Odd Lots - Hyun Song Shin on CBDCs and the Future of Central Banking

Episode Date: June 24, 2021

The world's central bankers are facing challenges the likes of which they've never seen before. We're in a unique moment for the macroeconomy, coming out of the pandemic crisis at a rapid clip. What's more, the nature of money is changing. Cryptocurrencies are on the rise. More commerce is becoming digital. The pandemic showed weaknesses in the existing payments system. On this week's episode, we speak with Hyun Song Shin, the Economic Adviser and Head of Research at the Bank for International Settlements on the future of central bank digital currencies, and other challenges they face right now.See omnystudio.com/listener for privacy information.

And welcome to another episode of the Oddlots podcast. I'm Tracy Allaway. And I'm Joe Wisenthal. Joe, I feel like it's an interesting time to be a central bank. I mean, yeah, it always is, but I think particularly interesting right now because the scope of new challenges, new economic conditions, new forces on sort of like how banking and money and markets work. Lots of new stuff right now, lots of new territory. Yeah. So not only are central banks responding to an exceptionally unusual economic crisis in the form of a global pandemic, which basically led to the shutdown of the entire economy last year, but they're not now all reacting sort of differently to the recovery.

So for instance, we saw the Fed coming in more hawkish than expected last week, but it's still basically on hold for the foreseeable future. You have Brazil, delivering successive rate hikes to deal with inflation. China is sort of winding down some of its easy monetary policies. The ECB hasn't even started tapering or even talking about tapering at this moment in time. So you have all these central banks sort of going off and doing their own thing, trying to respond to this very new environment. And in the meantime, you also have some very interesting ideas floating around on the nature of money. So sort of like the very fundamentals of being a central bank. Yeah, that's true. I hadn't really like thought about it. Sort of those kind

of crosswinds. I mean, you're absolutely right. Like sort of like unprecedented. You know, I guess there's a sense in which the COVID crisis hit everyone the same way at the same time, basically, like it kind of had this big shutdown effect. But the recovery is very different with different conditions. So it's like, okay, everyone turns off everything for a few months. And now we're trying to turn it back on again. And some countries have had different fiscal policies. Some countries have had different trajectories of the virus itself.

Some countries have like different underlying economic conditions that change the nature of the recovery. So there's that. And so then you get the splintering of policy outcomes as you talk about. Plus, again, you know, the, the rise over the last year of like different thoughts about money, particularly the cryptocurrencies. We have the Chinese digital currency, which is like people talked about for a long time, but it's actually out. That's raising all kinds of new questions. So yeah, just numerous things all hitting at the same time. Yeah, it's a lot for central bankers to wrap their heads around.

But we are going to try to do exactly that today. And we have the perfect person to discuss these broad themes with, you know, the outlook for central banks and also how central banks are dealing with new approaches towards money, including cryptocurrencies. We're going to be speaking with Hiong Seng-Shin. He's the Economic Advisor and Head of Research at the Bank for International Settlements and also a previous all-thoughts guests. So, Hion, thank you so much for coming on. It's really great to be back. So I guess just to begin with, I sort of wanted to zero in on the central bank digital currencies idea because it does feel like over the past year this is an idea that is gaining a lot of momentum. We've seen a lot of banks issue papers about it, including

the BIS. One of the things I want to ask is, are we seeing more talk about CBDs because of the economic environment that we're in? Has the pandemic sort of accelerated interest in central bank digital currencies because we're perhaps not using as much cash and we need a whole lot more liquidity in the financial system. I think it's a bit broader than that, Tracy. I think, you know, there has been a broad trend in the thinking about the monetary system at central banks. I think it's been accelerated certainly by the pandemic and the advent of touchless systems and so on, contact systems and so on. But I think it's broader than that. And I think it's a result of the importance of, I would say, the importance of data in the digital economy. I think the vast

