A Webinar on Central Bank Digital Currencies

[Music]

 

Dean Reuter:  Welcome to Teleforum, a podcast of The Federalist Society's practice groups. I’m Dean Reuter, Vice President, General Counsel, and Director of Practice Groups at The Federalist Society. For exclusive access to live recordings of practice group Teleforum calls, become a Federalist Society member today at fedsoc.org.

 

 

Evelyn Hildebrand:  Welcome to The Federalist Society's virtual event. This afternoon, July 29, we discuss central bank digital currencies. My name is Evelyn Hildebrand, and I'm an Associate Director of Practice Groups at The Federalist Society. As always, please note that all expressions of opinion are those of the experts on today's call.

 

      Today, we are fortunate to have with us a very distinguished panel, which we're really pleased to welcome this afternoon. I'll introduce our moderator, Mr. Alex J. Pollock, who will then introduce our panelists. Alex Pollock is a Distinguished Senior Fellow at the R Street Institute, and he formerly served as the Principal Deputy Director of the U.S. Department of the Treasury's Office of Financial Research. He is also a member of The Federalist Society's Financial Services and E-Regulation Practice Group. Much more could be said by way of introduction, but I will cut the introduction short there so that our speakers have more time to remark on today's topic of conversation.

 

      After our speakers give their opening remarks, and towards the end of the program, we will turn to you, the audience, for questions, so do think of questions as we go along. If you have a question, please enter it into the Q&A feature at the bottom of your screen. And, again, if you have a question, please enter it, and type it into the Q&A section at the bottom of your screen. With that, thank you for being with us today. And Mr. Pollock, the floor is yours.

 

Alex J. Pollock:  Thank you very much, Evelyn. And thanks to The Federalist Society for arranging this critical and very timely discussion of the many issues surrounding the idea of central bank digital currencies, or CBDCs. This question of whether central banks should issue their own digital currencies as their own direct liabilities, in some form or other, is being debated all over the world by dozens of central banks, including, of course, the Federal Reserve. Now, the question is, actually, whether there should be a new form of digital currency, since -- as many people have pointed out, including Fed Vice-Chair Rand Quarles -- normal checking accounts in banks, and the accounts banks have with the Fed, are already digital currencies. But, should, in the most straight-forward version of a U.S. CBDC -- and in my view the most dangerous version -- should the Fed make accounts with it directly available to the public, to anybody, not just to banks?

 

      Other questions involved in this issue are; should the Fed, if it does so, be able to pay interest on such accounts? Could it thereby become a deposit monopolist? Should it be able to track everybody's financial transactions, as most of the people who think about it think is China's goal in its CBDC project? Should a Fed digital currency be -- not a direct account, but should it instead be tokenized, and operate through intermediaries, as Federal Reserve dollars today do, through banks as intermediaries? If so, should a CBDC intermediary be thought of -- and regulated as -- a bank, or would they be more like money market funds? And, should they be regulated like a money market fund? Or would they be a 100 percent reserve, or so-called narrow bank? Or would they be something else? And what regulatory conclusions go with that?

 

      Next, if the liabilities of a central bank greatly should expand -- through central bank digital currency in any form -- its assets must expand, correspondingly, to the liabilities. What form will those assets take? And how might that affect credit allocation in the economy? What would it mean to the banking system? And, what would the impact of such a CBDC system be in a financial crisis, or a panic?

 

      We have an excellent panel today to address all of these, and other questions about central bank digital currencies. And let me introduce them in the order in which they will speak.

 

      First will be Chris Giancarlo, who is Senior Counsel with Willkie Farr and Gallagher, and who served as Chairman of the Commodity Futures Trading Commission, where he oversaw the first Bitcoin futures products. Chris, by the way, when you were doing that, I was on the board of the CME Group when we introduced the Bitcoin futures -- an interesting and good step, I think. Chris is a financial technology entrepreneur. He's a principal of the Digital Dollar Project. And he's also known as crypto-dad.

 

      Our next speaker will be Bert Ely, who has been providing insightful analysis on banking and financial issues for four decades. Bert specializes in banking, monetary policy, housing finance, and the growing federalization of credit risk. And Bert, maybe CBDCs will be part of the growing federalization of credit risk.

 

      Our third speaker will be Pete Earle, who is an economist and writer with the American Institute of Economic Research, having previously spent 20 years with securities firms and hedge funds. His research includes financial markets, crypto-currencies, monetary policy, and the economics of games.

 

      Each panelist is going to speak for about eight minutes. We're then going to give each the chance to reply to others or clarify points, and after that, we'll move to a general discussion. Members of the audience are invited, as Evelyn said, to send in your questions electronically, and we will adjourn promptly at 3:00 o'clock. I'm sure we're going to have an interesting and enjoyable discussion. And Chris, you have the floor.

 

Chris Giancarlo:  Well, thank you, Alex. It's a pleasure to be with The Federalist Society and present the work of the Digital Dollar Project. The project was launched in January 2020 to advance the exploration of the United States central bank digital currency, CBDC. The project is a partnership between the Digital Dollar Foundation -- a not-for-profit enterprise -- and Accenture, the global business consultancy firm. The purpose of the project is to encourage U.S.-based research and public discussion on the challenges and opportunities of a U.S. CBDC, and to convene private-sector thought leaders, and propose possible models of a U.S. digital dollar.

 

      In May of 2020, the project published its initial white paper, proposing a champion model of a tokenized form of the U.S. dollar -- enjoying the full faith and credit of the U.S. government -- operating alongside existing forms of physical cash and commercial bank money. This champion model proposes that the issuance, distribution, and redemption of digital dollars would take place just as cash does today -- that is, issued by the Federal Reserve to domestic banks or regulated entities against reserves. It would support maintenance of the existing two-tiered architecture of commercial banks and regulated money transmitters in deploying and recording digital dollars on new transactional infrastructure that is informed by digital ledger technology.

