The Wolf Of All Streets - CORNELL PROFESSOR BREAKS DOWN THE FUTURE OF BITCOIN | ESWAR PRASAD

Episode Date: October 21, 2021

The world is rapidly going digital, and different forms of digital money are competing for adoption. Eswar Prasad is a prestigious professor and prolific author known for his thoughtful considerations on the future of money. As an economist, Eswar hopes for a competitive future in which money is more accessible, transferable, stable, private, and digital. Arculus: Arculus is the new crypto cold storage wallet that combines the world’s strongest security protocols with an easy-to-manage app. Store, swap, and send your crypto all with a simple tap of your Arculus Key™ card. Order the safer, simpler, smarter crypto cold storage solution today at: https://thewolfofallstreets.link/arculus -- Kava: Kava connects the world's largest cryptocurrencies, ecosystems and financial applications on DeFi’s most trusted, scalable and secure earning platform. Kava lets you mint stablecoins, lend, borrow, earn and swap safely and efficiently across the world’s biggest crypto assets. To learn more visit https://thewolfofallstreets.link/kava -- If you enjoyed this conversation, share it with your colleagues & friends, rate, review, and subscribe. This podcast is presented by Blockworks. For exclusive content and events that provide insights into the crypto and blockchain space, visit them at: https://www.blockworks.co ーーー Join the Wolf Den newsletter: ►►https://www.getrevue.co/profile/TheWolfDen/members

This podcast is sponsored by Kava and Arculus. Stay tuned for more information about both of them later in this episode. What's up, everybody? I'm Scott Melker, and this is the Wolf of All Streets podcast, where twice a week, I talk to your favorite personalities

from the worlds of Bitcoin, finance, trading, art, music, sports, politics, basically anyone with a good story to tell. Today's guest is a prolific writer who has seemingly written an entire library worth of books, but his newest book, How the Digital Revolution is Transforming Currencies and Finance, certainly grabbed my attention, as you can guess from the title, and my deep interest in cryptocurrencies and digitization in general. It's my hope today that today's guest can tell us what we can look forward to in the future for money as it becomes digital. Ishwar Prasad, it's a pleasure to have you on the show.

Thank you so much for taking the time. Thank you for having me on, Scott. So let's dive directly into it. What were the conclusions of the book? What obvious answers did you come to? Well, one obvious thing that we're all living with day to day is the disappearance of physical currency that is cash and the fact that we are moving into digital forms of payment. But, you know, as I started working on this book, it also occurred to me that from the long arc of history, we are seeing a first created, that a lot of money was essentially issued by private parties, you know, by traders, other people conducting various forms of commerce. Eventually, governments started getting into the game and there was competition between governments and private individuals

or private institutions in issuing currencies. The creation of central banks basically eliminated competition from private currencies. The creation of central banks basically eliminated competition from private currencies. So central banks set up by national governments essentially became the main creators of money. But now we are back into a world where private currencies are actively competing with government issue of fiat currencies.

So this is an interesting area of currency competition, but certainly as we move into digital forms of payment, there is going to be a lot more competition, and ultimately this is going to be good in many ways for consumers, businesses, financial markets, but there are also some potential risks as we move into the digital future. Wouldn't you assume that governments would be reluctant to allow private forms of money

to exist? What do you think that they'll do to prevent that from happening? Now, from the point of view of governments, the key question is, what is it that these private currencies are trying to do? Are they trying to solve a problem? And in fact, there is a problem out there. In fact, there are many problems out there that some of these currencies and the systems that have been created along with them are trying to solve.

