Bankless - 77 - China's Digital Currency Revolution | Richard Turrin

Episode Date: August 9, 2021

Richard Turrin is the best selling author of Innovation Lab Excellence, and recently published his new book Cashless: China's Digital Currency Revolution. This new release covers the story and context of China’s new Central Bank Digital Currency (CBDC) and the innovation happening in that space. In this episode, Richard walks us through the efforts China has made to innovate within its Fintech platforms, and how it poses a long-term threat to US Dollar dominance. With smart contracts on the way, what does the world look like with a maximally successful Chinese CBDC? Listen in and find out. In this episode's exclusive debrief, we dive into all the questions we didn't have time to ask and explore how big of a challenge CBDCs pose to crypto. Get it here: https://shows.banklesshq.com/p/exclusive-debrief-chinas-digital  ------ 📣 PoolTogether | DeFi's No-Loss Lottery Protocol https://bankless.cc/PoolTogether  ------ 🚀 SUBSCRIBE TO NEWSLETTER: https://newsletter.banklesshq.com/  🎙️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/  ------ BANKLESS SPONSOR TOOLS: 💰 GEMINI | FIAT & CRYPTO EXCHANGE https://bankless.cc/go-gemini  🔀 BALANCER | EXCHANGE & POOL ASSETS https://bankless.cc/balancer  👻 AAVE | LEND & BORROW ASSETS https://bankless.cc/aave  🦄 UNISWAP | DECENTRALIZED FUNDING http://bankless.cc/uniswap  ------ Topics Covered: 0:00 Intro 9:30 Richard Turrin 12:03 Where The US Went Wrong 16:34 China’s Last 10 Years 23:10 Comparing the User Experience 30:00 A Cultural Divide 38:17 A Regulatory Divide 47:00 Central Bank Digital Currencies 57:43 Digitized vs Digital Currency 1:05:19 Benefits of a CBDC 1:14:48 The Design & Smart Contracts 1:25:00 Verification and KYC 1:30:57 China’s International Ambitions 1:35:43 The Impact on Crypto 1:39:13 When the West Wakes Up 1:42:03 Closing & Disclaimers ------ Resources: Richard on Twitter https://twitter.com/richardturrin?s=20  Cashless: China's Digital Currency Revolution https://www.amazon.com/Cashless-Chinas-Digital-Currency-Revolution/dp/1949642720/ref=tmm_pap_swatch_0?_encoding=UTF8&qid=&sr=  ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://newsletter.banklesshq.com/p/bankless-disclosures 

Welcome to bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, and how to front-run the opportunity. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. Wow, epic episode on China's Central Bank digital currency, a digital currency revolution that's going on that we really haven't uncovered in crypto up to this point. Richard Turin was the perfect guest for this, incredibly comprehensive over. review, what's going on in China in this important field. David, what were you thoughts on this episode? Yeah, the biggest takeaway I had is that unless you have actually like intently gone after in research what China is doing with this central bank digital currency is, and you do not know.

And so there is a mountain, there's an absolute world going on in China that unless you have actually been researching it yourself, like you don't know what's going on because what I thought was going on and turns out what is actually going on are two totally separate things. I thought the central bank digital currency was just a basic, you know, some sort of fintech layer on top of a central bank that allows for easier paying. Yeah, right. Like blockchain, not Bitcoin nonsense. Yeah. No, no, no, no, no.

Like Richard Turin laid down the story of the Chinese central bank digital currency and it is a force to be reckoned with. And he was a fantastic guest to tell us the story. And I think the other really cool thing about central bank digital currencies is that they are inherently inspired by crypto, by Bitcoin, by the technology. that we created, but the Chinese bank digital currency has taken some of the parts that are most suited to them and applied it to their banking layer. But what is the resulting product of that is something much grander than I think what people give credit for. Yeah, it's so true, though, so like we get these news clips, you know, come out of whatever. And I don't know if it's like an east-west communication thing or like a, you know, translation thing or what it is. But it's just

suddenly, you know, China's doing this with the central bank digital currency and there's never any detail, right? I've like forever since I've been in crypto, wanted to understand the detail of this thing because it's been an active project since like 2014, 2015, we've been hearing about it. And for the first time, this is a comprehensive overview. And like here's what I feel like this story is, David. Over the last 10 years, while the U.S. banking system stayed stagnant, China really digitized its banking system. And it turns banking services into like a giant app platform with WeChat and AliPay. These are organizations you're going to find out more about through this podcast. And through this digital banking functionality, it's really leapfrog the West.

So I made the comment like, hey, here we are with ACH transfers that take three days, and wire transfers, we have to show up in person. You don't have to do that in China anymore, right? Like they digitize this. And now they are launching a central bank digital currency. It appears like they're dead serious about it. Like it's coming. 2022, it's coming. And this is actually the second version. like a V2 of their entire digital currency strategy. So all of this information is kind of like news to me, and I feel like it's misreported in the West,

and this is like what is actually going on. This is the story. It's funny that you mentioned the Times Richard said, hey, thanks to cryptocurrency for introducing it. But like he almost said this as if like, hey, central bank digital currencies, we'll take it from here, guys. Like we are the successor, right?

Thanks for all you did cryptocurrency, but like we'll take it from here. And I think he's very bullish on, central bank digital currencies, both for China and for all countries. And so it's a really interesting perspective that I don't think you've ever heard on bankless. Or ever, really. Or ever. I do think it is one version of the future that could possibly play out here. We frequently talk about the final boss of crypto, which is the central banking layer, or the, but more specifically, the Federal Reserve of the United States. And while that's true, that final boss is also like this very old, old

the old king with the old gray beard. And I would like to introduce a new, like, character into this story. And that is, like, Crypto's Shadow Twin, which is a Central Bank digital currency. And so while there's this old boss that we want to defeat, there is also our equal, who is our, like, shadow twin. And that is the CBDC. Our nemesis, maybe. Maybe. But also, that's also another topic of conversation is because while, you know, CBDCs might be Crypto's evil shadow twin,

it has actually done more for banking people, or at least the revolution of trying to step towards the CBDC, because this has been a long arc. And Richard is about to tell you that long arc towards China's CBDC. But this progress that China has made towards the CBDC has actually banked so many more people than crypto ever has. And so while we think that CBDCs in crypto are evil shadow nemesis, it's actually done a lot of good for the world. So that is something that we have to come to terms with as an industry when we talk about CBDCs. Yeah, I think that's a really interesting discussion. I want to get into maybe a few definitions really quick here first in the intro. So when Richard refers to RMB versus the WAN, there's not much difference there. Those two terms are both like ways to say basically China's currency, rather. The R&B is kind of the name of the currency. The wand is the unit of account. Those are used interchangeably.

He also used this term NFC. That is a method of wireless data transfer. So when you go to the store, David, and you've got your Apple pay. and you're paying and it's like touchless that uses NFC technology. That's a technology that's kind of picked up in the West, not so much in China where they're using QR codes for those things. So a few terms for you before we get into the episode. I think you'll find that during this episode, we didn't actually push back very much on what Richard was saying. So there were times where he'd say something about like privacy or about the centralized control. And we didn't push back much with the bankless vision. Part of that was, like, we just wanted to listen to what he had to say and find out as much as we could about central bank digital currency. The other part was we were

kind of short on time. But if you were interested in David and I's raw thoughts on that episode, right, and kind of the pushback points, the puts and takes of, hey, they're unbanking a lot of people, but at what cost, this cost of centralization, how does cryptocurrency stack up against the central bank digital currency? You will want to tune into the debrief this week. The is the raw after the episode episode where David and I give our thoughts about what we just listened to. You can get the debrief if you are a bankless premium subscriber. To do that, go to newsletter. com slash subscribe. There'll be a link in the show notes. So you can become a premium member and access that debrief. Wow. A lot to unpack here, but we are going to get right to the episode.

