15. Central Banks & Commercial Banking, Part 1

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visit MIT OpenCourseWare at ocw.mit.edu. GARY GENSLER: All
right, we're going to turn today to
a fun topic of how central banks, right at the
heart of the financial system, are thinking about blockchain. And we're going to do
this over two classes.

We're fortunate that we
have some real expertise in the room, and I'm not
talking about myself. But Rob Ali, who ran the digital
efforts at the Bank of England, and is now– and has been for some time–
part of the digital currency initiative over
at the Media Lab, is going to come up from time to
time and give his perspective. Not only from MIT's
Media Lab's perspective, but also from the history
of what he's done. He's authored a number
of papers in this area. He works with
technologists creating a number of technologies. But I'll let Rob tell you
a little bit about what he's doing in central banking. Simon Johnson's
also joined us, who is a former chief economist
of the International Monetary Fund. He's told me he doesn't
want to be called on, but I will call on Simon to give
his perspective at some point in time, from the IMF days. But as you all know,
Simon is Sloan faculty, a great teacher, himself,
teaches a lot of you in the global markets
course and the GLAB course, and things like that.

And Simon and I in the
spring teach a public policy and private sector
course, which is just one more time for me to plug that
that's a good course, too. So now, let's just talk a
little bit about central banking and blockchain. First, what are we going to do? A little bit about our readings
and the study questions. We're going to start
with Fiat currency, and go back again
to Fiat currency, and how does it fit
into central banking. So the first 20% or
30% of today is really just about what
is a central bank, and how does it fit into money? Then, how are central
banks thinking about blockchain technology? What are their approaches? And we're going to talk about
four different approaches that central banks are taking
to blockchain technology.

Then dive into one of those four
approaches– payment systems, and how are they looking at
payment systems right now. Dive into probably the most
interesting one– central bank digital currency, and what's
called the money flower. You might remember
that money flower that was in the BIS
report, and so forth. And then just wrap it up. So that's a little bit of
what we're trying to do. The study questions were
really about central banking– what are they thinking about? How are they thinking about
digital reserves, and so forth? Because I have a
guest with me, I'm not going to do as
much cold calling, because we're going
to leave time for Rob to get up here and give some of
his thoughts as we go through.

But the key
questions were really how are central banks
thinking about central bank digital currency? How might they think of
the design considerations– which we're going to dive
into in the latter part of the class. Designing retail
versus wholesale. Access– should it be a
token or account-based? Interest bearing or not? And we'll talk a lot Thursday
about why Sweden right now is come out with their most
recent paper, which was not in assigned reading,
because the paper came out about a week ago. But they're saying they're
thinking they should make it interest bearing, which I
wouldn't have necessarily predicted. But that's where their thinking
is as of October of 2018. And then, what are
the challenges? That it might relate back to
the commercial banking business, the credit markets,
the economy as a whole. So that's a little
bit of the background. And these were the readings. I apologize, because
this week is probably a little heavy reading,
which meant you all skimmed rather than actually dove in. One of these
readings, Broadbent– Rob did you help write this
speech that Broadbent wrote? ROBLEH ALI: No, I confess,
this is all Ben's work.

And I reviewed a draft
that he sent round and made some
comments on it, but I can't claim any [INAUDIBLE]. GARY GENSLER: Anybody
working in the central bank digital currency
space really goes back to Broadbent's speech– I assumed that Rob may have
written it or reviewed it. And Garratt, who gave testimony
in front of the US Congress on these issues, is often quoted
by the Bank of International Settlement and others. So if there were two that you
really want to think about– the economics of money and
central bank digital currency, Garratt and Broadbent
are picked up a lot. The Economist piece
was kind of lively, and walked us all the
way back to Adam Smith. Did anybody read The Economist
piece and remember what he– anybody remember
the Adam– so James? AUDIENCE: He basically
argued everything that's done right and wrong
with Fiat currencies, exactly what's happening with Bitcoin. GARY GENSLER: It's exactly
what's happening with Bitcoin. In The Economist piece, it
talks about in the 1770s, when they started to move a bit away
from gold money to paper money, and they set up a
clearing house in 1773 to deal with the paper that was
going amongst and between all the banks.

That Adam Smith
apparently wrote that it was wagon wheels in
the air, and that gold was the highway of money– but paper money and central
clearing of that paper money was the wagon wheels in the air. So The Economist was
basically saying, these debates are
as old as time. Adam Smith was saying,
you can promote an economy with wagon wheels in the air– money. But maybe that's what's
going on now, as well. So I've already introduced Rob– research scientist from the
Digital Currency Initiative, and before MIT.

He helped Broadbent–
he won't say he did, but he helped
Broadbent do everything he did at the Bank of England. And then Simon, who's
taking notes feverishly– did I get your– did I get this right? Yeah, good picture? SIMON JOHNSON: Not
sure about the picture. GARY GENSLER: What's that? Not sure about the picture? So Fiat currency is
anybody going to remind me what Fiat currency is? Brodish? You were slouching in the
chair a little bit there.

AUDIENCE: So Fiat currency
is the currency particularly issued by the central
bank of the government of the countries– which
is [INAUDIBLE] something that is normally the
norm in the ecosystem to use as a [INAUDIBLE]. GARY GENSLER: So it's
issued by a central bank, it's the norm in the system. And what are two very
important economic features of Fiat currency, that
make it so widely accepted in any economy that
we've talked about? AUDIENCE: One of
the reasons is it's typically used as the means to
pay taxes for that [INAUDIBLE].. GARY GENSLER: Right, so taxes. And what was the other big
one that almost every country you can use it for? Pria, were you looking at me? No? Shawn? What? Yeah, you can use it
for debt payments. So societies come
together and say, you can use it for all
debts, public and private. You can use it for taxes. It sort of gives it an enormous
network effect and an advantage in any economy. And then what happens is,
so many of us in a society then use it as a
unit of account, and there's an enormous
amount of network effect.

Just the raw
economics of money is that others will use
it, and exchange it, and thus it becomes the medium
of exchange, unit account and store of value. So it's represented
by central bank notes. And commercial bank deposits
relies on a system of ledgers, which makes it
somewhat adaptable, and why blockchain is
interesting in this space. And taxes and debts. So then, I've pieced together
a little bit of a slide to think about, where do
central banks fit into this? Ultimately, you'll see
where I'm going with this.

But commercial banks and
central banks both have money. Central bank money
are reserves and cash. So it's not simply the cash in
our pocket, it's also reserves. And bank deposits actually
are a form of money. So a little diagram– if the central bank
is at the top– and these are number
banks, commercial banks– reserves are the deposits
that commercial banks have with the central bank. When central banking started
200 and 300 years ago, it was the commercial
banks wanted something from the government. They wanted some backing, they
wanted a lender of last resort, and they would have to open up
accounts at the central bank.

But today, when we
have unified ledgers, then the central bank issues
reserves to the banking system, and those reserves
are a form of money. The next thing is, there's the
public down at the bottom– Bob, Alice, and Charlie. We all have money, and
it's called bank deposits. But there's one other piece of
this puzzle, if I can get it, it's cash. So three forms of money– we can all have
cash in our pocket, as I commonly pull
out, this here, right. I'm going to watch you,
Hugo, I'm going to watch you. No, no, but what is
that right there? AUDIENCE: Federal Reserve note? GARY GENSLER: Right. That Federal Reserve
note is a representation that at the central bank they're
storing some value for me. It's got a serial number. That piece of paper itself
is not the store of value, in a sense, even
though we accept it. Would you say that's
a store of value? AUDIENCE: In some ways.