One is the fact that in many countries, payments, especially digital payments, are very difficult for consumers and businesses. In economies that are dominated by cash, that is a problem for businesses, which have to deal with the hassles of managing and handling cash. There are concerns about theft, loss of cash and so on. So it's not a great medium of exchange. Now, the problem is that digital payments

are not easily accessible to a large part of the population in some economies. Many people don't have bank accounts, especially if you're in low-income economies. But even in a country like the US, about 5% of the population, of the adult population, is unbanked or underbanked. So these people don't have easy access to low-cost digital payments. Then if you think about international payments, which matter a lot for people

conducting trade across countries, or even for economic migrants, sending remittances back to their home countries, those payments tend to be very cumbersome, very slow, very expensive. It's difficult to track them in real time. And then the third problem is related to access to basic banking products and services, which many people

don't have. So in a sense, if you think about private payment systems, they are trying to get around the problem of lack of accessibility to payment systems. If you think about the financial ecosystem building up around the decentralized blockchain architecture created by Bitcoin that is meant to solve the problem of financial inclusion. But the concern for governments is that some of these new ventures might end up causing problems in terms of what governments really care about. So what do governments care about? They want to make sure that neither their money, nor any money issued by private agents

are used to finance illicit activities like drug trafficking, money laundering, terrorism financing, and so on. Then they're concerned about financial stability. Will there be any risks, say from investors in Bitcoin who might end up facing large amounts of financial volatility, which could infect the rest of the financial system.

And then, of course, there is the threat of monetary sovereignty. Does a government really want a currency issued by a private entity to compete with its currency? On the first two, I think there are ways in which those concerns can be managed. On the third, there is certainly an important issue about whether countries are going to let their currencies be overtaken by private currencies. And the third question was the one I was certainly alluding to when I asked you, which is that obviously the competition of a private currency versus a central bank currency is something that a government probably wouldn't want. I want to address the first point that you

just made, obviously, which is that governments do not want currencies being used for illicit activity. That's been one of the biggest knocks against Bitcoin, of course, although I believe it's a bit of hyperbole and wildly exaggerated. But the irony of that to me is that we all know that most money laundering and criminal activity has been, you know, using the US dollar in history, right? And it doesn't require digital currencies for criminals to do illicit activity. Yeah, criminals will find a way. And the reality, as you said, is that cash, especially U.S. dollars, have been a key component of cross-border financing of illicit activities. So the move of central banks

themselves to issue digital currencies might take care of some of that problem. But you know, when you think about government competition with currencies, different countries are approaching it in different ways. Take the two countries that have made the most progress in terms of thinking about issuing their own official digital currencies, that is China and Sweden. In Sweden, the use of cash has plummeted to very low levels, and the Swedish central bank, the Riksbank, is perfectly happy with private payment providers who've been doing a very good job of providing efficient, low-cost digital payments. But the Riksbank is concerned that if the entire payment infrastructure is in the hands

of the private sector, it could be subject to crises of confidence that could cause the entire economy to freeze. So the e-Kroner or the digital Kroner project is basically meant to provide a backstop, a retail payment system that can function in parallel with the private payment system. So this is meant to make sure that private innovation can flourish without being squelched by government competition, but at the same time, the government still retains a backstopping role. China's an interesting case.

Very few people in China use cash anymore, given that Alipay and WeChat Pay, which now dominate the digital payment space, are doing a great job of providing very low cost, very easily accessible digital payments. But to the Chinese government, this is a cause for concern. First, the fact that these two corporations, Alibaba's parent group, Ant Group, and also Tencent,

have acquired a lot of economic and political power. Plus, they have control of huge amounts of data, which they're not willing to share with the Chinese government. So in the context of China, it is more a matter of control to make sure that the central bank money remains relevant and provides competition to the private payment providers. Isn't money already somewhat digital? I mean, we talk about the usage of cash, certainly in the United States, most people do not transact with cash, right? I mean, when we talk about printing money, it's largely really just an expansion of a balance sheet, right? More than it is actually printing cash, so to speak. And all of us have become used to

using PayPal and Venmo and Cash App and all the other ways that we transact digitally. That's true. I mean, digital payments are really the wave of the future because I mean, there are still some people like me, the author of Future of Money, ironically enough, who still tips us Uber drivers using cash or my coffee baristas. As well, I feel that that tactile element in the personal connection that cash provides is a little difficult to do with a digital form of payment but even i'm beginning to bow to reality so in most countries um including in the us we are moving towards digital payments but the difficulty again is that it's not easily available i mean you can very easily use apple pay on your phone

but you have to have that connected to a credit card account or to a bank account and if you have one of those you're good to go but there is as i mentioned earlier a significant fraction of the u.s population that does not have access to digital payments precisely for this reason that they don't have enough income or maybe for other reasons they don't have a bank account or a credit card but you're right that if you think about money creation in a modern economy, we think about central banks printing this money, that's not quite how it really works anymore.

