Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - David Andolfatto: The Impact of Central Bank Digital Currencies on the Banking Sector

Episode Date: December 18, 2018

Since the rise of digital currencies and cryptocurrencies, central banks are considering the role these new forms of money may play in our evolving digital economy. One of the ideas studied is the notion of a central bank digital currency. While people and companies can hold central bank liabilities in the form of cash, only licensed banks have access to digital cash accounts with central banks. We’re joined by David Andolfatto, VP of Research at the Federal Reserve Bank of St. Louis. David was previously on the podcast to discuss his idea for Fedcoin, a central bank issued cryptocurrency. In a recent paper, he explores the impact central bank digital currencies may have on the monopolistic banking sector. Topics covered in this episode: The state of central bank research on digital currencies and cryptocurrencies The idea that central banks may hold Bitcoin reserves David’s new paper on the impact of central bank digital currencies (CBDC) The potential impacts of CBDC’s on the banking sector and our economy The role of fractional reserve banking in our economy How fractional reserve banking applies to cryptocurrencies The Debreu model and the need for money in an entirely liquid market David’s outlook for the future of Bitcoin and cryptocurrencies Episode links: Assessing the Impact of Central Bank Digital Currency on Private Banks (paper) Smart Contracts and Asset Tokenization (article) My perspective on the Bitcoin Project (article) The Trust Machine: The Story of Bitcoin (article) Fedcoin: On the Desirability of a Government Cryptocurrency (article) David's last appearance on the podcast Thank you to our sponsors for their support: Simplify your hiring process & access the best blockchain talent . Get a $1,000 credit on your first hire at toptal.com/epicenter. This episode is hosted by Brian Fabian Crain and Sébastien Couture. Show notes and listening options: epicenter.tv/266

This is Epicenter, Episode 266 with guest, David Andolfato. This episode of Epicenter is brought you by TopTal. Experience a new way of hiring as TopTal delivers only the top 3% of applicants, including highly skilled blockchain engineers. If you're looking to scale your team with the very best talent, visit TopTal.com slash Epicenter. Hi, welcome to the Epicenter. My name is Sebastian Guizio. And my name is Brian for my name is Brian for my name is Brian for your best.

Yeah, cool. yeah so actually as we're recording this i'm in your hometown i'm here in basel and apparently not too far from where you grew up which is kind of interesting and just want to mention that over the course of the next few weeks i'm going to be releasing some content that i reported here some interviews with some of the key members of the hyper-eligible community and also brian bellendorf who we had on the show a couple weeks ago so look for those interviews on our youtube channel and also, you know, we'll be tweeting them out, of course, and, like, sharing them on our social channels.

But, yeah, it's a great conference, and I'm really happy that HyperLedger invited me, or the Lydnix Foundation, sorry, invited me to come out here and do these interviews. It's kind of a, it's kind of a little, you know, welcome change from the other side of things, which is sort of like the DevCon and permissionless systems. Here we're seeing a lot of enterprise,

other guys in suits, very different vibe from DevCon, I must say. But yeah, so today we're speaking with David Andolfo, who is a researcher at the St. Louis Federal Reserve. And we had David on years ago to talk about Fedcoin. And so today we were fortunate enough to be able to speak with them again. And we talked about a number of things, including, you know, sort of like the sort of space and how it's evolved since we last spoke, the idea of central bank digital currencies. We also talk about his recent paper that he wrote, about the impact of central bank digital currencies on the bank sector and touch on some other sort of interesting, high-level

economic theorizing about sort of the tokenization of liquidity. So here's our interview with David Andolfato. Hi, welcome to Epicenter. My name is Sebastian Kutio. And my name is Brian. We're here today with David Andolfoero. he was on the podcast before. Actually, we just checked before

and it's been three and a half years, so a long time. Last time we talked about Fedcoin, which was, you know, basically the idea of how could the Central Bank, like the Federal Reserve, issue its own cryptocurrency? I think a lot of people were like,

what is this horrendous idea? So, yeah, today, of course, in the meantime, lots of things have happened. And we're really excited to have David back on to speak a little bit about, you know, some of these ideas back then. and the activities around central banking and federal and cryptocurrencies and some of the other research topic that he's been working on. So thanks so much for coming on, David.

That's my pleasure. Thanks. So yeah, before I mentioned, well, fortunately not much has happened. So let's come to that. Let's come to that question. Since the last time he spoke, and I think at the time, you know, there was hardly anybody from a central bank writing about Bitcoin and writing about crypto. So it's become lots of activities. So what do you think are the most important development in the last three years when it comes to kind of central banking and cryptocurrencies? Well, I think in terms of central banking, I'd probably say the most important development

from my perspective is just a greater awareness of the possibility of the central bank, a central bank, becoming more directly involved in issuing digital. money to regular people and not just limiting the privilege to a set number of banks. Give us a bit of an overview, I guess, from your perspective, sort of what is the state of research and maybe specific projects being developed in the area of central bank digital currencies? Well, I guess a lot of that answer will depend on exactly how we define digital currencies. You know, I think that the research is multifaceted. I mean, there's a lot more to digital currencies than just currencies, as you know.

It basically has to do with database management. So I'm aware of efforts throughout central banks in studying kind of broader applications of, say, distributed ledger or blockchain technologies. There's considerable amount of research being done, trying to study the financial market implications of this emergent technology, what impact that might have for regulatory policy going forward or central bank policy going forward. And then there's some work actually asking the question of whether or not the central bank itself might enter into the space and issue its own form of digital currency. And this primarily is in the form of what I would call just digital money,

not necessarily a crypto asset, like a digital token, but more of like just a regular account-based money that is available to non-banked individuals. So I guess on that side, we're talking about like this sort of realm of digital currencies from like all across the spectrum, right? So from having a digital ledger, which is based on a centralized database model or more of an account-based system, like the ones that we see in cryptocurrencies and blockchain.

And on the other hand, we also have central banks positions on decentralized cryptocurrencies like Bitcoin and Ethereum. With regards to the latter, and you did say that there has been a broadening of awareness, how are central banks now looking at the public permissionless cryptocurrencies like Bitcoin and Ethereum? Has there been a change of opinions with regards to how things were, you know, three or four years ago?

A change in opinion. I would characterize it more as a, not a change. There was really no opinion before. And that's not just incentives. central banking, but almost everywhere, because I would say as of three years ago, the last time we spoke, not many people really understood what the underlying technology was and what it was delivering relative to existing protocols in database management. Central banks, central bank researchers have become more aware of the underlying technology, as has everybody else. And so I would say that the way the opinion, you know, it's hard to, it's hard to generalize because, you know, what we're talking about here are individual researchers sprinkled throughout the research divisions of central banks around the world.