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That's AAVE.com. Hey, Bankless Nation, we are super excited about our next guest. On a topic we've been wanting to cover for a while, we just recently found the perfect expert. This is Richard Turin. He is here to tell us about China's central bank digital currency. This is a topic that's been swirling in crypto circles for a while. Quick intro, he's a best-selling author. He's a former fintech executive at IBM, had a 20-year career working for a global investment bank. So he's very familiar with the banking system as it exists. He spent the last decade in Shanghai where he had a

firsthand view of what's going on in China's fintech sector. We're definitely going to dwell on some of his personal experience. And he wrote this fantastic book. It is called Cashless. You're listening to Bankless, but we're talking about a book called Cashless. And Cashless really describes the digital currency revolution that is going on in China right now. Richard, we are delighted to have you all the way from Shanghai. How are you doing today, sir?

David and Ryan, I'm doing great. And I'm delighted to be here because bankless, cashless, central bank, bank, digital currencies all go together. It's a really wonderful mix-up of them all. Because really, central bank digital currencies offer us, in short, something new. And that is really the ability to go bankless and cashless. And they're both part of the same solution. And they're going to change how we live in our world. And yeah, it's going to be bumpy getting there. But so let's So, yeah, so let's let's start in. And hit me with as many questions as you want.

We're going to have a ton of questions because I've been waiting probably for the last like three years to have a conversation with somebody who's actually knowledgeable what's going on in China and their central bank digital currency. But I actually want to start with my experience in the U.S. because I know you have experience in the U.S. with its banking system today. And here's the thing, Richard. I live in the U.S. I still write checks, okay?

I still have to show up physically at a bank in order to wire funds. And when I do so, I have to wait five days for it to arrive at its destination. As a business, which we own a business, I still have to pay 3% of my business sales to credit card companies like Visa. What is going on? Like, where did the U.S. go wrong with its existing system? My impression is China is a little bit differently. But like, where did the U.S. go wrong?

How come the banking system is so stagnant? Look, that is a wonderful question. And to everybody out there, you should be mad. Look, I had it, right? Okay, so look, I live, let me tell you a story. Let me, I'm going to tell a story and then come back, right? So I'm living in China. And I need some money sent around.

I have a joint account in the U.S. I call my brother and I said, look, you've got to send some money over here. He says, all the banks are closed. I can't. I said, what do you mean you can't send anyone? I call the bank. No, if you're going to do a wire transfer, you must come to the bank. Thank God I had a bank account in Singapore.

because my Singapore bank account allowed swift transfers that I could implement over online. So why should I be able to use a normal bank, nothing special in Singapore, to send a swift transfer to myself in China? And why can't I do this? So next part of this, ready, I have to pay some other stuff. And I go to use Zell. All right? So I use WeChat and Ali pay every day.

They're my, you know, like everybody else in China, these are the way we pay, right? It's easy. I go to use Zell for the first time. It security locks me out like four months in a row for me paying a rent check to a, you know, to a landlord. It was just nuts. And it was really a compare and contrast how easy it is with China and how hard it is in the U.S. to do some of this online banking. and you hit it. How long do we have to pay credit card companies three and four percent? And look, I use Square for some book sales and some other stuff, and I certainly pay with PayPal, and I'm paying four and five percent. Because what we call fintech in the West was basically built on top of these credit card rails that protect income. with large fees. And that's why I often say, and I know it's controversial, I often say that FinTech in the West, or U.S. and EU, is a lie. Yeah, they made the interface better, but underneath

it all, they are stuck on this rails, on the credit card rails, which basically are taking your money. And for what purpose at this point? You know, it's how long will you pay three or 4% interchange and merchant fees to a credit card company, how long are we signed up for this forever? And I don't think so. And that's the hope that Central Bank digital currency and digital currencies that are perhaps stable coins offer to people, the hope that we can escape from what is a system that's rigged against you. It's bad. And I think so. I really believe that was all my passionately. Look, so do we. That's why we started bankless, is because the banking system sucks and we want less banks and we're talking about the West year. And I noticed you mentioned

Zell, which is an app from Wells Fargo. So you're speaking our language. We like to knock Wells Fargo all of the time. And you contrasted that with WeChat, which can do like instant payments and all sorts of other magic for very low transaction fees. Free. So yeah, for free. Let's make it clear. It's free. Okay. There's 0.1% not on payment, but when you move money from a WeChat account back into the bank, you have to pay a small 0.1.1%. So, but that, but all the, all the transfers you want in and to pay out of your bank is 100% free, no problem. So this is cool. So let's talk about, because I've been reading your book, Richard, because this is like a very scarce content, I think, because I've never seen an exhaustive, in-depth look at what China is doing with their digital

payment system and their central bank digital infrastructure. So I've just been like, this book up. And once again, bankless listeners, it's called Cashless. We'll include a link in the show notes so you guys can pick this up too. But I want to set the scene because you really describe in the first part of your book. Yeah, there it is. There it is. Check the QR code. We're going to be talking about QR code soon. Yes. There is a QR code on the cover of the book and it's live. It goes to what I hope is an amusing site for you. And I just learned the importance of QR codes to you from this book partially. But I want you to set the scene because you paint the scene in the first part of the book about, you know, I think your major point was this. This was

a revelation to me that China isn't kicking off its first version of a central bank digital currency right now. It's been doing a first version of not quite a central bank digital currency, but let's call it a digital currency system. And now it's about to kick off its second version. So in the West we hear headlines like China is getting ready to pilot its central bank digital currency. And what I learned from your book and your main point is like, no, guys, actually, China's had a digital currency strategy for the last 10 years. And what's actually moving from is from phase one to phase two. I wonder if you could tell us for people who aren't familiar with what's going on in sort of this phase one, what's been going on in China over the last 10 years?

What do you mean by this version one of China's digital currency system? Absolutely. That's a wonderful question. and I would give you an A-plus grade for getting the primary theme of the book down. And so, okay, look, let's dive in. China is already a big user of digital currency through WeChat and OliPay. However, it is not a central bank digital currency. It is a corporate-tized system that uses the R&B. And they're called WeChat and OliPay are called Walg Gardens, their platforms. And you take your money out of your bank and you put it on the WeChat platform or you put it on the OliPay platform.

Either one, they sort of are separate from one another. Money doesn't go across, but it goes via your bank, okay? It's fiat currency, but it's digitized and it's, made into an easy payment mobile, easy mobile payment system. All right. Does that make some sense? So this is what I call the first generation. How successful was it? It's been online since 2014. And basically it's the total amount of mobile payment in China is around $52 trillion in 2020. And what does $52 trillion mean? That's a big number, okay?

So let's give it two comparisons. So $52 trillion is 3.7 times the GDP of China. So China's GDP is $14 trillion. And how do you get a payment number bigger than GDP? Well, it's because payment flows in cyclic fashion. So I'm buying you a coffee. I pay the person who makes the coffee. But you want to pay me back. So the cost of the coffee goes from me to the coffee vendor.

Then you pay me back. And then the money goes from the coffee shop into its bank. So that money has flowed in that example three times. You to me, me to the coffee guy, coffee guy to the bank. And so money goes around the system. So great example of how huge digital payment is in China. So, okay, $52 trillion. about this. It's around a little less than twice all of the credit card use in the planet. Add up all credit card payments in the planet. It's China's digital mobile payment is twice that. That's incredible. Yeah, mind-blowing, right? So they're fun statistics. But what it really means, now here's the real killer. If you look at the percent of GDP that has a digital connection, right digital GDP

China's digital GDP is 30% sorry I got it wrong 37.8% almost 40 the US and the UK are coming in at 8% and 7.7% respectively no sorry I got to

9% and 7.7. I'm really losing it today so 9% for the US and 7.7 for the UK which are comparable just good numbers to compare. So what digital payment version 1.0 did is sweep the nation with free payments for all. And what it allowed the economy to do is to digitize to a deeper level and to have people using payment in a using digital payment in a way that allows them to digitize and put their

business, put their service, put what they do online. And because it, and why? Because it's free for everybody. So that's version 1.0, which has led to the broad digitization of the Chinese economy. Not all. Remember, it's only at a mere 37.8%. It's got a long way to go. But now we're looking at the next tool. And that next tool is version 2.0 digital payment, which is where the government says, okay, we're going to make cash money digital. And you don't need to use Visa, MasterCard, Ali Pay, a third party company to carry the payments. We're going to use the central bank and they're going to issue the money. Before we get to that second stage, Richard, I'm wondering if you could do some more to sort of paint the payments. picture for our Western audience listening to this because, like you mentioned, the numbers,