In fact, most of the money that is created in an economy that fuels economic activities, such as consumption and investment and so on, is created not by the central bank, but by commercial banks. So in fact, in this whole discussion, you know, we may not like the big commercial banks and what they do to us, but the reality is that commercial banks

are really important in money creation in modern economies. And if all these new financial developments affect the banking system, there might be some unintended consequences that we need to think a little about before we move too far ahead in this direction. What are those potential consequences? And the corollary to that, what is Bitcoin and the existing cryptocurrencies roles in that? Obviously, a lot of what we're talking about, central bank digital currencies, these are effectively stable coins, coins right they don't have the volatility of a lot of cryptocurrencies um so i'm curious then you know what's your personal opinion

on crypto and where it fits into that that future so bitcoin of course uh um you know some marvelous technology um but in its ostensible purpose as a trustless medium of exchange clearly does not work very well. You alluded to this earlier, the digital anonymity that Bitcoin is supposed to provide is a bit of a mirage unless you're technically very sophisticated. So the use of Bitcoin for illicit purposes is really not where the action is right now. But Bitcoin doesn't work well as a medium of exchange because it has very unstable value. It doesn't have the ability to process a large volume of transactions on its network. It's relatively slow and cumbersome. But of course, the remarkable thing is that Bitcoin has become a store of value.

When I was talking about Bitcoin a few years ago, I had boldly predicted that Bitcoin, if the technology matured, might work as a medium of exchange, but there was little chance it would become a store of value. But that's what it has become, a speculative asset. Do I think it's a stable store of value? To answer that question, one must ask, what is the fundamental source of value? There are many things out there that have intrinsic value because of the functions they provide bitcoin's intrinsic value was supposed to be

as a medium of exchange but it's not fulfilling that function so bitcoin adherence will tell you that most of the value comes from the scarcity you know the u.s federal reserve can print dollars at will um whereas bitcoin has a hard gap of 21 million Bitcoins, of which, as you know, about 18 and a half million have been mined so far. Scarcity might be the underpinning of the value, but to an economist, that's a somewhat dubious proposition that scarcity by itself can generate value.

There might be value if investors in Bitcoin have faith that it will maintain its value, but that seems to be a rather fragile foundation of faith. Of course, there is the irony that something that is provided in basically infinite quantity, which is the US dollar, manages to maintain its value despite the fact that by all economic reasons, it should probably be losing its value. But that's a somewhat strange world we live in. But you know, as I think about Bitcoin, what is really going to be transformative is the blockchain technology, which, as I was writing on this book and learned more about the technology, I began to understand what a remarkable innovation it truly is. And certainly it is creating the basis for an entire financial ecosystem in the form

of decentralized finance. And I think it's going to be transformative. So what is the intrinsic value of a dollar, if not faith in your government? You know, the U.S. dollar is backed by the government's ability to tax you and to require that those taxes be paid in US dollars. But there is another curious feature of the US dollar that is important. You know, the entire world views the US dollar

as a safe haven during very troubled times. So even if that trouble emanates from the US economy itself, you have people coming to the US dollar for safety. Now, why the world, including US investors and foreign investors, view a government that is as indebted as the US that continues to run very large deficits, and that is a central bank that prints large amounts of money? Why that retains the faith of international investors is a curious question. I tried to address this question a couple of books ago in a book I called The Dollar Trap, Why the World is Stuck in the Trap of Dollar Dominance. And part of

the reason is simply because the U.S. economy is very large, U.S. financial markets are very large, but most importantly, foreign investors still seem to trust the US institutional framework. And that institutional framework includes an independent central bank, the rule of law, an institutionalized system of checks and balances. So we might consider all of these elements of US institutions somewhat shaky over the last few years, but they have stood the test of time over a long period. And in international finance, you don't necessarily have to be perfect. You just have to be better than everybody else.