troves of data, that's probably the most important feature of a digital economy. And that, you know, poses a couple of questions on the way that the monetary system works. I think one has to do with, you know, competition. I think here the discussion about big techs and finance, you know, very much, entails into this. So if you have network effects, you know, whereby the more users flock to a particular platform, the more incentive there is for others to flock to that platform, you know, then they, then the data has this property that it actually is a very important resource and the payment system itself is, you know, can be prone to concentration. For example, in China, the two big companies have a 94% share of the mobile payment market. If you then combine that

with issues to do with data privacy, the importance of maintaining financial inclusion while guarding against the entrenchment of market power and so on, I think all these considerations point to the importance of a kind of a public interest case for a well-functioning payment system, So I think that's probably the best background to pose this particular question. So obviously another thing we saw is this sort of like frustration at the speed and ability of authorities to get out stimulus. In the U.S., we saw a lot of issues with the unemployment insurance. There was frustration at the ability of central banks or the Fed to be able to backstop large portions of the credit market while being unable to do anything for smaller businesses or households.

how much of the CBDC discussion is informed by some of these disparities with the tools that we have for policy in a crisis? I think, Joe, it's probably less to do with the tools, but rather, I think, a realization that the current payment system still have a way to go. You know, when we talk about programmable money, this is sometimes how it's put. You know, you have very, you know, clever contingent contracts in the disbursements. I think in a way, you know, programmable money is a bit of an oxymoron, if you think about it, because the whole point of money is that it's invariant, you know, its value is invariant to changes in circumstances. I would say that these kind of contingent contracts are more like vouchers. But I think it's worth actually thinking back, Joe, to the discussion more broadly about financially

inclusion. I think in many countries, I think once the political decision was made that the disbursements would take place, I mean, most of it was done in a very efficient way, very expeditious way through the conventional banking system. You know, if you have pretty much everyone connected to the banking system, everyone has an account, and it's working efficiently, and the costs are very low. You know, you don't have to send out paper checks to people. You can just, you know, credit people's bank account. And I think it's important to think about the CBDC debate, not as something which is fundamentally new and something which is radically different from what's gone before.

It's more of an evolution. I think it's important to bear that in mind. I think if we think about the so-called retail fast payment systems around the world, so these are now pretty commonplace, even in developing countries. And actually, some of the best examples are in countries like India that's really a much manage to build up their systems. And it's a payment system where there is a platform that's provided by the central bank or is operated by the central bank. And you have a pretty open system in that if you want to be a member of the system, you have to, you know, abide by data ownership,

data governance rules whereby, you know, you cannot simply form, you know, data silos or walled gardens where you simply have a proprietary network, you have to be, you know, open to the other entrance into the system. But, you know, in return for that, in return for playing according to those rules, you have access to an open marketplace. And the idea is that you can, you know, turn these kinds of, you know, these attributes of network effects and activity begetting more data, which begets even more activity and so on. That kind of thing can be turned into a virtual circle where you have bigger markets, cheaper services, and just generally a more inclusive system. So I think just to cut a long story short, I think we probably overestimate how much

there is new in this debate. I mean, there is a pretty long thread that goes back to these conventional payment systems. The Indian women are looking for more. More to themselves, their businesses, their elected leaders, and the world are out of them. And that's why we're thrilled to. introduce the Honest Talk podcast. I'm Jennifer Stewart and I'm Catherine Clark and in this podcast we interview Canada's most inspiring women entrepreneurs artists athletes politicians and newsmakers all at different stages of their journey. So if you're looking to connect then we hope you'll join us listen to the honest talk podcast on iHeart radio or wherever you listen to your podcasts.

So maybe now is a good time to step back and ask what exactly the ambition is of CB. So what are central bank digital currencies actually trying to do or what problem are they trying to solve? And if it's about making an improvement to the payment system, then why not just let private companies build payment technology on top of the existing system and the money provided by the central bank? I guess another way of saying that is, you know, what's the right division of labor between the central bank and the private sector when it's. it comes to improving payments technology. Yeah, I think that's a great way of posing the question. So what are CBDCs? What are central bank digital currencies?