And there could be a wide variety of opinions out there. But I would say that for the most part, central bankers, you know, being trained economists, for the most part, are highly skeptical of the endeavor in terms of providing at least. a digital currency. There, maybe 10%, I mean, from what I've seen, are kind of less skeptical. So, but by and large, there's a skepticism of the role that a private money might play or to displace a well-managed kind of state money. That's kind of how my measure of what the attitude is at this stage. So the skepticism, what are the biggest things?

that make central bankers so skeptical of cryptocurrencies? Well, I would say that a combination of things, to be generous, you know, I think that one way to think about it is, you know, the skepticism is based on kind of this, our historical experiences with private money issues. They haven't often turned out. particularly well. Now, in fairness, it's really hard to assess the historical data because there's so much going on, the interaction of regulations with the private money provision. So it's very hard to tell sometimes whether it's the private provision of the money supply that should be criticized vis-a-vis the underlying regulation that prevents it from operating well. But by and large,

you know, there's just this this intuitive feel based on the data. You know, if we look at the so-called free banking era in the United States that ran from about 1836 to 1863, and what you saw was just literally thousands of different monies issued by thousands of different banks. And, you know, the system didn't, it functioned, and by some measures it functioned relatively well. But, you know, there's just a great inconvenience of having these different private monies coexisting, circulating. There's counterfeiting problems, et cetera. So rightly or wrongly, I think that a large amount of the skepticism just comes from based on what we have seen in the history of private money provision. That's very interesting, you know.

So we have because we have this technology, right, and I think people in the blockchain, in space survey, like forward looking, say, oh, there's something totally new. It's revolutionary. It's never been seen before. And the technology is so much at the center. And then you have maybe like people looking at it from a central bank in this historical perspective and saying like, oh, but it's similar to the thing in the 1800s, you know, in the private banking area and then kind of applying that framework on it. It feels like a very big, very big difference, no, in terms of the perspective brought to the topic. Yeah.

Well, you know, it's almost a universal truth that almost there's almost nothing new when you look around. There's some examples we can draw on in history that are very close. And this is no different. You know, FinTech, financial innovations have been with us all the time. from the beginning of recorded history. You know, the invention of the checking account, for example, that largely replaced small-denomination bank paper notes. You know, this is a database management technology,

and it was facilitated with the use of wire communications and, you know, techniques for storing the data. Basically, what we see today is kind of more or less the same thing as I've written about before, but kind of on a much broader scale just because of the innovations we have in communications, storage capacity and also, you know, cryptography and things like that. That's interesting. I find this a bit puzzling.

So you think really that generally the best way to predict the future is to, you know, sort of say, okay, how is it similar to some episode in the past and then use that? Well, let me put it to you this way. Think about what Bitcoin is fundamentally and blockchain more generally, what it is fundamentally. And I think to my view, it is a database management system. Money is one example of a ledger, of a ledger system. It's information that is stored in accounts and you need a way to manage that account, those accounts, keep the data secure. and to manage the information flow across accounts,

the debits and credits of money across accounts. This is database management. It's very important, but it's nothing new. And so, you know, in that sense, we can look to history because this database management problem is around us everywhere, not just in monetary systems, but as you know, supply chains, for example, or, you know, the relationships between suppliers and their customers and so on.

Big, big issues, they're perennial issues, so in that sense, nothing new. What is new? What is new are the emergent technologies that facilitate communications. We can now speak by phone or communicate over the Internet. We can now store data more securely and in larger quantities. These are the innovations that lead to innovations in these database management systems. These are the innovations that permit a wonderful technology like Bitcoin to emerge. And no one can really predict exactly what's going to happen,

but at the same time, one can appreciate that the fundamental problem is always the same. It's database management. How do you keep the data secure? And, you know, how do you read and write to the database? keep the data secure and make sure that there's easy and widespread access to the database or to the constituents that you're trying to target. So, I mean, I certainly agree with you, right? You can look at Bitcoin, and this is a perfectly fair description of Bitcoin,

but I feel like you can also have a different way looking at Bitcoin, right? You could say Bitcoin is kind of like this, this is term decentralized autonomous organization, right? So you have, in a way, all of these different players and the miners and the developers and the users and the exchanges, and there is no central organism, yet they somehow all coordinate this, like, massive system, and it evolves in some way, right? So there's this.

So that's something that feels pretty novel to me. Do you see, no? No. I mean, it doesn't sound novel to me at all. In fact, I've written on this saying, it sounds like the most ancient thing that I can think of. It's called, you know, decentralized, you know, know, communal behavior, little communes, little hunter-gatherer societies operate on this principle

of not having any centralized authority, but people getting together and communally deciding on how to manage the societal history for the general prosperity of the tribe. This principle is not new at all. Again, what is new is the technology that permits this idea of communal recordkeeping to scale on a global scale, that is new, but the underlying principle is not new at all. Yeah, I was just going to get to that. The way that I perceive blockchain in this context, and whether that be cryptocurrencies or permission networks or what have you, is that they are essentially, you know, governance mechanisms that attempt to apply governance to a sort of human interaction at scale.

and governance of human interaction at scale sometimes gets complex if you look at democracy as a governance mechanism there are definitely advantages to it but there's also issues with democracy once you get to a certain point corporate structures also have their advantages and their fail points

and so to me blockchain is a type of governance mechanism that allows you to scale that also has its its advantages and points where it might fail. And it's sort of finding the balance between, you know, what do you most care about? Do you care about user experience or privacy

or the ability to have a governance that's more decentralized or less decentralized? And you sort of have to pick, you know, some of these and find the right balance for your application. You know, Bitcoin has one certain way and Ethereum might go another way or, you know, a permission network where, you know, you're dealing with a known set of actors

might interact in a different way. Much like our societies interact in different ways when thinking about governance. Yeah, I think that's exactly the right way to think about it. You know, there's database management as a problem. There's many problems, many, many different, you know, there's no one solution fits all the problems. And so it depends on what the constituency is looking for in terms of the properties of the database management system. And as you mentioned, if some, you know, if the, uh, decentralized record keeping is something that the constituents find desirable.