GARY GENSLER: In what way
is that a store of value? AUDIENCE: I know
that it's worth $20. GARY GENSLER: And
why is it worth $20? AUDIENCE: Because the
central bank says so. GARY GENSLER: And see what
happens if you hand it to Rob. He'll take it, right? That's how you know
it's worth something. But it's a tokenized
means of money. It's a physical token,
and the central bank has something stored there.

But you also have bank deposits. And if you go into Starbucks,
and you buy something at Starbucks– James, if you buy
something at Starbucks, what are you giving them? AUDIENCE: A piece of paper–
well, a piece of linen. GARY GENSLER: No, but do
you actually– who here– AUDIENCE: A credit card. GARY GENSLER: All
right, so when you give a credit card, what
are you giving to Starbucks, ultimately? AUDIENCE: A notion that I have
some money in my bank account that they can take in
exchange for coffee.

GARY GENSLER: In exchange
for coffee, you're going to– I hope you give them
more than a notion. What will the payment system do? Ross? AUDIENCE: A receivable from
the credit card company. They just have a right to
get paid from the credit card company. That company checks to make
sure they're willing to– GARY GENSLER: And
ultimately that receivable will be moved bank
deposit to bank deposit. You'll never be handing
him my $20 bill.

[LAUGHTER] What's that? All right, Rob, that's his fee. Teaching fees are cheap at MIT. But Ross, you want
to go through that? So the receivable will be
a bank deposit, ultimately. AUDIENCE: Right,
and they collect it from the credit
card company, who is going to move money
from their account to Starbucks's account. Then the credit card
company sends you a bill. So there's two separate
relationships there. So when they're
checking your card, it's just a credit card
company checking its records to see if they're
willing to issue the receivable to Starbucks. GARY GENSLER: So what
you're really doing is you're spending a form of
money called bank deposits. And your bank deposit
is going to go down, and what's Starbucks
bank deposit going to do? AUDIENCE: Go up. GARY GENSLER: Go up. So three forms of money– the cash, the deposits,
and the reserves, because the central bank
is giving some money. All of this is handled in
accounts in a ledger structure. And we talked about it.

So the accounts– there's
central bank accounts, and there are bank accounts. It's just accounts are ledgers,
I've just changed the words. And it's moved through a
system, a payment system that we talked about last
week– and I'm putting to. Real-time gross settlement
is that little box up there. Real-time gross settlement
is a system between banks and a central bank. Almost every country
has some form of real-time gross
settlement system. Here in the US, we might
call it the Fed wire, or ACH. I see Ali– is ACH real-time
gross settlement, or maybe not? AUDIENCE: No, they're not real. GARY GENSLER: Just the Fed wire. AUDIENCE: There's
another one, but I forget the name [INAUDIBLE]. GARY GENSLER: Chips? AUDIENCE: Chips. GARY GENSLER: Chips– so
in the US, we have chips, and the Fed wire are both
real-time gross settlement. That's between banks
and the central bank. And then you have all
sorts of systems– what's in that little box
is not as important to read, is basically to
move between banks.

So that's central banking
and how it fits into money. Rob, how we doing? All right so for? You can come up here anytime. All right– what's that? ROBLEH ALI: [INAUDIBLE] GARY GENSLER: All right, we've
got some feedback, though. So I just wanted to
hit two things on cash. Cash in the economy is
moving up a little bit. The BIS report, for
those who read deeply, this is just a chart that
comes from your reading. This is cash as a
percentage of GDP. You'll see one
arrow going down– Sweden. Sweden only has about 2%
of their economy in cash. The US is going
up– it's about 8%. We have a $20 trillion
economy, we have $1.6 trillion of those $20 bills. So in most countries,
it's going up. China– Japan, by the
way, is close to 20% of their GDP in cash.

I added this chart, Simon,
this was to keep you guessing. Yes? AUDIENCE: Why is Japan so high? GARY GENSLER: Why is what? AUDIENCE: Why is
Japan's cash is so high? GARY GENSLER: Who do we
have from Japan here? You want to answer
this question, Akira? AUDIENCE: Japanese people tend
to use actual cash rather than credit card. People use [INAUDIBLE] going
to use their credit card, because they're using the
account credit card number, and the [INAUDIBLE]– it's a little bit old people
feel uncomfortable to use that number. GARY GENSLER: So a
bit of a cultural– AUDIENCE: Cultural, I
think, yeah, cultural. GARY GENSLER: And technological. Or more culture? AUDIENCE: So the
younger generation is right to use their
credit card for [INAUDIBLE],, but older people
doesn't [INAUDIBLE].. ROBLEH ALI: And I think, what's
interesting about this slide is, a lot of the other
central banks in Sweden is like the canary in the mine– they see cash usage
dropping, and they're thinking about this sort
of fundamental question about should the public have
access to central bank money at all? And they have it now,
in terms of cash, and should we provide a digital
version cash is not convenient anymore.

AUDIENCE: It's starting on
2007, is this [INAUDIBLE]?? Or is it capturing the effect
of advanced buying lots of assets in the market? GARY GENSLER: So
this question is, is does this reflect because–
we start in 2007 to 2016– is there something
else going on? The quantitative easing
of central banks. But what else happened
during this period of time? What fundamentally happened
during this period, Elan? AUDIENCE: The mortgage crisis. GARY GENSLER: The
mortgage crisis, or more broadly, the financial crisis. So there was– I think, more than
quantitative easing, I think that this whole sense– that Satoshi Nakamoto
tapped into, too– is central institutions
are failing.

So should there be a
run to physical cash? Is this– it's not gold– but is this more,
in some cases, safe than commercial bank deposits? Now, my dad, if he
would have been– well, he was alive
during this period, but he would've been taking
his money out of the bank and getting gold. Simon, you haven't
heard this story, but my dad always had some
gold coins and a few diamonds.

He inherently did
not trust government. He also carried a
gun most days, too. [LAUGHTER] He is in a tough business. But in this period of time, you
couldn't easily get the gold. A lot of people went to cash. How much do you think
the US's $1.6 trillion, or 8% of our economy, is $20
bills like that, and $10s? And how much do you
think it's $100 bills? Anybody? It was not in the
readings, I'm just kind of curious what
do people think here? AUDIENCE: I think $100
bills are worth 80% of the– GARY GENSLER: So 80%
of the $1.6 trillion. Does anybody have a
different thought? That was pretty good. So here's a chart that I
pulled out, through 2017. Of the $1.6 trillion, it
looks like about $1.3 trillion is $100 bills. So what's expanding
in the US is not the use of $20
bills and $10 bills, it's the use of the $100s. And I could put
up another chart– over half of those
$100 bills are thought to be held internationally. And they're not even held
within the 50 continental– the 48 continental states,
and Alaska and Hawaii.

They're not held domestically. So it's great to be
a reserve currency, it's great to be
a store of value. Ross? AUDIENCE: I was
just going to ask the store of value question. Maybe I misheard you before,
when you were passing the $20, you said, is it
a store of value? And I thought you said, no. And if half of that
is $100s overseas, then that's the store of value,
that's what people are holding. GARY GENSLER: I don't think
there's a real answer to it. I would say this represents
a store of value, ultimately, on the central bank's ledger. Because the central bank
could, if they wish to, deny use of this. They haven't, they
haven't for decades, but I'm saying
somebody could say, that's a bad serial number. But most people would say
that $20 piece of linen is a store of value. AUDIENCE: I was going
to ask, would you expect the velocity of these
to be inversely related? Like with $20
bills, they probably have a higher velocity
than $100 bills, especially if they're being
used to store of value, right? GARY GENSLER: Yes,
so the question is, is the velocity of
$20s higher than $100s? Yes, meaning they
turn over faster.