I mean, you can think of them as a digital version of cash. I mean, currently, if you want to make a digital payment, you make a transfer from your deposit to the receiver's deposit account, possibly at another bank or a payment service provider. The idea is that you can use a CBDC to make a payment digitally using your phone or some other device, just as you would by handing over cash. And Tracy, as you put it, the idea is not to displace banks and other financial service providers, but rather it is meant to serve as a kind of, you know, base layer on top of which the other payment service providers can can then serve customers better.

So the idea is that CBDCs will still enable central banks to have a very small footprint in the financial system. I mean, cash typically is a very, very small fraction of total deposits in the economy. And the idea is that CBDCs will similarly have a small footprint. But the idea is that this base layer can be an enabling layer that brings benefits to do with data, data governance, and we can go into the details on how exactly they would do this. But if you can put down a layer that guards against data silos and concentration of data in the hands of a few players that leads to entrenchment and monopoly power and safeguard, you know,

data privacy, then that could be a very promising base on which, you know, other private sector players can really, you know, maximize and, you know, display what they do best, which is, you know, use their creativity and ingenuity to serve customers better. So it's very much a two-tier sort of vision, but the base layer is such that it enables a more competitive and a more sort of inclusive system where you can guard against, you know, very high costs or entrenchment of market power. That's That's kind of in a short version. So this is one thing I kind of want to push on, but if central banks are devoting all this time and energy to designing this new technology, why not go further? Why stop at a layer that augments the existing financial system?

And why not sort of go all the way and actually try to create a digital replacement for cash? because the system that you're describing at the moment doesn't necessarily have the same autonomy that cash would. So, you know, if I pay someone with cash, it can be an anonymous transaction. The central bank doesn't know about it. But most of the systems being discussed as CBDCs seem to veer much more towards a sort of traditional payments technology rather than designing something that's a little bit newer that maybe would preserve the anonymity of cash. Yeah, I think that's a very good, you know, goal to aim for. The idea is not to, you know, replace the role of the private sector payment service providers, but rather to have an option where, you know, users can make payments digitally, just as if you were using cash, but do so digitally. So the idea is that, you know, rather than going through an intermediary, you would actually, you know, have a wallet on your phone. and you would transfer a digital cash unit, as it were, directly to someone else.

Now, how can we preserve privacy in that kind of context? And I think this is one of the big design challenges, undoubtedly, because a digital version of money is a ledger entry. I mean, it's an entry in a database that says so-and-so owns this unit at what time. and then if you transfer that, there has to be a ledger entry that indicates that, you know, that transfer. Now, if that ledger was something that is like Bitcoin, you would just have, you know, this public ledger, everyone has access to all the transactions. It's just that you are masking your true identity, you know, behind the address that you're using.

Now, in the conventional payment system, some notion of know your customer rules, K-Y-C rules, so-called, I think, you know, will be necessary to keep the integrity. But, you know, there are ways of, you know, minimizing the unwarranted access to data. So just to give you a quick example, in the so-called APIs or application programming interfaces that we use in conventional payment systems, in some open banking jurisdictions, what you can do is you can open the app of one bank and you can check your balances in another bank using that, you know, one bank's app. And you can do that because, you know, when you log into your, the first banks app, what you're doing is you're logging in using your password, then your

identity is established. And so when the instruction goes to the other bank that says, please display the account details of this person, what you're doing is, you're doing is, you're you're sending a secure message to, you know, to this other bank, establishing who you are, and then retrieving only the information that is absolutely necessary for that kind of transaction. So, for example, so, you know, if they know the name and the account number, I mean, that's all you need to establish, you know, that link and bring the necessary balance over. They don't need to know, for example, the payment history or your home address or phone number and so on.