Then kind of a blockchain structure kind of sounds like the type of database management system that could better serve their needs. But for a lot of people, that's just not important. For a lot of people, they're very willing to trust delegated recordkeepers, trusted historians, if you like, to manage the data. But by and large, I kind of see room for coexistence here. I don't see why it necessarily has to be one thing or the other. I think that as always we see coexistence to fit the various niche demands of the constituents. Okay. So then I would like to maybe bring a sort of different way or different blockchain direction,

and here you take on that. So if you look at the Ethereum, right, there's this idea of a world computer where anybody can write their application on it and it can, it's intraoperable. with other applications and, you know, I can create my application and it interrupt with yours, but we don't know each other, we don't trust each other, anyone can kind of deploy it on there. It, you know, it's kind of global censorship resistance or people now doing, you know, whether that's lending or derivative, so these kind of organizational structures or issuing all kinds of assets to games, does that not feel like something like really radically

revolutionary novel that just is not comparable to something we've had in the past? You're really searching for something truly novel. So let's think about it here. You know, this notion of a decentralized autonomous organization sounds pretty cool. And I don't mean cool and necessarily in a good way. It's either really exciting or it could be very frightening too if you start thinking about it. Can I off the top of my head draw some analogy from history? I mean, what do we got here?

Decentralized autonomous organization is just basically, there's no central authority. So that's okay. Yeah. Well, you got me on this one. Maybe there is something, you know. You know, we basically have the prospect of robots. governing how contractual terms are executed. You know, some sort of contract that, you know, we could write up on code and share.

We write a contract, I don't know you, you don't know me. We can write the terms of the contract, the terms of the contract can be executed on kind of publicly available information. And the terms are going to be contracted, whether they're going to be executed, whether we like it or not. not, I mean, that's, I guess, something that's, uh, sounds very new. And in any case, it certainly is something that's feasible with this, this new technology. And I think it's exactly, uh, that area that I think is, is, uh, the decentralized autonomous organization that I think will be seen policymakers are going to be starting to open their eyes a lot more to that dimension of the, of this endeavor. Because I, I think that actually potentially,

that part of it is likely to have the most profound implications for society. Yeah, that I very much agree with. And of course, you absolutely right that with any powerful new thing, there is the upsides and the downsides. And certainly with those, it's very absolutely possible to imagine, you know, quite horrendous ways this could be used as well as wonderful ways it could be used. So there's no, and I think it could be a perfectly reasonable stance in my view to say, okay, I see those possibilities and I see the good possibilities and the bad one.

And for me, I think the bad ones are maybe too likely or too bad so that I'm overall against this. I think that's in a reasonable position to have. I'm glad to hear that you think I'm reasonable. Hiring is stressful. Let's face it, it's a long process of sifting through as a reason. amazing interviewing candidates without any guarantee of quality. But it doesn't have to be this way. Companies all over the place are experiencing a new way of hiring with TopTal. If you go to their trust pilot page, you'll see that of the hundreds of people that have left reviews, over 98%

were four or five star ratings, including one guy who wants to give his developer a bear hug. That says a lot. TopTal gets all this great feedback because they focus on their clients and their top priority is quality. They only accept the top 3% of applicants, including highly skilled blockchain engineers. One of these engineers is Rodek Ostrowski. Roddick has experience as a lead software engineer and data scientists for Sony and Expedia. Then he discovered blockchain and he became totally consumed with Ethereum. He worked as a consultant for the firm Start OnChane and his time-locked app won the top quarter consensus U-port and identity blockchain hackathon. Then he expanded his reach through TopTal. He worked with a bunch of clients on projects such as

smart contract development and a POC that leverages blockchain. want to hire engineers like Roddock for your team. Go to toptale.com slash epicenter for a no-risk trial. A TopTal director of engineering will deliver your next hire in as fast as 48 hours, and you'll get a thousand dollar credit when you decide to hire. We'd like to thank TopTal for their support of Epicenter. Before you move on to the next topic, which is this paper that was recently released, I wanted to ask you your thoughts about it. So in the Bitcoin space, there are some people that throw around the idea that central banks should and government entities should start holding crypto in their reserves. We'd like to get your thoughts on this if you think that's a good idea or something desirable or not at all.

Yeah, well, that's, it's interesting. I'd like to know. Yeah, I personally think that central banks around the world should start stocking up on reserves on my own personal IOUs. And I guess the point of that really terrible joke is to ask, what is motivating people saying things like that? It sounds like they're just trying to generate some sort of additional demand for something that they're heavily invested in. The idea of a central bank holding reserves in some security like crypto or Bitcoin to be specific to me seems kind of strange. I'm not sure why. I mean, maybe not central banks, but perhaps government entities that typically would hold, you know, currencies of other countries in reserves or, you know, gold or perhaps some sort of security to hedge against risk or to, I'm not sure exactly, but, you know, I think you get my idea.

Yeah, yeah. I guess, I mean, I have to say, I don't think that that's a particularly good idea. But, I mean, we kind of live in second best world or maybe even third best world. So could I imagine scenarios where that might make sense? And I guess I can. I mean, one scenario would be, for example, if you're living in a country that permitted, say, banks to issue liabilities denominated in Bitcoin. It's perfectly feasible. I mean, banks could potentially denominate their deposits or make their loans denominated in whatever they want, legislation permitting.

Now, I would actually argue for legislation that would prevent that from happening, at least for banks that had access to deposit insurance or the lender of last resort facility at a central bank. But I imagine you're living in a country where, for whatever reason, banks are permitted to write, loans and issue deposits denominated in Bitcoin. Then, well, we have a lot of historical experience of what happens with these types of structures. Just replace Bitcoin with gold. What you get is the possibility of these bank runs. In fractional reserve banking systems, the banks collectively are not going to have enough gold or Bitcoin to make good on their obligations.

And so, you know, you could imagine a government, wanting or instructing banks to hold sufficient Bitcoin reserves if they're going to get into the business of issuing Bitcoin-denominated liabilities. So those are a lot of ifs. I mean, if, if, if, if. But whether government should get involved in this as a matter of principle, I don't know, I could argue against. I mean, you could say, listen, if you're a bank and you want to get into this business,

get into this business, but, you know, make sure that either you hold 100 percent Bitcoin back, make, you know, hold sufficient reserves of Bitcoin, or, you know, then the threat is, if you get into trouble, we're not going to bail you out. But the problem with governments is that they can never commit to those promises. And so I just think it's a bad idea. Yeah, I mean, I guess let me sort of try to articulate what I think is the position. and yeah, I think basically the position is, and you will probably disagree with this,

that, okay, Bitcoin, you know, is going to grow and more and more people will use it, and it will become this, you know, digital gold thing, right? That's held by many, you know, individuals. And that, you know, so over time that you may have a kind of erosion of the value and the trust that some people have in fiat currencies and it will increasingly shift to Bitcoin and said that then it will be, you know,

important for central banks to have, you know, in their thing backing their currency, have, you know, Bitcoin reserves, just like they have maybe gold reserves today. And that then there could be some sort of mechanism where, you know, it is if, if let's just say that the different central banks believe that there is some good chance of that happening. And, you know, if it happens, it will have some effect on the Bitcoin price. That you then have the incentive to be basically a first mover and say, okay, I'm going to go ahead because then I'm on a relative basis, you know, better off than the other central banks.