And one measurement of
it is, is how quickly these currencies, these
linens, have to be replaced. And $1 bills, I think, have an
average life about 18 months. They keep coming in
and out of the system. And I'm not entirely
sure, but I think $20s are maybe three,
four, five years. In essence, these are
all signed by secretaries of the treasuries,
and I apologize for those who aren't Americans. But it's hard now to
still find Rubin's– Bob Rubin, or Benson's,
which was the early '90s– signatures on the $20 bills. Now, part of that is because the
currency design keeps changing.

So $100s aren't used as often. They have turned over since the
currency design has changed, because even an
illicit activity, you'd prefer a new
$100 to an old $100. Because a new $100
is more secure– it's less able to
be counterfeited. And when I served in the
US Department of Treasury, I had to spend a lot of
time, because I chaired something called the Interagency
Counterfeit Deterrent committee. And I had to meet in these
secure rooms, where they locked us in, and you learned about who
was counterfeiting the money. Brodish? AUDIENCE: Please go
back to the last slide.

So what I see here is the
vertical shift in most of the economies
is smaller, which I'm hypothesizing that the
value of consumption in cash are also [INAUDIBLE] dense. So if that is the
case, then what is the rationale of increasing
the high-value notes in the system? GARY GENSLER: What do
central bank issue more cash to meet that demand? AUDIENCE: And why
more $100, as compared to the smaller denominations
who have the cash consumption– seem to be more low
value consumptions? GARY GENSLER: So
Brodish is asking why– why, in, essence
is this happening? Well, a central bank has
a couple of choices– they can issue paper
currency to meet demand.

And the demand is
really as evidenced through this thing called DAS– does the public
ask for the cash? And that's what's
largely happening. Or can they put some quota
system, or by government Fiat– like an India, where
they said, no, you have to hand in all
the old banknotes? And there was an
active desire in India to take cash out of the system. But in the US,
we've not had that. We have not had any real
large government interest of taking it out of the system. And so what you do have, is
you have more and more demand for $100s, as a– I'll call store of
value, whether it's for illicit activity, or
for straight-up appropriate activity.

And the central bank
is facilitating that. This entire 8% of our GDP,
or $1.6 trillion of notes, is interest-free borrowing
for the US government. So there's seniorage. Eric? AUDIENCE: Yeah, I just wanted to
make a quick comment regarding the store of value. And going back to what we
discussed in the first classes was that, it's actually a
social construct, the belief that you're going to
solve debts, or pay taxes without the Fiat currency. And that reminded
me of a story, there was this– this was true– this
was a South American drug lord family, this drug lord was
on the verge of being caught. All their assets were being
seized by the government. And the story is told by
his son, who was actually sitting in the one
apartment, surrounded by piles and piles
of dollar bills, which they actually
couldn't do anything with.

They actually used them to burn
and get some heat out of them. And then you go back
to think, is it really an intrinsic sort of value? This is going back to the
social construct, right? Because their money wasn't
good for any merchant in the south– in that specific
South American country. GARY GENSLER: Right, so it is– if your point is, it's
a social construct, I'm concurring, agreeing. In that case, maybe it
was also a little bit of time value of paper money–
he was about to get arrested. There's so might– so
I don't know enough about that circumstance. But for sure. So let's move a little
bit on to central banking. And I choose the US, but
it's true around the globe.

So there are
economic policy goals that central banks
have taken on. In the US, it was captured,
written into law in the 1970s– 1977, to be precise– something called
the dual mandate. Interestingly, the US dual
mandate for the central bank has three things,
written in law. This is a quote, "promote
effectively the goals of maximum employment,
comma, stable prices, and moderate long
term interest rates." That is what's
known as, in the US, is the Federal
Reserve's dual mandate.

You might say it looks
like three mandates. Simon, do you have any thoughts? SIMON JOHNSON: Well,
the central bankers will tell you that stable
prices are the best way to moderate interest rates. So that's [INAUDIBLE]. GARY GENSLER: And
thus, mostly, people call the dual mandate
is price stability and maximum employment. And then some
central bankers would say, the best way to
promote maximum employment is stable prices,
depending on how– You wouldn't say that if you're
going for senate confirmation to be a member of the
Federal Reserve Board, but am I not right? That some economists– AUDIENCE: If you were up
for presidency of the ECP.

were up for president of the European Central Bank. AUDIENCE: You'd
have to say that. GARY GENSLER: Because? AUDIENCE: They only
have one mandate. GARY GENSLER: They
only have one mandate. So around the
globe, central banks might have different
mandates, but almost– I would say, though I haven't
studied 180 central banks, all of them would
have price stability, or to ensure that there's
not much inflation.

Because they are in the business
of having the public mandate to secure the money. That's the core thing. Now, what do they do? They manage money. And I think of it
as supply and price. So these are
Gensler's way to think about what central banks do,
but it's about supply and money. Supply is physical cash. Do we keep issuing
more physical cash? This $1.6 trillion of cash? But there's broader things
called monetary base. This was not in the reading–
does anybody want to tell me things like M2 and M3, what– anybody taking a finance course? Are you studying what monetary
base is, or M1, or M2, or M3? There's no reflection
on you, it's maybe a reflection on Sloan.

I'm just asking. No? So there's different
measurements of money that central bankers
will monitor and manage. M1 is usually the hardest core
money– used to just be cash, or cash and demand deposits. In the US system, it's about
$3 and 1/2 to $4 trillion. So about half of it's the cash. And then they add– the
Federal Reserve says, demand deposits in a
bank are just like cash. And this comes back four
and five decades ago, started to say that the
hard money, M1 is that. M2 includes the
rest of deposits. So M2, in the US, is somewhere
in the order of $14 trillion. In the US, there's
about $13 trillion– or 65% of our economy
is in deposits the banking system has.

Every country that you're
from has a different number, I'm just using the
US as an example. So deposits and make up
more money than cash. Cash is about 1/2
to $2 trillion, deposits are $13 trillion. You add the together,
you roughly– I'm using this term loosely– M2, which is a wider form of
money, is about $14 trillion here in the US. There's also an M3, and there's
other measurements of money. So the Federal Reserve
tries to manage that, and they manage it not only
by how much physical cash is printed, but it's also the
leverage in the banking system. If you let a banking
system be highly leveraged, then you're, in essence,
creating more money. If a banking system
needs more capital, then it's going to
have fewer abilities to expand the economy. And those are the big tools that
a Federal Reserve, or the Bank of England, or any central
bank has to basically shape the supply of money. But there's also things they
do to shape the price of money. And that's interest rates. The price of money is like
I'm lending Rob money, he's giving it back
to me in a year– what's the price of money? And it's that.

So two big tools– supply
of money and price of money. If you ever want to be a
governor of your central bank, you're in the Fiat
money business. Rob, any thoughts? Did I– ROBLEH ALI: Yeah, I
that's about right. And obviously, that's when
modern central banking came in, mid '70s, when the Bretton
Woods came to an end. So this is [INAUDIBLE]
floating exchange rates, and all the rest of it. And there's some good books
about this– there was a– there's a recent book
came out, a history of the eurozone, like
monetary union in Europe is about 40 years old, give or
take the different [INAUDIBLE].. [INAUDIBLE],, his name was,
a guy at the IMF, I think, worked on the Greek crisis,
and he wrote a very good book about, right, the
history of monetary union in the European Union,
and how that worked.