 

      And, importantly, the project does not propose direct retail digital dollar accounts with the Federal Reserve. The digital dollar project is officially agnostic to continued development of stable coins and other non-sovereign digital currencies. The proposal is also monetary-policy neutral. It takes no views on issues of money supply, and it proposes U.S. CBDC as a tool of monetary policy, but not a policy expression in and of itself.

 

      In September of 2020, the project identified nine pilot programs to inform the future design of the U.S. digital dollar. And the programs range from use cases by retail consumers in both urban and rural communities, small and medium-sized businesses, but also wholesale use, and global remittances and institutional payments. Last May -- just a few months ago -- the project announced that it would, itself, begin work on five of the nine pilot programs over the next twelve months, working with interested stakeholders and participants. We'll publish the results and insights from the pilots for use in academic study, and policy consideration by Congress and the Fed.

 

      The project's efforts are meant to complement other important CBDC work being conducted, including the work of Project Hamilton being conducted by the Federal Reserve Bank of Boston and MIT. Importantly, the project believes that if the U.S launches a CBDC, it must be consistent with democratic values of free enterprise, rule of law, and individual economic privacy. Now, although a right to financial and information privacy is not specifically established by the Fourth Amendment, U.S. courts have generally protected privacy using a doctrine called reasonable expectation of privacy.

 

      We believe the jurisprudence around the Fourth Amendment needs to evolve further to improve the balance between economic privacy and public policy for central bank digital currency. We believe a well-functioning USCB must be private. People should be able to use a CBDC without making themselves subject to inappropriate government surveillance or economic restrictions. It must be secure. It must improve -- and not degrade -- people's security against theft, hacking, illegal seizure, unauthorized data mining, and fraud. It must be accessible. It should improve Americans' access to financial services. And it should run on systems that are transparent -- operationally so -- so that the public can assure themselves about its technological functioning, security and resistance to impermissible monitoring.

 

      It's been said that war is too important to be entrusted to generals. Well, similarly, I believe money is too important to be left to central bankers. American society must speak up as central bank digital currency is being developed. Without inviolable protections for such civil liberties as freedom of speech, free enterprise, and individual economic privacy, a digital dollar would be no more worthy of a democratic society than the currency of an authoritarian one -- many of whom are developing their own central bank digital currencies. The United States has everything to gain by encoding into a digital dollar stealth protections for individual liberty and privacy. And American society has everything to lose by neglecting to do so.

 

      I said earlier that the Digital Dollar Project is agnostic about continuing development of non-sovereign digital currency. Well, my personal belief is that CBDC should exist alongside non-sovereign digital currency. On one hand, the best protection against impermissible government surveillance of economic activity, or restrictions on otherwise local transactions with CBDC, may be robust competition from well-constructed stable coins and other non-sovereign digital money.

 

      But, on the other hand, private operators of stable coins are not bound by the Fourth Amendment to respect individual privacy. They could easily be brought under political pressure to surveille or restrict politically incorrect transactions -- say, purchases of ammunition, or abortion -- depending on which party was in power, in the same way that social media platforms are actively influenced today by the U.S. government about what speech can be hosted.

 

      On the other hand, a U.S. government-sponsored CBDC would be subject to constitutional Fourth Amendment protections, to which private stable coins would not be subject. You might, therefore, think of a government-sponsored -- a sovereign digital dollar, as a public option for Fourth Amendment-protected individual economic privacy. But, yet, perhaps the best approach of all is a jigsaw approach to privacy, where no entity -- sovereign or non-sovereign -- has all the information about a transaction, so that the CBDC doesn't become a tool of financial surveillance or financial control by either government, or big tech, or both.

 

      In short, broad choice between sovereign and non-sovereign digital currency may be the most effective guarantor of economic liberty and individual privacy -- which brings me, at last, to Bitcoin. If a reasonable expectation of financial privacy is not reliably encoded into digital money -- public or private -- Bitcoin and similarly decentralized forms of crypto will continue to thrive and succeed. And it will not just be for illicit use, but for use by ordinary citizens who simply and rightfully want their financial affairs to remain private and have lost faith in governing institutions to make it so. I'll pause here, and I look forward to the discussion with everyone. Thank you.

 

Alex J. Pollock:  Thanks very much, Chris. Bert?

 

Bert Ely:  Alex, thank you very much. And let me go to my slides. I want to, again, thank Chris for being here, and the opportunity to talk to him about this and others on this issue. You know, I think the first question -- and the central question that has to be addressed -- is what problem or problems is a central bank digital currency supposed to solve? Are these really problems? And, if so, can they be solved more effectively outside of the central bank.

 

       But I think there also are problems that a CBDC could create. First of all is the potential for electronic counterfeiting. The second is the disintermediation of banks. The third is credit allocation distortions and reduced financial privacy. There's also been an argument that CBDCs would increase financial inclusion -- however that term is defined -- but then the question rises, well, if so, how would it do that? And I have yet to hear the advocates of a central bank digital currency offering any specifics on how inclusion would really be increased.

 

      A crucial design question that Chris touched on is, will the central bank digital currency be a token -- in effect, comparable to a piece of currency, or, electronic currency, if you will, -- or an account at the Federal Reserve that an individual or a business would have, that effectively would be comparable to a deposit account at a bank or a credit union? This is a really important design issue that I have yet to hear any really meaningful resolution as to how that would work out. But what's important is that each design option raises a host of issues, and let me just list what some of those might be.