So that seems to be one of the fundamental value propositions for the dollar. The other is another curious thing as well, which is the fact that the financial systems that we have right now often end up with problems in liquidity. That is, you might have perfectly solvent financial institutions, but they need short term infusions of cash to meet their demands for cash or liquidity in the short run. And when you have a financial system that is so large, that is so dependent on short

term infusions of liquidity, the willingness of the US Federal Reserve to provide that liquidity again, and essentially infinite quantities at very short notice, makes people more willing to accept that currency because they know when the chips are down, when somebody needs to keep the financial system afloat, the dollar will be there to keep the system afloat. And that, again, somewhat ironically, underpins the dollar's value. So it's more a function of the defects in the international monetary system and our financial systems, which continues to prop up the dollar. Right, of course.

I mean, people follow the dollar index, obviously, and they often don't understand that when you see the dollar going up, it's not really dollar strength, it's relative dollar strength to other currencies, right? So I kind of like to joke that it's the prettiest pig in the pen, so to speak, right? It can be doing poorly, but as long as it's doing better than everything else, it's doing quote unquote well. But how long can that last, right? You sort of pointed out all these things that make very little sense and how curious they are, as you said. Can we go on like that forever? And what's the end game if not?

So the proposition in my book, The Dollar Trap, was essentially that now the world is stuck in what I call this very fragile and suboptimal equilibrium. What it basically means is that now the rest of the world owns a huge amount of dollar denominated assets. So foreign investors, including foreign central banks, hold about $6 trillion worth of US government bonds and a whole lot of other US dollar denominated assets. US investors hold a lot of foreign assets, but those are all denominated in foreign currencies. So let's imagine that the world loses faith in the dollar

and the dollar's value plummets. The US doesn't owe anything more to the rest of the world because all of our debt is denominated in dollars. But now if the Chinese currency appreciates relative to the dollar, because the dollar depreciates, our assets in China are going to be worth a lot more. So now if the dollar were to fall precipitously in value, we would be fine.

The rest of the world would take a real loss on its assets. So now we're stuck in the situation where nobody wants the dollar to really plunge in value because it would end up hurting the rest of the world far more than it hurts the US. One other concern that has come up because it would end up hurting the rest of the world far more than it hurts the US. One other concern that has come up in terms of the dollar's prominence is the fact that the Chinese now have a currency that they're trying to spread out on the world stage. And China is also experimenting with a digital version of its currency, which would be called the digital Yuan. So there are questions about whether the digital Yuan

might help China get to displace the dollar. I don't really think so. I think having a digital version of the Yuan might help marginally in terms of the Renminbi or Yuan's role in international payment transactions. But you know, most international payment transactions are already digital anyway. So the change is going to be marginal at best,

but as a store of value, that is as a currency that people turn to in troubled times, for the reasons I mentioned, it's hard to see the dollar being challenged. It's not clear that China has the trust of foreign investors or if it ever will. So even if the renminbi becomes a somewhat more important currency, and this has been happening for the last few years,

it's taking away the shares of the euro, the Japanese yen, the pound sterling, not so much the dollar. So there is a lot of competition among the second tier currencies, the euro, the yen, the pound sterling, the Chinese renminbi. But the dollar remains by far the most dominant, and I don't see that changing anytime soon. Guys, I'm so excited to tell you about this new crypto cold storage solution called Arculus. Their cold storage technology keeps your crypto keys off the internet and on an Arculus keycard.

