Policy Punchline is a podcast, created, produced, and edited by a group of very talented Princeton University students – led by Tiger Gao. The podcast promotes long-form dialogues on frontier ideas and urgent issues with scholars, policy makers, business executives, journalists, and entrepreneurs.
Policy Punchline with Martin Fleming
The following is the portion of the Policy Punchline podcast on digital currencies.
“My punchline is that the Chinese are going to push hard over the course of the next couple of years. There’s a bit of a war here between maintaining the advantage that the U.S. has with the global currency and other nations trying to take advantage of the inefficiencies that exist and, shall we say, supplant the dollar.”
Martin Fleming was formerly the IBM’s Chief Economist and the head of IBM’s Chief Analytics Office. His research focuses on artificial intelligence, the future of work, and digital currencies.
Q: Could you speak a little bit about your own research on digital currencies and IBM’s involvement with promoting blockchain cryptocurrency, and how it might compare to what other countries in Europe and China have already tried to implement?
A: The first distinction that I always try to make is the difference between a cryptocurrency, like Bitcoin, and a digital currency. Cryptocurrencies are typically used as a way of compensating developers who are contributing code in development projects. I think of those currencies as much more like a security which grows in value and allows one to accumulate wealth as a result. A digital currency is much more like cash or for transactional purposes – to be able to make transactions more efficient.
The challenge today is that when we want to make payments, particularly in the business sector, it’s a very inefficient process. Imagine that we have a very large ship that leaves Japan and arrives at Long Beach Harbor with 10,000 automobiles, and there are $5 million dollars-worth of payments that have to be made by the receivers of those automobiles to the manufacturer in Japan. It’s going to take three or four days for that payment to occur. That is, in effect, a 1% tax, reducing the value of that payment to the manufacturer. It’s a very inefficient process because every transaction takes three or four days to be completed.
A digital currency, on the other hand, is much more immediate. I can send the both of you an email, and you’ll get it in a few seconds. But, if I want to send you $10,000 dollars, it’s going to take four days. There is no real reason for that delay, other than the fact that there is a large number of incumbent bankers who generate a lot of a revenue as a result of the payment system, as all of this cash is sitting on various balance sheets overnight at various places.
Naturally, there is a reluctance to transform that business. Somebody is going to come along and figure out how to do this more efficiently and be able to competitively threaten the existing established players. Now, we do have banks like J.P. Morgan Chase who recognize this and have been quite active in creating their own version of a digital currency. That’s certainly a smart strategic initiative. But nonetheless, there’s certainly a great deal of reluctance to address that source of inefficiency.
However, along come a number of smaller countries and one not so small country – China – who are launching a digital currency. The challenge is, of course, that a very large proportion of the world’s transactions occur in dollars. If a digital currency is going to be really successful, it has to be a Federal Reserve digital currency because of the volume of transactions that occur.
Now, because the dollar is the world’s global currency, there are enormous advantages to those of us who live in the U.S. Our interest rates are lower, meaning we can buy homes and cars and all kinds of other products, and the business sector can borrow funds at lower rates. There is what has been referred to as an exorbitant advantage of having the dollar as the global currency. There’s a bit of a war here between maintaining the advantage that the U.S. has with the global currency and other nations trying to take advantage of the inefficiencies that exist and, shall we say, supplant the dollar. This is going to play out over an extended period of time, and I’m not sure anybody knows exactly yet where it’s all going to take us.
Q: Can you talk a little bit more about how the Federal Reserve might take control of or manage a digital currency? Bitcoin is, by nature, decentralized, and it also has an interesting taxation scheme where it’s treated more like an investment with capital gains. That’s probably not what the federal government would have in mind if they were to introduce a new digital currency.
A: There have been some very interesting proposals. For anybody who is really interested in this topic, Julia Coronado and Simon Potter at the Peterson Institute have a paper outlining exactly the kind of proposals that you’re asking about.
You can imagine the Federal Reserve creating a digital currency and putting on its balance sheet a third liability, in addition to reserves and cash, and it would look like an electronic version of cash. Then, they could make that available in various ways, either to banks, dealers, or even consumers and households. Now, that’s probably the most far-fetched idea and would be a very radical change, and it would require significant legislative change, but you can imagine that at some future point in time.