And so, yeah. Yeah, maybe. But, you know, my view is if a central bank can't be trusted to manage the domestic money supply in a responsible manner, it should get out of the business and just let Bitcoin take over. Just let private banking take over. So why should the central bank intervene by buying up a Bitcoin when it has the power to create its own money and manage it responsibly?

on its own. Buying up Bitcoin doesn't necessarily endow the bank with any magical management prowess. So I just think it's wrong. Either the central bank can be trusted to manage the money supply responsibly. And this is oftentimes a very complicated thing because the way it interacts with the fiscal authority. But this should be just all up to ultimately to the voter. of the jurisdiction. And if it turns out that the central banks and fiscal authorities cannot be trusted to manage the

money supply in this manner, then I think naturally these other competitors like Bitcoin or gold or whatever will provide the substitutes that people want that are better managed. But I don't see any reason for why the central bank should dabble in the, in Bitcoin reserves. So moving on to the next topic, we want to talk about your paper, which came out in October. It is titled Assessing the Impact of Central Bank Digital Currency on Private Banks. By digital currency, I presume here you're talking about digital currencies of the crypto flavor. And so, you know, why, how does this paper build on your previous research topics for the to central bank cryptocurrencies?

Well, so cryptocurrencies, again, this is more of, I make the distinction between what I call like digital money and digital cash, I guess. Digital money, we already have digital money. We use digital money all the time. Debit card transactions, most of our transactions are done with digital money. We have bank accounts. and the idea of central bank digital currency is the idea of instead of having a bank digital money account with a regular chartered bank, why not permit people to just open up bank accounts

with the central bank directly? That's what I mean by central bank digital money. One could go one step further and have the central bank or some other entity issue what I call digital cash, which kind of has more of the... the token aspect to it. But that would be distinguished simply by, you know, I think the analog would be like, imagine the central bank permitting users to open up kind of anonymous Swiss-style bank accounts. So in that scenario, people would be sending money from account to account and would be relatively

anonymous, as opposed to the system we have today where you'd have to identify yourself, you identify your account number and you know that I'm sending money to you. So my paper was really about central bank digital currency, which is I think probably the empirically more relevant case because I don't think a lot of central banks will be willing to experiment with the notion of issuing the equivalent of digital cash just for a lot of regulatory concerns like know-your customer requirements or anti-money laundering rules.

And so the purpose of this paper was to kind of say, look, if you take a look at the way the payment system is structured at the United States today, there seems to be kind of two classes of individuals, agencies, I guess. On the one hand, you have these big, powerful depository institutions, these private banks that have access that can hold accounts directly with the Federal Reserve Banker.

These accounts are interest-bearing accounts. They presently earn something like 2% interest. The banks can send money between themselves using Fedwire, which is a real-time gross settlement system. So you can send money instantaneously. And there's like trillions of dollars that flow through the system every day. And moreover, the banks, it costs almost nothing to operate this database management system. I mean, it's basically free as far as the big banks are concerned.

So this is the banks on the one hand. And on the other hand, you have kind of the retail experience, the one that I have to go through or some small business, for example. They either have to use cash, which is very costly. I mean, it's filthy. It takes a lot of resources to keep it secure, to transport it securely to a bank. to deposit it.

It's subject to theft, for example. If instead you want to use a digital money, you have all these interchange fees you have to pay. I mean, and this can often be a significant fraction of the sale. So in contrast to these big banks that pay basically nothing for instantaneous payments, you got a small business person who's working on very small margins. They have to pay these big interchange fees. and the payments don't clear for two or three days.

It's on a completely separate, the ACH system that was basically developed in the 1970s. So this proposal in this paper is to say, listen, what if we kind of combine, what if we permit these regular retail people to have access to interest-bearing central bank digital money where the payments clear instantaneously on a real-time gross settlement system? why don't we do that? And the answer one often gets is that there are some, you know, there's some, I guess, constituencies in the economy that are very opposed to that sort of system. And typically they are the incumbent banks.

People argue that these banks are going to be worried about whether or not they're going to be losing business. Somehow it's going to, you know, disintermediate them in some manner. You know, what if everybody moves their money to the central bank, for example? what's that going to do for banks who are interested in funding their investments? And so the purpose of my paper was to kind of study that question formally in the context of an economic model where you had basically monopoly banks. And that's very different than what's commonly done.

What's commonly done in this literature is to assume that the banking sector is competitive, which is, I mean, everybody knows it's not quite competitive, but, you know, the other extreme is to think of it as being more oligopolistic or more monopolistic. And that's what I do in my paper. I argue that that's a much better approximation of the current U.S. banking system. And then I ask the question of what happens if the central bank introduces an interest-bearing digital money instrument for the masses, what effectus have on the lending activities of monopolistic banks and also and the, and they, their profits, basically. And what does it do in terms of financial inclusion? And what I find in

the paper is that, not surprisingly, the introduction of this central bank digital currency increases financial inclusion because it makes it more attractive to hold interest-bearing digital money at the central bank instead of the zero-interest-bearing paper stuff that relatively poor people are now kind of forced to hold. So one, it increases financial inclusion. It makes, you know, the regular depositor better off. It has no effect on the ability of banks to fund their investments. I think that's a striking result. So for banks who are arguing that's going to impinge on their ability to fund investments, I think that that's a very questionable claim that they're making. And then finally, what I find is not surprisingly that

it cuts into bank profits. But it cuts into bank profits. But it cuts into bank profits. but it makes kind of everybody else better off and it doesn't impinge on the bank's lending activity. So that's basically the upshot of the paper was to try to identify, at least in the context of a simple model, kind of what the likely impacts or repercussions of introducing a central bank currency would be on the incumbent banking system. The conclusion is basically, don't worry about it. for us, the banks will have lower profits, but central bank and governments are not put in power to maximize the well-being of incumbent banks. They're put into place to maximize the well-being of the broader population. So I say on those grounds that would justify, this paper justifies

that type of intervention. There's a lot to unpack here. And it's a really interesting paper. I mean, so it does also describe this model that you talk about in a very mathematical form. So if, you know, for those who are not very comfortable with reading lots of mathematical formulas and mathematical models, this might not be the paper for you. But you've described it and summed it up very, very nicely. I would like to come back just sort of the notion of digital currency. the central bank and sort of the spectrum that we have there. So on one hand, we have something that's quite familiar, I guess, which is, you know, akin to having a bank account, right? So there's a ledger. It's privately owned and privately managed. And that ledger has a set of accounts

and those accounts have balances. Only instead of having that ledger at a bank, right, like Chase or Wells Fargo or BNP or whatever, it's with the sense. So essentially, rather than holding cash and money that you have on this private ledger, this money, this digital money is held with the central bank. And then there may be gradients of that, and these are theoretical, of course, where you get to a point where perhaps a central bank has some sort of a DLT style or blockchain style digital currency, where essentially the central bank would be sort of. of the only note.