And this goes for a long– like end of– taking place at
the end of Bretton Woods to, I think, the Greek crisis. GARY GENSLER: One
weekend in 1971, if I've got my year correct,
early 1970s, Richard Nixon took to Camp David– which is the presidential
retreat in western Maryland. The leaders that he needed to
get together in one weekend– the head of the Federal
Reserve, the undersecretary for monetary affairs at
the Treasury Department, who happened to be Paul
Volcker at the time. But he got together four or
five people in one weekend, and took the US off the
end of the gold standard. We kind of went off the
gold standard in the 1930s, but after World War II, there
was an international consensus, Bretton Woods, and
there was still that central banks
to central banks could exchange money for gold.

So we were still in
somewhat a gold standard. And Rob might have a
different point of view– a good friend of
mine, Jeff Gordon, is writing a book
about that weekend, he was dean of the
business school at Yale. But the French had asked
for some of their gold back. And they got it back. But then the British started
to make noise, Bank of England, started make noise that they
wanted some of their gold back. And Richard Nixon
had a challenge. So he decided he'd just take
us off the gold standard. There's a lot of
historians' debate whether the Bank of
England forced it or not. Simon? SIMON JOHNSON: It
wasn't their gold, it was our gold– they
wanted to exchange their dollars for our gold. That's what Nixon didn't want– GARY GENSLER: I see, I see. So Professor Johnson is
saying, it was actually– SIMON JOHNSON: US gold.

GARY GENSLER: Wait, it was
the US gold, or the UK's gold? SIMON JOHNSON: They had dollar
balances that they accumulated, which was all fair and good. And under Bretton Woods, you
could convert your dollar balances into gold, until
Richard Nixon said you couldn't. GARY GENSLER: Right. And so the question
was, whose gold was it? And under Richard Nixon's view–
and I think Simon is agreeing, it was– I didn't know, because you're
a dual citizen, aren't you? I just didn't know when you
said our gold, whose gold? SIMON JOHNSON: It was
in my American accent.

GARY GENSLER: So your British
accent was throwing me off. [LAUGHTER] OK, so Richard Nixon would
agree with Professor Johnson that it was our gold. And the British to
this day would say, well, we didn't really
ask for it back, They were making some
noises about this. I don't know if that's–
that might even be. So what do they do? What does the central
banks actually do? They oversee the
fractional banking system, providing those reserves. But also regulating
the banking system. I mean, if you're sitting on
top of all of this back here, you might want to
regulate the whole system. And that's why around the globe,
by and large, central banks regulate the banking
system– not always, and sometimes, like
in the United Kingdom, they gave it up to another
agency and then pulled it back. Hugo? AUDIENCE: Yeah, I
just have a question. So I understand how central
banks introduce new money into the system. But what would be the
mechanism of trying to decrease the supply of cash? Would it be an increase in the– or not allowing the commercial
banks to use much leverage? Or how would they bring
money back and get rid of it? GARY GENSLER: So you can apply– a very good question– Hugo is saying, how can you
change the amount of money? And I'm going to use all
digital forms of money, not just physical cash.

But off digital forms, the
way you can effect it is say that any one bank needs
more capital, or more reserves– so you're lowering
the multiplier effect in fractional banking. If you need 5%
capital, that means you can have $20
of balance sheet for every dollar of capital. If all of a sudden you
say, no, you need 10%, then you would be shrinking
the banking system in half, for instance. So there is a number of tools,
but one of the direct tools is reserve requirements
and capital requirements. It's not the only tool. AUDIENCE: So it
would be a mandate to the commercial banks? You wouldn't
necessarily directly interact with the retail? GARY GENSLER: Correct, the
Federal Reserve manages monetary supply
in numerous ways, but some of the direct ways– and it's why they also regulate
the fractional banking system.

They have that direct need. But they also need, very
importantly, the third bullet point, to promote a safe and
efficient payment system. In some countries, many of the
countries represented here, written right in the
legislative act that sets up a central bank, says they must
promote a safe and efficient payment system. And if it's not written
into legislation, it's at the heart of
every central bank. They are also the
lender of last resort. When banks fail, they
come in and support them. Our central bank
was set up in 1913. In 1907, we had a crisis. Banks were failing all around. Does anyone know the
history of that crisis? Who actually was the
lender of last resort in the US economy in 1907? And it was not
the US government.

AUDIENCE: JP Morgan. GARY GENSLER: JP Morgan. And not JP Morgan the
bank, JP Morgan the man. I mean, he had a bank,
he had a library, he had a lot of other
things going on for sure. You could say, he was
the Bill Gates or Warren Buffett of his time. But in sense, he had more
influence than a Warren Buffett or Bill Gates in 1907. We had had a– in fact, that picture in
the upper right corner, is the First Bank of the US in
Philadelphia, set up in 1791. It was set up with
a 20-year charter. Hamilton and Jefferson
had a huge fight. The Congress passed
the law to set up the First Bank of the US. And Jefferson recommends– Jefferson with
Secretary of State– recommends to President
Washington, veto it. Hamilton's wrong. Washington gave Hamilton one
week to write him a report. It's a really
well-written report– I've not read it in
a number of years, but I went back and read
it when I was at Treasury.

One week later, Washington
signed the bill. Jefferson never forgave
Hamilton for that, and many other things. But it was a compromise
that only lasted 20 years. In 1811, we no longer
had a central bank. So we had a love-hate in the
US with this central authority in central banking. AUDIENCE: There's [INAUDIBLE]
and crypto anarchists say that because Fiat currency isn't
backed by the gold standard, and because of fractional
reserve banking, that the Fiat accounts
is worthless– I guess, what would
your response– or the bankers in
the room– what would your response to that be? ROBLEH ALI: Well, I think– I mean, money is– it
comes back to money as a social construct
thing, right? Anything can be money if you
want it to, almost anything.

So if you've got a big enough
group of people who think something's money, then it
has– that it's valuable, then that's true– the US dollar, and a Bitcoin. But I guess the
question is how do you generate trust in the system? And I guess the US
government generates it through having a nation state,
an army, and a treasury, and everything else. Whereas Bitcoin has this
network of miners, and this code that people put their faith in.

So it's just generally– it's
the trust in a different way. But to say, money is only
worthless if everybody thinks it's worthless, or like
a significant group of people. So the Zimbabwean dollar
is worthless, right? But Fiat money as a general
concept being worthless, I mean, now you've choice. You can choose Bitcoin, or
any other crypto currency, if you want to, depending
on your preferences.

But I think it's difficult
to maintain it's worthless when lots of people use it
all the time, can exchange it for goods and services. GARY GENSLER: And I think
also, Fiat currency has had a lot of challenges and crises. Usually related to either
poor fiscal policy– that the nation,
the government state is overspending
its taxing ability, because taxes are revenue,
and then the spending. Often related to
wars, but not always. Or to the monetary policy– in essence, a lot of
printing of money. In the old days, it was
physical printing of money. In the new days, it's digital. It's the overseeing
of the banking sector. And some of the
biggest banking crises have led to
significant, in essence, expansion of the monetary base.

