's sit right at the center of money so the four things we talked about they managed the nation's fiat money in every country the supply the price the payment systems payment systems are how we move money around so if you really want to you know just boil down you can take a whole course there's wonderful professors here that teach central banking but I would say manage the mace nation's fiat money oversee the banking system because the banking system is a way to basically move money around the system and provides credit Tom what does a bank do when it provides credit just use the word money somewhere in your definition experience the quantity money and how does it do that so banks stand in between investors or savers we can call them depositors so on the one hand you have depositors or investors on the other hand you have borrowers and banks are just the in the middle and that's why it's called financial intermediation intermediates they're just in the middle it's more than just being in the middle I mean it's a big role but so the banks in the middle are all about money and says central bank's want to get involved and manage those institution initially commercial banks came before central banks commercial banks were around and they kept failing even at a time of the small Italian states they would fail and there was some family usually or a central authority that helped out and ultimately the central bank seemed still today it seems like the central banks came first but the commercial banks kind of first and then there was a central way to protect the system senator banks are bankers to their own governments Paul Tucker who teaches over at the Harvard Kennedy School but Paul Tucker just came out with a book he was a deputy governor of the Bank of England about the unelected power and and central banks are unelected usually they're not they don't stand before the voters there but they have a tremendous amount of authority so the four types of buckets and things they do so then we talked about I use this chart the other day a little bit but the three different types of money please this is how without also the central bank says about key role in international payments and international research so the question is will the central banks have a similar role for crypto currencies anybody want to take one side or the other about it Ali and you think it's going to go to zero so you would probably say central banks will not have any role if crypto currencies go to zero the question would do central banks have to do all right so Elena just took the other side he said what is central banks have to do with crypto currencies he's going to be a principal one country they will still need to manage international reserves and manage international cross-border payments the like a global currency they need to read over so it it's a hypothetical currency to float versus Bitcoin or whether you want to defensively buy Bitcoin and have your currency I think like the central bank has a choice Brazil so anyway other views when whether central banks will get deeply involved in Bitcoin and crypto currencies perish can circle of its own in terms of transactions where it does not need to interact with the fiat currencies then the role of central bank could be completely restricted to the governance of the activities is handli whether it needs to get involved in that yes from the risk it poses to the picture but if it is interacting with the fiat currency at any level then the central bank's move becomes more important so isn't it isn't it possible that I mean we don't know what the future will bring and allene might be right if cryptocurrency doesn't take off then central banks can kind of just just wave it away some experiment on the side of Finance but if it starts to take off I think you're pronouncing qml yeah Guillermo says that if it becomes somewhat central is brutish and others have said I think that there would be a role for central bank's if a country actually was going to use it as its medium of exchange a unit of account a store value and particularly if there became fractional crypto banking this MasterCard patent like if you actually saw somebody taking crypto deposits and making crypto loans and you had credit facility through crypto we're a far way away from that we're not there but I'm saying if that happened Shawn the monetary supply and in order for the central bank to you it's functionality just like the completely open open market operations so does that also apply to kind of the cryptocurrency plays that are all does that also apply to Sean's asking if we really were in this in this world we're not yet in and cryptocurrency was a dominant form of finance banking and so forth would you envision the central bank trying to do an open market operation anybody want to tell the class what open market it's not in the readings but what open market operations are used for the central bank can buy some of the money or sell some of the money which affects the supply and thus affects the price so open market operations effectively affects the interest rate you have often probably read the interest rate targets the Federal Reserve has a target but what they're doing in an open market operation is really buying and selling supply of money and when you influence the supply of something you change the price and the price of money is measured in interest rates or foreign exchange rates so Shaun I would say that if it becomes a dominant part of an economy then some central authority might want to try to influence its price but there's a challenge does anybody want to guess what what challenge I'm thinking about about why cryptocurrency let's say Venezuela was adopting Bitcoin as a central means in that country what what what would be their challenge of trying to influence the price of Bitcoin in Venezuela so Venezuela might be only a small portion of the overall Bitcoin usage around the globe so it's one thing if you are one country and trying to influence the price of the currency that's in use in that country if Sweden wants to influence the price of the corona or Israel the shekel but it's it's for more problematic if it's a worldwide currency Hugo and then Tom I mean I could see that being kind of like what we saw earlier this year last year when there was like a Korean the the price of Bitcoin in Korea was higher than the price of Bitcoin the rest of the world because there was so much demand there so if you get like the central bank of a certain country buying Bitcoin in their currency they're basically