$52 trillion in annual mobile payments. Just to give folks perspective, this, again, is from Richard's book, Apple and Google Pay, this was, I think, 2019 or 2020, they recently broke $540 million. Okay. So $52 trillion, and then the U.S.'s largest tech companies, Apple and Google pay, $540 million. So $52 trillion to million. That's like, $1,000. That's like, $1,000,000. like, this is incredible. But like, I don't think people in like the West, living in the U.S., and other places, actually have the scope for what AliPay and WeChat actually are. Because it's sort of like this social media platform, as I understand it. So think of like Google plus Facebook and also your entire banking system all rolled into one mobile app experience. So they've

almost created like banking as a service, a banking platform. platform inside of their ecosystem. I'm wondering if you could illustrate for us, Richard, like a day in the life, okay? Yeah, sure. Like, how is it different than like you got the typical American who, you know, we've got credit cards in our wallet and we have a mobile phone and we're using like, you know, social media platforms, this sort of thing? How is that different from the experience of using an alley pay and a we chat in your regular

day in China, somebody living there? Look, absolutely wonderful question. So let's get into it. So this is a very common question. I hear it all the time. I have digital payment in the West. I have Google or Apple pay on my phone. I have tap or swipe with my card.

And how is it any different? You see, most people in the West view payment as simply the act of paying. So Google, Apple Pay, boom, done, you paid. and same thing with tap on your card. You just pulled it up to the device, bang, your guns. You see, that is true. That is digital payment, and it is fast and convenient. It's good.

I'm not knocking it. But it's only a very small sliver or part of what Ali Pay and WeChat pay deliver. And what they deliver is this concept of a 360-degree lifestyle platform. Okay. And in the case of WeChat, that platform is built around social media services where you talk to talk to people on your WeChat. You give them messages. It's kind of like WhatsApp on steroids, plus a little bit of Facebook rolled in for people who don't know it. And in the other one, which is Alipay, it's built around what is essentially their killer feature is selling stuff like Amazon. So it's got that. But it's also. got a complete, and this is what you talked about before, it's got complete banking services, investment services, life insurance, you name it, you can do it. So what's the difference? All right. So my day starts out on WeChat where I text people. And I am going to, from today, actually, as a matter of fact, I'm going to send my landlord rent money here. So boom, I go to WeChat.

I link, it's already linked to my bank account. I pull the money out of the bank account. I send it to my landlord, done, all right? But what also happens on these platforms is that I can do banking services. Now, I can do banking services through the specific banks that are associated with Ali Pay or with WeChat Pay. One at WeChat Pay, unsurprisingly, has We Bank, which is a digital online bank and Ali Pay has my bank. My aunt is Mai Yi, MI, which is why it's called my bank. Right. And those were in 2014, the People's Bank of China licensed the first private digital banks. And that was sort of the breakthrough moment. And my bank and we bank were among them. And basically what they allowed was for banking to be combined with payment.

And then after that came money management, buying stocks, bonds and stuff. And now, by the way, it's really funny because other banks have apps that you actually access through WeChat and AliPay. So I-CBC and other banks have full, almost full banking apps. that are on the WeChat and Ollie Pay platform because they have to be where the clients are. But I diverge. What does it mean to be on the platform? What does it mean?

So when you use Apple Pay, yes, you can. Now you pay for stuff. But it's not a entryway into an ecosystem of services. When I use AliPay, okay, I'm like, all right, I'm on my Ollie Pay. Now I pick what I want to do. I want to buy stuff. Okay. I want to pay for my subway trip. Okay, it's got an app for that. It's got a capability for doing that. I want to buy insurance. I want to go to the bank. I can cover almost 360 degrees of my life on that app. And that's not the same as with Google Pay or Apple Pay or a credit card.

So, yeah, it's this concept that you can do anything on the app. And that's fundamentally different from anything we got in the West. And it's a big deal. And we're getting there. We call these super apps. And now the big battle now is to build platforms and to build super apps in the West. We're going to be a while before we get there because of regulations. But it's a good service and it's generally very,

productive for people. It makes your life better. And no, just because you got a credit card or Apple pay or Google pay, it doesn't mean you got a super app in your pocket. And the West is surprisingly far behind in all this. Yeah, Richard, as you said, you can actually pay people money inside of things like Facebook Messenger, inside of iMessage on your Apple device, and so many other different ways for that tech companies in the West are trying to allow payment exchange inside of their app. And I would imagine that maybe one of the reasons as to why there isn't these super app services where there's further and further banking services inside of these applications is because people in the West never adopted these things.

Like I've never sent money inside of Facebook Messenger. I've never sent money inside of like my I message on my iPhone, even though it's possible, even though it's super convenient. And so to some degree, I would imagine that the reason why these banking services aren't being built out is because people aren't using the baseline payment services at all. And so my question to you is maybe this is a cultural divide. Maybe there's something about the people of China and the people of the East that they are just more suited to these kind of services than people in the West. Because I would imagine if there was actual adoption of these digital payment rails that we have available to us,

there would be a stronger inclination to build out some of these banking services inside of these apps. Yeah, look, absolutely. There is the sensation in the West that people do not trust big tech. and if you've got to trust somebody online and you've got a choice between your bank and you're going to pick your bank. So yes, there's no doubt about it. Just one funny thing is that the Facebook pay has the ability to use QR codes just like WeChat and All they pay in the West, which I think is amusing.

But I diverge. They copy that. Do they copy that? Absolutely. It's a great example of tech in the West copying China. And the defining moment for WeChat and AliPay was when they wanted to make payment available universally to everyone in the country. And the easiest way to do that was to use QR code because the cheapest smartphone with a camera could use a QR code. Compare that the same year, 2014, when this all launched in China,

Compare that to Apple Pay, that also launched in 2014, that forced you to buy a new iPhone 6. You couldn't use Apple Pay with an older version iPhone because it didn't have NFC in your field communication built in. So one is payment for the people, use QR code because we can get it to everybody. And the other is payment for a limited slice of people who can afford to buy a new iPhone 6. So that was sort of, that was sort of the big gap. But, but yeah, let me go back to, let me answer the question. Yes, no question about it. There is a split between how China approaches, how China approached payment and how the U.S. approached it. And that big moment came in 2014 when

the People's Bank of China, the Central Bank and the banking regulator, the CBRC, licensed the first private banks in China. And the banks that they licensed were ready. They were a bank for AliPay, a bank for WeChat or Tencent. The parent company of WeChat is a Tencent, a bank for Buy-Doo and a bank for Sunning. Now, me explain who these are. Ready? So Alibaba is the equivalent of Amazon. So give Amazon a banking license. Tencent or WeChat is somewhat like Twitter or Facebook. Give them a banking license. Buy-do is the equivalent of Google in China. Give them a banking license. And Suning, the last one in the list, is China's largest electronics retailer. I don't know what the equivalent would be.

give them a banking license. So look, China had a problem with underbanked and unbanked population, had a massive unbanked population, and it realized the only way it could reach them was through digital. And by giving banking licenses to these digital players, they cracked open the ability of big tech to reach people and increased the. quality of life and the GDP coming out of tiny little villages where there's never going to be a brick and mortar bank ever because they're just too small. Compare that with the West. Now, we started our conversation talking about paying three and four percent of credit cards. So FinTech in the West is not allowed to have a banking license. Must use the services of credit card companies, must use the credit, use the service. If you look at our neobanks, they're all built

on top of a bank which white labels its services out to the neobanks. There are a few cases now where neobanks have banking licenses, the first two or three. But so what we're looking at is the opening of the banking system to big tech in China. And what we're looking at in the west is the closing of the banking system to big tech and the maintenance may the main maintaining a division between big tech and um the banks uh basically throwing back the progress of digital banking in the u.s in order to keep the um monopolies of incumbent banks intact and that's that's a bad way to say it but it's but it happens to be true. Richard, is this what you were saying about how credit card

companies are just helping banks maintain their grip upon their status quo. Is that what you were saying earlier? Is this more or less what you were referring to? Absolutely. So look, there is a regulatory paradigm that is unchallenged in the West and in the United States. And that paradigm is that banks are on one side of the spectrum. Tech companies are on the other side of the spectrum.