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which is Kava. Kava connects the world's largest cryptocurrencies, ecosystems, and financial applications on DeFi's most trusted, scalable, and secure earning platform. They have borrow APYs as low as 0% and reward APYs as high as 200%. They let you mint stable coins, lend, borrow, earn, and swap safely and efficiently across the world's biggest crypto assets with a simple and intuitive user experience and the full confidence of institutional grid security and quality. Guys, if you have not checked out Kava yet, then what are you doing? You can check it out at the wolfofallstreets.link slash Kava. Do it now. It's interesting because I think your average person has heard the story that China owns all of America's debt. That's a huge risk to the United States, but you just sort of described it as the opposite as to why that's actually a much larger risk to China. So it's a very interesting sort of bipolarity there, I think. So what you've described obviously shows that

there's a major systemic risk, obviously, to a collapse of the dollar or anything changing as far as the dollar's global reserve status. Crypto industry now is at about $2.4 trillion. Large, but still very small relative to most other assets. Do you believe that there's any systemic risk to a crypto collapse for the global economy, or do you think that it's still too small? So when I see a value of $2.4 trillion, the question is how much investor participation is there, what sort of institutions and what sort of individuals are exposed to investment in those cryptocurrencies,

and what are the spillover effects, either into the macro economy or into the financial system more broadly. My sense is that while the amount of interest in crypto investments is rising, it's a fairly concentrated pool of investors still. You know, if you think about Bitcoin, it turned out that Lehman was very closely connected to a lot of the other major financial institutions, which immediately came under pressure.

It's not obvious that there is a great deal of institutional exposure to cryptocurrencies right now, but certainly having, you know, $2.5 trillion of wealth disappear in a short period could have unsettling effects on the overall financial system, but I don't see it leading to a lot of the really useful innovations that are taking place in this decentralized finance ecosystem, which I think has a number of benefits for society at large, especially to low-income consumers and households, but also to investors and businesses. So I would hate to see that innovation die off, but I don't see a major systemic risk, even if there were to be a crypto collapse.

I love hearing you say that. I went on a rant about it actually myself, because the Bank of England only yesterday, a deputy came out and said, listen, it's a 2.4 trillion. The credit collapse, the subprime loan collapse was 1.2 trillion. That means that Bitcoin and crypto are a larger risk to the economy than even subprime loan collapse was $1.2 trillion. That means that Bitcoin and crypto

are a larger risk to the economy than even subprime loans were in 2008. And I made the exact same point that obviously the banks aren't exposed to it. And therefore, that risk does not exist. So I'm glad to hear that point echoed because that was my feeling about it as well. But you just touched on DeFi and how a collapse like that or some sort of crash in the crypto markets could stymie some of that innovation. What are the most exciting parts about DeFi for you? So I think the ability to conduct such a broad variety of transactions without having to rely on intermediaries is certainly an attractive proposition and the fact that technology can solve some of these coordination problems between buyers and sellers, between savers and borrowers without the use of intermediaries, some of which end up collecting a lot of rent, some of which turn out to be quite

inefficient. So cutting out the middlemen in that respect, I think is certainly a great idea. And we're beginning to see the creation of new products which make financial markets work more efficiently. So if you think about how flash loans can be used to arbitrage across markets, that is certainly a very worthwhile proposition. But I think fundamentally what DeFi holds out is the promise that you can have much broader access to basic financial

products and services, which is really lacking, even in the advanced economies, but also in low-income countries and much more so in low-income and developing countries. So a world in which people have easy access to very low cost and efficient digital payments within their countries and across the national borders where businesses including small-scale entrepreneurs have easy access to capital both domestically and from other countries in the world and where you can have new products and services that fill in what I think are genuine needs, for instance, for credit products, for insurance products that are structured to meet the needs of specific types of businesses and households. I think there is enormous potential. But having said all that,

I think that technology still needs to go a fair bit before it matures to the point that it is going to be stable, that we don't have any crises of confidence or technological vulnerabilities popping up that create issues. And as with most financial innovations, there are going to be some new risks, some unknown risks that we have to be prepared for. We can't trust technology to solve all of these issues. And I think some role for the government could be useful in terms of managing some of these risks, in terms of setting out certain guardrails for how this industry should operate. And I think actually some government involvement would give the industry more legitimacy, which might actually draw more people

into using it. So the right level of government involvement, which does not limit innovation, but provides a backstop in terms of managing risks, I think could really be helpful. I think whether people cheer for regulation or not, it's inevitable. Obviously we know that it's coming to the space. It's been the hot button topic all year.