devaluing their currency in relation to Bitcoin it might not but it might not affect the world market in the way that they think it was right unless they're like effectively buying Bitcoin on all open markets all around the world and do you do when do you have a view as to why the pricing went up in Korea versus elsewhere is called the kimchi premium those literally I don't make this up but that was what it was called in Bitcoin the kimchi premium which was that Bitcoin was valued at a higher price in Korea than elsewhere Hugo do you have a you had one reason you said it just thought that the Koreans were trying to buy a lot of it so there was a kimchi premium other Tom we're gonna get to it late in order to open an account on a Korean exchange I think it'd be very interesting so like you weren't really able to arbitrage very so Hugo you're onto something you're saying arbitrage been so it's difficult to arbitrage so the basics of Finance we're moving a little way from Bitcoin but the basis of finances arbitrage has been a part of Finance we're again thousands of you if I can buy something in France and sell it for a different price in Switzerland and it doesn't cost too much to travel the roads between France and Switzerland I might buy it in one country sell it in another and that's called location or Geographic arbitrage in a modern digital age digital assets don't have much locational arbitrage oil still has locational arbitrage because you might be buying it in the Gulf Coast and selling it in Africa or so you know there might be locational arbitrage and physical commodities but in digital financial assets there's for a little locational arbitrage and it's interesting in Korea's case there was a locational arbitrage what was this about and it was because it was hard for regulatory reasons so there was a kimchi premium literally for quite some time because it was hard to move Bitcoin across the borders for regulatory constraints and so forth but now we got Tom you orcas yeah the user probes are wire banks to hold dollars anybody been in banking want to answer Tom's question Josh you spent a lifetime in banking right if you hold it in Treasuries which are very liquid and you could get out of them in a certain amount of time there's a big premium to to hold your capital and so I think the rules don't necessarily specify whether it's dollars or another currency so josh is right it's basically it's all brought back to the home nations currency unit dollars or Euros or remember and some accounting books it's brought back into that but there's different haircuts or weights depending upon some perceived model of liquidity so a US Treasury bond versus a German government bond might have similar liquidity and and and the regulator's will count it the same but you're in a very real time basis using the foreign exchange rate to bring it back to the unit of your home country I'm jumping the shark a little bit on my knowledge about Bitcoin becomes a reserve currency or or whether or not things hold it here most point if central banks aren't allowing financial institutions to get credit for holding well currently central banks are not that favorable to Bitcoin and crypto currencies but they're probably right there's not there's not a deep history there's not a lot of liquidity and there's high volatility and the underlying markets are highly susceptible to manipulation we don't know for sure what the real pricing is in an income and time but in the hypothetical world where it's becoming largely adopted I would suspect that central banks around the globe would have some capital regime that would treat it more favorably than its treated today but less favorably than government fiat currency I mean more so than you do decentralized three types of money that central banks are involved in us anybody remember there's even a chart up here you can you can see you can grab it from Akira life see ya collateralized no that's we're gonna get there that's gonna be about stable value tokens I'm talking about so we talk about m1 m2 m3 so what's the what's the first thing that you might think about and I heard the word cash but some deposits but starting with just cash is money so did I make it green yes there we go thank you I got some help here cash that's one form of money and we all have it or actually I've never asked I always have cash in my pocket how many people in this room actually currently have cash of some some country in their pocket so we're down to about seventy percent but thirty percent have no cash in their pocket you're putting yours away one dollar we were in Japan it would probably be higher though right so one form of money is cash another form of money that the central bank's reserves let see if I made that green yes so central bank reserves again I'm just going back through this for from Tuesday reserves storied but because they were commercial banks and when government set up central banks they said you have to say and put some of your money a reserve with the central bank so that we might give you deposit insurance we might give you access to liquidity and hard times which is called opening up some liquidity or lending facilities so you have to keep serve from us that's that's where the word came from but it's a form of money and the third form of money the form of money that almost everybody in this room uses the one of daily basis the real form of money that we use almost all all the time we had cash we had central bank reserves what do we actually use almost every day what's that deposits so our bank deposits we are actually transacting when we go into Starbucks I know it doesn't feel this way but you're actually moving some of your bank deposits to their bank deposits that that's how we're really moving money so those are the three forms of money we never see Federal Reserve or or central bank reserves we just see the cash and the bank deposits or the central bank so Kelly's asking you know we all lived through the financial crisis how many of you in 2008 were in banking in anyway you were at Goldman Sachs I got heard of them the other people that raised their hands who else raise their hand like where were you working for them very big back Josh a hedge fund right mortgage hedge fund yeah yeah we thank you Josh so the question is how would Josh alpha or a cure I get money today who did anybody work in central banking No so the 2008 crisis came along and Josh we let him fail he was a mortgage hedge fund okay what's that goldman sachs got a bit of government support bank of Tokyo mr.