And the technology behind these APIs, I mean, this is nothing other than public key cryptography. This is the technology that's underlying, you know, the digital signature technology in many applications, including Bitcoin. You have this public key that's out there. You know, you can sign a document and convince the receiver that it's you without necessarily revealing your private key. So, you know, there are these technologies available where you can, you know, mask, all the data, other than the pieces that are absolutely necessary. So it's, so think of this, you know, rather like a jigsaw puzzle. You know, everyone has a little bit of the jigsaw puzzle, but no one has the full picture,

you know, other than the individual concerned. And no one needs to know the big picture. And that, of course, includes the central bank as well. And central bank doesn't need to know everything. It only needs to know the absolute minimum that will enable the central bank to actually execute the change in the ledger. Well, let me ask you another sort of like reframe the question a little bit because even before the digital currencies discussion started heating up, there was a criticism of

cash was growing. And of course, there was Ken Rogoff's book. He was largely focused on large denomination bills, but still like this idea that cash is kind of a scourge for various reasons and crime and money laundering and so forth. setting aside the technical capabilities, do you perceive that transaction privacy, at least on some level, is a value that central bankers or regulators around the world want to preserve? Is it something that they care about preserving as the world gets more digital? Or more or less, do they see this as an opportunity to sort of fix what was a sort of flaw in the monetary system? I think central banks put a great deal of value to privacy and maintaining privacy.

And I think cash is a very valuable medium in that respect. I mean, not only is it a direct claim and a very tangible, you know, linked to the central bank, but it guarantees a certain minimum level of privacy, which I think is, you know, has attributes of a basic right. I think what Ken was talking about was much more to do with the implementation of monetary policy and how to implement deeply negative interest rates and so on. So I think that's a slightly different discussion. And certainly among central banks, the need to preserve privacy, I think, is a very important strand in the discussion. And you may have seen the various notes that central

banks have published. The ECB has recently published a note about this. Now, even with a system which is based fundamentally on digital identity and real name that enables, you know, know your customer type of, you know, requirements for the payment service providers, you can achieve some level of anonymity. I mean, it's, you know, you can think of it as a kind of anonymity overlay. You can actually, you know, have an overlay on the system that guarantees this. The system that the ECB has floated is this idea that there is a separate privacy registrar, which is separate from the central bank. And then you would, you know, register in your real name, but the registrar would grant you a kind of credit of how much you can spend

anonymously. And then so when you use a CBDC, you can use some of this credit. Now, whether you like that particular scheme or not, I think the fact that these schemes are being discussed, I think it's very much a sign that maintaining, you know, this minimum level of anonymity is a very very important part of the monetary system. I wanted to ask you how central banks are thinking about stable coins at the moment as well. We keep thinking along the exact same lives. I'm glad you went there. All right. We finally reached the ultimate melding of mines. But I mean, stable coins are an interesting development in many ways, but sometimes people talk about them as sort of impinging on conventional money or conventional monetary policy in the sense that you know you're sort of

creating something that's supposed to be relatively stable obviously the clue is in the name but it's still backed by fiat currencies it's still backed by a central bank or a government and that maybe that has the potential to to sort of splinter the monetary system so i'm just curious is this viewed as a challenge to the existing financial system, or is it sort of overblown currently? I think, Tracy, this is a very good question, and it is occupying minds at the moment. And just to be clear, when you talk about stable coins, I think you're referring to the stable coins that have been proposed as a means of payment rather than all the defy stuff that's going on. So I'll assume that.

Correct, yeah. Yeah, so I think, you know, we had the discussion about least. two years ago, which really concentrated mines. And that plan has been, you know, somewhat modified. Now it's a single currency proposal that's being prepared under the new name of DM. I think the stable coin idea is a very interesting idea and that it is going back to the history of money in a way. I think last time we even possibly talked about the Bank of Amsterdam where in the 17th century, you know, merchants would bring their gold and silver coins, and then the Bank of Amsterdam would then write up a ledger entry. You'd have a deposit, and then you would transfer those

deposits to other merchants as a means of payment. And that's essentially what a stable coin is. You know, you can buy into a payment means, you know, by transferring fiat currency, if you like. You know, this would be, you know, used as a means of payment. You know, I think one issue that was present with Libra, which is not present now, I think, is the multi-currency aspect. But more broadly, just leaving aside the particular proposals, you know, one issue I think is, to what extent will stable coins allow a system that's going to be interoperable with the conventional payment system? So, for example, can I, as a customer of a bank, make a payment or receive payments from a stable coin account holder? I think for that kind of system to work, you know, there would have to be some kind of settlement, you know, underneath it. Typically, what would happen in the current system is the central bank would be, you know, at the base.