And I think, as you said, the fear is that it would be heavy-handed regulation that would stymie innovation and send people certainly from the United States offshore, right? But you can't stop the technology. You could just send it to a different country where it's more friendly regulators would continue to innovate. Do you think that the United States will actually be reasonable with their regulation of these projects and this industry, or do you think that we're more likely to see a heavy-handed approach? There is going to be a challenge here because the difficulty is the need to understand what

these technologies are, what they are capable of doing, and what the risks might be that they entail. And countries around the world are falling into different parts of the spectrum. So China, as you know, has completely banned cryptocurrencies which is certainly going to limit any cryptocurrency related activities there. There are other countries that are taking a much more laissez-faire approach,

but what the US does has the potential to set the standard for the rest of the world. And I'm hopeful that the US government will understand the innovations that can potentially benefit people, set in place the right kind of guardrails and make sure that the regulation doesn't become too onerous. But there is a responsibility for the industry as well. You know, rather than shying away from regulation, I think educating policymakers and the public about the potential, acknowledging what the risks are and facing up to them squarely could result, I think, in a much better approach because the reality is that regulators anywhere want to avoid the worst possible

outcomes and they tend to be very conservative, often with good reason, because we've seen how certain types of regulations have had unanticipated consequences that end up creating even more financial instability. So when you see financial engineering at this level, using a technology that is not easy to understand, it naturally makes them much more conservative and cautious. But I think in the US, there is an understanding, again, that the strength of US financial markets is really key to US economic and financial dominance. And that shutting down this industry entirely would be a mistake,

even from the point of view of the US population. So I'm hopeful, although not entirely sure, that we will come to this happy middle where we have the right kind of regulation that reduces financial risks, provides more investor protection, creates guardrails for the use of data and technology, but doesn't block the innovation altogether. Where does your deep interest in money come from?

You've obviously been writing about it for years. It's what you teach. What's your background? So I actually spent the first few years of my professional career after leaving graduate school at the International Monetary Fund, which, as you can imagine, is a place where we think about money a lot. And a lot of my work had been about currencies, capital flows, and exchange rates. I became a professor at Cornell about 13, 14 years ago, and I've been doing work on monetary policy issues. My last two books are about the US dollar and the Chinese renminbi, but about three or four years ago,

the central bankers, hang out with a lot of central bankers, started asking me questions about digital currencies, and I didn't know very much about this, so I started to read up, and it turned out there wasn't very much to read upon at the time. So I decided I would try to put my thoughts

together in the form of a couple of papers or so. And then as I started thinking through this, it became a real intellectual journey for me, learning about Bitcoin, learning about blockchain technology. And I had some wonderful mentors at Cornell and also the Brookings Institution, another institution I'm affiliated with that helped me think through many of these technical issues. But I plan to write a book about central bank digital currencies. But the more I thought about it, the more I realized I had to talk about fintech. I had to talk about cryptocurrencies and the changes they were going to create, what it might mean in terms of the creation of central bank digital currencies,

and ultimately what it might mean for financial markets, institutions, and the global monetary system, which is why a modest little book project turned into a 500-page tome at the end. So Bitcoin maximalists, one of their obvious maxims is that Bitcoin will one day become the global reserve currency, right? First, is that even a remote possibility? And second, what would the world look like and what would it take for the world, for that in the world happening, for that to actually be the case? It's hard for me to imagine a private currency becoming a store of value that investors around the world have faith in, especially a decentralized unbacked currency. It takes a lot to maintain faith in a currency during very perilous times.