Pitts see did you get any government support but the central banks around the globe particularly here in the u.s. provided liquidity in multiple ways but it wasn't going to be enough they were providing liquidity one for some banks that were failing bear stearns and 2007 failed and through a legal authority that had from congress from the 1930s where you could actually lend to a financial institution actually you could lend to any any company in society but but they only they had never used the authority but they used the authority that you could lend versus collateral and and that was done with bear stearns in 2007 and then it was done again in 2008 for others and what did they do with Lehman Brothers when the fateful weekend that Lehman Brothers failed what did the Federal Reserve say to Lehman Brothers James said they let him go bust that is correct they said we can't use this Authority and and then you know we all know the history books are written how that that fateful week in September 2008 then everything falls bust because there was there was uncertainty in the marketplace and so what they did next Kelley so they were using traditional authorities what they did in excess they started to test the limits of their legal authority along with the Treasury Department and the Federal Deposit Insurance Corporation and they put a series of other things in and under an old authority of the Federal Deposit Insurance Company Corporation they actually guaranteed all debts of the banking system in the US for a period of time under other authorities have figured out how to put a guarantee or money market funds was about two trillion dollars in money market funds all of these almost extra legal authorities I mean they were not written right in the concur in to congressional law into law push the outer boundaries and we mean we knew when Larry Lessig was here he said that every contract has some ambiguity every law has some ambiguity and the best lawyers at the Federal Reserve the best lawyers at the US Department of Treasury and elsewhere we're thinking where is the ambiguity and can can we use that uncertainty in the law to save the system and then they went to Congress they went to Congress and asked for 700 billion dollars when Hank Paulson treasury secretary went to Congress they sent a four page but it might have been three paged legislative requests for 700 billion dollars I remember I first read that three or four page requests because then a senator from New York Hillary Clinton asked me what this thing's come up will you read it and give me your advice it didn't take me long to read three pages it was an outright request for 700 billion dollars it finally did pass it first failed in the House of Representative it became I think a couple of hundred page document but 700 billion dollars of US taxpayer money went to the Treasury and the Treasury then lend it out and so forth so it was multiple things ten years later ten years later a law here dodd-frank limits some of what the federal government can do it tightened the ability to be the fire department and the midst of a raging fire and there's lively public debate recently Tim Geithner who was Treasury secretary at the time has come out publicly and Ben Bernanke I think and they've written an op-ed and some other pieces saying it would be good to loose and some of those dodd-frank restrictions but there's others on the other side who said no we need to keep those restrictions tight because if the restrictions are loose then we have something called moral hazard does anybody know what what what moral hazard might be I think it's you run a risk that he's not commensurate so the banks are financial institutions if you know you're going to be bailed out we'll take more risk it's human it's it's it's who we are so my father had a small business in Baltimore he never had more than 30 employees it was a cigarette and candy and pinball machine business if he couldn't make payroll on Friday the city of Baltimore was not going to help him out on Monday his employees might give him another week or two hey Sam like that's named Sam you know well give mr.

Sam another week but two or three weeks later they would have all quit but the banks so large so tied into their economies for many decades 2008 wasn't the only time the sovereign steps in the central bank step said so Kelly the answer your question is there's probably less ability for the central bank in the u.s. to step in they still have very real tools to be the firefighter in the middle of a raging fire but they're a little bit more constrained we as a society spoke through our Congress and said we don't want bailouts but the in the midst of the next crisis some Treasury secretary and some Federal Reserve chair and maybe some president will be testing the limits of those statutory authorities and they might knocking on the doors of Congress again I guess my question is more touchy on the implications of it we were to have for example if Bitcoin were to be backed by central banks what those implications would be you know so anybody want to take the other side of Kelly's question bitcoins now the the currency that's it hypothetically the Bitcoin or some crypto a lien would tell us it would be some other crypto it's maybe it's Al Gore and or something what happens what what's going to happen to the flexibility of a central bank and a government to bail out their economy if it was a crypto remember your first Isaac so I success it goes down what do you mean it means it their flexibility goes down and there has to be consensus protocol that has to be so Tom content Isaac says it gets a lot harder Tom says it's not just harder it's impossible Eric in some the design of the conspiracy platform that underlies that peep-toe has been used because we will see maybe later discuss there some non collateralize simple coins that actually have smart comfort that enforce the money supply policies to keep the stable which is really similar to handling one a supply in an automatic way so Eric is saying it's the coin I santosh if you control like the mining system can change the protocol what Eric and Santosh are saying is there's some flexibility either flexibility written into the algorithm or flexibility in that the 51% if there's a consensus or hard fork you might be able to adjust but at its core it's probably as Isaac introduced it it's harder I don't know if it's impossible but I think it's a lot harder just like the European Union has a lot harder time helping out Greece because you now have multiple countries involved in the decision making the consensus what satisfies German economics and German politics is different than what might satisfy Greek economics and Greek politics so when you say central banks in cryptocurrency you don't mean central banks in CBBC's yeah I think we're dealing in a hypothetical discussion what if a cryptocurrency were to actually take hold like a Bitcoin in the future I think that's what your questions were about the Aronoff used enough as a store of value used enough as a medium