 

      Presumably, with tokens -- that is, effectively, like paper currency -- you know, how would the use of CBDC tokens be monitored from the standpoint of their use in illicit transactions? Might they become used in the same way that a lot of the cryptocurrencies are being used now for facilitating an illicit transaction, such as -- among other things -- a ransomware payment. If you take the counterapproach, that is where each holder of a digital currency would have to have an account at the Fed or at some designated party, how would that arrangement work? And, in particular, what privacy protections would exist, particularly in token-to-token, personal -- person-to-person transactions.

 

      Chris touched on this a little bit and suggested that more privacy -- you know, there obviously should be privacy -- but the question is, when you have a central bank which is a government entity, and we can't not [00:16:59] forget that, then how can privacy be assured?

 

      You know, income tax data is supposed to be privately held, and yet Politico recently was able to release a lot of information about the tax returns of wealthy individuals. So the privacy issue is one that is a very serious issue, and I have yet to hear what I consider to be any meaningful resolution of how that's going to be handled. The other thing that, of course, is a very serious issue, and that is, if there is a financial crisis -- and we do have them periodically -- would there be a flight to safety from bank accounts., money market mutual funds and investments into CDBCs? And, if so, you suddenly have literally trillions of dollars pouring into CBDCs. How would those funds be re-intermediated back into the financial system? Absolutely, a critical issue.

 

      And then, to what extent would --particularly if the CBDC or the central bank, the Federal Reserve accumulated substantial balances that represented what was outstanding in the CBDC -- what politicization would there be of the credit allocation process? Might the Fed balance sheet grow even bigger than it is? And it's important to keep in mind that there are enormous concerns about how big the balance sheet is today.

     

      And then, given the ease with which central bank digital currencies could be issued, might they become an engine of inflation? Might the government find it very easy just to distribute these at will? And would the CBDC become, in effect, an engine of inflation, an electronic printing press, if you will? Again, an issue that I haven't seen discussed.

 

      Now, one of the arguments for a CBDC is that it would somehow protect the dollar's role in international trade and investment. That assertion's been made. I have yet to hear any convincing arguments as to why that would be the case. Let me close by citing a recent American Banker headline, which I thought was very relevant to those discussions, and it says, "Why the U.S. and Europe are trailing China's central bank currency rates." And that headline should raise this question: if an increasingly authoritarian country is racing to digitize its currency, should the world's democracies follow China, or reject it? And I think that that is an issue that has yet to be debated as fully as it should be. And, with that, I thank you, and look forward to our discussion.

 

Alex J. Pollock:  Thank you very much, Bert, and let's go to Pete.

 

Peter C. Earle:  So, thanks to The Federalist Society and the other panelists for having me. A lot of the points I was going to make were made, but I can work around that. So it's true that if the -- if China's digital yuan is the first digital currency, they'll be able -- to some extent -- to set the standards that digital currencies have to adhere to thereafter. I don't think that's as big a concern as people believe, because U.S. banking dominance and trade relationships will keep that at bay, to some extent. There are other reasons that are given, for which a digital currency might be desirable, and some of them were mentioned: payment streamlining, improving inclusion, reducing reliance on cash. But -- while some of this may sound like it -- I'm not in any way waxing conspiratorially, but rather, recognizing that states and central banks have a way of growing. And that there's sort of an iron law of growth, whereby policies eventually become established. And they become platforms for other, even more pernicious, ones to grow on.

 

      So, one of the big problems in central banking is one that's really difficult to address with regulation -- especially because the institutions are supposed to remain politically neutral -- are the incentive structures. And they're exceedingly asymmetric. And I'll give an example. My wife is an obstetrician at a New York City hospital. And, she, at times, has described the decision to start a family in the following way -- because she talks to a lot of patients. They say, "Well, you know, my job isn't going well, if I'm out of work, whatever, it's a terrible time to start a family." And, at the same time, if your job is going gangbusters, if you make a lot of money, it might not be the best time to start a family. You don't want to sort of derail everything that's happening. So it's highly asymmetric.

 

      And so, coming at their monetary policy, the Fed is rarely inclined to raise rates, or, you know, engage in a contractionary policy, even when it's [00:21:35] that something like this is needed. A friend of mine a few years ago asked me, he said, "Pete, when do you think the Fed should raise rates, you know, when do you think they…" and I said -- well, at this time, my daughters were small, and I said "Well, they were watching a movie a few weeks ago called Beverly Hills Chihuahua," and I said, "That's a clear sign that the Fed needs to raise rates. If something like that can get credit, can get financing, you know, obviously, we're in a very, very, loose money situation."

 

      Seriously, though, whether or not to raise rates is a difficult choice; if the economy's not doing well, they risk making it worse, if the economy is growing, they risk ending the expansion. This is all tied to my view of digital currencies, here, okay? So, if we consider the massively distorted effects on prices -- we call them Cantillon effects -- decades of falling purchasing power, and the effect of punishing savers in favor of consumption and credit expansion, I think American citizens and policy makers are very well served by thinking long and hard about expanding the Fed's armamentarium.

 

      And digital currencies would be a way of engaging in truly unconventional monetary policy, whether it's the Chinese yuan's ability to create, essentially, a demurrage currency -- which basically allows for the tailor-making of loss of purchasing power -- whether it's negative interest rates or all that sort of thing. I'm not alleging any sorts of evil plots, or any such silliness, but extending a new set of tools for an institution which treats social science like a matter of physics might not be wise. Again, this has to do with political pressures, skewed incentive structures, and the frailties that all human beings face -- and particularly those who are constantly in the spotlight.