And there is a relatively small set of majors of currencies and that I've been able to accomplish. And when I talk about backing again, it's not just the financial strength of a government, but the institutional strength of that government that really matters. But certainly trust in financial institutions and governments has been eroded. And it is not implausible that a privately issued decentralized currency could become much more important as a reserve currency, as a store of value. But I think the prospects for that are quite limited.

I think Bitcoin may end up becoming an important speculative asset, but as a major reserve currency, as a store of value, and especially as a safe asset, I find it a little difficult to envision that prospect. But certainly if we had one currency, either government issued or privately issued, becoming the standard for the world over,

it would have some positive effects. It would reduce the negative consequences of exchange rate volatility and so forth, and make trade and financial transactions across borders much easier, but it would come at the cost of losing a very important tool of macroeconomic policies, and especially in market-oriented economies,

which inevitably see up and down cycles. You want to have every policy tool you can possibly get, and losing monetary policy, which would be the consequence of a country did not have its own currency, I think would be a significant loss. Well, there was a world without volatility and exchange rates. And when the world was largely on a gold standard, of course, it wasn't a single reserve currency. We've had something like that before. Do you think we could ever return to something like that? Bitcoin aside, a gold standard or some sort of more coherent policy worldwide? You know, the attraction of a gold standard is that it disciplines central banks, but it puts

such constraints on them that given where we are with the modern financial systems, I think it's very difficult to envision a return to a situation where we have constraints on the supply of money. You know, monetary discipline certainly sounds like a good thing. But the problem is that unless we have the financial discipline and the fiscal discipline that come first, trying to start off with monetary discipline can end up very badly. I mean, if you think about the breakdown of the gold standard, the breakdown of the Bretton Woods system, it was because of a very inconsistent set of policies. We were trying to use monetary discipline as a way to discipline other policies.

And that did not work very well because governments weren't able to discipline other policies. So I think right now, given where we are with our financial systems and with our government policymaking in the major economies, trying to flip the order in which you should get a policy's discipline and starting with monetary policy will probably not end well. So what do you make of El Salvador accepting Bitcoin as legal tender? Obviously, you worked

at the IMF. They were not very happy with that decision. And obviously, even, I believe, threatened to withhold loans as a result. But what's your take on the El Salvador decision? Now, it certainly seems like an attractive proposition to ride the coattails of the Bitcoin speculative wave. And I think what El Salvador is trying to do is basically make up for the failings of the local government and institutions by adopting cryptocurrency as legal tender. And certainly there is a subtext that El Salvador, you know, the history, of course, is that El Salvador had episodes of very high inflation

with a plunge in the value of its currency. So it basically gave up its currency and started using the dollar instead. Now they've started issuing their own currency, but it remains very volatile. So the dollar is still largely used. So getting away from dollar hegemony and the fact that the use of the US dollar gives the US in the eyes of the El Salvador government

a lot of power over its citizens, over the government, I think is the real issue. in the eyes of the El Salvador government, a lot of power over its citizens, over the government, I think is the real issue. But, you know, trying to make up for a weak central bank and failed government policies by adopting a cryptocurrency and perhaps hoping that by acquiring stocks of Bitcoin, you can also generate some government finances if the value of Bitcoin were to rise.

I think that is a bit of a dream and it's not going to end terribly well. And it's not just Ecuador, you know, Venezuela tried to do the same thing. It issued an official cryptocurrency, the Petro. That was a little different, but yes. Yeah, a little different, but the objectives were sort of similar,

trying to get around US financial sanctions, trying to generate more government revenue. So I don't think these are experiments that are going to end well. You know, there are other Latin American countries like Uruguay that have experimented with central bank digital currencies, digital versions of their existing currencies. And those, I think, have a reasonable proposition of succeeding because, you know, they're trying to make digital payments more easily available. But riding on the cryptocurrency wave, I think it's not going to work well. Yeah, I would argue that the Venezuela situation was slightly different because it was a cryptocurrency created by a tyrant who was the one who was actually hyperinflating the economy himself. It wasn't adopting something that was decentralized and third third party really the only similarities there obviously they're both