Q: When you talk about adding a third element to the balance sheet, does that mean a digital currency used by the federal government might have some kind of centralized ledger system? Or, will this still be something decentralized?
A: For a central bank digital currency, it would be centralized. It would sit on the central bank’s balance sheet, whether it’s here in the U.S. at the Federal Reserve or any of the other countries who are already doing this. That’s another difference between a digital currency and a cryptocurrency, which of course is decentralized.
Q: Do you see any serious technological vulnerabilities with something like a cryptocurrency that we might not have seen with minted money? Is there anything that maybe IBM could get involved with?
A: Of course, there are enormous issues, but there are security issues with physical currency as well. A very small proportion of one-hundred-dollar bills are circulating in the U.S. Most of it is used by other somewhat nefarious creatures around the world for various transactions. There are certainly security issues on both sides of this, and like any electronic transaction, there is always going to be the need to pay attention to cyber risk.
But, with respect to the larger question of the involvement of an organization like IBM, you can imagine that if the payment system today – that is being operated by the financial sector and the large financial institutions – switches over to a real time payment system with a digital currency, a vast proportion of their IT infrastructure would have to be fundamentally redesigned and changed.
Of course, for an organization like IBM, that would be a tremendous opportunity, but on the other hand, it would be a significant change that the banking system would have to go through in order to be able to accommodate real-time payments because they’re not set up to do that today. The rails that all of these transactions ride on are really based on this two-, three-day payment process.
Q: We quickly touched on some other economies around the world that might be implementing something like this. Do you feel that the U.S. or IBM has their eyes on any country in particular that might be piloting cryptocurrency right now?
A: The Monetary Authority of Singapore is probably the central bank that has been the most active and ambitious in this space. Now, China, of course, has announced a digital currency and has begun to launch a currency, so they are very active as well, in a much more limited fashion in terms of its use and its circulation. There are other nations that are beginning to look at this work – other South Asian nations and Middle East nations – and there are a number of smaller central banks that are building capabilities in this area. Somebody is going to figure this out at some point and it will change the way we do things.
Q: One thing that came to my mind after hearing the distinction you made between cryptocurrency and digital currency mind is Facebook’s Libra. Zuckerberg even went to Capitol Hill and testified, and there was so much the opposition, not just from U.S. lawmakers, but also even from European lawmakers and the Bank of International Settlements (BIS). I suppose that’s where the clear distinction comes in: do you think that in our future, a digital currency that is managed by the government – and that helps with transaction and payments – will probably make our life easier, whereas something that is controlled by a corporation will likely not make people feel safe enough to give their money to?
A: Facebook, of course, faces their own challenges. Some of us are old enough to go back to a time in 2004 when we clicked on the “I Agree” button on Facebook and didn’t really know what we were agreeing to. Facebook probably didn’t know what they were asking us to agree to either, and subsequently have used all of our private information in many different ways, some good and perhaps some not so good.
It’s a bit of a reputational issue that Members of Congress have with Facebook. They are quite explicit in saying that they didn’t understand the privacy implications when we were joining the Facebook global network, and they’re certainly not going to repeat that if and when Facebook begins to be part of a group launching a digital currency. So, the regulators are taking a very active role because of the use of private information in the past. They’re not going to be fooled again.
Q: Do you have an expected timeline for when we should expect to see the implementation of a digital currency system?
A: It’s really difficult to know. Certainly, the Chinese are going to push hard over the course of the next couple of years. The Federal Reserve has announced a plan to have a real-time payment system of sorts, which is a good first step. The Bank of England has a real-time payment system that they’re implementing.
It’s going to depend on where the pressure comes from and who’s willing to respond, but I don’t believe it’s going to happen quickly. One way to think about this is that the British pound was the global currency for a very long period of time, and early in the 20th century, the dollar became the world’s global currency. These cycles last a long time. Now, we’re talking about technology and a digital currency, so the cycles are probably not nearly as long. But nonetheless, the unit of measure is probably centuries: we don’t know whether it’s a quarter of a century, a half a century, or a full century, but it’s not years. These things happen over a long period of time.
Martin Fleming's Blog 