Maybe it was lending
against real estate in a housing bubble in
Ireland, or other countries, and so forth. But we're not unique in the
US to have housing bubbles. And that can undermine
the social consensus about Fiat money. Take China in the late 1940s,
where every few minutes you had to worry about, did
you have enough suitcases of physical cash to pay
for your restaurant bill, if you were at a
restaurant, and so forth. And any country that's in
the midst of hyper-inflation, you usually then– the
social construct falls away. But it's rare that it hasn't
been replaced by another Fiat currency– maybe with a stronger military,
or a stronger central bank. But after some crisis. Occasionally, it's replaced
by another country's Fiat currency, and there's a number
of Latin American countries that have said, well
this isn't working.

We're going to go
to the US dollar. And just be darn– we're not going to
trust our sovereign, we're to trust somebody else. And remember, I've
said this once, I think, in this
class, the history– and Simon, bail me
out, and Rob, bail me out– but the history
of the Bank of England was that the King of England was
at war with the King of France, and needed to borrow some money
and couldn't borrow it readily. I think it's like 1
and 1/2 million pounds. And some noble lord
said, well, this is how we'll give you the money– if we set up a board– it was initially,
the Bank of England was in essence a contract
between the sovereign and the noble lords that
said, we have to check. And then the war went
on, I don't remember, you guys probably won
and beat the French.

But it was in the
midst of a war that– SIMON JOHNSON: Always. GARY GENSLER: All right, you're
recorded, by the way, video. Rob? ROBLEH ALI: Yeah,
the Bank of England was set up to finance
a war with France. GARY GENSLER: Yeah, was to
help finance a war with France. ROBLEH ALI: And
what's interesting– because the English
Civil War was actually in the mid-17th century,
so shortly after that. So that's after the
powers of the king had been significantly
reduced, and became effectively a kind of
constitutional monarchy. So the Bank of England was sort
of set up around that time.

GARY GENSLER: Same spirit
of checking the sovereign. So let's move on
a little bit, just so we can get to what
central banks are doing. But in essence, what
central banks do is they oversee
the banking system. I mean, back to they promote the
economy through stable prices, and in some countries, also
this concept of a dual mandate. They manage the Fiat
currency– money– through supply and pricing.

Oversee the banking system. And basically, are the
bankers to the government. When the government's
really in trouble, think back to the 1690s
when some noble lords were funding the king– it still happens that
central banks do sometimes fund governments. So the US Federal
Reserve balance sheet– I'm not going to
spend time on it. It will be in the
slides in Canvas. So let's talk about where
central banks approaches to blockchain and crypto. Some– I would say a majority–
are monitoring and studying. The US Federal Reserve would be
this way, the European Central Bank. Rob has a better feel, because
he talks to central banks all the time. But monitor and study
is the dominant place. Restrict– restrict its use. I'd say that the People's Bank
of China is more towards this. They're kind of a mixture
between monitor and study, because one of the readings was
actually from a senior policy person at the People's
Bank of China, and he's written some
remarkable pieces.

Every few months, there's
a piece in like CNN, or CCN, which is a crypto
newsletter, or Coin Telegraph, that this one individual from
the Central Bank of China is writing these pieces. Now, I don't know a lot about
the Central Bank of China– he always puts at the bottom,
these are my personal views. But I have a
suspicion he would not be allowed to write these
things if it weren't something bubbling underneath. But you can restrict
the use of crypto. And some countries, like China,
and elsewhere are doing that. There's payment system
experimentation, which we're going to chat about. And then there's this
thing called central bank digital currency initiatives.

And Rob and I know
the answer to this, but I'm curious to the group. Central bank digital
currency, having read all that you've read
for today, does it rely on blockchain technology? Show of hands, yes or no? So yes, it relies on– my hand won't matter. Does it rely on
blockchain technology? Central bank digital currency? I don't see a single hand. How about no? How many people think no? Oh, you did your readings well. Did you read it– thank you. She's– Simon, I'm– you know. So central bank
digital currency is inspired by this whole
crypto finance movement, but it does not
necessarily depend upon blockchain technology. But I think it's
central to this course, and central to a study
of blockchain technology and money, because
it's absolutely inspired by this whole movement. Though, the first person
that wrote about it was Tobin in the
1980s, if I'm right. Right? ROBLEH ALI: [INAUDIBLE] GARY GENSLER: Yeah, 1987
or something, I think. Tobin wrote about
basically giving the public a direct tokenized means
beyond paper money– a digital means of an account.

But most people would say,
central bank digital currency relies on blockchain
technology, and you've made me proud that you said no. Let's talk about
the pain points. This was last
Thursday's lecture, but there's some payment
system pain points. I added one or two
because of your feedback, but cost, delayed settlement,
chargebacks, fraud, privacy, financial inclusion,
and the like. And for Rob and Simon, this
was last Thursday's discussion. So some of what the
public sector is doing is non-blockchain
initiatives– entirely non-blockchain initiatives.

The European Union,
the US, others, are doing things
about faster payment. Basically trying to
move the payment system to 24 hours a day,
seven days a week, not locked up on the weekend,
where you can actually move. And that merchants can
do it as well as banks. So whether it's the
target instant payment system, or what's known
as TIPS in Europe, or faster payment task
force, which has led to a faster payment mechanism– I think, I'm guessing
Pria's husband's working on that, right? Does he– AUDIENCE: He was. GARY GENSLER: He was
working on the task force? Shrimp joined us last
Thursday, and he talked about– he's at MasterCard.

So a lot's going on. I just note– I put just two other countries. India's immediate
payment service is really government
sponsored, government pressed. I think one of the gentlemen
that works on it, Simon, you have speaking at MIT'S
campus in a few weeks. Arvent worked on it. And in the UK, where
they're saying– not only are we updating our
real time gross settlement system, but there's
a government mandate that banks have to open up
their bank accounts to what's called open API.

A lot is going on,
non-blockchain related, related to payments, making
it faster and more access. But in the midst
of that, here is a little bit of what's happening
in the blockchain space. And with the help of the South
African white paper on this, I break it into three phases. So I thank South
Africa's central bank. First is phase one. Three countries wrote papers– Canada, Brazil, and Singapore. Canada and Singapore
even called them something– it's called
Project Jasper in Canada, and Project Ubin in Singapore. And they did some
experimentation, all based on a Ethereum network– could you do a better payment
system based on Ethereum? So an open-source, blockchain,
permissionless system. And they tested out a new
real-time gross settlement system. And generally, the way
they do this is they get a group of banks
in their country– and if you were to read each
of their detailed reports, there's some similarities
and some differences– but by and large, get a group
of banks in your country, use the platform, try to do
a talking through, and see if it will work.

Elene? AUDIENCE: So they built
a permissionless system? GARY GENSLER: They
were trying to see if they could use the Ethereum
network to build a better payment solution. AUDIENCE: Or are you saying
they developed a smart contract undercutting Etherium? Or did they deploy their
own Etherium permissionless network? Which one did they do? ROBLEH ALI: I think it
was, they just claimed Etherium and deployed it. Like internet– it wasn't
ever outside the [INAUDIBLE].. AUDIENCE: They
were doing mining? ROBLEH ALI: I don't
know how they did it, in terms of mechanism. GARY GENSLER: Now,
what you'll see– because I want to
quickly go to phase two. Phase two, none of
them used Ethereum. Phase two, two more
initiatives happened– Japan and Europe together. And when I say Japan and Europe,
I mean the central banks. And all of these are
central bank focused. Japan and Europe added,
and South Africa. And all five initiatives– all have been
published already– were happening in those various
states in mid to late '17.