 

      I think that a fully digital-based currency -- and, in particular, if it's coupled with a cashless economy and some of the other features that the digital yuan is said to have embedded in it, or it's within the grasp of policy-makers -- introduces possibilities for increasingly unconventional monetary policy and the increasingly negative effects that come with it. Now, money is, in its most basic form, an irreplaceable facilitator of calculation, it’s a social instrument for making cooperation possible. And some of these policies that could be introduced with a fully functional -- or with the range of functions that have been spoken about, available for digital currencies -- could possibly turn those on their head.

 

      I think it was what Bert said earlier, when he said, "Should we be following China so quickly into this -- one of the most authoritarian nations around?" I think that's exactly the point. So that's -- some of that was covered, but that's my take on it. And I wrote an article a few weeks ago, called -- the name of the article was -- I should know the name of my article, "Programmable digital currencies are weaponizable money." Potentially weaponizable, but that's exactly my point in writing that article. It came out in April.

 

Alex J. Pollock:  Thank you, Pete. By the way, I read that article of yours about weaponizable currency, and thought it was very good. Thank you. And thanks to all the panelists for a very interesting set of comments. Now I want to go back through the panel, in order, to give you a chance either to add or discuss something somebody else has said. Two or three minutes each. Chris, you'll be first again.

 

Chris Giancarlo:  And, Alex, if you don't mind, and the audience doesn't mind, I'm going to be a little provocative here. Some of the questions asked --

 

Alex J. Pollock:  The audience will love it, and so will I.

 

Chris Giancarlo:  Great. Well, you know, the questions asked here and by some of the Q&A that I've been reading as we've gone along, and is asked often, "Why do we need this, and what problems will it solve?" And I think those are great academic questions. I suppose similar questions were asked in the 1990s and the 2000s as the internet weaved its magic across the globe and transformed everything that we know about retail, about transportation, about communications, about photography, about recording music. We probably asked those same questions. The fact of the matter is there's not a lot of optionality here, guys. This is a technological transformation as big as the early phase of the internet.

 

      It's completely naïve to think that the internet is not going to do to things of value, especially money, the same thing it's done to photography. Nobody uses Kodak anymore. It's gone. And it did it to retail. Sears is gone, Amazon's replaced it. A generation that's used to sending a photograph around the world in a second is not going to wait three days to cash a check and to move money. It's still faster if you've got to get $10,000 from New York to London to stuff it in a suitcase and get on an airplane. That doesn't make any sense. The financial system we have today is going to be fundamentally transformed by this technology, and along with it, money.

 

      And it's not just CBDC. What China's building is much more than a digital yuan. They're building the first fully network economic system -- all under central bank control -- where every transaction will be fully networked, fully digital, fully in a network -- a financial network -- every transaction in that currency. And it's not just authoritarian systems. The Europeans are hell-bent on doing this. This is moving very, very, very fast, and it's only going to get faster, this transformation. So, to me, the only optionality is not, "Do we want it? Can we have it?" It's not -- we're not going to stop it.

 

      The only question is, does society stand up, in a democratic society, and demand that democratic values be ingrained into this technology? Do we demand the economic privacy that we have in physical token money be in digital token money? Do we demand that we have full economic -- not only privacy, but control -- and that governments can't use digital money to prevent us from using the money to buy the things we want, to support the causes we want, to express our individuality in the way we want? So, again, I'm being somewhat deliberately provocative, but I don't think we have the option of stopping this. I think that what we've got to do as a society is make sure the values that got us here, quite frankly, that have led the world -- the aspirational democratic values of free enterprise, of the rule of law, of economic privacy, are ingrained in this new innovation that's going to wipe away existing systems faster than -- you know, ten years from now, the financial world is going to look very different than it does today, and the financial institutions that survive are going to be the ones that adopt this technology. The ones that are going to be gone are the ones that try to fight it.

 

Alex J. Pollock:  Thank you. Thanks for the provocative comments. Bert?

 

Bert Ely:  Well, I will disagree with Chris on this. I don't believe that, first of all, it's inevitable that we're going to have central bank digital currencies. I think there are lots of issues about them, particularly with regard to the privacy, that cannot be just wished away. Once information is collected, then it becomes vulnerable to misuse and disclosure, and we just have to accept that reality.

 

      The other thing about cross-border payments -- and, again, I realize that it is a serious issue, there's a lot of inefficiencies there. But cross-border payments get bogged down, as much as anything else, because of currency translation, of going from dollars to pounds to euros or whatever. And CBDCs don't solve the currency issue of changing, of converting, from one currency to another. Granted, international payment systems need to be modernized, but you don't need central bank digital currencies in order to do that.

 

Alex J. Pollock:  Okay.

 

Chris Giancarlo:  Can I -- I don't want to cut Peter off, but can I just make a point?

 

Alex J. Pollock:  Jump in, and then [00:29:29].

 

Chris Giancarlo:  Tokenized digital money is far more protective of privacy than the existing system. The existing account-based system only works by identifying identity in every transaction. Every transaction must identify who the person is, where they bank, and how much money is in the bank. Otherwise, it doesn't work. Tokenized money doesn't require identity. It requires an algorithm to confirm that the instrument is authentic, but not the individuals. Now, you can go back through the blockchain and identify who were the parties to a transaction, but it's not required in every instance.

 

      So we can actually design this technology to be more protective of privacy. And you asked the question about financial inclusion. People don't need identity to use this system, but you do need identity to use the existing system. If you don't have identity, you can't get a bank account. If you don't have a bank account, you can't use the accounts-based system, but you can use digital currency.