And what's interesting with this idea, and I think this is probably what we discussed in our last conversation, is that here you sort of have permissionless innovation on top. So the wallets, the applications that you can build on top of this theoretical central bank cryptocurrency, the innovation is opened up for sort of anyone to partake in. Do you clarify what you said? You said there's a single note? Right. Where the central bank essentially was using an open, right, does the clearing, but it's an open sort of stack of technology so that one can build applications on top.

So regardless of where one thinks of on the spectrum, the paper addresses sort of the more general idea of, okay, a central bank has accounts where individuals, companies, you know, small and large. can hold balances there. And in fact, since our last conversation, this is something that I thought about quite a bit and talked with people about it. It sort of opened my mind to like the role of the central banks play in our economy and also the role of the banks play. And one thing that I find really interesting about this is that having, you know, opening accounts to individuals and businesses at central banks, effectively renders some of the activities of a bank obsolete, aside from the lending part, I believe. Yeah.

So if this was the case, if you could have an account with a bank, a central bank, rather, as an individual, and that account was generating 2% interest, what is the scenario, like, what does that look like in? in terms of the more, like, broader economy? What is the effect that that has on the economy as a whole? Yeah. Yeah. You know, this is something that ongoing research is trying to answer. Okay. So the short answer, we don't know for sure.

And, of course, my paper was just an example of trying to chip away at that, to try to understand what the likely effects might be, some of the likely effects might be. If I had a guess... But yeah, let's hypothesize that all of a sudden, people don't hold savings in banks anymore. Savings no longer have the back up a second. I mean, that's not necessarily the assumption you want to make. The assumption you want to make is suppose that the central bank offers a competing product that banks do. Now, first of all, we have to think about this.

I mean, I have in mind something kind of modeled more like the old U.S. postal savings system. And this is an old idea. Many countries have postal savings. banks. And the idea is that the government is getting involved in providing a very basic utility service. It's not a full service account. It's just a basic plain vanilla bank account that could potentially pay interest, very low fees, fully insured, and you make payments. You just pay people using your phone or whatever. Now, you're charging interest on that, so banks are going to have to compete against that product. And the way they're going to compete against it is one of two ways.

They're going to start raising the interest rate on the deposit accounts they offer you to attract your business. But they are more likely to try to compete on the basis of kind of non-interest bearing benefits. There's a whole bunch of other services that banks offer. So they'll get into the full service bank account. They might offer insurance on the side. There's all sorts of things that the banks might still profitably be able to do, even though this basic utility service central bank digital currencies available. So I don't think you're necessarily going to see deposits flocking from the private banking sector into the central bank. You might see some, and the fact that the central bank is paying interest on these deposits is likely to

force the private banks to offer better terms to depositors. Because if you take a look right now, take a look at right now since 2015 when the Fed started raising its interest rate, and take a look at what's happened to deposit rates in the United States, they've basically remained zero, even though the interest on reserves, the interest rate that the Federal Reserve pays banks is at 200 basis points. At the same time, you see the lending rates that banks are charging have gone up appreciably. I think the lending rate on home secured loans is something like 600 basis points. So they're making that big spread. So my view is that if nothing else, even if nobody comes over to the central bank, the very threat of the central bank offering a 2% interest bearing account would

be sufficient to induce the banks to compete. And so they'll be forced to compete to keep the deposits. And this will show up as higher interest rate on our accounts and better service, ultimately, as they compete to keep our accounts. Cool. So I want to ask a sort of related scenario, which may seem outlandish to you, but maybe not, right? I think we talked about it a little bit last time, maybe. So, I mean, let's say now, because, because, right, today we have this fractional reserve system, right? So where you have, banks can basically create more dollars, right? And you have this deposit.

And Bitcoin in a way is like the full reserve system, right? So there's, you know, you have a Bitcoin, you have a Bitcoin. Like I can't give you or nobody can really issue sort of, you know, fractional reserve Bitcoin or when it happens, it's considered a fraud, right? Like let's say on Mount Cox, you could say there was sort of a fractional reserve Bitcoin system at one point. So why not create, you know, full reserve U.S. dollar system, right? So there's no fractional, like, let's say you made a cryptocurrency and it's the U.S. dollar

cryptocurrency and anybody can check the ledger, right? You send me some U.S. dollar. I can check on the ledger and is like, okay, this is, you know, real U.S. dollar. So it wouldn't make any sense for anybody to accept some sort of fractional, you know, fractional backed U.S. dollar. what do you think of that? Is that a good idea? Well, in fact, the central bank digital currency that I propose is essential a variant of that. The accounts that you're holding are 100% backed.

There's no fractional reserve banking there. But the basic idea that you're espousing right now is an old idea. It's just called narrow banking, the narrow banking proposal or full reserve banking proposal. It's called the Chicago plan. If you take a look at the literature, there was a big proposal, I think, in the 1930s from the University of Chicago, making exactly this point. The idea that fractional reserve banking should be separated from the payments system. And what that basically means is that if you're a bank and you're in the business of processing payments, you better make sure that these liabilities that you've issued, these departments,

these deposit liabilities are fully backed with reserves, either in the form of gold, could be Bitcoin, government treasuries, whatever. They have to be fully backed. And that the credit market should operate separately from the banking system. I honestly don't know where I come down on this idea because I'm still exploring kind of the history and also the theory here. The idea of fractional reserve banks is not inherently a bad idea. I mean, the question is, is what are banks doing when they're issuing fractional reserves?