And into '18, were
all on permission. They were looking at
Corda, Hyperledger Fabric, and Quorum– Quorum is the closed loop
system that JP Morgan. We talked about Hyperledger,
Fabric, and Corda. So I think, Elene, this kind of
starts to answer your question. That they then
said, well, no, it's not going to work
on a permissionless. Every one of them
in phase one said, we don't think this
is going to work on a permissionless system. Let's then go into a
phase two experimentation. We're now in kind of phase
three, or a third wave. We haven't heard from
Brazil recently– don't know whether that
project is basically stopped. But these are big countries
and big central banks, that are interested is– can
there be a payment system solution? So I'm just going to talk
about Singapore for a minute, and give you a flavor for
outside of the readings, but a little bit of what
the Singapore project is. But it captures all
of these by just talking about this project. This is from their papers.

But they really see that we're
in a multi-phase project. And they are willing
to publicly say, we're going to go further
than where we are right now. We want to get to
the place where we have domestic
delivery versus payment, and in the future payment
versus payment systems, money versus money. Delivery versus payment,
DVP, is basically a security versus money. So if you see the words DVP,
it's in the securities business where you move a security
and a payment simultaneously, and there's no credit risk.

I will not give Rob the
security unless he gives me the cash, or vise versa. Ask me one day about when– before we had DVP, what
the markets were like. So Singapore is willing
to publicly announce– we're going to take this
as far as we can go, all the way to a
cross-border settlement of payments and securities
against each other, D versus P versus P,
is what they call it.

The D you can think
of as securities. Will they succeed? Do they need to stay
on a blockchain? I can't predict that. But they're willing to say,
we're going to give this a try. Where are they right
now in phase two? Well, they tested Corda,
Hyperledger Fabric, and Quorum. And they have a
full 60-page report they published a month or two
ago about how did each of them work to do basically payment
versus payment, cash, large cash movements. But here are the six
criteria they tested, and they say they passed
every one of them. Now, I read the full
report, and I have to say, it struck me that they
probably did pass it. But I'm not enough of an
expert, and this stuff gets very granular,
and the question still is, could you just use an Oracle
database to do the same thing? And it's a fair question. But they tested it basically,
can you digitize the payments? Can you decentralize
the processing? Can you do the queuing– the queuing of payments.

And a lot of
cross-entity payments, you have to net the payments. I'm going to pay Rob,
Rob is going to pay Hugo, Hugo is going to pay me– well, that doesn't make sense. You net it all, and it's
a queuing factor in all these real-time gross payments. Elene? AUDIENCE: So what is
decentralized processing mean here? So this was in what country? GARY GENSLER: Singapore. AUDIENCE: Singapore? So there's a central
bank in Singapore, it's clearly very centralized. What is the central [INAUDIBLE]? GARY GENSLER: It's up to them. And what they write
about, they think that you could lower the
single point of failure risk by not having the central bank. They actively– this is a
central bank writing the paper saying, we could have more
resilience in the system if the database is
distributed amongst– in this case, they had
11 banks participating.

And the 11 banks
have separate nodes. Now, it's still a
permissioned system. You might say, and
somehow the central bank has a notary node, maybe. But it's amongst the 11 banks. And that there would be more
resilience to this system than having it centralized. AUDIENCE: And the central bank
still does monetary policy? GARY GENSLER: Central bank
still does monetary policy. Rob, what do you
want to add to this? Because Rob swims
this lane, I don't. ROBLEH ALI: Yeah,
I mean, I think it's one of the big
challenges, right. Because the question of
how much the central bank consciously limits its own
power, I think is important. Because if you have
a system where– because I think there is
an instinct of certainly some central banks, they want to
maintain control of the system. Like, well, OK,
but we want to have a special node for
the central bank, we can do all this,
that, and the other.

And my argument is,
you actually want to limit the power
of the central bank as far as you possibly
can, because it– to the extent that
the central bank has special powers
over the system, that creates a
weakness in the system. Because if that node
is then taken over, then whoever can go
change the system– has effectively all the
power of the central ban. Which takes away the
benefits of decentralization. To my mind, the point
of decentralization is increasing the
cost of the attack, by saying, well, to attack
the system, you have to attack 50% of the nodes, or whatever.

But if you have this one special
node that could do everything, then you only have
to attack one node. And it defeats the object. So I think when you're
speaking to central banks, you have to persuade
them of the need to have a system that they– like almost setting
up and let it go, rather than have to
continuously interfere with, an have to have these
special powers in it. GARY GENSLER: What's interesting
with so many countries, there's going to
be a wide variety. And I really do think that
many of the central banks are in that monitor
and study slipstream, and a couple are in let's
restrict the use slipstream.

And even China that says,
we're restricting the use, is still studying
the heck out of this. But some countries like
Singapore and Canada are in the forefront
saying, let's figure out– maybe this technology
will make the payment system, and thus the system of
Fiat money more resilient. It's still unknown, but they're
really trying to test the edge. Yes? AUDIENCE: So perhaps this is
just a peculiar observation, but I feel like the
very institutions that Satoshi and Bitcoin were
trying to disintermediate, are the ones that are taking
inspiration from this, and then trying to advance
their own technology. And it feels– is it
a competitive threat? What's the disconnect? How are they
thinking about using this for something
that was basically built to disintermediate
me your first name? AUDIENCE: Zahn. GARY GENSLER: Zahn– so Zahn
is asking about Bitcoin, and wasn't Satoshi
Nakamoto's innovation about doing something
not just decentralized, but not trusting–
trustless sort of system.

But every technology
evolution, whether it's in electronics and
telecommunications, or elsewhere, startups, if
they have something good, incumbents will look
at that technology and see what to
adopt for themselves. Partly because they're
threatened by the startups. And in this case, I really do
think central banks have felt a little bit of heat on their
neck, a little bit of heat like, we've got to
think about our payment solutions and our
money solutions, and maybe there's something
from blockchain technology. But regardless of whether
it's the heat on the neck or opportunity, incumbents
will always look at technology, and see.

And that's why the paper
that you've read sometimes, the Geneva Report,
that Simon and three of our colleagues and I
co-authored this past summer, we called blockchain technology
a catalyst for change. And we were agnostic,
partly because there were five of us
co-authoring it, but we felt that that captured
our five points of view. That it might be a catalyst
for change for incumbents, it might be a
catalyst for change to inspire central bank
digital currencies, which frankly, don't have to be
on a blockchain at all. Or it might be some startup
that does really a unique thing, and I mean unique
beyond crypto kitties. You know, something
more than that. Aviva– I know you, Aviva. AUDIENCE: So I was
just curious, are there details about the timeline
for this, in the sense– GARY GENSLER: Wait,
say that again? AUDIENCE: Are there
details about the timing for like how long
it takes to process a payment by the central bank,
like all the way to settlement, vis a vis Fiat currency? GARY GENSLER: So the timeline
for the– so not the study, not this timeline, but you're
saying a timeline for– AUDIENCE: No, for that specific
project, and this extract here that they defined.

Have they also– GARY GENSLER: I'd have to look
back– it's a good question. I don't think Singapore has said
they're going to finish this by 2019, but I don't
know whether they said a date like 2021, or '22. But it's a multi-year project. AUDIENCE: [INAUDIBLE] for
a specific transaction to process it all the way to
settlement, how long it takes? GARY GENSLER: Oh, the test
case in Singapore and Canada, within seconds– but I don't know if it
was like nanoseconds. No, it's very quick. AUDIENCE: I have another
question for the three of you, actually. How is the central bank
thinking about reporting for these transactions? Or is it a later-stage
problem to worry about? GARY GENSLER: Well,
the reporting, as I have read these reports– and then I want to
move on to central bank digital currencies, which we're
going to be largely talking about Thursday, but
I want to set it up because Rob won't
be with us Thursday.