And there is no way for them to come meet comfortably. And the OCC tried to have a FinTech banking charter, which was held up in the courts, unsurprisingly, held up in New York State, which is one of the biggest states for banking. So the big banks are all there, and they challenge it very heavily in the New York State courts. It's sort of in limbo right now. But the concept that there is this division between banking and big tech that will never come together in the U.S., and there's arguments. And there's arguably good reasons for it. There are some good reasons there. I'm not saying it's all bad.

But my point is there is this division that is not coming together in the U.S. And in China, the ability of big tech players to have banking licenses basically changed who they were and what their role in society was. So that's why when you look to these services, when you look to these services, when you look these surveys, do you trust big tech with banking? Do you trust big tech with your money? In the West, the responses are always low, meaning we don't trust big tech with our money. And in China, in particular, they're always high because people have been trusting big tech with their money for more than a decade here. It's almost a decade. It's no big deal. It's considered perfectly natural. Yeah, I think this is a huge insight from your book, honestly, Richard, that you mentioned.

Like David mentioned maybe some cultural reasons for adoption in China versus the U.S. But I would rate this kind of regulatory one higher. Basically, like, the banking lobby, other forces maybe have sort of kept big tech from eating the banking layer in the U.S. Right. So you know this Andresen Horowitz quote is like, software is eating the world? Well, software is eating the world. We talk about this often.

And what Chinese regulators essentially allowed to happen is for software to eat banks. They just said, hey, we'll give big tech banking charters. Here you go. Here you go. Here you go. And in the U.S., we have divided these things. We have not allowed Mark Zuckerberg to eat the banks. It's like, if you remember his congressional hearings when he was talking about Libra in front of Congress,

it was so telling how little trust there was from Congress being projected to Zuckerberg, a lot of distrust. And so this is part of the reason the U.S. is not allowed big tech to eat it. It's banks. And as you said, Richard, for the good or the bad, because one interesting byproduct in China is, oh, my God, AliPay, WeChat, these companies are absolutely massive. And they have, like, not only your full social graph data, but they also have your full financial history data. And this is not something that the West has been comfortable with to date. But this is a key reason, I think, that the West has kind of fallen behind is they have not. This is why I'm still writing checks, right?

Like the beginning of the conversations, because the U.S. regulators have not allowed technology into the banking system. They're just leaving it analog, and they're keeping the status quo. Oh, look, absolutely. Let me throw gasoline on the fire. The U.S. banking system is complacent and has been allowed to become complacent because of regulatory protection, which has essentially shielded it from the digital revolution that's happening everywhere else. And I would like you to imagine the following.

In 2014, when the PBOC granted banking licenses to the four big digital players in China, they did so knowing that it would impact and take away revenue from state-owned banks. I challenge you to imagine the day when the Federal Reserve and the banking regulators in the West would say, well, we're going to allow some form of digital, Neo, or other bank. And that decision would be at the expense of incumbent banks in the United States. Can you imagine that? I can't. I mean, really.

So, yeah, it's. you know, it's, it is a big deal. And the banking business has been fundamentally protected from going digital. And it was allowed to base it. Look, it was pushed by FinTechs and other to become digital, but on its own power or under if it had its own wishes, it would go back to banking in 1985 and have you write more checks. I mean, anything that slows the speed of, money, allows it to remain in the hands of the banks for longer, anything that, you know, gives them greater control over your funds. So look, one last, one last thing about this. Control over your funds. Look, I get it. And you're right. Alipay and WeChat have a tremendous

amount of data on you. That's a negative for anybody who basically says, oh, well, you know, I don't want to give data. I prefer cash. I want nobody to know where my money is going. I agree, WeChat and AliPay are not for you because, yeah, they have a data stream. On the other hand, what I get out of this is hypermobility of my money, meaning that I can put my money wherever I want, whenever I want 24-7. I don't wait for anybody. It goes into an investment. It goes to the landlord.

it goes where my money is at my beck and call to go wherever I want it to go. And that is mind-blowing. You don't have that. You don't live in that world right now because you're still writing checks. And that is a better world. And if it means giving up now, this is my personal decision, not really a decision because I don't have any choice. I live in China. it is a reasonable trade to give my data to Ali Pay and re-chat for that immediacy and that convenience

of instant payment. But now in a central bank digital currency world, I won't have to make that trade-off. So I'm leading to the next to the segue. Richard, we have a section later in the podcast to talk about this, but I kind of want to just introduce it here. The decision for the Chinese government to give these banking. licenses out to the tech guard Genschenchmen at their own loss to their own negative benefit. Would you say that that was a decision in order for them to bring the power of big tech

under the control of the state? As in if they have the banking licenses, if all the big tech apps have banking licenses, that they are now closer to the central authority of the Chinese government and the Chinese government can tap into the power that they have, would you say that that was a strategic decision by the central power of China? No, not of the least. So look, the decision in 2014 to open up banking licenses was really done as a means of reducing the unbanked population. Look, there's 1.4 billion people in China.

Many of them live in rural environments, and these rural environments simply don't have access to banking services. So by opening up the banking system to big tech, they could use digital to bring these people into the banking system. Now, what you see happening now, however, is so, okay, that's 2014. We're now in 2021 and we're living in this world where basically everybody's watching China's regulators come after big tech. What happened was that while they were smaller players in 2014, they are now too big to fail banks, right? Well, that's the 2008 terminology. These banks are too big to fail. Well, that's what WeChat pay and Ali pay are now to China. They're too big to fail. They're so big and they're so massive that China has been reexamining what was basically a seven-year run.

run of low regulation, basically saying, look, you guys have so much money now. You are bigger than some of our banks, largest banks, and you need to have regulation, which isn't all a bad thing, but it's certainly done in typical Chinese fashion. It's done quickly, decisively, and it shocks the living daylights out of everybody. But it's not the end of the world, and it's not necessarily a bad thing for digital fintech in China. Okay, Richard. So, guys, this has been sort of the first phase called digital currency 1.0 in China that we've talked about.

And let me maybe to just summarize very quickly. But digital currency 1.0 in China gave mobile access to banking, basically every citizen or a much more expansive group of citizens in China. How did it do it via the tech giants? They allowed big tech to eat the banking system. Now, the banks still exist. They just exist in a more diminished fashion than they might otherwise. And what this led to so far is better, cheaper, upgraded digital banking, kind of a leapfrogging

of the banking services that we have in the West, at least in some key areas. But so far, we've been talking about kind of this fintech layer. Hey, guys, I hope you're enjoying the conversation with Richard Turned thus far. In the second half of the show, we get into the actual CBDC version of this story. about the actual way that the Chinese bank digital currency is actually constructed. Fun fact, they have smart contracts coming down the line in 2024-ish. And I thought that part was an interesting thing to dive into. We go into the ways that this can benefit the people of China as well as still enable the business layer, the commercial banking layer of China as well. And then we turn to

China's geopolitical ambitions and how these Chinese CBDC may help actually. trying to establish dominance in the East as a currency. Richard was a fantastic guest on this podcast. I hope you're enjoying the second half of the show as much as you've enjoyed the first. But before we get to the second half, we must talk about these fantastic sponsors that make the show possible. Balancer is a powerful platform for flexible automated market makers. Typical AMMs just have two tokens inside of one liquidity pool, which can lead to fractured liquidity across the many pairs in Defi. With Balancer, you can access the full power of multiple tokens.

