Is the end of physical Currencies approaching?

Cornell University Professor of Economics & ‘The Future of Money’ Author Eswar Prasad discuss the future of digital currencies.

Video Transcript

AKIKO FUJITA: Well, as the Federal Reserve considers a path ahead for a central bank-issued digital currency, a new book is taking a look at what the future of money will look like and how CBDCs are likely to alter the way we transact. Let’s bring in Eswar Prasad, he’s Cornell University professor of economics and the author of The Future of Money. We have also got our crypto reporter, David Hollerith joining in on the conversation.

Eswar, it’s great to talk to you. You know, it feels like there are so many different currencies we’re talking about right now, and of course, that’s more on crypto and that’s different from CBDCs. But when you look at just what that supply looks like right now, how do you think that’s going to evolve in the future, and ultimately, how does that change the way we conduct financial transactions?

ESWAR PRASAD: One thing is clear, Akiko, is that the end of physical currency, cash is certainly drawing near, and cryptocurrencies, including Bitcoin, have certainly paved the way for that revolution. Now, my own view is that cryptocurrencies may not ultimately prove to be viable mediums of exchange, especially the decentralized ones like crypto coin that have very volatile value and that have a number of other impediments but they’ve already given rise to stablecoins, whose value is backed by reserves of hard currency, such as the US dollar and US dollar securities, which could provide more efficient payment transactions.

And in addition, we are seeing cryptocurrencies basically catalyze central banks into issuing digital versions of their own currencies, which I think are really going to be the future of at least central bank money. These are going to lead to more efficient payment systems, bring more people into the financial system, and are going to make monetary policy effective in some ways. There are going to be some negative implications potentially for the banking system, for private-sector innovations and payments, for privacy but I think the technology is evolving to a point where some of these risks I think can be managed.

DAVID HOLLERITH: Yeah, professor, Prasad, could you drill down a little bit more into the benefits and risks of central bank-backed digital currencies? I know there’s a lot but just the key benefits and risks?

ESWAR PRASAD: So it’s worth thinking, David, about why central banks are bothering to issue central bank digital currencies if private payments providers are doing the job of providing low-cost, efficient digital payments quite effectively. In many countries, the objective is financial inclusion, the idea so the central bank makes a very low-cost digital payment system easily accessible to everybody, including low-income people who may not have access to a credit card or a bank account. That’s going to help people bring people into the financial system and also act as a portal for basic banking products and services for credit, savings, and so forth.

In some other countries like Sweden, the concern is that if you have the entire payments infrastructure in the hands of the private sector it could become vulnerable to technological or confidence problems. So the Riksbank is considering issuing an e-krona to serve as a backstop for the private payments infrastructure. In countries like China and India where the private sector is doing a great job of providing digital payments, the idea is to keep central bank money relevant at the retail level.

So in addition to financial inclusion you know, you can use central bank accounts if that’s the form that CBDCs take. You know, to use that as a channel for guiding deposits of money from the central bank and so on. So I think there are many benefits to be had but we will lose privacy, there could be threats to commercial banks. And in addition, you could have private payments innovations facing some difficulties if the government is doing that job.

AKIKO FUJITA: Let’s talk a little bit more about the privacy concerns because you just laid out all of the benefits but there’s a lot of fears here that if we do move towards a CBDC here in the US you know, do we really want the central bank knowing about every single transaction that we conduct? And you’ve raised that question yourself about whether, in fact, this is going to end any kind of anonymity when it comes to financial transactions. How do you think the Fed should be weighing that?

ESWAR PRASAD: That’s right, Akiko, it’s a crucial issue, when the European Central Bank did a survey of its citizenry about what their primary concern about a digital currency was, it was about privacy. So if we live in a world where in fact, every transaction that we undertake is visible either to a private payments provider or a central bank or government agency, there is a question we need to deal with at a societal level, not just as a technocratic matter about whether that’s the kind of world we want to live in.

But here again, technology is providing a solution, China is moving forward with the digital currency where there are low-grade digital wallets as they’re called, where very basic transactions, very low-value transactions but allow users to have some degree of anonymity, while high-value transactions will require them to reveal their identity. So here too, technology might help us to balance the benefits and risks. But I think ultimately, no central bank wants its money to be used for illicit purposes. So auditability and traceability of transactions, and therefore loss of privacy is I think a feature we’re going to have to live with.