Reporting is– this
is a ledger, this creates a database, this
permissioned blockchains amongst 11 banks in Singapore. And it's just a test,
it's just a test– is basically a form of a ledger. So I don't think they've built
out any customer user interface and reporting that way. But the transaction ledgers were
kept, similar to bank ledgers, as I understood it. But they didn't build
out a user interface. Unless Rob, you
know any otherwise. No. So let's talk a little bit about
the next and the toughest– central bank digital
currencies, that may or may not be based on
blockchain technology. But they're absolutely inspired
by blockchain technology. So central banks currently
issue digital reserves. We saw that earlier. It's digital money already. And then physical tokens– I keep my eye on this
physical token here, right? So that's the form of money. Commercial banks, then,
issue bank deposits. In the US, that's
about $13 trillion to the public in bank deposits,
and there's only $1.7 trillion of this. So bank deposits are the
biggest form of money, and it's all digital.

Essentially, bank deposits
are intermediated central bank digital currency. Those are my words, but it's
digital currency bank deposits, it's just not directly
with the central bank. It's intermediated in between– if you go back to that flow
chart that I had earlier. So the private sector is also
experimenting with stable value tokens. We're going to talk about
that Thursday, there's some readings, so I'm
not going to dive in now. So there's a little
bit of competition. So it's like Zahn's
earlier question– the private sector,
Circle, and Tether, and others are having
these stable value tokens. So there's a little bit of
competition coming that way. So the strategic question
for the central banks is, should we allow direct
access to digital reserves? We have this
intermediated central bank digital reserve
called bank deposits, but should we have
something direct to us? Like cash is a
direct relationship between the central
bank and the holder. That's really the strategic
question, when you– I believe when you move
away from the technology, you don't know have to
know about hash functions or anything.

That's the strategic question. Why do I think there's
some opportunities? And we're going to dive
more into this Thursday, but I want Rob to see if he
wants to speak about this and tell us. I think this is
a real question– and Sweden has highlighted it– they want a
continued involvement in the means of payment. Sweden is already down to
about 2% of GDP, or 1/2% of GDP is their kronas– the physical kronas– the
US is still at 8% or 9%. But they're saying
nobody is accepting physical kronas anymore
in Sweden and Norway, and so forth. Pretty soon, most retailers
will not take them. So they're saying,
maybe the government needs to have a continued
direct relationship. Could it promote competition
in the banking system? Because otherwise,
if you don't have it, then the banks are controlling
the payment system, and the means of payment. Promoting financial
inclusion– not everybody will have a bank account. Well, maybe they could
have some digital form of central bank money
instead of a bank account. The pain points– and I
would say for some countries, some countries are clearly
looking at central bank digital currencies to
avoid US sanctions.

Venezuela and Iran both have
projects for central bank digital currency. Sorry, question? And so here, of course,
blockchain technology could be relevant. For these six reasons,
or five reasons, you didn't need
blockchain technology. But I'm going to say, blockchain
technology could be relevant– Fiat currencies on a ledger,
verification and networking costs are critical to
the economics of money. So I wouldn't count blockchain
technology out of this, because blockchain technology
can lower verification and networking costs. But I think we're too early
to know whether blockchain technology will be at the
center of central bank digital currency. But it could have an effect. So the challenges. And again, we'll dive
more of these Thursday. Rob, you want to say anything
about these challenges? ROBLEH ALI: Yeah,
I mean, I think Ben's speech was good on– GARY GENSLER: Ben
Broadbent's speech. ROBLEH ALI: Yeah, Ben
Broadbent's speech is good on that one. Because I think the
fundamental one is this– how do you fund a productive
enterprise in the real economy? Right, that's the real– GARY GENSLER: How do you– ROBLEH ALI: How do you
fund productive enterprise in the real economy? And at the moment, certainly
in the UK and Europe, and I guess to a lesser
extent in the US, but it's largely true
for the US, as well, is that you are very much
reliant on bank lending.

And if you do something which
essentially drains deposits from banks, are you like
fundamentally changing the nature of the system? And how are you going
to create a system which allows people to fund
mortgages, or fund businesses, or whatever it is? And I think that's
the big challenge. So I think that's like the
central question, which I think is the
bullet three, effects on credit allocation
in the economy, is the thing that I think weighs
on central bankers the most. GARY GENSLER: So basically, if
you disintermediate the banks, and the banks are
not collecting– again, using US numbers–
$13 trillion of deposits, but only $12 trillion of
deposits, or maybe $6 trillion of deposits, what are we
doing to credit allocation? Because for three
to five centuries, or certainly since the
Industrial Revolution, banks form an important
feature in our economy to promote the
extension of credit.

And we had this six or eight
lectures ago, this graph that in the US, debt to
our economy is about 3.8, or 380% of our economy in
debt it's not all bank debt, but bank debt is a
big piece of that. Can you move credit allocation
away from the banking system? Well, the answer has got
to be in some level, yes, but what are the pros
and cons of doing that? It's not whether you
can, it's whether it's a better system, a better
economy, better growth with or without it. Shawn? AUDIENCE: I was just
curious, can you use different interest
rates to represent different level of risk? And then use a differentiation
and interest point as a way to fund the corporates, so
they can get the loan faster, or they can get the [INAUDIBLE]? GARY GENSLER: So the
question is, could you use interest rates to try to do it? Which leads us to
design considerations. Which is basically, I
listed that the last one. You could have a central
bank digital currency that had zero interest rate– interestingly, we'll
talk more Thursday– Sweden said no.

They think they'd put
an interest rate on it. But you could go
no interest rate. And I'd like to
hear your thoughts Thursday, well, why did
Sweden come out there? And what does that make sense? You could put limits
or caps on it, and say, these are only
low dollar accounts. You can only have X 100
euro, or X 100 krona, or Y number of dollars. And it's really just small
transactional accounts, equivalent to $20 bills,
not $100 or 500 euro notes. So you can put limits or
caps, or no interest rates, and so forth. Do you make it widely
accessible, and so forth? So there's all these
design considerations, which I'm guessing
Rob, you've talked to a bunch of central banks.

Where do they come out on these
issues, as you see it, in 2018? ROBLEH ALI: You've got a lot
of different opinions on it. I think the limits and
caps thing is a hard thing to practically implement. That was always the
sort of skepticism around that– it's like if
you have these accounts, and you say, well, we're going
to only have one per person, we're going to cap it at
a certain amount of money. What practically
happens in a wrong– is the government really
going to say, well, no, you can't put any more– Like there'll be a lot
of political pressure in any crisis, so I think caps
are really seen as viable. And then, I think the interest
bearing thing is interesting. I mean, the only
reason cash doesn't bear interest is because it's
technologically difficult to make a paper bear interest.

So I think with
digital currency, they might as well give
yourself the option. Say, yeah, well, we can
set the interest rate to zero if you want to, but
why limit yourself to say, well, we won't charge interest? Because it's again–
it's like that's a limitation that comes
from the technology of physical banknotes,
and there's no real need to import it into the digital
world, when you could achieve the same effect by just
setting the rate at zero if you want to.