And so when a payment is made from one bank's customer to another bank's customer, the ultimate settlement happens on the central bank's balance sheet. And the question is, how would that kind of system work when you have a stable coin working alongside the conventional payment system? I think if it's interoperable, I think then we can reap many of the benefits that are there in an open payment system. If, on the other hand, if it's going to be more of a data silo, more of a silos system where you have a walled garden, then I think, you know, there are issues to do with, you know, to what extent will there be a fragmentation of the monetary system where the whole point of a monetary system is the more people use that particular system, the more useful it becomes. And so more people want to use the system. There's a kind of, you know, virtuous circle there. If you have a fragmented system, the question would be how much that virtuous circle, how much of that feedback loop is going to be undermined by the fragmentation. Are you satisfied with the level of regulation of stable coins right now?

I mean, they're currently, they're about $100 billion in market cap or how many have been issued. Some of them, there continue to be questions about what's backing them and so forth. How much does the current sort of, I mean, it's an exploding. area, how much does the current environment resemble what you think the ideal environment should look like? Well, Joe, I think you've hit upon a very topical issue. As you know, this is something that is being discussed among regulators. The traditional answer has been that this space is really too small to pose financial stability risks. And I think that that has been the case. If they become much larger, and I think if in particular, you know, we have points of contact with the, you know,

with a conventional financial system, in particular with a conventional banking system, then that kind of assessment may need to be, you know, may need to be reassessed. But as long as the, you know, the activity is very much, you know, within the, you know, within this crypto sphere, probably the dangers of financial instability probably are going to be, are going to be less. The issues, I think, may have more to do with the usual kinds of conduct issues, consumer protection, you know, and other conduct issues. So that's more the area of financial regulators rather than central banks wearing their hats as the guardians of the monetary system. But clearly this is something that we need to be, you know, need to be monitoring very closely.

So I mentioned earlier that the BIS is one of a number of economic institutions which has been writing about central bank digital currencies and in fact, you're out with a new report this week as part of your annual review. It's called CBDCs and opportunity for the monetary system. There's a bit in there that caught my eye and, you know, advance apologies to any Bitcoin maximalists who might be listening. But the exact quote was, by now it's clear that cryptocurrencies are speculative assets rather than money. And in many cases are used to facilitate money laundering, ransomware attacks, and other financial crimes. Bitcoin in particular has few redeeming public interest attributes when also considering its wasteful energy footprint. So that's pretty

damning from the BIS in my mind. Do you want to perhaps walk us through your thinking around, you know, the original cryptocurrency Bitcoin and why it's not necessarily applicable to your thinking when it comes to wider central bank digital currencies? Well, Tracy, I think you've caught the one paragraph on Bitcoin in the whole report. So we'll hold on that. So we were not going to spend – so we're not spending that much time on Bitcoin and cryptocurrencies in this report because the focus of the report is very much on how can central bank digital currencies, you know, build on the current payment system to make it, you know, to make it better.

But the idea behind that particular paragraph was just to point out that Bitcoin isn't that much use for transactions. There was a time when there was a discussion about whether Bitcoin would be used for transactions on a daily basis. I think that debate I think is probably closed. It's much more about whether Bitcoin can serve as a crypto asset, as it were. and all the focuses on how much, you know, they can be bought and sold using conventional money. So that was the point that we were making. Of course, we devoted a lot more space to this a couple of years ago when we wrote about cryptocurrencies. And back then we pointed out that, you know, there were problems of scalability, problems of finality,

that would probably, you know, render these, you know, these, you know, very clever instruments, less than suitable as payment media. Canadian women are looking for more. More out of themselves, their businesses, their elected leaders, and the world are out of them. And that's why we're thrilled to introduce the Honest Talk podcast. I'm Jennifer Stewart.