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And that's sort of, we've been talking about this fintech layer on top, like the banking services layer. Now we're getting to like the M0, like the base money layer. And that seems to be the next area that China is kind of innovating. So lead us into that. Now, Richard, I want to set some context because I think a lot of our listeners in the crypto industry have heard that China's been pursuing a central bank digital currency for years. I remember this in like hearing reports in like 2016, 2017, right? We've seen some pilots. It seems serious. We've also heard our Western governments too talking about like, oh, we're doing a pilot. It's a central bank digital currency. Like we're doing this. And like every so often the Fed comes out, it seems like every three months, every six months. Somebody in the Fed says, hey, maybe we should do this central bank digital currency thing. Like maybe. So I think there's, when we hear central bank digital currency, right, like we're not sure how serious governments are

about it. Let me ask you, how serious is China about a central bank digital currency? Oh, they're deadly serious. Okay, so where are we going? In 2014, when the central bank allowed we chat and Ali Pay to get licensed for digital currency, it also started a project of its own. And this is a direct result of crypto. So here's really an interesting thing. China is not just digitally sophisticated with regard to fintech. China loves digital. With 1.4 billion people, China going back to 2000 in the 2000. 2005, into the post-200 world, China realized that digital was how it could bring services to 1.4 billion people. They were onto it. So when they saw what cryptocurrency was doing, the U.S. basically ignored it.

It said, okay, it's 2014. Nobody really cared about crypto. Okay. It did not yet run up to 20K, right? Bitcoin. So the U.S. basically ignored cryptocurrency and said, there's nothing here, we don't give a debt. China, on the other hand, said, hey, there's technology here. There's something going on that we want to learn from. This is interesting. So in 2014, before we chat and AliPay became huge sensations, the PBOC started its digital currency project. So why do I give that historical fact? Many people say, okay, the central bank digital currency is designed to eliminate WeChat and AliPay.

Not true. The central bank digital currency project started in conjunction, the same year that they did. So PBOC has been investigating digital currencies since 2014 with the goal of understanding how to make digital payment part of a central bank function. Central bank's function now is to issue cash money, pieces of paper. How do they take then what they call the next evolutionary step to transform this paper into a digitally, a digital piece of paper that is offered by the central bank? So central bank, digital currency backed, issued by People's Bank of China, cryptocurrency, digital currency,

related in technology, but supported by faith. And that's okay. I'm not going down that road, but it's supported by faith. The other is supported by the Central Bank. And the People's Bank of China has been working on this until 2021 when they started the first, or 2020, when in September, they started the first trials in the city of Shenzhen, where they released some central bank digital currency into the market to test it, to see how it works. And they've been trialing it in cities ever since. And they have half a dozen cities that are trialing it. And in each city, they try something new. So if you're going to digitize money, you have to make it so that it's integrated into society. It means that the electric company has to take it, the subway has to take it,

a online retailer has to take it. Old people have to be able to use it who don't have cell phones. There's all these, it's not like Bitcoin where you send it out there and you say, okay, if you're digitally sophisticated, you can use this, go have fun. Right? We can toss out a new currency overnight, cryptocurrency we can do overnight. But if you're going to do a central bank digital currency, they've been working on it for seven years and they have all kinds of new gadgets, little cards for using it that are thumbprint controlled and allow you to use NFC to transfer currency without having a cell phone.

You have the ability to transfer central bank digital currency from phone to phone without having a signal. So there are all these things and inventions that you need to support a central bank digital currency because everybody's got to use it. So China is deadly serious about launching its central bank digital currency. It will be launched probably 2002. I would say second quarter, not with the Olympics. They're going to trial it with the 2022 Olympics in Beijing. Foreigners will have access to it, but the actual launch will probably come sometime thereafter.

But remember, it's all about building it into society so everyone can use it. And China is deadly serious about making sure that when it does launch, everybody can use it and it'll be the equivalent of cash access to everyone. That's super interesting. I just want to underline that point you made that like in 2014, while the U.S. was ignoring cryptocurrency, China was like, hey, this blockchain thing could be a big deal and digital currency could be a big deal.

And they were building, which is super interesting. And that's a very direct contrast. But I want to just ask the definitional question for people who still aren't quite getting the difference between the digital cash you might have or the digital R&B that you might have in something like WeChat versus what we're talking about here, which is a central bank digital currency. Now, here's how I would sort of describe it, right? So the central bank digital currency that we're talking about in this second phase is a direct liability of, China's central bank. So it's a bare asset. It's the M-Zero base money. It's similar to cash, let's say, in the U.S., that the U.S. might print, essentially. Whereas digital currency on something like WeChat or AliPay is still kind of, it's not M-Zero. It's still kind of an IOU in the banking

system. It's like maybe an M-1 or an M-2 or something to that effect. Is that what the difference here is? And if that is the difference, you know, Jerome Powell says he's still not convinced we really need this thing because we've kind of already digitized. So what are the benefits of a central bank digital currency? Help us with that, Richard. Sure. Let's dive into this. I want to make a blanket statement first. And so we just beat it around. We just touched on the edges of this. Central bank digital currencies owe their existence to cryptocurrency. So I know that there are a lot of people that hate cryptocurrency. Well, you know something? You can hate them all day long, but you owe them this. You owe the entire concept of central bank digital currencies to the innovators, dreamers, people that were roundly mocked for loving Bitcoin, for loving Ethereum,

the technology that was developed and proven to, work for crypto is what is underlying every central bank digital currency out there right now. So hats off to the guys for crypto. And that doesn't mean that I love them all for their various different reasons, but I love that they took the technology and ran with it and proved to the planet that it would work so that it could underline a central bank digital currency. And we offer hats off to them all. So now, what's the difference between WeChat on my phone and for anybody who's watching the video version, you can see, you can see me opening the WeChat app. So, you know, I've got WeChat open on my phone right now and I've got the money green QR code

showing. What is this? This is WeChat money. It is an account-based monetary system. So basically, WeChat in its simplest form, I'm not going to get real deep, WeChat in its simplest form takes money out of a bank account. So when I look at money on my phone, the money is not on the phone, right? The money is in an account somewhere. And when I transfer money with WeChat, I'm transferring Fiat currency from one account to another. Okay. So everything that happened, so ready, the money is not on my phone. I have a digital wallet. The digital wallet shows me an account balance. It is not a digital wallet in the sense of a

Bitcoin or cryptocurrency digital wallet. Okay. So money is in accounts. Money transferred from account to account using third-party system of WeChat or Alipay as the means of transferring that money. Next step, central bank digital currency. So central bank digital currency, like Bitcoin, like any of the cryptos, it is a digital representation of money. So when I have a digital wallet on my phone with central bank digital currency in it, it is fair to say the money is on the phone, meaning that the long digital string that is a representation of paper money resides on that digital wallet and resides on my phone. It is in the stored in the memory. So we chat an AliPay account based money. money transferring from one account to another using my phone. Central Bank digital currency is in China, is a tokenized form of money where I have a digital

wallet like Bitcoin, like cryptocurrency, where the tokenized version of money is actually resident on that digital device, digital device and held within the memory. And here's the most important thing. I can transfer money from party to party without the use of third party services. So, ready, wait for it. Here's the disruptive card that the Fed really goes nuts over. For me to transfer money from me to you, I don't need Visa. I don't need MasterCard. I don't need a bank. I do not need a third part. I do not need a third party entity to transfer the money on my behalf. I just send the money from me to you digitally. And anybody who works in crypto is like, yeah, man, that's why we love this. That's why we've been using it for years. What? You guys are just figuring this out? And it's like, yeah, well, it's not a matter of that the people are just figuring it out. It's just that basically, it's something that is highly disruptive to the financial system in the West and in China too. And it's a

facility that the Fed is uncomfortable handing out because it means a fundamental change in the banking system and a releasing of power from the banks, from Visa and MasterCard, from these third-party entities, and it empowers people. And that scares the living daylights out of the Fed and out of the banking system because it's a fundamental change in perspective. That change is coming quickly in China within, as I said, 2022, it's going to come here. And it's coming after years of research. The research is just starting in the Fed now, how they're going to do it in the U.S. and in the EU is unknown. I give the EU a lot of credit because they're far further down the road than the Fed is, and they've made a commitment to central bank digital currencies while the Fed has not.