GARY GENSLER: And one of the
reasons that some countries are exploring this
option, is they think it'll be easier to
do monetary policy, because you're going to have
negative interest rates. Physical cash makes it
hard for– oh, nobody like that, huh? No, the two Elenes, you don't
like negative interest rates? But for a while, we effectively
had negative interest rates. Certainly for
corporate deposits. But if everything was digital,
and there was no physical cash, central banks say
we could actually go and have no lower bound, no
zero bound to interest rates. ROBLEH ALI: I guess
you, in a way, you don't necessarily need that. Because if you can
just create more money and pump it into the economy,
it has the same effect, right? GARY GENSLER: Right,
so what Rob is saying is you could affect
that by supply of money, rather than the
pricing of money. And so there's both. One of the most interesting to
me is the second bullet point– is a token or account based. And the two merge
together, in a sense.

This piece of paper is a token. Nobody's keeping an account that
when I hand this to Rob– here, you can take it, Rob. That's your fee, remember. So that's a token based
bit of money, that's what is called token based. Token based money
is more anonymous, and you can keep
it more anonymous. Account base is
when you're actually keeping the ownership
somewhere on a registry. Even though that $20 bill
is registered somewhere, it has a serial number, it's
a token based bit of money. The Swedes, interestingly, say
they'd have to change the law– their own central bank
laws– for one of these two. And now I can't remember. But they have– if
it's token base, it would come under
their e-money laws, and I think they don't need
to change the law to do that.

But in Sweden, they would have
to change their central bank laws to do e-deposits,
because they would literally be opening up their central
bank to something other than commercial banks. That's it– they have to go
to their legislative body and parliament to actually
do an account based, and not a token based, if I recall. So there's some
also legal reasons why you might need to
do one or the other, but one would have more
anonymity than the other.

it's worth noting, on these token versus
account models, it's not well-defined what
people mean when they say taken and accounts. So different central
banks will say this, and mean different things. And also people who work on
Bitcoin will think about– so when I see tokens, I think
about particular structure and transactions,
which Bitcoin has. And when I think
about accounts, I think of structure of
transactions that Ethereum has. And that's how I distinguish
between those two things. But I think having spoken to
different central bankers, they think about it differently,
because e-money is like– you could think about it as– I mean to me, that's an
account based system. But some bankers
think about it– some central bankers think
about that as token based. So it's worth noting
that the definitions are very fluid in this area.

GARY GENSLER: So we're going
to save this for Thursday. I'm not going to
go through this– it was in one of the readings. Garratt, who
testified in Congress, was so popular with
this, then the Bank of International Settlement
picked up this thing called the money flower. But I'm going to save this, I
want to kick this to Thursday. But it's basically
the four things– widely accessible, is it
digital, is its central bank, is it token based? And depending upon
where these intersect, you can take any form of money.

You could say, well, it's
not central bank issued, its token based,
private digital tokens, is down on the right hand corner
is one little piece of it. It's just a way to take these
four important features. And we already have
central bank digital money, which is in the middle of all
this, it's called reserves. But we're going to hold
this for Thursday– but this crazy
little money flower, central bankers who
are in this world, they've been using this, because
this Professor Garratt came up with it.

I mean, I've seen
this in other papers. ROBLEH ALI: It's very important. GARY GENSLER: They
love it, you know. I don't know. Money and flowers
together, there you go. But Rob, I don't
know if you want to come up and help
close it, but these are the ones we're going
to talk about on Thursday. And since Rob won't
be here on Thursday, I'm kind of curious if he has a
point of view on any of these– and you can see
them here, as well. ROBLEH ALI: The UK one is
actually being stopped. So I read something recently
that the UK government– I assume at the prompting
of the Bank of England, although their fingerprints
are not directly on it, I can imagine that
they were behind it. I think Uruguay is
an interesting one.

I recently went
to a presentation by Uruguay central bank,
and what's interesting about that project is that it was
actually live and out there in the hands of people,
paying for things in shops. And I think that's
what distinguishes it from a lot of the
other projects. So for example, the
ones that Gary's talked about earlier in, say,
Singapore and Canada, are really just in-house
creative concepts, whereas the Uruguay
project was something that actually has worked, and
they've taken an early form. The Swedish one, again,
is fairly early stage. The e-krona is
not out there yet, they're just starting
to explore it.

The Tunisia one
was interesting– I've spoken to one of
the guys working on that. And again, that's interesting
because it's a live project. It's continuing– unlike
the Uruguayan project, it's a continuing project. So it'll be interesting to
see how it plays out there. And I think the reason being
is a lot of the thing that puts off central banks
from actually doing it, is they don't know what effect
it would have on the banking system, or whatever. And I think you
will start to see– when you start to see
people actually trying it, and deploying a central
bank digital currency in the real economy,
then you will have a real pilot, or
a real world example, that you can then
research and say, well, actually the
effect was this.

Because at the moment, a lot of
the debate around central bank digital currency, what
would be the effect be on the banking system? This is conjecture,
you can build a model. But it's very difficult. But I think once you start
to see countries actually issue them, then you
get the evidence in. And then I think you'll
see a cascade effect. It will be very quickly, then,
the technology is proven out, and then more and more
countries will issue them.

And also because of
the funding effect, Gary talked earlier
about the cash– like US dollars, physical cash,
is effectively $1.6 trillion of interest-free borrowing
by the US government. And if, say, the US government
issued digital dollars, then arguably you could
retire half the national debt and replace it with money. So there are these big
fiscal implications. And the Body of the
Commonwealth paper, which my colleagues at
[INAUDIBLE] wrote, I think, two years ago, sort of
addresses that fiscal element.

And I think that will be a
big attraction to politicians looking to spend money. GARY GENSLER: And
before we close, Simon, because you're rarely with
us, but from your perspective, either from your chief
economist days at the IMF, or just because you– Simon hosts the Tuesday night
blockchain seminar dinners, by the way, too,
for three years. So Simon is way ahead– one might say he was kind
of a blockchain Bitcoin maximalist three years ago. I think you've moved
more to the middle– you can self-declare
where you are. And Simon, Johnson,
and Nehan, Narula, and Michael, Casey,
and I, are going to be standing up a blockchain
lab course in the spring. So Simon? Your question is, what do
you think about all this, and maybe for both of
you in the last minute, when are we going to see a true
central bank test this out? I mean, there's nine of
them on this page that are kind of feeling it out. SIMON JOHNSON: I don't think
there's any technical problem here at all. I think Rob has clearly put
this out on a long time ago.

I think the issue comes
down to what Rob said, what does it do to credit? Who really wants to
find out the hard way? And what does it
do– what happens in a crisis when
everyone– you know, let's say you're
not paying interest on a digital central
bank currency, and you can get interest
on your bank account, but there's a crisis. And you say, well, I
don't want to have this– be holding the liability
of a private bank anymore, I want to be holding the
liability of the central bank. Doesn't everyone run
to the central bank? And what does that do to credit? And how you're going
to figure this out, without actually running
something like on [INAUDIBLE].. GARY GENSLER: And
two predictions– how many years before
our country actually– because 180 countries,
nine of them are already bubbling around. Two of these– Ecuador
stopped, Uruguay maybe stopped, and the UK Royal
Mint might have been stopped by its own government.

But when do you
think we're going to see a country actually
have a direct digital account to their reserves? For the retail public? ROBLEH ALI: It could
be a couple of years. I mean, Tunisia is
the closest to– up on that list– but a couple of years. For the first one, yeah. I mean, we're early
[INAUDIBLE] years, within two years,
at least, possibly. GARY GENSLER: So back
together on Thursday. We're going to dig
back into these nine, and talk a little bit
more about the money flower and the readings,
which I think, as I always do, I list them. Some of those are more fun,
and they're shorter readings, as well. So I will see you all on
Thursday at 2:30 to 4:00, and I thank you once again. [APPLAUSE] .

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