of exchange and and then there was a crisis very different than a central bank digital currency yes it was hard selling then they could actually come in be asking could the private sector be sort of like really works you know the central bank in essence come in and support a cryptocurrency to some extent for sure depends on what their reserves are and they also of course are part of a government that as a taxing authority has a military and there's a lot of extra might that comes with being part of a government so I think the answer is yes but multi jurisdictional currencies usually fail on some level the European the URL is still an experiment it may still fail some decades in the future it's been tested but multi jurisdictional currencies in the past high probabilities they usually fail because you don't have one political system one unified set of government two counts one taxing authority you know there's a bunch of challenges let's move on and try to hit some of the things on so that's just that's kind of review a little bit of the other day we said what's fiat currency we've talked about of course fiat currency then represents all three forms bank deposits and notes and reserves and it's accepted for taxes and it's legal tender in this hypothetical case we hadn't even gotten to whether would Bitcoin be accepted for taxes with Bitcoin or crypto be accepted as legal tender but I would I would might remind everybody whatever the future holds I think wide adoption in any country you'd have to address will the government accept it for taxes well the government say it's accepted as legal tender until unless that happens you know usually wouldn't have wide adoption even in a country that's in distress and again we're not talking about central bank digital currency but you could say the same thing about central bank digital currency unless it's accepted for taxes which it probably would be or accepted as legal tender so I wanted to go back to private bank notes so commercial banks have issued notes in the past think of this is basically a piece of paper that represents a bank deposit the same way that we might be moving mobile money now think of it but most of this was done before there was a time of central banks and in the u.s.

It was called the free banking era Andrew Jackson was the seventh President of the United States and he really didn't like a central bank it was called the second bank of the United States but he let it he let it expire in the 1830s Andrew Jackson does anybody know what what piece of currency Andrew Jackson is on where is his portrait $20 bill that one that we keep passing around and everything Andrew Jackson also as president a period of time that he paid off the national debt paid it off to zero is it Tennessee and then had a strong view about finance we had a very tough time in the 1840s so I'm not sure we should have paid off the debt completely but the free banking era the notes that went around in the u.s.

For 20 to 30 years were all bank notes and then the Civil War came along and the US government needed to finance a war and the word greenback comes from 1863 when the North the Union wanted to raise some money and they were there literally started printing greenbacks and also the First National Bank Act passed during the Civil War and the National Bank Act set up something called the controller of the currency and the controller of the currency those two words they confused me a lot when I was on Wall Street why was the bank regulator called the controller of the currency but in the 1860s it was to control all of these banknotes that were being issued by a bunch of commercial banks most of which that failed hundreds failed many of the pieces of paper which different values discounts to each other and so forth and some say that the world we're living in now with cryptocurrency this new market is a little bit like the private note period interestingly there's two countries or two areas that still use private banknotes anybody from Hong Kong James and Anton so who issues your your currency your cash there are three banks so Bank of China represents of People's Republic China i HT HSBC brand represented a local Hong Kong and standard County represented they do but it's not really a private bank so in Hong Kong the notes the the dominant notes my right or anything over ten dollars is by a bank they have to follow the rules of the central bank and anybody from Scotland or Ireland oh what's that – for North but similarly in the United Kingdom there's sterling banknotes so we still do have some of this there's still a little legacy of it left tightly highly constrained legacy because it's the Monetary Authority it's caught in Hong Kong because it caught a central bank monetary and financial Authority so the word monetary is right in there just like in the 1860s in the u.s.

The bank authority was called the controller of the currency and it still is called the controller for the currency the person given to you because you're spending the bread in England everyone panics it's like what is this this does not look like the usual bank though it is technically legal tender but people go so it's not good north of a certain sort itself is something red that it's not legal tender in South but it's also not legal tender in Scotland so they can use them in Scotland as a matter of custom I got a question I had but as a technical legal matter it's actually not it doesn't extinguish the debt that somebody wants I believe I believe Ross is right but for those who don't know Ross has spent a career as a bankruptcy lawyer as a partner of a firm before he came back for a slow and MBA so I'll go with Ross on this one so stable value tokens what's the moral on this James if you get a stable value token do you give it back so what are stable value tokens and what what what value might they have what pain point in the crypto space why did they come about there was a reading on it so maybe it was volatile 'ti eased to dampen the volatility why would somebody want a crypto asset but ease the volatility what are the use cases for crypto without volatility trading betray what kind of cryptocurrencies crypto currency trading you want to tell you go back to the stable one thing going back to another crispy crunchy you don't have to go into the banking system all right so maybe it's also being used for trading so I've heard that it dampens volatility I agree it could be used for trading because you might go crypto – Krypto – crypto but you want to keep a better store value in a stable token as well and and that's what what it's it's been I I list four different approaches to it these are design features they all are trying to do the same thing have a crypto currency that's not centralized or at least not backed by government not centralized that way it might be centralized that the algorithm and the software is centralized and for different design features and I think there was a reading on this if I remember as anybody want to say anything about tether I mean what basically backed by u.s.