You know, when they go to you, you know, to either, you know, when they go to you and make you a loan, what are they doing? They're creating money out of thin air, and they're giving it to you. What they're in effect doing is monetizing your human capital. They're giving you credit. They're saying, you know what, Brian, you know what, Sebastian? We believe in you. here's the money. And by the ways, it happens to be redeemable for cash,

so we're going to have to keep some cash on hand. But we know that by and large, you can just pay this money, account to account. It doesn't necessarily have to be redeemed in cash, except under special circumstances. And so what the banks are effectively doing is monetizing the debtors. If I have an investment, I want finance. The banks are in a position to translate your dream.

your investment into monetary purchasing power. Everything hinges on the ability of the bank to make good decisions in assessing credit risk. But conditional on assessing, you know, making the correct assessments, the idea of issuing and creating money to facilitate positive net present value projects like yourself, like your education, and holding only a little bit of cash on the side just to satisfy the occasional redemptions that come whenever people have to like pull out a $10 bill to pay for a cash. ride. There's nothing inherently wrong with that business model in my my my my view. So, so we have to ask ourselves, what is it that you're trying to like, why would people, you ask that you said

something, I'm sorry, that if people had access to a full reserve account, that they would never deposit their money in the fractional reserve account. I think that's false. The difference between these two accounts is that the fractional reserve account is going to offer you a higher interest rate. So there's going to be a cost-benefit analysis. This high interest rate that the fractional reserve bank is able to charge is a byproduct of the profitable investments it's financing in you and your friends and other positive net present value projects. And so it's not clear to me that depositors are going to go flocking to the narrow bank because the narrow bank is going to pay a very low interest rate. It'll be safe, but a very low rate of return. And so there's

going to be a trade-off. Okay, this is a great point. I guess where, you know, in many people in the Bitcoin space, right, if they kind of look at the history of banking, right, they, they see fractional reserve banking and correct me if this history is wrong, but it seems like it basically started as a bit of a fraud, right? So people would put in gold, let's in a bank, and then you give up sort of a receipt for the gold, right? And then you could give out, the bank could give out more receipts than you have gold without people necessarily knowing and does have a bigger business, right, which is basically what you just described. I guess the, and I think you're probably right that if you, if you had this sort of full reserve like the crypto US dollar, right?

Probably still people will create these fractional systems on top of it. But in today's system, right? You don't, like in that system, it will be transparent whether you have a, you know, a real U.S. dollar, which you don't have some kind of, you know, it doesn't have a dependency on how well a bank has managed its credit portfolio versus, you know, JP Morgan U.S. dollar, which J.P. Morgan promises you if you go there and bring J.P. Morgan U.S. dollar, they're going to give you, like, a real U.S. dollar. But, I mean, you're aware that there is an additional risk there because J.P. Morgan doesn't have full backing because they issue more J.P. Morgan U.S. dollars than they have real dollars. Correct. Well, they issue more J.P. Morgan dollars than they have real dollars, but they don't necessarily issue more J.P. Morgan dollars than they have assets. Right, right. So the whole question, the whole issue of fragility in the banking sector is the liquidity of these

assets. But that's the whole business of banking is to render those illiquid assets liquid. If those assets were already liquid, if your human capital was already liquid, you wouldn't have to use it as collateral for a loan. You could just sell off pieces of yourself, tokenize yourself, little bits of human capital of Brian and Sebastian claims on your future wages. And you wouldn't have to go and raise money at a bank. So the whole reason of banking is there to overcome the, to overcome these frictions. You said one other thing. You mentioned that the history of banking is a history of fraud. You have to be careful. You go look at it in history, all sorts of activities are fraudulent. Why pick on banking? You know, there's oil and mining is fraught with fraud as well.

You know, we don't ban mining. I mean, we don't, mining exploration. So the Goldsmith story that you told is the one that's commonly told in textbooks. And I guess there's some truth to that, but it's an anecdote. You take a look at monetary historians, people like George Selgin or Warren Weber, who've studied these episodes. Go take a look at the Scottish Free Banking episode in the 1700s. There the banks had, I think, double liability. I mean, the bankers, if their operations went under, they were personally liable to make good on the losses, for example. So it is not, and that system, arguably, by my reading, worked pretty well. So you have to be careful at kind of reading, select anecdotes from your favorite economics textbook

and kind of generalize as to what the historical experience has been for fractional reserve banking. The story is mixed. Was there fraud? Of course there was fraud. There's fraud in every endeavor in history. That's not the issue. The issue is just how did it work? Was it relatively, did it work relatively well or not?

And if not, why not? Was it because there's something intrinsically wrong with fractional reserve banking? Or did it interact some way with the existing legislation that prevented the banks from otherwise operating from fractional reserve bank from operating in a more stable manner? Sometimes that's a very key part of the equation is the legislation often prevents banks from operating in a way that you might consider in a more prudent manner. Yeah, this kind of falls into the next topic, which is sort of the tokenization of liquidity.

And you made a great point that a bank's job is to create value out of things that are illiquid. And I think that to Brian's point, and I think this is what he's sort of alluding to, is and and perhaps you know since the last banking crisis in 2008 is people have become aware that banks were were backing debt with with illiquid assets but giving way too much value to these assets with regards to how much they were actually worth so there was a great disparity a credit gap between the underlying value and asset and what banks were lending out. And I think this is what has caused a lot of the skepticism around banks sort of generally.

And a lot of the skepticism, I guess, in the Bitcoin space, perhaps because Bitcoin came out around the same time. So, you know, after every financial crisis, people suddenly recognize the problems with banking. The Federal Reserve was born out of the financial panic of 1907. The U.S. Postal Savings System was formed in 2011, the Postal Savings Bank that offered small deposits that were fully insured by the government. It was a tremendously popular program, and it came in the aftermath of the panic of 1907. So what you say is true. it's just kind of in some sense remarkable that the same sort of mistakes keep on getting repeated, although in some defense, I mean, the crisis, the most recent crisis did not happen at the retail level.

The recent crisis did not really happen in the regulated banking sector. You know, people have deposit insurance, nobody lost their money in the bank. There were no bank runs, you know, deposit insurance rose to $250,000 in the United States. States, the crisis this time happened in the so-called shadow banking sector, the kind of less regulated, more opaque sector of the economy. But the principle is exactly like what you said, kind of this liquidity mismatch and also some very bad or questionable investments were made and some questionable ratings were attached to these investments. And this all came crashing down, not in the retail sector this time, but in the wholesale sector, but the wholesale sector,

principles the same. And now I think what you want to ask is like, what can we do about it? Like what do these new technologies, how can they kind of mitigate these problems? Well, your blog post, and we'll look to this post in the show notes, so it describes a scenario where one can tokenize his own assets. So basically the job of a bank, or one of the jobs of bank is to say, okay, these are illiquid assets and we're going to lend money with those assets as collateral.

But if one could say, okay, this is you know, I'm me. I consider my time to be valuable, my my, you know, experience and I have these abilities. And so therefore, I'm going to use that as collateral in some sort

of transaction or perhaps it's, you know, physical assets like I've got a farm with cattle or some basic example. So maybe we walk us down this route and with this blog post in mind. One thing I love about this whole endeavor, cryptocurrencies, Bitcoin, blockchain, it has brought to attention what the fundamental issues are in monetary theory. This idea of money being a ledger, for example, was nobody knew what I was. Nobody knew what I was talking about when I used to, I've been lecturing on this for almost 30 years.