 

Bert Ely:  All right, Chris. Now you've touched on a very important point that I mentioned at the beginning of my remarks, and that is, this comes back to the design. Is it going to be a token-based system, with all the anonymity that that promises, or is it going to be account-based? That's a question I would have with regard to what the Chinese are doing. My sense is that the tilt, politically, will be towards an account-based system, or some way of being able to track transactions -- for money-laundering purposes, if nothing else. But you've -- again, you've come back to a core issue that doesn't get discussed enough. It's a good [00:31:04]

 

Alex J. Pollock:  Let me jump in there, Bert, because I want to give Pete his turn, and this actually leads into his weaponization worries very clearly. And we know Chris is in favor of tokenized, not account. I think, Bert, you may be right that the political pressure will be toward account-based systems, but, even with tokenized systems, there is weaponization to be feared. I think that's true. But let me give Pete his promised three minutes for any comment, and you will come back.

 

Peter C. Earle:  It may not be three minutes completely, but I agree with most of the points here. But, I guess my personal view is that -- I don't want to sound like I don't have faith in citizens, but I'm not sure a democratic debate would necessarily result in a digital currency or some other monetary, you know, digital money, that has the features we'd like. What I'd prefer is -- someone before used the term a jigsaw -- what was that, I wrote it down here -- a jigsaw approach. That made me think of one of Hayek's later writings which is The Denationalization of Money.

 

      And, so, I would be more willing to accept the digital currency if I could get a guarantee or -- if I could get a guarantee that governments would stop cracking down on crypto, which I view as sort of the escape valve for, you know, pernicious money effects, and for over-zealous monetary policy. And, even if that doesn't happen, I don't think we have a lot of reason to worry, because, right now -- as I frequently say to people in tens or hundreds or maybe thousands of dorm rooms and basements and, you know, skunkworks projects of major technology companies -- there are projects going on to create the next Bitcoin, to eliminate on and off-ramps.

 

      So, I think there will always be some way of getting away from, you know, from a central bank, or from monetary policy gone amuck. But, I still think the pound of prevention is twice -- you know. I still think that it's better to be cautious early on, because these things have a way of running away with them. I mean, there's a story about how, during the troubles, cameras were installed in London in various places to see that cars weren't lasting -- weren't parked for too long, that sort of thing. It was initially meant as sort of an anti-terror measure, but, eventually, it was used to generate parking fines, and all that sort of thing. So, you know, these things have a way of taking on a life of their own. I think -- to the extent we can -- we should be very cautious about the ability of these things to become weaponized money, essentially.

 

Chris Giancarlo:  Well, Peter, I tell you -- go ahead, Al.

 

Alex J. Pollock:  Let me just jump in there, and then we'll give you a chance, Chris. And, to Peter's point, I often think about the Bank Secrecy Act, which was originally an act about secrecy of bank customers, and became an act of disclosing whatever your customers were doing to the government. It may be an interesting -- an unsecrecy act. Anyway, go ahead, Chris.

 

Chris Giancarlo:  Well I was going to say, I think the attractions of central bank digital currency are too great for central banks to not go down this. And I think the fed will do it as well. That's why we launched the Digital Dollar Project -- to bring the private sector into the discussion. It's too important to be left to the central bank. And if they're going to do it, then in a democracy, we wanted to set up a vehicle for society to have a say. The risk is -- look at the other democracies around the world. There is no private sector digital dollar or digital euro project in Europe saying to the BIS "Here are society's concerns." There's none going on in Sweden. It's the central banks alone creating central bank digital currencies in the other democracies.

 

      We wanted to make sure that -- in this democracy at least -- there was some vehicle for the private sector to have a say. Now, it may be that our leaders are so enlightened that they say, "We're not going to go down that road. We're going to leave it entirely to the private sector." I think the attractions of that amount of data -- if data is the new, you know, oil -- it's the new, the most valuable commodity, I don't think governments are going to not get into it. I think there's a whole lot of reasons why they're going to be attracted to it. And that's fine, as long as society has a say, and puts our foot down, and says that privacy is critical, control is critical.

 

      You know, a government that doesn't mind leaning on big tech to censor what's said on a social media platform is not going to hesitate to lean on big tech stable-coin operators to put similar restrictions on. And that's why I think society needs to stand up and say, "Whether it's in stable coins, or whether it's central bank digital currency, here are -- here's the third rail. Here are the restrictions: our privacy, our information, our economic autonomy must be supreme."

 

 

Alex J. Pollock:  And we know that the government doesn't mind leaning on big banks, either -- speaking of money. Let me come to a question from the audience, which Andrew Shaw (sp) asks, which is, "How about protecting the existence of cash?" He suggests one of the threats here may be that you can take cash away. And then once you take cash away -- the privacy concerns. And, also, something that Pete brought up, which is -- some proponents of this kind of -- of the account-based digital currency point out as an advantage -- that you could then impose negative interest rates, negative nominal interest rates of any magnitude. [Crosstalk 00:36:40]

 

Peter C. Earle:  Right. Negative interest rates, to some extent, are held at bay by the existence of cash. Right? Because people can pull their money out of banks and stick it in the mattress and all that sort of thing. We've seen that for decades now in Japan. But, you know, I mean, a lot of the desire -- a lot of the public interest in digital currencies -- has to do with sort of this notion of streamlining, making things simpler and all that. And I get that. But, you know, more and more -- you know, it's sort of a cop-out answer. I think the answer to all of this is people shouldn't -- Americans shouldn't open up -- shouldn't see their first economics textbook as sophomores in college. I think people should study economics far, far earlier, because so many of these things -- you know, they just -- they're extremely complex, and I think it's -- we're just woefully prepared for them, as a democracy, by the reach voting age or whatever. Anyway, that's just an aside.

 

Chris Giancarlo:  That's a good point. You know, I've got --t

 

Alex J. Pollock:  Chris, how about cash?