JARED BLIKRE: Professor, we’re going to take a short break here for a commercial break but we want to take a listen to a clip that we have from President Trump, who spoke with Yahoo Finance’s Adam Shapiro yesterday. Adam specifically asked Trump about the US dollar and here’s what he had to say.

DONALD TRUMP: I think he wants to do his own currency, whether it’s crypto or otherwise. And one of the reasons that we have to be very careful is we have a currency right now, the dollar, and I’m a big fan of the dollar. I’m a big fan of our currency. And I don’t want to have other currencies coming out and hurting or demeaning the dollar in any way. And China is looking to do– China is certainly not looking to back the dollar but right now they’re based on the dollar and they would probably have to stay that way unless we do something very foolish in our country.

I mean, the problem that I have with so much has happened, whether you look at the border, the horror show at the border, or the horror show of the Afghan withdrawal, is our country is losing credibility. And if you look at a monetary system based on the dollar, if you start losing credibility, all of a sudden, you’re going to lose that strong monetary system. And we have to be very careful about that.

JARED BLIKRE: Well, professor, so you heard what President Trump just had to say about that. And we’ve seen the central banks of the world, especially the US and China kind of jockeying the US to maintain its global monetary hegemony. China to break into it years ago with SDRs or increased share in the SDR basket from the IMF. What is the current status here and what do you think of Trump’s comments as they pertain to this?

ESWAR PRASAD: I’m certainly a fan of the dollar as well. Now, it seems like China is getting a jump-start in terms of getting its currency, the renminbi to become more prominent. China is one of the first major economies to undertake trials of its central bank digital currency and it’s likely that the digital yuan will be rolled out, if not nationwide, at least in most parts of the nation sometime in the next couple of years. And that is a concern whether the US Fed is asleep at the wheel.

I really don’t think there’s a first-mover advantage here. Certainly, if the digital yuan becomes widely used within and perhaps even outside the country someday, although the central bank of China has not indicated the plans to allow that to happen, you could see the renminbi being used more for international payments, to settle trade and financial transactions. But ultimately, as a store of value, as a reserve currency, it’s not just economic size that matters or the depth of financial markets but also countries’ institutional framework. You know, the independent central bank, the rule of law, and institutionalized system of checks and balances. And in all these dimensions, I think China has a long way to go. So I don’t worry too much that even a digital yuan is going to undercut the dollar’s dominance as the global reserve currency.

DAVID HOLLERITH: Now, Professor Prasad, to Akiko’s point about the loss of privacy with central bank-backed digital currencies, I’ve been wondering, Fed Reserve Chair, Jerome Powell has talked about how you know, a digital dollar could potentially– it would serve the purpose that a lot of cryptocurrencies serve. And you know, I’ve heard people in the community sort of disagree with that. So I was curious, do you think the issuance of central bank-backed digital currencies or something like a digital dollar, do you think that would hurt or enhance the value of cryptocurrencies?

ESWAR PRASAD: If the central bank were to issue a digital dollar, one can certainly see much less of a strong user case for cryptocurrencies as effective mediums of exchange. Likewise, if you think about stablecoins, which many issuers are considering, including Facebook itself, which plans to issue its own stablecoin called the Diem, which would be backed up by reserves of US dollar assets. Those become much less important as mediums of exchange if the central bank is providing a very low-cost, efficient medium of exchange already. But cryptocurrencies also at least promise to provide some degree of anonymity because all you need to provide are your digital identities to conduct certain transactions. But as we know, David, Bitcoin has some degree of anonymity but not the degree of anonymity that we thought it might provide because you can unravel users’ true identities.

So I think we might see a bifurcation like cryptocurrencies somewhat ironically become financial assets, although in my view largely speculative ones, you could have a digital dollar perhaps coexisting with certain types of stablecoins. And then you have some other cryptocurrencies, such as Monero and Zcash, which start fulfilling the anonymity needs that certain transactors might have. So I think what we’re really seeing is a bifurcation of the different roles of money into mediums of exchange, stores of value, and so forth.