I preface every one of my monetary theory courses with, you know, why is it when I go to buy a cup of coffee? Why can't I just pay with a personal IOU that represents a claim to the lecture that I'm giving you guys? I'm a professor. I give economics lectures. People value that. Why can't I just issue tokens? I didn't use the word tokens. I used personal IOUs, but it's the same thing.

I should in principle be, you know, if it's some sort of famous person, probably they could do it, in fact. But I'm just anonymous. And if I attempted to do so or to issue a claim against my house, for example, suppose I want to buy a cup of coffee in the morning, you know, a dollar cup of coffee with a one one millionth share of the bathroom of my house. Why can't I do that? The answer is, in economic theory, you can do that. And it's exactly in a frictionless world, that's exactly what you can do. There's no liquidity issues. I mean, if you can use your imagination and just imagine a world where these frictions are absent,

you should be exactly able to do what I described. And so then the question is, well, what are the real world frictions that prevent this from happening? Why is it that when I go to the coffee shop and I offer a, a one-one-millionth slice of my salary is payment. Why doesn't that work? And the answer is, well, first of all, they don't know who I am. They don't know if I'm a professor or not. They don't know what sort of claims I'm making.

It's very easy to fabricate information. I could be lied, and almost surely I might be lying. Second of all, even if I'm not lying, what makes anybody think that I would honor the claims of these personal tokens or IOUs? I mean, I claim that my house can generate rental income of $10,000 a year. And I issue a token against that revenue stream. Well, who's going to enforce the payment of that token? Who's going to enforce the tenants of my house to pay the rent?

I mean, just because I'm recording the ownership on a blockchain or some sort of ledger doesn't magically solve the problem of enforcing payment of the tenant or of enforcing. I've seen my payment of my set, part of my salary to the obligations I've issued. So it doesn't necessarily solve a whole pile of informational frictions that render certain types of capital, like your human capital, my human capital, illiquid. That's exactly the job of banks. Banks have credit officers that are specialized to interview you, to go and make an assessment of your home. We trust these third parties to make accurate assessments of the underlying collateral.

Now, they often fail, of course. They don't operate perfectly. But my question is, how does a decentralized database management system where the data is recorded by in some Merkel tree structure, how is that supposed to solve these underlying frictions of basically enforcing property rights? and these kind of informational issues that are associated with the asset that makes the asset illiquid. So I think these are the issues that need to be addressed in this kind of tokenization endeavor. And, you know, I'm still studying it. So maybe there are some good answers, but I don't know what they are yet.

So this is a very interesting point. I mean, my, I think it is a commonly held view in the blockchain space that exactly one of the things that is being created is that all of those things are becoming much more liquid and that we would go to a world where you have, you know, almost perfectly liquid market. And, you know, to give an example, so I, you know, once years ago worked a little bit in commodities trading and was dealing with like, you know, the execution of these trades. And it's like a complete nightmare and, you know, it's super tedious. And, you know, one of the issues is that you have then, you know, let's say I have a promise of payment if I deliver these goods there, but this is highly liquid, right?

say it's a commodity discerating company. It has all of these promises of payments, but it can't actually sell the individual promises of payments on an open market. It has instead to go to the bank and the bank looks at all of it and it gives you, you know, a loan, which is probably much less than you could get in the liquid market. And now there's many projects. You know, to give one example, there's a project called centrifuge. Right. They're trying to take all of, you know, give anybody the ability to put like purchase orders or invoices and stuff like that and immediately sell them. You know, and so. And so, And then at the same time, you have things like prediction markets, right?

So you could have maybe liquid markets on information. There's a lot of work that's being done on having exchanges, right, that maybe can have kind of liquidity and narrow prices, even on like a large number of markets where there's not a big order books and stuff like that. So it does feel to me like we are going to a place where, okay, it's not going to be perfect liquidity and perfect markets everywhere, but like a massive step in this direction. Did you feel that, so did you see that as well?

And let's just assume this actually did end up happening. What would be the consequences of that? Well, do I see it happening? Yes, I do see it happening. But, you know, I see it happening even kind of independent of blockchain technology. I mean, what you just said was truth. things are becoming more liquid because of the, you know, what renders objects liquid, though? It's enhanced communications, you know, enhance, you know, security of information.

Making information more symmetric renders things liquid. And database management systems can be designed to enhance communication between different parties to render, you know, what's on the books more transparent. These are statements that we can make independent of blockchain. These are just the properties of a database management system in general. The question I have is, you know, when people say tokenization, they are specifically meaning using a decentralized database structure where the data is recorded in some Merkel tree form

and that the clearing is undertaken in a decentralized manner by some sort of consensus protocol. that's the part that I have some issue with. I haven't actually, I have a hard time seeing where, apart from the application in terms of like DAOs, you know, I'm not entirely clear how decentralized consensus is supposed to enhance the liquidity of an object independent of the other innovations that I'm speaking of that are occurring even, even, you know, independently of. kind of blockchain kind of considerations. And I'm sorry, you had one more question. What is the limit? I mean, what happens as things become more and more liquid?

I think that what you'll see is basically a gradual disintermediation. The whole reason we have intermediaries, like firms or banks or whatever, is to deal with these issues. If we go to the limit in a world where everything is fungible, that there's no questions about when I make a promise, it's a good promise that I'm good for it, at least that it's risk-adjusted prices, is priced correctly. In that sort of world, a lot of the institutions that we see around us, the very existence of corporations and firms would cease to exist.

There would be no need to organize activity through any intermediary. We could just go about our daily business and be trading. You know, with this, this is a very futuristic world. But we could in principle just undertake all of our economic activities independent of belonging to any particular firm or having a particular bank account at any sort of trusted intermediary. That's what the limit would look like. Yeah, absolutely. I mean, I think the big difference is if you have, let's say, these assets that are issued on this open system, then anybody can build things that, like, interact with each other, right? So, for example, you have an out of this purchase order and somebody can use it on Ethereum to back a loan.

And that doesn't really work with normal fintech companies, right? Well, back up, you know, the fact that it's open is something that you don't need blockchain to make a database open. Do you? I think I would disagree with that. If I publish my diary online, I can publish my diary online and everybody in the world can, can download that database to their computer. That's effectively a distributed ledger of my life. Yeah, but when, like, who has then the authoritative copy?