 

Chris Giancarlo:  I've got three 20-year-olds. I've got a 26, a 25, and a 22. If I called them up right now and said, "How much cash is in your pocket?" they'd all say, "None." They use --they use digital transactions. Cash is going away, because it's a generational issue. Our generation used cash, theirs doesn't. It going away. Sweden's already doing away with it because their Swedish society doesn't use it.

 

Bert Ely:  No, no, but cash actually is coming back, to some extent, in Sweden, because of the inconveniences that arise in certain transactions. But cash -- certainly, U.S. cash -- certainly isn't going away. Because, among other things, it is widely used outside the United States as a reliable store of value. So, I don't think cash is going to be going away, in part -- not only because of the convenience of using cash in many situations, but also because there is an absolute guarantee of privacy in using cash that will not exist in any transaction that's captured in some electronic form.

 

Alex J. Pollock:  Now, Bert, while you have the floor, I have another question from the audience I want to direct to you. It's from Kyle Hauptman (sp). He says, "If Chris is right, and all this is coming, what should banks be doing to prepare themselves for this world ahead -- whatever it may be -- in terms of central bank digital currencies?"

 

Bert Ely:  Well, I think it's -- first of all, it's an extremely important question, and it's really more for the banking industry, and that is, "How do -- how do banks, as an industry, protect themselves from the disintermediation that can happen because of the ability with which people would be able to flee to digital currencies if there was concerns about the -- about the banking system, or what was happening in the economy? And, I think that is a central policy issue that hasn't been addressed enough -- and that is, if you have a huge buildup in the Fed's balance sheet, because of all the CBDCs it's issued, how do those funds get reintermediated [00:39:35] back into the private economy? To some extent we have that problem today with all of the Fed's emergency lending activities of recent years, but that problem could be magnified if we have a central bank digital currency. And, again, it's one of these issues that just hasn't been really discussed enough.

 

Alex J. Pollock:  Any comments on that? I said in my remarks -- and it seems to me a financial necessity -- to expand your liabilities you have to expand your assets. And if this results in the -- let's say it does result in the vast expansion of the central bank's liabilities, and therefore, it's assets -- kind of, does that raise fundamental questions, as Bert is suggesting?

 

Bert Ely:  Well, it's a credit -- it becomes an issue of credit allocation, of who gets credit and who doesn't get credit. We already have that -- to some extent -- with the community re-investment act, for instance. But the problem could be a much greater problem, and a real drag on the economy.

 

Alex J. Pollock:  We have another question I want to take up to the panel. I think I'd like to direct this one, if I may, Chris, to you. And the question is, "If we -- If everything becomes electronic, or digital money, how much more vulnerable do we then become to electricity outages or to a generalized power outage, and isn't that a risk vulnerability we should think about." Thanks for that question.

 

Chris Giancarlo:  Yeah. So, a prolonged and universal power outage would be challenging. Now, there's a lot of development of -- you know, the existing account-based system absolutely requires on a telecommunication system. You can't run it if you can't get a cell signal, because, as we said before, every transaction requires establishing identity -- bank account access and what's in the bank account. In a tokenized system, you don't need that. So you can actually go offline and do tokenized transactions that then can be reconciled when the lights go back on.

 

      But, the question is, for how long -- if the lights are off -- or how prolonged, and how universal would that be. And that is an issue. That's an issue, virtually, in our entire economy. I mean, honestly, if the lights go out for a prolonged period of time, it's not just that money doesn't change hands -- it's everything stops.

 

Alex J. Pollock:  Yeah, good thought. We also have questions, as you mentioned before, from Dina -- Chris, and all the panelists -- that goes something like this -- it's an extensive question, but it goes something like this, "Now, tell me, again, why in the world we want the Fed to be our local bank and have all our accounts with the Fed?" Now, Chris, you've already said that isn't what you want. You want -- well, you want Federal Reserve liabilities, but not --

 

Chris Giancarlo:  No. And on that one, I don't think the Fed wants it either. Unlike digital money, which I think all central banks ultimately want, I don't think our Fed wants to be in the retail banking business.

 

Alex J. Pollock:  Pete or Bert, more comments on that?

 

Bert Ely:  Yeah, you know, again, this comes back to the question of, is central bank -- to what extent is central bank currency going to be account-based or token-based? If it's token-based, then I would suggest it would never grow to much because of the fact that with tokens, the question then becomes of how you move payment from A to B, if A and B are not having a direct physical interaction. So, I -- my sense is, once this got going, there would be a strong -- a lot of pressures to move towards an account-based system. And that's where I think a lot of problems would develop.

 

Chris Giancarlo:  I'm not sure I agree with you on the first point, there, Bert. The beauty of a tokenized system is the fact that you can move money around the world in an instant -- directly, person-to-person, peer-to-peer. With programmability, you can then move it -- not just in space, but in time. You can program your money to do things in the future, without the need for executors and a whole host of intermediaries to promise you things that they may or may not do once you're gone. You can program that directly into money.

 

      For the first --here's the problem with -- physical token money was always limited in space, right? The further you go from the point of issuance, the less valuable, the more vulnerable, it was. And it was absolutely limited in time, to temporal transactions. The problem with tokenized money is, it's exclusive -- you don't have identity, you can't use it. It's costly, because you've got to pay people to do all of those account reconciliations. And it takes time.

 

Alex J. Pollock:  I think you're talking about account -- you mean account-based.

 

Chris Giancarlo:  Account-based money, existing account-based money, right? And it takes time. The beauty of digital tokenized money is you transcend all those shortcomings. Suddenly, money is no longer local. It's universal, and it transcends time. And the problem with account-based money -- it's no longer exclusive, it's no longer costly, and it's no longer latency in time transactions.