Yeah, it's interesting because the Fed has been so reticent to, like, allow the disruption of its banking sector, right? It seems very reticent to touch anything. So to fundamentally change things in the way a central bank digital currency does, it's kind of like seems like a bridge too far, unless there are benefits on the other side of this, Richard. And before we get into the design of that China is selected for its central bank digital currency, which we want to do, I want to just touch on the benefits. Right? So like, why is a central bank digital currency beneficial to a nation state, maybe to the citizens of that nation? I'll throw a few out here that you mentioned in your book. And I want maybe like just grab one or two of these as the most importantly you want to highlight. You talked about improved tax collection, AML enforcement. Folks in the crypto will not be excited

about that, but that is one potential benefit. Financial inclusion, we've talked about that. auto being able to like helicopter stimulus checks, which is somewhat interesting, right? Getting that digitally is maybe a benefit. Monetary policy. So the ability to kind of calibrate, maybe have negative interest rates on your unit of account is, I guess, somewhat interesting if you're a central bank. Of course, folks in crypto do not love that either. You also mentioned as a cryptocurrency deterrent, which was really fascinating. I'm wondering if you could just highlight one or two of the biggest benefits you see of why China is doing this right now? Sure, 100 years from now, the greatest legacy of central bank digital currencies will be

their benefits to financial inclusion. So go sometime in the future, look back. So the Fed, you say, well, the Fed doesn't know whether it wants to issue a central bank digital currency. Here's the, according to the Fed's own statistics, right? I'm going to read this because it's just easier. According to the Fed's own statistics, 22% of American adults, that's 63 million people, are either unbanked or underbanked. 16% of these are classified as underbanked, meaning that they rely on payday loans, check cashing, or money orders, which is a tax on our most vulnerable populations, that CBDCs, Central Bank Digital Currencies, will likely eliminate. Now, the Fed still can't think of a good reason why it needs to issue a CBDC.

After we just had a pandemic where it's issuing paper checks and plastic cards and direct deposit to their credit to the entire American population and the stories of people. going to check cashing and or other places with their checks are real. But still the Fed says, we don't know why we would do it. There's no benefit. We can't see the benefit. Ask these 63 million people if there would be a benefit to them if they had a digital currency that gave them immediate access to banking services of some basic form and to digital transfer of money. I think it would help them. Now, does that mean it's going to miraculously solve all problems? No, I get it. There are people who have difficulties that are beyond, you know,

central bank digital currency to solve. I get that. But for this population, for the unbanked, it will do miracles. You say, well, where's the evidence of this? Go to, small villages in China. Go to the villages where before 2014, people had to basically take their money and put it in the mattress and go to them today where they have access to WeChat and AliPay, which allows them to digitally store and spend money and basically invest money. If they have a little savings, they can get higher interest rates on it. I don't mean buying stocks. But they can also startup businesses and conduct business online. So you say small villages in China. One of the things that accompanied digitization of the financial system in China was digitization

of ready, and this is the funny part, digitization of logistics, getting stuff from point A to point B. So once people had money to spend in small villages or once small villages had the ability to sell stuff, it increased their standard of living. And that was fundamentally a good thing. So if you say, well, I don't believe this. There's no evidence that digital banking, digital services help the poor. Go to China. go look at the ample reports of what digital services have done to improve the lifestyles of those who live in the smallest villages here in China. It's not eliminated poverty, but in total, but actually China launched a big campaign announcing that it had launched, it had eliminated the lowest form of poverty in China.

This happened this spring. And much of that is attributable to, not all, a lot of it is attributable to roads and other stuff, infrastructure, but part of it is attributable to the ability of people to have online services. So, number one, for central bank digital currency is financial inclusion. No question about it. Everything else comes secondary to that. But let's touch on the other things. Look, KYC, AML.

Well, Richard, actually, before you move on, I'd like to add in a comment here because coming from the crypto perspective, this is actually like an incredibly like sobering line of conversation that China saw the merits of crypto in 2014 and actually executed on this whole blockchain, not Bitcoin meme that started around that time in 2014. And one of the fundamental like ethos or goals of the cryptocurrency industry is to bank the unbanked and have financial inclusion. And that's one of the merits of crypto that we try to espouse to the West, to the regulators, as to why they should use, you know, crypto rails.

But the fact that China was able to see the power of blockchain technology and central bank digital currencies that would be built on the blockchain rails and then also execute on our visions way faster than we ever could is incredibly powerful. and something that I think the listeners should appreciate that China came after our industry and is doing incredible amounts of financial inclusion as a result of this technology before the crypto industry ever could. That's powerful to me. Look, absolutely. Let's just make sure we get the timeline right. No question. It was WeChat and Ali Pay in 2014 who spearheaded the effort, private companies are not government

related. They started it. The government, when they really took off, the government was already building a central bank digital currency, exploring with the technology. And now having had this tremendous success, the government is doubling down and saying, look, if it worked that well, let's take it to the next level. And yeah, China, look, the premise of my book is that the West can fundamentally learn from China. And I wrote it because I was scared. When I went back to the U.S. and EU, both places Italy, where I both have homes, I was shocked at how the discussion is not in the right place. Nobody's even talking about this stuff. Meanwhile, China is taking it to this second tier, the second of generation. And yeah, I know that people have various ways of thinking

about China, which are not always so kind. And I understand that China's in the news for being politically incorrect at certain areas, or at least accused of it, how, whatever. You cannot ignore some of the good things that are coming out of China. And the FinTech, Central Bank digital currency, and the use of digital payment is something that China can rightly be proud of, and that's something that we should be watching and learning from. No question about it. And yes, it kicked off with AliPay and WeChat. And to a certain degree, the technology underneath it all, not underneath WeChat and AliPay, which is not blockchain,

but the underlying technology for the central bank digital currency is blockchain related. Technically, it's not, you know, it's not a blockchain, but we can leave that for another day. Yeah, it's super interesting. Richard, we've got so much to cover. I know we could go back and talk about the other benefits, but I'd encourage listeners to like check out your book, which goes into detail on the other

central bank digital currency benefits, at least to the central bank side. I want to just touch on the design of this thing because we've pushed around the edges of it. And I think people are starting to flesh out what this is. It's token based, not account based. You also mentioned it's not actually disrupting the bank. So it's a two-tier system. So the banks in China will be involved in this. I'm wondering if you could give us a few highlights in the design. I'm going to throw a few more things out there and you just pick one or two. to jump on that you think are most interesting. It is not blockchain tech, but it's blockchain inspired, the China Central Bank digital currency, uses a UTXO model, which is somewhat interesting.

But of course, unlike Bitcoin or Ethereum, they don't have to worry about 51% attacks. Why? Because it's centralized, of course. Don't worry about that. You also mentioned earlier, it's going to have the ability to do asynchronous transactions, which means if you're offline, no big deal, right? You could still make a transaction. There's also the notion of wallets where you keep your private key. And this was super interesting to me. You had a section in your book that the Chinese government was considering incorporating smart contracts into its central bank digital currency. It's a little bit worried about it because, of course, there's lots of issues of smart contracts. But again, learning from the success of

Ethereum, thinking about incorporating smart contracts into design, if not in phase one in future phases, give us some of the highlights of the design of this thing. Let's take it from scratch. Okay, it is a two-tier central bank digital currency, which as you say preserves the role of banks. Right now, cash, central bank prints cash. They give it to commercial banks, commercial banks distributed through cash machines, right? Okay, same thing. Digital currency, minted by the central bank, given to commercial banks,

commercial banks retain their accounts. You have an account with the commercial bank and you get digital currency. Now, that's the two-tier system which preserves the role of banks in society. It is tokenized, meaning it is a non-account-based system, although it can rightly be called hybrid in the sense that, yes, you do not really, when you spend money, right, you actually don't spend money from your account. You spend tokens which are on your wallet. The tokens go for verification as to their validity, not as to whether you have money in your account.

So that's critical. All right. Now, that's the UTXO model, correct? That's the UTXO model. And that's critical. Why? It allows for asynchronous transfer of money. which means that you can be on the net or not on the net.

So I can take two cell phones, put them next to one another with no signal, and they can use NFC and the security protocols based on the phone to transfer low-value CBDC from one phone to the other. Very important if you're living in mountainous and far-off regions of China, where there is no signal in some places. But that's so, and so the concept of UTXO is very important because it allows for this phone to then go online. And once it goes online, it says, oh, I did a bunch of transactions and it sends the transactions for verification. Okay.

Also important because it allows for vast parallel processing, which is with 1.4 billion users critical. So you say, why no blockchain? Very simple. Allie pay network during the peak, what's called Singles Day, 1111, 11, 11, 1,1, right? That's singles day. The Ali Pay network processed 500,000 transactions per second. Compare. So 500,000 transactions per second. How big is that? Well, the Visa MasterCard network is rated, depending on who you talk to, between 50 and 70,000. thousand transactions per second, Bitcoin network, seven transactions per second, 10, somewhere in there. Ethereum maybe 1,000. Ethereum 2.0, rumored to go around a couple hundred thousand.

We don't know yet, but China's really big. I'm sorry, I love blockchain, but it's not going to handle the needs of 1.4 billion people. Maybe somebody says lightning or the new protocols. That's great. But remember, we're dealing with the central bank. They're not on the bleeding edge of technology. They want stuff that's proven to work. Okay, that's just central bank.

And remember, they've been researching this for years. So today's latest was not around when they were doing this in 2016, 17, whatever, 18, when they were doing a lot of design work. So UTXO, two-tier, tokenized money, asynchronous transfer, meaning that you may or may not. be connected to a network. The ability to basically have no bank account. So up to a certain amount, we don't know the amount right yet, just yet, but up to some couple thousand dollars, maybe 10,000, whatever, R&B, you can use the central bank digital currency without having an account in the bank, meaning you just have your little device. Okay. Now, the little devices they're coming out with for the elderly are a little credit card style device, but it's an IC card. It's got

built-in thumbprint reader, and maybe it's got some of the different versions have like a security code. You put in your number, and then you hold it to a little reader and NFC takes over and away you go. So you don't need to have an account to basically. basically use this and you don't need to have a smartphone to use this and you don't need to have signal to use this. So that's some of the basic designs. And the big thing that people need to understand is this is tokenized, not account based. I will say that for large sums of money, yes, you need a bank account to use it. But remember, as soon as you go into digital, As soon as you convert Fiat money from the bank to digital currency, it's in sort of a different, separate world.

And then you basically accumulate, you spend the CBDC, acquire CBDC, and when you acquire some of it, you push it back to the bank, and it becomes Fiat money again. Quick one. Central Bank Digital Currency. Oh, you may have a bank run. You're not going to have bank run. It's basically like a credit card in the sense that you sense that you have limits to the amount that you can spend. Limit to the amount. If you have millions and millions of R&B in the bank, you're not going to convert millions of R&B to central bank digital currency.

So you avoid or eliminate the bank, not going to happen. There's limits to how much you can use. Smart contracts are built in, are going to be very, very powerful. there are two forms of intelligence built into central bank digital currency. One has already been shown and used. That is big data. In other words, right now, if you're on Netflix, you can't use Netflix in whatever country because it's location limited. That's big data. It says, where's your IP address, right? Same thing with central bank digital currency. It has big data built in, which means there's certain things you can and can't do with it, but it's based on the big data system. Very, very, very, very powerful form of intelligence, not to be taken lightly. The next one is smart contracts, which is not for use when rollout. They got enough on their plate rolling it out without using smart contracts. Eventually, it will be ping on insurance company just issued a policy that could be bought with central bank digital currency. And in their write-up, they say, hey, this is the

first of its kind. At least you can buy it with CBDC. But eventually, we're going to going to have the policy in CBC, the claims payment in CBDC, everything will be in CBDC, and you're going to have a digital insurance contract. That's coming. That's going to be three, four years away still, but it's part of the modernization of money. And guess what, guys, who do we owe this all to? And here's the funny thing. Traditional bankers like me are loathe. They, they, it makes them boil. Ready? We owe it all to the guys who were in crypto for designing this crap because we're using it now in the central banks. So I tip my hat. I acknowledge the debt to the guys in crypto who came up with all this stuff.

And now it's being used by central banks. And I know crypto fans are like, look, we don't want K.YC. We don't want AML. I get that. But be at least proud that your creations are being adopted by central banks in China and in problem and in all across the world right now. And that's a good thing. Richard, some, the more cynical among us would say it's been co-opted by the central banks. And this is a discussion for a little bit later. But you mentioned AML, KYC. I understand that there is,

you mentioned three centers in the book, kind of these central processing centers. I want to just touch upon one, which is the verification center. So there's some notion that every transaction, the central bank digital currency will require verification. AML, KYC, that's kind of tied to your mobile phone, right? So think like facial. recognition in order to like, you know, send the currency. That's sort of the impression I got in reading the section. Can you talk about the verification that is baked into this central bank digital currency? Sure, not unique to China. When central banks talk about digital currencies, they, of course, want AML and KYC built in. They want to know who's using it, all right? So in China, your phone is

going to have the very minimum. Look, all phones are registered to people in China. burner phones, not a thing here, okay? So you have a phone. That phone is registered to a person. You have an app. That app will be your digital wallet contained usually by a bank or contained by a wechat or AliPay. Those apps have security, usually facial recognition and or passwords or whatever to open them up. So you have these different walls of security. So now you're spending a digital currency, you're spending a token. from your phone to another phone, okay? Let's just say that you're online right now, because we know that these tokens can be transferred offline as well

with lower degrees of security. But if you have a direct transfer with both phones online, that transfer is sent, goes through the security on both phones, is accepted, and is then sent for verification to what is called the verification center. And with the verification center is it checks the hashes. It's really right out of, you know, crypto. It just checks that the hash strings are correct and valid using the different, the public and private keys that are sent with it. And that's it. It's not checking an account. That's the key thing for people to get. Phone to phone transfer checks the of money, of tokens,

from one to the other is like Bitcoin, it checks the validity of the string, not that there is an account. Okay? So that's what the verification center does. Now, the verification center does not know who you are. They do not have the data to link you with your phone. They have your keys. They have a whole string of zeros and ones, but they've fundamentally do not know who you are. There are two other processing centers. The big data center which says, okay, that's where they're going to look for anti-money laundering and stuff. They don't have your data. They don't know who you are. If they suspect money laundering with an account, they can produce the evidence that says we suspect money laundering and then they can

go to the police who have control or another segment. I don't want to say the police, but they have a process which they, by which they will then go to the KYC Center, which is a different group of people and say these people we think today, we did money laundering, we want to connect the data we have with the people. So the concept that China's central bank digital currency is this big vacuum cleaner for data and has no control over who sees it and what sees it is fundamentally wrong. And without question, the privacy afforded users on central bank digital currency is greater than that provided by the WeChat and AliPay platforms currently in use. So it's relative to China, it is providing a higher level of

privacy and a higher level of data protection than WeChat and AliPay. And that's undisputed. Now, is it up to standards? Is China's design up to standards for the U.S.? Well, every country is going to look at building its own central bank digital currency, and every country is going to have to tackle the privacy and anonymity problem. And they will all come up with different solutions. But the one that's furthest along is Sweden. Sweden's looking at building a central bank digital currency. And even Sweden, who also segregates user data from, they segregate who's using it from what is being spent. It's not actually a token-based system. Even they say, in cases where we suspect criminality, we're going to have the right to go and figure out exactly who's using the

currency. So digital currencies are tremendously powerful. They will be built according to the privacy and anonymity specifications of each individual country. China's are better than what is being commonly reported, and it is better for China users. The CBDC is better for users in China for both anonymity and privacy than the existing payment apps that are available. Richard, so far, we've talked about China's CBDC from a Chinese domestic perspective. And I think, like many in the West, find that sort of easy to ignore, okay, China, you know, do your domestic thing. We'll do our domestic thing is maybe the idea. But let's talk about China's international ambitions with the CDBC. So does China plan to export the CDBC internationally?