cryptocurrencies but the petro obviously failed immediately it actually never reached any level of adoption it basically in my understanding ended up being a pr stunt that was highly useless there was actually a period when the v Venezuelan government required that certain things like passports could be paid for only using petrol. Some government employees were paid using petrol. So it did have a functioning life for a while, but it did not end well. So in a perfect world, you've obviously looked into the digitization of money into the future. For your average person on the planet, what is the best case scenario? Is their money private? Is it government issued? Is it a central bank digital currency? Is it some sort of combination? Or is it just a world where all

these things exist, giving people actual options? You've obviously talked about the fact that people are unbanked or underbanked being one of the largest problems, how DeFi could solve that, how all of these currencies could solve that. What is the best case scenario for your average person 10 or 20 years from now when cash is largely gone and the world has moved digital with their money so i'm an economist scott so i think competition is good um and competition that leads to innovation by the private sector in terms of the functions of money as a medium of exchange, as a store of value, and providing some discipline to central banks and national governments is a good scenario. So I think a scenario where everybody around the world has very easy access

to low-cost digital payments that could either be in the form of the central bank digital currency or a private sector use of an infrastructure provided by the government or created by the private sector in a way that enables them to conduct transactions easily seamlessly that would certainly be helpful but i would also look for a world in which basic banking products and services, you know, for credit, for saving, for investment are very easily available, where investors and entrepreneurs have easy access to capital from around the world. And where most importantly, despite all of these things being digital, we still have some expectation that we can maintain some degree of confidentiality in our financial lives and where whatever data that is generated through our transactions to these digital networks is not used by malicious actors or by malicious governments. And, you know, India provides a

good example of this, where the government provides the infrastructure, but makes sure that it does not block innovation, that private sector innovators can build on top of the government infrastructure. And the government has very strict guardrails on who owns the data. It is still the consumer who determines how the data can be used. So that is a world that I would hope that we move towards. I have very little faith that if we move to a digital dollar and central bank digital currencies, that our privacy will remain intact and protected. I worry about that too.

I think to me, that's almost the biggest fear is that every single one of your transactions is completely tracked by the government. They want your taxes, they remove it from your wallet. If they want to provide stimulus they deliver it directly to your wallet and all privacy and really individual controls eliminated you know technology creates problems but it can solve some of them too um you know in china which is rolling out a digital yuan they're setting up different grades of digital wallets um so there

are very low grade digital wallets that actually have a much higher degree of anonymity because the government or the central bank doesn't care that much about tracking those very low value transactions. But as you move up in terms of the value of your transactions, those are going to be auditable and traceable. So it might still be possible in the future to buy a cup of coffee using a digital dollar and maintain some anonymity. But even that I think I worry about because ultimately anything digital leaves a traceable. I absolutely agree. And we're already even seeing the United States government. I mean, Treasury Secretary Janet Yellen talking about and the IRS talking about

reporting transactions, six hundred dollars or more, right? We're already moving the bar tremendously lower. Yeah, that is certainly a concern. I think we are moving to a world where, yeah, any notion of confidentiality and privacy is going to be severely compromised. And I think we need to have these discussions as a society, as we move towards CBDCs, they have many advantages, not just for consumers and businesses, but in terms of economies working a little more efficiently, in terms of bringing economic activity out of the shadows. But there are some issues that go beyond economics that I think deserve serious consideration.

When the European Central Bank surveyed the euro area's population about their concerns about a possible digital euro, the number one concern by far was privacy. Yeah, that's very rational and makes a lot of sense. So where can everybody follow you after this and where can they buy the book or any of your other books for that matter? All the books are available at at fine booksellers including amazon more information about my book is at futureofmoneybook.com and it's been a pleasure talking to you scott thank you so much it's a spectacular book i

recommend that everybody everybody go out and buy it and read it it's a very interesting perspective and gives us a very good idea of what's likely coming in the future. Thank you so much for taking the time. I really appreciate it. It's been fun.