 

Bert Ely:  No. But the problem with token-based money is -- and we've seen this with the cryptocurrencies, and that is -- if you lose your password, or you lose your wallet, you're out of -- I'll clean up my language -- you're out of, you're out of luck. So, the point -- it becomes --

 

Chris Giancarlo:  You're right.

 

Alex J. Pollock:  You're out of tokens.

 

Chris Giancarlo:  Nobody's saying you keep all your money in tokens, keep all your value in tokenized money. That would be as silly as keeping your money in your mattress. You should only keep in your digital money what you need to spend. The rest should be in a banking institution earning interest, having an FDIC guarantee.

 

Bert Ely:  Well, that suggests, then, that there wouldn't be that much outstanding in the way of tokenized CBDCs. If people are only keeping on hand what they need for, you know, the next few days of transactions, my sense is that the backers -- the supporters of CBDCs -- envision it becoming much larger than that, which almost dictates having an account-based system, and not just tokens for small transactions.

 

Alex J. Pollock:  Let me put in a question here. I think one of the determinants of how big any CBDC would be is whether the central bank is going to pay interest on their digital currency. Now, it was the law for a long time -- as we all know -- that the federal reserve could not pay interest on bank's accounts with the Federal Reserve. And, then, that got changed. Now the Federal Reserve pays interest. The law presumably limits the level of interest that is paid, but it's not such a tight limit, and at least in -- conceptually, the Federal Reserve could pay any amount of interest on its digital currency. And if it wanted to expand its digital currency, it would only have to pay -- not being a profit-maximizing body -- it would only have to pay whatever amount of interest it wanted. Now, what do we think about this question of interest on central bank currency?

 

Bert Ely:  Yeah, you know, the Fed makes a -- sends a lot of money to the treasury every year from the [inaudible 00:46:42] it earns on the currency that's outstanding that it doesn't pay interest on. It invests that in treasury securities. If the Fed started paying -- if the Fed were to pay interest on digital currency -- or on the tokens, if you will -- then that would reduce the [inaudible 00:47:00] income that would flow to the treasury, and Congress might have some problems with that.

 

Alex J. Pollock:  It might, but it would be a way to get your -- get the size of your balance sheet up as big as you wanted it, and take it away from all your banking clients, Bert.

 

Bert Ely:  Well, that -- the Fed would like that then, I think.

 

Alex J. Pollock:  Any other thoughts about it?

 

Peter C. Earle:  There's a view that the interest on excess reserves are -- were a factor in preventing the huge size of the balance sheet, to create outsized inflation in turn. Inflation was muted because of the interest on excess reserves, which I think is about 20 to 25 bps over fed funds, it's not much, but it's enough to get that money back.

 

Alex J. Pollock:  But it's over. It's over the market rate. It's -- I think, it's the point I would make, Pete.

 

Peter C. Earle:  So it's -- you know, it just occurs to me that since its formation -- you know, the Fed was originally set up to provide the nation with a more stable currency, and more stable currency units. And over time, the mandate increased to unemployment, and growth, and more recently, towards -- I mean, I'm hard pressed to measure how they would do this, but -- monetary policy directed at climate change, and towards social justice. So, with the Fed having its finger sort of paternally positioned over the panic button, and with the thresholds for action seemingly lower and lower, and, you know, increasingly, triggers for intervention. Yeah, I think that the opportunities that the digital currency would provide for interest rates as well to -- I mean, we have to -- we'd have to wait and see, because it's all in the -- it's all in how it manifests, but I definitely think that would be a factor. I think that the -- the digital currency may allow the mandates to broaden further still, to who knows what.

 

Alex J. Pollock:  Thank you. Now I have another question from Rohan (sp) Excuse me. Excuse me, go ahead.

 

Chris Giancarlo:  Alex, can I just make a point -- a point on that last one. You know, commercial banks play important -- a number of important roles in the domestic and global economy. Two, in particular, I think are worth noting. One is correspondent banking, and the other one is fractional banking. Correspondent banking -- I'm afraid to say -- is in the direct crosshairs of this innovation. The amount of money earned by banks just to move money around the globe -- to really do all the identification and account verification and account movement, is -- it's going to be replaced by this technology in the way that Kodak's role in developing film was replaced by digital photography.

 

      Fractional banking, however, is a different matter altogether. I think it's vitally important, and I think if we design this right, keeping all your wealth on a digital wallet would be as foolish as keeping all your wealth in your mattress. But, what it should do, is enable people to much more efficiently move money in an out of a banking institution than ever before. So you can keep most of your money in a bank, but the moment you need it, you can have it out on your -- with a swipe of your mobile device, transacted directly, without having to go through the correspondence system, anywhere in the world, any time, any place into the future, and then put the excess back into your bank account, earning interest.

 

      Now, banks may have to pay some degree of interest again, to attract that money off digital wallets into bank accounts, but that should be good for consumers. That should be good for society. And I think that the Fed should recognize the important role that banks, especially community and regional banks, play in the local economy. They're the job creators of this country, and we've got to preserve that role. And I think that if we do, if we design the digital currency right -- a tokenized digital currency -- we can preserve the fractional banking activity. I think correspondent banking activity is going to be hard-pressed to justify its value -- its value proposition -- when money can be moved with a click of a mouse the way it can be with this technology.

 

Bert Ely:  Alex, if I can just jump in on this point -- and that is, with the tokenized money, you may be able to move dollars very quickly from point A to point B. But, if you're making payment to someone who wants to be paid in euros, or yuan, or whatever, then you still have to go through the currency conversion process. And, as best I can tell, CBDCs do not deal with that issue at all. So you're still going to have -- particularly for international transactions, -- you're still going to have the currency conversion issue.