And I'm Catherine Clark. And in this podcast, we interview Canada's most inspiring women. Entrepreneurs, artists, athletes, politicians, and newsmakers, all at different stages of their journey. So if you're looking to connect, then we hope you'll join us. Listen to the Honest Talk podcast on IHartRadio or wherever you listen to your podcasts. You know, I'd love to just pivot a little bit with a few more minutes to some of the broader macro questions. Actually, I think a good way to sort of like sag a little bit between the discussion of currency itself to the broader macro is to talk a little bit about the dollar because the dollar itself, the good old greenback is always sort of seen as being stressed or people are predicting its demise or that may.

maybe somehow a crisis might test it somehow. We've obviously seen like price weakness just amid this sort of like big risk on move that we've seen in asset markets over the last several months. But from like a standing perspective, the dollar's role in the world looking compared to a year ago, has anything changed? Is there any like stress on the role of the dollar itself or changing its position from your perspective? I don't think there's been much change there, Joe.

I think we were on, we were discussing pretty much almost exactly a year ago. We were discussing financial markets, fiscal space, as I recall, and the dollar. I think the long-term, you know, structural features are still very much, you know, very much intact. You know, there are, of course, the short-term fluctuations. And, you know, we have seen a shift in the dollar, you know, in, in the last few days. I remember when we had the last conversation that we ended off by saying that everything would depend on the trajectory of the pandemic. And I think that's been proved right. Since we last talked, there has been, of course, the rollout of the vaccines, which has been

a real game changer. It's not sufficiently distributed worldwide yet, so we're not out of the woods. I think economies have opened up a lot faster than, you know, when we were last discussing this. And this has meant that, you know, as well as the dollar, the talk about inflation is really taken off. And, you know, we've seen some interesting, you know, movements in the treasury market with the flattening of the yield curve and so on. So there's plenty for us to think about. You know, I suppose what we need to do, though, is not to, you know, not to you know, read too much into the, you know, day-to-day movements in market prices and not to interpret these day-to-day changes in terms of some sort of some kind of deeper economic rationale. I mean,

right. Sometimes it's just, you know, we sometimes use the short-hand, the market's expectations to denote the expectation of some kind of mythical individual. But it is just a short-hand about, you know, about prices. And it's important to bear in mind that the market is, is not actually a person. It's, uh, price is just the outcome of individual actions. Um, so, you know, when you have unwinding of various positions, you know, steep in the positions or, um, on, uh, on the reflation trade using, uh, you know, break evens, you would see this kind of action, um, you know, in the, in the yield curve. So I think we shouldn't, you know, read too much into the day-to-day changes. I think what we have seen is that as the economy is opened up, um, inflation,

has become more of a topic. You know, we're of the view that a lot of the recent tick-up in inflation have to do with the base effects. And I think there is a lot to be said for the argument that this is mostly, you know, transitory. When we talk, you know, possibly if we have another chance to talk a year from now, we'll have a time to, you know, reflect. Since you mentioned the steepener trade just then,

And since the Fed meeting earlier this month that came in more hawkish than a lot of people had expected, we did see a pretty significant bond market reaction with the curve flattening significantly. And a lot of these steepener trades that had become basically the reflationary trade getting stopped out and a lot of whiplash in the market. I know the BIS has been concerned with liquidity in the treasury market overall ever since the big drama that we saw in March of 2020. I'm wondering how you're thinking about that issue now, whether or not you feel the market is more robust, given Fed interventions over the past year,

and what the market reaction might actually be as we sort of prepare to normalize monetary policy. I guess that's a really long way of asking, are you concerned about a taper tantrum fueled by market structure issues? You know, there has always been the, you know, there has always been, I think, the short-term movements in the market, especially, you know, even in very liquid markets, like the Treasury market. I shouldn't really go into the details of the specific, you know, monetary actions of specific central banks on this. I think it's enough to say probably that, you know, when we think about the market functioning issue, there are, you know, there are these episodes when the positioning of market players can lead to, you know, very sharp movements. But even, you know, during normal day-to-day movements, you know, there can be some big