Or like, if somebody changes it, you change it retroactively? Or like, how am I going to rely on that? I have the master copy. I print out a new version every day. Only I can write to it, but I make it open to everybody can read it. You can't go on my blog site right now and change my blog, can you? but everybody in the world can read it. It's a distributed open database.

So I don't need blockchain to make a database distributed and open. I think I would disagree with that. I mean, in this example, like, you're, okay, you're publishing your database, right? And I can like, okay, copy it locally, but now you fiddle with it. You retroactively change something. Okay, I have the evidence, but someone else has a different record now of the, I mean, blockchain massively gets rid of the coordination problem. okay, there's one authoritative copy.

We all know the sequence in which it has been, you know, created. Nobody can mess with it. Nobody can change it. Like, you can go and change it back. Like, you can go on your website, right? You can pretend you have some blog posts that you wrote a year ago, that he didn't actually write a year ago. But in a blockchain, you wouldn't be able to, right?

So I can easily build an application that builds on your data feed, without having to worry about, like, those kind of, risks. I think if I could just sort of interject here, I think what I think David is right on the point that this is possible without blockchain, but it, it doesn't scale. And, and this is coming back to my, what I was saying earlier, we're governance. And I guess similarly, one thing that's kind of similar in this sense where, of course, you know, we can achieve it, but it doesn't scale, is like PGP. So in the 80s and 90s, and even today, I mean, you know, sort of cyphurunks, and people that are conscious about their security use PGP to send encrypte an email.

And there is this web of trust system and everybody thought that we were going to move to this system to send secure data communications. But that system simply doesn't scale because you have to meet people in person and exchange keys on paper or like verify that, you know, your key is in fact the one that I have. And where blockchain solves some of the issues here is with the scaling aspect. So we can now do this at scale and we're finding solutions where this secure exchange of information that is sort of anchored in time and where I can go back and look at a record and know that that record hasn't been tempered with. This is what blockchain enables. Yeah. So totally agree with what you said. I think that we can come to a mutual understanding here by understanding that we can, what we're our.

What arguing here is the conceptual distinction between the right privilege to a database and the read privilege. I'm talking about the read privilege. So I'm saying, suppose that you trust the writer, me, for example. Suppose you trust that I'm not going to go back and fabricate old blog posts. I'm just assuming that. Then there's the question about the read privilege. Can we make it open? And my answer is, yes, I don't need a blockchain to make the database open.

open. And in fact, it could work perfectly function. You know, I can be transparent. I can be honest. Of course, it requires you to trust the writer. If you don't trust the writer, then what you say is absolutely true. What the blockchain enables, the centralized consensus protocol permits us to not having to trust the writer either. And that permits the system to scale in a system where you want open read privileges and you don't trust. any single writer to the database. So I think we can reconcile these two. I just wanted to push back that you don't necessarily need blockchain to make a database open and transparent was my point. Yeah, I think also, so I think you're right, but what blockchain also does to a large extent is

it allows you to forego having to even think about whether or not you trust someone. And so as as we enter and as we live in a society where our data is free flowing on all types of systems and we have interactions, whether financial or purely on a communication basis with, you know, dozens, hundreds of entities every day, the blockchain sort of allows you to forget about the trust issue. You know, you don't have to think about whether or I want to trust someone or whether or not that exchange is genuine. And it sort of takes out of the equation to some extent. Trust.

I want to push back a little bit. I know where you're coming from, and I kind of agree. But on the other hand, I don't think that's exactly true. You still have to, if I'm using blockchain for the first time, I have to enter it with some degree of trust. I mean, I can't read C++ code. I don't know the cryptography behind anything. How do I trust... This is true.

This is true. How do I trust that my automobile is going to get me to work safely? I don't know how the internal combustion engine works in detail. The way the trust happens is we, on the basis of experience. And so if it turns out the blockchain kind of renders very good user experience, people will come to trust it. But the exact same thing is true of my bank. So the question is really, where do you want to place your trust? I think, as opposed to not having to think about it.

Of course, yeah. So this is all very fascinating. I think we could go on for hours here, but we're very conscious of your time. And so before we wrap up, I just maybe want to get your final thoughts. If you look forward 10 years from now, and so at the rate at which the space is growing, at the rate at which government entities, central banks are now changing. their, not changing, but sort of observing these technologies and perhaps experimenting with them. From your perspective, where can we expect things to be in the next 10 years?

Wow. This is tough, right? I mean, you're not going to hold me to any of this, but we could use a prediction market to come up. Right. You know, well, I see basically more of the same in terms of the innovations in FinTech and database management. And I think that central banks will have to be increasingly on guard, I think, to, you know, to make sure that they are managing their policies in a socially responsible manner. And I actually view this emergent class of technologies as kind of useful in terms of like disciplining banks, central banks in kind of incentivizing them to kind of really look for kind of the use value that they can deliver society. And if at the end of the day they can't pass that market test, they should probably disappear.

I don't know if that's not going to happen in the next 10 years. But the other thing I think I would look for is, again, going back to what we alluded to earlier, is this issue of decentralized autonomous organizations. I can envisage very, very rapid spontaneous growth in that dimension along various aspects. And I think this is going to give regulators and policymakers headaches, endless headaches, because I don't think it's something they can necessarily, they're not going to be able to control. And that makes regulators very, very nervous. And maybe it's good.

But I can also see some dangers. and we can spend another episode, I guess, discussing what those might be. But it's going to be very interesting, I think. I think you're just going to see that DEO space develop very rapidly and with it kind of the discussions by policymakers wringing their hands about what can be done about it. What's the proper policy, public policy to take, public policy view to take on these issues? Great. Well, I mean, I guess we can say that we'll have you back on again.

I hope it's less than three years, though. With pleasure. So do come back any time. We'd love to talk to you again about all these things and sort of follow the trends with regards to central banks and how they're experimenting or thinking, at least, where the research is going in this topic. It's a fascinating topic. That's been a lot of fun. Always fun talking to you guys. Likewise.

Thanks very much for coming out today. Thanks so much. My pleasure. Thank you. Thank you for joining us on this week's episode. We release new episodes every week. You can find and subscribe to the show on iTunes, Spotify, YouTube, SoundCloud, or wherever you listen to podcasts.

And if you have a Google Home or Alexa device, you can tell it to listen to the latest episode of the Epicenter podcast. Go to epicenter.tv slash subscribe for a full list of places where you can watch and listen. And while you're there, be sure to sign up for the newsletter, so you get new episodes in your inbox as they're released. If you want to interact with us, the guest or other podcast listeners, you can follow us on Twitter. And please leave us a review on iTunes. It helps people find the show, and we're always happy to read them.

So thanks so much, and we look forward to being back next week.