And let me just ask this, because we don't have a lot of time remaining. And I want to get to the crux of things. Does the Chinese CBDC mean the death of the dollar? Is this kind of a threat to the dollar's monetary reserve currency status in the world? What do you thoughts? Yes, but not in the way that you think. Okay. So, I'm going to make this real short and real super clear for everybody, all right. Central Bank digital currency will eventually be used in international markets. It is clear. There is no doubt about that.

It was mentioned in the recent white paper by the PBOC, and there is a Hong Kong Monetary Authority, PBOC research platform for a interoperability system that's, based between United Arab Emirates and the Thai Central Bank. So they're looking at. No question. So I still have people saying, well, we're not sure. Look, that's done. We're sure. It's going international. Now, what will not happen? China will not launch its central bank digital currency. And like Bitcoin, it is suddenly available to all. It doesn't work like that. This is central bank. So every country that intends to use China's central bank digital currency for buying stuff will have to be approved. They'll have to do an agreement between China's central bank and

whatever central bank. So it's going to be a rolled out country by country with KYC, with AML in those countries. And it'll be a very slow rollout first to belt and road countries. China has what's called the Belt and Road Initiative. These are developing countries that are doing a lot of business with China. They will be the first users. The second users will be also, and there's some overlap here, regional comprehensive economic partnership, R-C-E-P, which is a Pacific-A-E-E-E-P economic partnership area that all have a deal with China to promote their respective economies. those will be the users. And it is a long-term project. The central bank digital currency isn't going to get launched and isn't suddenly going to miraculously take over for the dollar. What's going to happen is it will be a long, slow blood dripping, where a drop at a time, a country, a business line, something says, hey, we can save money using central bank digital currency in China to buy stuff rather than using dollars. Remember, many developing countries have to take their currency,

convert it to dollars, then go from dollars to R&B to buy stuff. So they've got two currency legs, it's costing the money. If they can use central bank digital currency to go directly from their currency to digital R&B, which is sent over, you know, in 10 minutes or five minutes to buy the stuff in China, it's going to be a big win for them. Okay? So yes, it is a change in how we use currency. It is a threat to the dollar in that it threatens the dollar that is used in trade. Remember, stocks are valued in dollars, bonds, investment. That stuff isn't changing. But when you look at the dollars that are used in trade to buy stuff, that starting at the low level, small traders, is going to convert for certain countries into digital R&B. And yes, in the long term, we're looking at five years, 10 years out, it will reduce China's dependence on the dollar.

it will not, and it is not designed to overtake the dollar so much has reduced China's dependence. And over 10 years, yeah, it's going to make a dent. There's no question about it. Well, let's talk about the impact on crypto next. We just talked about the impact on the dollar. And we lived in a time over the last three to six months. China's been kind of cracking down on the crypto industry. Like proof of work mining has been out of there. You know, exchanges are leaving the country. What's your thought in the impact of China's central bank digital currency on cryptocurrency writ large? You said in your book there's kind of two schools of thought. Like one is the thought that, hey, everything's going digital.

So crypto will actually thrive. It'll increase in adoption because of this. The other school of thought is that now crypto will die because central bank digital currencies will overtake crypto. What is your take? What's Richard's personal take on how this is going to shake out? Will crypto thrive or will it die with the adjunctuary? advent of central bank digital currencies? I predict central bank digital currencies will not impact crypto.

Look, there's a lot of reasons why people like cryptocurrency. And those reasons are the direct opposite of why people want central bank digital currencies. My vision is that in the future, my phone will have a wallet on it. I already have WeChat and Ali Pay wallets, right? So that wallet will soon in China have central bank digital currency as an option. I can pick how I want to pay. For the West, you're going to have cryptocurrency, and that's likely to be any of the stable coins that are coming on strong right now.

Cryptos of various forms, central bank digital currency someday for the West, or whatever corporate coin, you'll pick Visa MasterGar. you'll pick how you want to pay depending on the utility of that payment. So central bank digital currency will not kill crypto. Anybody who believes that is fundamentally missing why people love cryptocurrency with near religious belief. And that's fine. I completely get that.

On the other hand, anybody saying that crypto is going to kill, Bitcoin is going to take over central bank digital currency is equally wrong. There's no way that central banks are going to give up printing money. That's their job. They don't believe that, you know, they believe fundamentally that it's their job to control currency. In the end, we're going to arrive at a peaceful balance where all of these things coexist. I will say this, days of crypto without KYC and AML are rapidly coming to a close. The gap between central bank digital currency and crypto is closing. That concept that you're going to privately, anonymously use my coin without anybody knowing, are gone. And just look to the IRS in the

United States with project hidden treasure where they're going after all the whales who were trading crypto. And who are they doing? What are they doing with it? They're using Pollytire, the big data company, to data mine Bitcoin's own IP strings to figure out who's doing what. So the gap between crypto and central bank digital currency is closing with AML and KYC requirements. Last question here, Richard. We have so much we could cover. And we want to invite you back sometime to talk more in more detail. There's a lot we could have covered.

But I want to ask this kind of closing question. So when the West wakes up and realizes this, let's take the U.S. They've got a lot to lose if China's central bank digital currency picks up steam. They've got a lot to lose geopolitically. They've got a lot to lose as a reserve currency asset. What are your thoughts on how they will respond? Because they have a few options, but it feels like the option they're taking right now, Richard, is status quo, do nothing? Let China take the lead. Ignore cryptocurrency. And to me, that doesn't seem a sustainable option. Do you think they'll continue with that option? Or where do you think they'll go next? I don't think they have a choice at this point. I think they are going to be forced to look, I think we're going to see the following. Stable coins, they're going to figure out how to regulate. No question about it. They have, the U.S. has no digital option. Stable coins are the only thing that it can put to field to give people some form of digital transfer. So stable coins, they'll figure out how to regulate them and they're going to figure that out within the next. six months for sure. Then you're going to see a central bank digital currency, but you can't rush

these out. I mean, look, it took China seven years to develop a CBDC. The Fed, with its Fed Now program, which is a immediate digital transfer system, is years behind. You know, they're really bad at building stuff. The Fed prefers to let private sector do stuff, and that's, to be argued, one way or another. But they're not going to beat China. Maybe they'll do five years to launch a CBDC. So you're going to have a period of five years where you're going to have to use stable coins, and then maybe five years, six years from now, you'll see the U.S. issue with central bank digital currency. But it's going to take a while. Richard, this is great. This has been definitely the most thorough.

case I've ever heard for a central bank digital currency and what China is doing with its central bank digital currency. We didn't even get an opportunity to pitch you on the bankless vision for things, Richard. So I hope you come back and you can hear kind of the crypto take on it. But this was really for David and I in the bankless community, kind of a listening endeavor to find out as much information as we could. And boy, you were full of it, full of great information, I mean, I should say. Thank you so much for... There's plenty of people out there who will say I'm full of it. I'm interested in a very positive way.

Who are upset. Go ahead. Anyway, Richard, this has been a pleasure. It seems to me very clear that we've got like two visions at play. One is the cashless vision of a central bank digital currency future. The second is a bankless vision of a cryptocurrency free money future. And both of these will intertwine in some way in the future, maybe come together. So, Rich, we thank you for, you know, painting the picture today and for joining us. Thank you so much.

It's been a pleasure being here. both David and Ryan, and my book is available on Amazon. And as you know, it's called Cashless, China's Digital Currency Revolution. And I talk a lot about how crypto contributed to building China, CBDC. So thank you so much for having me. Absolutely, guys. Action items from today's podcast. I will plus one that book.

I've got it. I've read it's fantastic book. Pick up a copy of Richard's book, Cashless. We'll include a link in the show notes. become a bankless subscriber. David and I, right after this, are getting ready to record our debrief, which is kind of our raw thoughts on the episodes. If you are a bankless subscriber, bankless premium member, you get access to that as well. Of course, risks and disclaimers, guys, none of this has been financial advice. We never talk about financial advice in the bankless

podcast. Crypto is risky. ETH is risky. We're not sure about the future of central bank digital currencies. As always with crypto, you could lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the bankless journey. Thanks a lot.