changes if the positioning can also, you know, lead to, you know, a revision of those kind of beliefs. But let me leave it there, Tracy. Okay, fair enough. I think this has been really good. One sort of thing that interested me, and this is not about any sort of specific central bank per se, but one of the things that is the thing that is the thing that we saw last year that I'm super interested in during the crisis is that various EMs, they engaged in forms of QE that people didn't necessarily think they had the tools available to them. We saw a lot of fiscal expansion, not just in the U.S., but even, say, in Brazil,

we saw fiscal expansion, much of it perceived to be effective. Has the crisis changed anyone's view about what is capable of that maybe from a policy space, per se? perspective that EMs had had more latitude to fight downturns on their own than we thought. I mean, we think of like EMs as like, oh, they have to tighten in a downturn, unlike developed markets where they can loosen in a downturn. Has the last year brought any sort of change in thinking about what kind of policy space might exist on the EM front? That's a very good question, Joe.

And I remember discussing this with you last time I was on. I mean, one issue was the extent of fiscal space that even emerging market economies found during the pandemic. And it was a kind of very unique crisis in that it was an economic sudden stop, as well as being a health crisis. And the fiscal response was really key. And I think what enabled emerging markets to deploy fiscal policy very effective. was that they discovered that they could actually deploy fiscal resources, even to the extent

of intervening in the bond market, mainly for market functioning purposes rather than for QE as traditionally depicted. But I think that was primarily because the Fed and other advanced economy central banks were able to really deploy their liquidity, you know, very expansively. Yeah, so they really opened the taps. What that meant was that financial conditions were, you know, kept very accommodative. The dollar, which, you know, strengthened briefly at the height of the pandemic, the initial phase of the pandemic, you know, then went into this, you know, downward trajectory. And I think that gave a lot of space to the emerging market.

that's been a very important lesson. Now, it's been now over a year since then. The question is how much more space do emerging markets have? I think fiscal space has narrowed because the debts of emerging markets have grown relative to where they were, you know, last year. And not all of these emerging markets have international currencies. And so, you know, there is an issue about the extent of fiscal space. And I think it's an area where we need to keep a very close eye on how well emerging markets can cope if there were to be another tightening of global conditions. So I just realized there was a question that we should ask, which probably threads the needle between the beginning of this discussion on CBDCs and the end of the discussion that's more

on macro and the role of the dollar and emerging markets. But there is a perception out there that central bank digital currencies could amount to an effort to get away from the US dollar as the dominant currency of the financial system. I won't mention any specific country names, but I think there are fears over a specific one. How credible are those concerns? And secondly, if we're talking about building a new payment system that involves central bank digital currencies, it feels like you need some sort of consensus among different countries, different international players. How do you go about building that consensus, given these different interests in the way the financial system functions? That's a very important issue. I think it's worth

starting out by saying that the payment system, you know, doesn't float separately from the underlying economic transactions. And, you know, currencies don't become international currencies, just because it's digital, just because it's in digital form. But rather, you know, they become international currencies because there is a user demand for it, you know, for instance, for the settlement of trade transactions. And I think that's probably, you know, important to bear in mind, you know, with regard to the discussions about, you know,

whether China is using the, you know, the rollout of its EC&Y for those kind of, you know, so convention. purposes. The idea of, you know, cash circulating in briefcases in the black market is probably not a good analogy for CBDCs because the kind of CBDCs we are envisaging, typically in most central banks, are based on digital ID. You know, they are account-based. So if someone were to use a CBDC that's issued in one country, but it's being used outside. The issuing central bank has to know about it

and has to consent to that use taking place. And of course, the host jurisdiction central bank will also have a lot of say in what kind of transactions take place within the domestic financial system. So I think we can overestimate the extent to which there'll be this kind of currency substitution where a foreign CBDC will be encroaching