 

Alex J. Pollock:  There will still be an exchange rate, that's clear. And the exchange rate will move. Now, gentlemen, thank you, but I want to move on to a question from the audience here, which I think is worth thinking about. And that is, Rohan Gupta (sp) writes this, "Thanks for this wonderful discussion." Thank you Rohan, we're trying. "Would you all be able to touch more on the use of tokenized currency in matters that threaten national security? Are there national security issues involved around the question of central bank digital currencies, or not?

 

Bert Ely:  I think there are.

 

Chris Giancarlo:  Well I can tell you, national security agencies are focusing on this issue very, very -- to a very great extent, because they are concerned about national security implications of digital money.

 

Bert Ely:  You know, we've seen this with the ransomware issue of -- you know, the bad guys want to get paid in a manner in which they're not identified as the recipients of the funds. And with tokenized CBDCs, you have exactly the same issue, which I think is going to rise as a -- as a real barrier to widespread adoption of tokenized central bank digital currency.

 

Alex J. Pollock:  Pete, do you have any thoughts on the national security issue?

 

Peter C. Earle:  Sure, I mean, to the extent that the -- that the Fed is permitted, or any central bank is permitted to do more experiments -- and they are, basically, experiments, because a lot of this is untrod ground -- on human beings without -- and there's an old joke, and it says, like, "What's the difference between biologists and economists?" and the answer is that biologists at least have the decency to test on mice and rats first. So, I think that the extent to which we allow ourselves to be tested on, and I -- again, not a conspiracy -- I've met many fed officials, they're very smart people. But they are engaged in an unenviable endeavor, which is trying to predict the way the economy will grow and the way people's behaviors will change, all that sort of thing.

 

      So, to the extent that we allow that sort of thing to take place, of course, that's going to have an impact on the economy, and on growth, on efficiency, our production capacity, and all that -- all of which has implications for taxation and for the strength of the dollar, and, ultimately, for our national security. And, I say that, and I'm not usually -- I am a West Point grad, actually, but I mean -- I used to talk about those things in an economic sense, but, certainly, they have an impact.

 

Chris Giancarlo:  Well, Peter, the good news is society's been doing this experiment now for 10 years, since the launch of Bitcoin in Sakamoto [00:54:09] white paper in 2008. And those experiments are pretty widespread, and it looks like society likes it a lot, so the Fed is -- if the Fed is wise, and if central banks are wise, they wouldn’t ignore all of that research that's been done, they'd actually draw upon it.

 

Peter C. Earle:  Right. Like I said, I mean, I agree with you, and I -- I look to the market. I look to the unending stream of new tokens, and new cryptocurrencies, and all that sort of thing to come out, to sort of compete with one another and also provide alternatives. Hopefully, if the worst of what I imagine digital currencies could become is realized, there will still be -- and that may even incent, or provide incentives for, you know, more innovation in terms of non-national technology innovation that will take the role -- or at least, you know, increase the network characteristics of Bitcoin and other private currencies, or private monies like that.

 

Alex J. Pollock:  As we come around to the end -- and just on this theme, and listening to the discussion -- it seems to me that the entire panel signs up. And it's come up, this famous essay of Friedrich Hayek's on competition in money. It sounds to me like we all sign up to -- at least in principle -- to the idea that competition in monies is good, between government monies, private monies, and various government monies competing with each other. Do we all agree with that? Or would anybody have any comments on this notion of this -- to my mind -- the great Hayek wrote it a couple generations ago.

 

Chris Giancarlo:  If I could, Alex -- I just put the finishing changes on a manuscript that's going to be -- of a book that's coming out in September called The Fight for the Future of Money, and it's exactly this. My position is that money is going to change dramatically, and if nothing -- if for no other reason than society wants it to. Our children have been voraciously experimenting with money and liking it, and they're going to change it. This is going to change, and what we've got to do is make sure that the values that got us here -- the rule of law, economic privacy, free entrepreneurship -- is encoded in that future of money, because it's happening. It's going to happen.

 

Alex J. Pollock:  Okay, thanks Chris, I'm going to take that as your concluding sum-up, and give Bert and Pete a chance for a parting shot here. We’ve got about a minute left.

 

Bert Ely:  I'll just differ with Chris on that, I just -- those sound like laudable objectives, but I think that the implementation of them is not going to go well, and I think that there will be continued resistance to having central bank digital currencies.

 

Alex J. Pollock:  Pete?

 

Peter C. Earle:  I'll just -- you know, I think it would actually would make a nice pair. But, if you like, as counter-point -- and I think we actually agree on most things -- to Christopher's book, I have one coming out in August called The Gold Standard: Retrospective Prospect. It's about the -- it comes on the 50th anniversary of the Nixon shock. Two things turn 50 this year -- the Nixon shock and me. So we have that book coming out. And I think if you read Christopher's book and then our book on the gold standard, you'll be very well versed in monetary issues.

 

Alex J. Pollock:  Well, that's great -- as well as when you listen to the recording of this conference, and go back over all the interesting things that have been said. Thank you all very much. You're an excellent panel. And thanks, audience, for very good questions. And Evelyn, we'll give it back to you to conclude.

 

Evelyn Hildebrand:  Wonderful. Thank you all, just to echo your gratitude to our excellent panelists and our excellent moderator. Thank you all for taking the time to discuss this this afternoon. To our audience, thank you for participating and sending in your questions. We welcome listener feedback by email at [email protected]. Thank you all for joining us this afternoon. We are adjourned.

 

 

 [Music]

 

Dean Reuter:  Thank you for listening to this episode of Teleforum, a podcast of The Federalist Society’s practice groups. For more information about The Federalist Society, the practice groups, and to become a Federalist Society member, please visit our website at fedsoc.org.