Dollars were to be like really adopted you would need to have a ton of collateral to make it like useful people and then the other issue is that you'd also probably need a central bank like the Fed to actually like you know be there intervening and Stephanie's saying if it really took off you'd need a ton of collateral what if tether it or any fiat collateralized currency was not just a couple billion dollars but it was a trillion dollars or a couple of trillion the whole US banking system is about sixteen trillion dollars there's 13 ish trillion dollars of deposits what if you were head of coin that's one trillion of that it's supposedly backed by if it's that large and it's supposedly backed by US dollars the two choices with three choices right you either have a stack of a hundred four trillion dollars physical okay where you at bank deposits which is what you're trying to get out of or you've got the money with the federal observer which you're also trying to get out those are your only three choices for where actually is the collateral it has to be something but the reason it drill into this this is part of the motivation of why central banks are looking at central bank digital currency they've been watching not just Bitcoin in the whole crypto space but then they've watched stable value tokens come along stable value tokens that are generally backed by some blockchain technology and blockchain initiative that frankly they don't have to be blockchain I think you could build something without it and why there's and there's also a business case where let's just go above a dollar the coin goes above another below a dollar you can either issue more difference and you can potentially if it's small enough a bank you can get interest on collateral but I do agree with you the problem comes along when you have like this huge scale a trillion at that point trillion wouldn't you run into the same type of scenario where at the US reserves so is your thought being that if it really grow and it there was it was accepted in commerce that maybe it wouldn't have to be tethered to the fiat currency it would then become trust the trusted the way that the paper currency became trusted and and Richard Nixon in 1971 could say we're no longer going to follow Bretton Woods or in 1933 when FDR in our country said we're going off the gold standard I think you raise an interesting point I think we're well well before before that I think right now though the interesting thing is there's a lot of a lot of entrepreneurial activity and stable value tokens my observation is one of the leading reasons is it was stated right here that in the crypto exchange markets which we'll talk about next Tuesday and the crypto exchange markets a lot of people want to go and trade crypto to crypto and not crypto to fiat and what are some of the regulatory or economic reasons they don't want to trade crypto to Fiat Tom taxes anything else what's another big thing that potentially be maybe more readily traced Ben okay well I see you were gonna remind the class what those letters mean so there's a whole regime around the world in the u.s.

It's called the Bank Secrecy Act but around the world about knowing one's customer tracking anti money laundering and so forth one of the dominant things in crypto that's going on maybe mistakenly maybe just because it's an early stage is that some people who have crypto assets feel I don't want to trade that for a fiat asset I don't want to trade in two euros or dollars or yen because then it's more likely the official sector can track me for taxes I think there was a false notion that if I sell something crypto and I buy something else crypto I do not have to report my gains or losses in my taxes now the US has clarified that you do but for a couple of years people were going well maybe it's just what's called a like-kind like selling one piece of real estate for another piece of real estate by the way if you sold gold and bought silver gold for silver that was not a like-kind exchange on a US tax law but there were tax advisers going around saying well there's some ambiguity maybe you don't need to pay your taxes if you went from Bitcoin to ether the tax bill that was passed in December let's call it the Trump tax bill that closed that window one of the few things that closed but but I think because of illicit activity because of taxes there's still a lot of people that say I just rather go crypto decrypter but there's there's one other thing the reason why people might want to stable value token about the payment system we talked about it last week do I see a hand up help me out so it's quick and it might be cost-efficient we talked about and I had a chart about using crypto as a bridge currency to move cross-border payments if you're moving from US Dollars to Mexican peso that can take two three four days and correspondent banking systems and the like but what if you use from u.s.

Dollars to crypto to Mexican peso very legitimate use case they can lower your your your cross-border payment down to seconds rather than days very legitimate use case that may be stable value tokens would be a good use case so again if anybody's interested in the different design characteristics there's a interesting there's a professor over at Harvard that came to see me Harvard he teaches Harvard Business School came to see me that he's creating a non collateralized senior age based stable value token so just even here in Cambridge there's a bunch of people look looking at trying to create things and do things and a lot of energy they're always asking me what's a real use blockchain you're some of it's just in this area you go and then we'll move on yeah collateralized ones that you don't upon there it's like Gemini the exchange recently created one and circle created one that coinbase adopted and those are both on top of aetherium and I think actually at least with Gemini I'm not positive about the circle one like coded into the smart contract is the ability to freeze tokens so like you could say that's a like an a ml type of thing right like if they see something going weird with with transactions with like G USD then they could actually like stop and see what's the mood of the class around stable value tokens that can be frozen right in a smart contract does that seem in the spirit of Satoshi Nakamoto what's that Hugo no whoever controls the smart contract in that case that would be a crypto exchange run by whose Gemini run by a couple of identical twins not the genzler's well again slurs weren't in a movie and didn't make a lot of money on crypto the Winklevoss twins by the way who were at the wonderful story with Mark Zuckerberg at Harvard if you remember the Winklevoss twins and their rowing part of a rowing elite to have made a lot of money in crypto and we'll talk a little bit about them next Tuesday so then central bank's and crypto currencies there were there was we talked about this the other day there's four things they're really doing they're monitoring and studying some are restricting the use like the Central Bank of China some are trying to do payment system and experimentation we talked about Singapore and Canada those are real blockchain initiatives the payment systems schools still out as to whether they need to use the blockchain technology but they are seriously leaning in particularly in Singapore in Canada saying there might be a more resilient payment system if we use a decentralized distributed blockchain to ecology based on quorum or corridor hyper ledger fabric I think we're a few years away from them sort of coming is there enough there enough they're there that it would be better than traditional databases but they are definitely putting a lot of energy and even the European Central Bank with the Bank of Japan has an initiative as well but in the fourth category central bank digital currency initiatives like caution everybody you don't necessarily need to use blockchain technology this is the part of the course to say this is something clearly inspired by Satoshi nakamoto's innovation and inspired by stable value tokens but when we talk about the Bank of sweden's initiative and some of these other initiatives you'll find that to my knowledge they're not built built on blockchain technology that doesn't mean they couldn't be in the future but I think they're important because they're really important to blockchain and money and how central banks are thinking about this area right now we talked about this last week that the first wave of payments were all on aetherium and as I said they've moved on from aetherium and the second wave of the payment system initiatives are all permission block chains and now they're looking at a third wave if there's further questions about how central banks are looking I'll take them now or we'll go on to the central bank digital currencies please only use two matically whose deposits are like it's more recently some positive goldman sachs deposits one day like exchange deposits within the central bank what do they currently use vanish use various forms of traditional databases and I'm not going to pretend that I know exactly each of those databases but they're usually for interbank money as you've talked about Morgan Stanley or Goldman Sachs they would call it the real-time gross settlement system or TGS system but the actual underlying database structure frankly probably goes back to batch processing most of we're still batch processing in the US I think we'll roll out a faster payment structure in 2020 and shreem who was visiting with us was on a whole big advisory group to the Federal Reserve to do that does that help a little bit but the question really is could blockchain technology inspired the next generation for the mid-2020s for any of these countries to have 24 hour seven days a week but also no one central place where the ledger is kept with multiple parties sharing the ledger and as lene said but wait a minute witness central bank's still want to have authority over the protocol the protocol amongst 20 or 50 banks and the answer is probably yes but trying to explore what's the most resilient system so central bank digital currencies the central bank's of course already issued digital reserves so the real question is this should access be given to others should it be expanded to the retail public and so these were the ones we chatted about and we're just going to go through four of them quickly just to say and you had a little reading on each of Ecuador Senegal Sweden and the Philippines these are the opportunities that the central bankers even talked about basically in Sweden's perspective they want to stay in the business of providing a means of payment and the krona is so barely used nobody's here from Scandinavia no the corona is so barely used they want to keep it you having some influence I'm trying to think if I put the chart in I'm going to skip over a couple things you know I didn't put the chart in so I apologize so what challenges do you think are really there from our readings which of these challenges do you think scares the central banks the most is it financial stability is it changing the credit intermediation of banks is it monetary policies at the payment structure or is it all of the above allene financial stability basically are a run on the backs I don't know I would say that in my conversations and Rob Ali has many more of them but my conversations with central bankers it's a mixture of the first one the one a lien did say and then basically the third one credit allocation that they feel like if we insert the central bank more directly into taking retail deposits are we going to be inserting the center Bank more into credit allocation or in essence if we shrink the need for commercial banks or we somehow shrinking the credit allocation and the economy so in normal times they worry in essence about credit and the extension of credit and in crisis they worry about being that it would be destabilize this system that's been my you know experience talking just in these eight months to central bankers and so that might just flow back through when the central bank is determining Isaac saying is couldn't you just address this as a central bank through interest rate policy and some differential interest rate and the pricing of money and I think some would contend you could but on the other side anybody want to take the other side question the question really is is does the central bank want to start making loans now the US central bank has a four and a half trillion dollar balance sheet as we talked about two days ago and owns about two little less than two trillion won a half trillion dollars mortgages so in a sense the central bank is already making a credit decision they're lending to the mortgage market but the question is do you want to go even further and have the senator Bank picking individual companies or individual homeowners to lend to and that's what if it got to any scale or size they talked about of course they could just lend to the commercial bank system and then the public would be lending that a central bank and the central bank would be lending to the commercial banks so the design considerations and we didn't talk about these these eight design considerations are all in the loop does everybody get it – only a few people get it as a token or account and so forth this little money flower that Garrett has put out there and central bank's talk about the money flower where's Bitcoin on this who wants to tell me where Bitcoin is we'll bring it back to blockchain I'll on wait so where where am i pointing you an orange blue and orange oh it's written there right there without the red right here private digital tokes tokens Jose lonely no tell me where you want me to point it sits so you're saying it's orange and what and then blue it is widely acceptable bitcoins widely accessible meaning anybody can get it I would say you can put any form of money into one of these little blocks government-backed and not government-backed we're stable value tokens look at this you read the closest and I can't remember your name Connery we're stable value tokens well it's not central back issue it I'll give you a hint so it's not in the green it's private digital tokens you could make it widely accessible like this so I think it's an excellent point a stable value token that is backed by a fiat currency is not central bank issue I would say that it's not in the light green but it's it it's it's highly dependent on the central bank it's highly dependent on putting deposits in commercial banks tether which purports to be a little over two two-and-a-half billion dollar crypto which is all backed by US dollars at one point in time last year they lost some of their commercial bank accounts meaning the commercial banks would not take their dollars the commercial banks in many countries said forget it I can't I can't have you because customer I can't follow you for any money laundering and otherwise and so that in essence you're highly dependent if you're a custodial stable value on the central bank I agree with that but I think you're not central bank there's a little it's just central it is central right so there's a lot of paradoxes in irony and the blockchain crypto spaces – how centralized something in us how decentralized and from Satoshi nakamoto's very decentralized way so we're going back to these and so Ecuador anybody read the Ecuador thing want to tell us a little bit about Leonardo well I think it was a story of Vader was backed by the central bank but the central bank had no credibility or trust from the users so you never to call so this the government of Ecuador had just defaulted Cuba for the launch this the economy was memorized so they issued something where people didn't really know whether it would would still be there within a few years the usage was extremely disappointing compared with the initial financial institutions were not obliged I sort of wonder if there had been like a minimum level of you know bound sheets at these institutions where they were quite about tapping using one level of the crypto currency could that have helped a little bit as far as I remember they also failed to manage expectations because even in the first year but they are saying what they are claiming is there are going to be 500,000 users or something I mean what turns out just 5,000 account so users so it's it's a it's a great story was also there's mismatching benefits and costs that were associated with the project they kind of Africa calculations were made the benefits were less of a million dollars compared to almost 7 million that the whole implementation was from the start from from the outside the design wasn't conceived again this is somewhat inspired by crypto finance no blockchain technology involved in it which by the way is going to be true for the next three examples as well but it's relevant this is sort of also inspired by initiatives like M pace and so forth it's like how do we get more inclusion in use dollars Kellee and then we'll go to an attempt to make profits because they said that basically like this and as Leonardo mentioned there was previously hyperinflation so once they discovered that it really I don't really think you're probably right about that one good thing that came out of it they finally sort of admitted that they shouldn't maybe be in the monopoly and they let mobile phone payment alternatives were authorized for the phone companies but I'm not close enough to Ecuador to know whether that was really done maybe it's now just a duopoly of a couple of phone companies doing it so they might have just shifted some economic rents from the government to a couple of major companies that are friends of the government or something the Philippines I think there was a reading on anybody want to say something about anybody from the Philippines no anybody want to say something about what happened in the Philippines and you're gonna see something that's similar about this in Senegal there's a software provider called a currency mint limited in Ireland that is marketing around the globe to do digital fiat currency I think they're careful they call it digital fiat currency rather than the central bank digital currency but nonetheless every time there's a press release whether from the Philippines or Senegal or elsewhere there's somewhere in the press release you see blockchain technology use for I've done my best to read everything I can on these two since last summer when I stumbled upon them in July I do not believe that either are using blockchain technology but they're sort of using the gloss of the terminology but it's still Senegal more than the Philippines is something that central bankers are looking at importantly it's issued by commercial bank it's not technically issued by the central bank the central bank has actually put out a statement and saying this is a test and a learn thing in a regulatory sandbox so the central bank is sort of saying all right we'll let this is a little bit more akin to private banknotes in the nineteenth century in the US and and I'll flip to the Senegal wine this this is in the West African economic and monetary union so there's a monetary union I think of 14 countries all using a currency it's called the franc I think the F is that what is it have you ever used it do you know it so one country in a 14 nation bloc has said we can maybe get more Financial Inclusion good I think there's a good motivation there we can get more financial inclusion we can put safer did I say it right safe on an electronic platform we'll use this software provider out of Ireland that keeps knocking on our door and and we'll see if we can push it out a little bit under some emoney regulations technically its Emani underwrite pre-existing regulations but i would say a lot of central bankers are kind of elsewhere around the globe sort of watching what does that do what does that mean does it increase Financial Inclusion and probably the most interesting one really is is in Sweden Sweden has said these are the benefits these are written in a document they've written now they're the third document on this it came out a couple of weeks ago it was not assigned reading because it just came out and it's 50 or 60 pages anybody wants to log through it they say it's going to continue the public access to the risk free guaranteed means a payment that's that's the key thing to them you have cash in your pocket right now Crona but very few people have it so few people have it that most retailers in Sweden are now saying I will not accept Crona and it's not such a big country that a bunch of people want to own Crona for a store of value so the total outstanding is our question it's not cute at all but they stock markets like the companies which are listed they're listed in crona's right so they how come it's not use at all it's not what no Crona is used digitally I'm saying paper crona's not used paper Crona but they're saying we maybe want to make sure that there's a government direct relationship to electronic government money the properties they've said they're willing to put a comprehensive range of services in make it widely available they've answered the design considerations and they actually say that they're looking at putting interest rate on this they think that putting an interest rate on it make cents and that it should have a identification they say it will be traceable they've already said in their documents they're not going to go with the totally anonymous imani this is out of their report but as you can see the blue line is Sweden that their total outstanding cash this is physical tokenized cash was four percent of their GDP it's now less than two percent of their GDP the US and Europe would be the Green Line we're up to about 10 percent but as we talked about on Tuesday eight of those ten points in the US or hundred dollar bills and four or five of the ten points in the u.s.

Are outside of the US this because reserves what we would hold in vaults the banks here are holding in rows this would be this would be cash that's outside that the public calls or the public in banks that is correct so if it's if it's cash that JP Morgan is holding physically just because they're putting it in that daily ATM machine it might be included I like the X number of dollars in everyone's bank accounts is bank deposits this is actually only about half of m1 this is the 1.6 or 1.7 trillion dollars of it's about 1.8 trillion 1.8 trillion in the u.s. of which 1.6 trillion or 1.5 trillion is hundred-dollar bills there's only two to three hundred billion dollars of US currency paper currency that is not $100 bills and well over half of the hundred dollar bills are outside of the US perfect Reserve statistics I think 57% how they trace that that would be another story for another day but Sweden doesn't have a bunch of people holding the equivalent of $100 bills or 500 euro notes as a store of value and so you see a decline of their paper you see the retail Merchants aren't taking it people aren't using it so Sweden feels compelled to say I want to do something here Tuesday we're going to be talking about crypto exchanges it's a bit of a set up also for Thursday when we've got our outside speaker so I keep chatting about I think talita what Selita had to leave early today but I think Tilly is gonna send you a message or put up on the website Jeff Sprecher and Kelly sent a list of readings I guess they're used to like being you know denote they're not actually used to doing they're doing this as a favor for me I got to know him very well when I was at the Commodity Futures Trading Commission they're rolling out the both the crypto exchange and a payment alternative and so they sent a bunch of things that they thought you might want to read so we put them up on the website midday to day I know that you've got a lot of other things to do and it's getting to that time of year where there's fewer and fewer things you're reading but what we're trying to do on Thursday is I'm going to open up with a little fireside chat they want me to ask them a few questions for 10 or 15 minutes and then we're going to open it up it's all gonna be your time there with us about an hour now we might encourage them to stay till the end but they're here from 2:30 to 3:30 now I know we always start at 2:35 but if if they're ready to go at to 32 or 33 I might start with them and start the fireside chat and then it's going to be you're asking them questions so to the extent that you read their the things that they sent around better for you I will say this in advance because one or two of you have already come saying I want to I want to see if I could go work for the company that owns a New York Stock Exchange and Owens backed and everything I will be glad to send whatever resumes or anything you want to Jeff and Kelly I'll act as a clearinghouse and send it if that's your call but in advance I not going to you know give their private emails to you and everything like that but but I think that will be an interesting conversation next week so central bank's play an important role in the economy we already live in an electronic age but they really are absolutely at the at the epicenter of money and how money's been defined for three or four hundred years payment systems and fiat currencies have had challenges I still continue to think blockchain I told you I'm not a maximalist but blockchain technology can be a catalyst for change central bank digital currencies is evidence of that even if it's not based on blockchain technology I think it's partly inspired and urged on by by this it doesn't solve what blockchain technology would do for it but I think that central banks by and large are monitoring they're exploring payment systems and a handful are looking at the central bank digital currencies I think and this is my own prediction though with 180 countries somebody Sweden might be the one to do it we'll be there to do some central bank digital currency Venezuela says they're doing one backed by oil so it might be the other end Iran says they want to do one to avert sanctions we didn't talk about that but sanction countries are looking at ways to avert sanctions so there could be company countries in distress countries looking to avert sanctions or or you know kind of first tier economic countries like Sweden that are looking at it so I will see you next Tuesday you

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