on the domestic financial system. Needless to say, if you want to use CBDCs for the transactions that will facilitate the legitimate economic transactions, then of course that's something that is very amenable to monetary cooperation. And indeed, one of the things that will surely come out as CBDCs become much more commonly discussed are discussions on connecting CBDC systems across countries so that we can simplify the monetary architecture where typically we would need to go through correspondent banks

in this very complicated chain, adding cost and adding delays to payments. If you have a simple system like a CBDC-based system, you could potentially simplify that monetary architecture. you could make cross-border payments much cheaper and simpler. You know, that would be a very good, you know, development for both, you know, migrants sending money back home, for tourists and for travelers. So I would see this much more in this positive light of, yes, there are pretty significant

controls you can apply to make sure it doesn't, you know, serve purposes other than the intended purposes. But then, you know, then the intended purposes could be, you know, pretty broad. And, you know, those are, you know, very desirable outcomes in any case. Hian, thank you so much. Really appreciate you coming on odd lots and explaining all these new ideas in central banking to us. So thank you. Thanks very much. Thanks. That was fantastic. So, Joe, it really does feel like there's a lot going on if you're a monetary policymaker at the moment. But one of the things that sort of stood out from that conversation was a,

how quickly the CBDC discussion is sort of moving on, but B, just how dead that narrative around Bitcoin as a transaction mechanism actually is, like that central banks barely even mention it now. It's crazy. Yeah, right. I mean, I think the perception among regulators is still like,

oh, this is like this highly speculative vehicle and so forth, but in terms of like actually like a thing to get sort of used in the conventional sense of used. I mean, I guess holding is a form of use. usage, but beyond is just like not really a thing that's on their mind. No, not at all. But I did find that conversation interesting.

I also found Hian's distinction between the idea of CBDCs as, by the way, every time I say CBDC, I think of CBD oil now. There's like a thousand CBD shops that have cropped up in Hong Kong. They're on every corner. Oh, I didn't realize it was big there. Yeah, it's huge. It seems to have suddenly all come over in the past year. But anyway, sorry.

So if I mess up, if I mess up the two terms, that's why. But one of the weird things about CBDCs is it sort of goes to Huyen's point about this being a augmentation of the existing monetary system rather than a wholesale redesign. And I think when a lot of people think about cryptocurrencies, they generally think about a revolution of the financial system, a major. sort of technological upgrade, whereas the way central banks seem to be thinking about a lot of this is a sort of, I guess, platform upgrade around the edges. Yeah, I feel like this like CBDC, I mean, because Bitcoin came along, and so we have this idea of this sort of like cryptographic thing, this sort of bearer asset, that that is the mental model that people still think of when they think of a CBDC. But for the most part, it sounds like a lot of the effort is still more generally,

towards doing a better job of just the core digital infrastructure of money, which is not very good. It's even the traditional systems are kind of slow. There are all kinds of problems with it. There's perhaps not sufficiently inclusive. Transfers are expensive. So I think a lot of this conversation is still about just like, how can the payment system be better than currently is now? And it's something that sort of like more resembles just like an upgrade. of the system rather than sort of like a new kind of central bank money.

Yeah, I think that's the right distinction to be making. All right. Well, we'll have him on in another year and see. He's always great. He's always great to talk to. I just like find like talking to him to be like the sort of like fount of insight and because he's at the BIS and so well connected, just like a great way to like sort of like sense where the world is going.

Totally. And I have a feeling it's going to get very interesting from a sort of macro bond market perspective. So good times ahead for markets content for financial journalists. All right. Shall we leave it there? Yep, let's leave it there. This has been another episode of the Odd Thoughts podcast.

I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway. And I'm Jill Wisenthall. You can follow me on Twitter at the stalwart. Follow our guest on Twitter. Hune Song-Shin, the Economic Advisor and Head of Research at the Bank for International Settlements. His handle is at Hune Song-Chin. Follow our producer Laura Carlson.

She's at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Levy, at Francesca Today. And check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening.