Do We Need a Digital Dollar? The Future of Central Bank Digital Currencies with Yaya J. Fanusie, Adjunct Senior Fellow, Center for a New American Security (CNAS). Julia Friedlander, C. Boyden Gray Senior Fellow & Deputy Director of the GeoEconomics Center, Atlantic Council.
Moderated by Michael Greenwald, Director of Digital Asset Education, Tiedemann Advisors.
SPEAKERS
Yaya J. Fanusie
Adjunct Senior Fellow
Center for a New American Security (CNAS)
Julia Friedlander
Deputy Director of the GeoEconomics Center
Atlantic Council
MODERATOR
Michael Greenwald
Director
Tiedemann Advisors
TIMESTAMPS
EPISODE TRANSCRIPT
Michael Greenwald: (00:07)
Future role of central bank digital currencies. It seems that the US dollar is at a critical inflection point, and that we're in an era of dollar dominance. We've been stuck at this era since 9/11 and afterwards. And so, Julia, I want to start with you, how do we move from an era of dollar dominance to dollar innovation?
Julia Friedlander: (00:33)
Thanks, Michael. And it's a pleasure to be here today to chat about a very crucial topic that bridges between national security and financial policy. To start out, I would say, we've been in a period of undoubted benefit from the dollar, in the Bretton Woods system in the interwar period and post 9/11, when the dollar really became one of the principal tools at fighting international crime and terrorist financing. But things are changing, the global environment. We've opened markets up incredibly, according to a US model over the past 70 years, and other countries have certainly learned to benefit from that. So as we move into a period of increasing digitization and the economy of global growth, we need to enter a new period where you the US dollar becomes a force for US innovation and for technology growth, and not just to preserve the status quo that we have enjoyed for the past [inaudible 00:01:41]
Michael Greenwald: (01:41)
So, Yaya, does dollar innovation mean a digital dollar? I mean, we'll get to what China's doing and what other countries are doing, but should the United States react to move to a digital dollar right now, and is that good for the United States?
Yaya J. Fanusie: (02:00)
Well, Michael, it all depends on how you assess the world around you, what's happening? I would frame it as the format of digital money is changing. So it's not even necessarily about dollar innovation, it's about digital money innovation. Previously, digital money has been the purview of financial institutions; where we use PayPal, or Zelle, or Venmo. Now, it is just the fact that there is a stretching of what's possible in terms of digital money. That's happening, whether the US makes a policy decision to create account-based or token-based central bank digital currency, it's happening. So really, I think, we have to frame the problem, or we have to frame the situation, which is digital money is changing. And if we're going to operate in this new environment, we're going to have to do something that's, maybe, at the end of this panel, we'll decide exactly what that is.
Michael Greenwald: (03:01)
So, Julia, it seems to me that we're in a multi-polar world, and we are really entering a period of a basket of currencies, where countries are retreating from the dollar. They're looking to go around the dollar at every turn. I've heard you say this in recent testimony on the Hill. Can we live in a world where DeFi, central bank digital currencies, a digital dollar, and stablecoins live alongside each other in a future global digital wallet? Is that possible?
Julia Friedlander: (03:37)
Yeah, I think so. I mean, we have to design it carefully, and the road there might not be easy. To preface what you were saying, Michael, I mean, of course, I'd also like to caution that the retreat from the dollar will be very gradual. And that if you see the international holdings of a dollar drop by a half a percent or something, so there should be no cause for alarm. I also don't necessarily think that the emergence of strong, properly regulated currencies alongside the dollar should be something to be discouraged, like the pound, the yen, the euro, for example.
Julia Friedlander: (04:15)
So I think that the framework, we shouldn't paint a false dichotomy between saying, we're going to have a CBDC and that leaves no room for stablecoins, or that leaves no room for crypto. In the world that is emerging, that we are trying to create for ourselves, there is ostensibly a role for essential bank digital currency, perhaps in direct payments between governments and individuals; for digital wallet in the form of fiat-backed stablecoin that facilitates retail payments, and then also crypto as an investment vehicle. All these things are possible.
Michael Greenwald: (04:54)
So, Yaya, to push you. 25 years ago, the dollar was at 75% global central bank reserves. Today, it's below 60%. I don't see any data pushing it up above 60 right now. It seems to be in a downward trend. So with that, has the United States become complacent about the dollar. Its complacency are Kryptonite, and our only alternative is to get on board with the 80 plus central banks that are developing a central bank digital currency right now.
Yaya J. Fanusie: (05:30)
Well, I think our moms always told us, if someone were to jump off of a bridge, would you do it? And she was telling us that that wasn't the reason to do anything. So I take the same, I think we should take the same approach. It may very well be that the United States should launch a CBDC, but it shouldn't be because other countries are doing it. It should really be because we have assessed... And I know we're going to talk about China and other countries, but you mentioned other countries. What are other countries doing? They're assessing the technology, they're assessing their currency, they're assessing the global economy. And many of them have decided that, "Oh, this technological innovation could allow us to do something that will help our currency, our economy, et cetera."
Yaya J. Fanusie: (06:16)
I think the US needs to do the same. We have to get away from this dichotomy like Julia said of, "Oh, it is this type of CBDC or it is nothing, and it's just crypto stablecoins." That's not the policy posture. The posture should be, let's assess it, and let's not see the legacy, the status quo of digital money be intrinsic, or in perpetuity that that's going to be the way things are.
Michael Greenwald: (06:43)
So, Julia, it seems, though, that the United States is a proactive country. But it seems that we have been admiring what other countries are doing. And the Feds are supposed to come out with a white paper this month or early next month about the usefulness of a digital dollar verse stablecoins. For the first time in a long time, I'm seeing a great debate at the Fed between Lael Brainard, pushing a digital dollar; Randal Quarles and his great Parachute Pants speech, pushing stablecoins. Is there a point in the middle, and why is the United States admiring other countries rise right now?
Julia Friedlander: (07:25)
You could say we're admiring the problem, but also the United States bears a very particular role in the global economy, as the global reserve currency. It's a very different story, if you are a small island economy looking at a digital inclusion and financial inclusion and your GDP is a couple billion dollars a year. So I think that the caution that some members of the Federal Reserve, Chair Powell first and foremost, is not to be directly criticized. But on the other hand, as you say the US has always been at the forefront of financial regulation, and it shouldn't give that role over to other countries that might create a framework and design structure for central bank digital currencies that do not work in the US interest or of the global financial sector at large.
Julia Friedlander: (08:25)
So the US's role should, as Yaya says, not necessarily to jump into the deep end and say, "We're going to have a central bank digital currency as soon as we physically can." But to create new fora to develop standards that are globally applicable. And this is, we would argue with the Atlanta Council, first and foremost, in the G20 format to develop these standards before it's a little bit too late and other models have gone far enough that we cannot pedal backwards.
Michael Greenwald: (09:06)
So, Yaya, speaking of our allies, it seems that we're in an era of a new digital asset foreign policy. You have authoritarian governments like China, Russia, Iran. You've seen what Belarus is doing in the last couple of weeks. Using central bank digital currencies for control to understand the consumer and every turn, where you then have other central banks like Sweden or allied countries of the United States trying to use CBDCs for equity, for inclusion, to promote the consumer. Talk about what China is doing, and are they creating a precedent for other authoritarian countries to follow?
Yaya J. Fanusie: (09:55)
What China is doing should be framed as less a currency issue, which is how most of the public is talking about it, and more of a data issue. So if the stance is going to be, "Oh, the digital yuan versus the dollar, of course, the digital yuan will not win." That's actually not really the issue. And I don't think China, from my looking at it over at the Center for a New American Security, we produced a report on China's digital currency. And we assess that China's playing a different game of strategy with this project. It's really trying to develop a digitized economy, and is trying to lay down infrastructure where the government can capture financial data, in a way that it can't with the current infrastructure where Alipay and WeChat and the companies behind them do not provide direct access of data access to the government.
Yaya J. Fanusie: (10:52)
So China's trying to create this new infrastructure and collect more data and analyze it. And I would say it would support digital authoritarianism. And so that's the way to see it. And then there's also maybe the competitive advantage. As China is able to collect, as the government is able to collect more data, it can innovate with the data. And I think we should see that China is operating under the idea that the nation with the best data wins. I think that's how it sees its pursuit of the CBDC.
Michael Greenwald: (11:25)
So, Julia, on that point about data, and obviously cyber is being a huge tool used right now, do we need a new National Security Strategy in the United States? The last one highlighted great-power competition. We all know great-power competition. Do we need to be more strategic about the US dollar rather than seeing it as a long term threat, admiring that down the road, should it be seen in a short and medium lens for the United States to actually be proactive, given what Yaya just said about China?
Julia Friedlander: (12:03)
Yes. But I think that it's something that's much more easily said than done. I've been part of the drafting process for National Security Strategies. It's a catchall process, where everybody feeds in a little bit, and what comes at the sausage making process is always a big compromise. It is very hard, and I'll say this as a structural issue of someone who works at economic statecraft. This is the intersection between finance, economics, and national security. Both of us work in the space that to frame economic and financial issues using national security language. And what makes it so nice to be able to speak with a community like you guys today, because I'd grown up in the Washington National Security Framework is to understand the role that financial markets play in national security going forward.
Julia Friedlander: (12:56)
I almost feel sometimes, and I don't want to be alarmist when I say this, especially with Department of Defense colleagues around, but it almost feels like financial market integration is the new nuclear deterrence. And how do you manage that appropriately with cross border transactions and geopolitical tensions? And so I I don't necessarily think it has to be framed in terms of the dollar itself, but understanding and being able to speak capital markets language in the halls of the Department of Defense. And it's hard.
Michael Greenwald: (13:30)
So, Yaya, back to China. It seems there's consensus in Washington that China's far off from internationalizing the digital yuan. They haven't been able to change Belt and Road into digital yuan yet. They haven't been able to really change SWIFT. They haven't been able to have cross-border contracts. Why are we waiting for China to internationalize? Why are we waiting for China to make improvements, rather than us fix our own plumbing here in the United States?
Yaya J. Fanusie: (14:08)
I wouldn't say that we're waiting for China to... We being US policy makers. I think there a good contrast that you're pointing out, which is America, we have a very complex system, our democratic system. It's not so easy to lay out a top down strategy. Maybe even getting back to the idea of the National Security Strategy idea when it comes to finance. It's not our thing to implant this, "Hey, this is the direction we're going to go." And then everyone fall in line. That is a Chinese Communist Party methodology, how you structure the economy. And that's actually what we see happening.
Yaya J. Fanusie: (14:48)
So what we're seeing, while we're... I won't say we're twiddling our thumbs. I'm not going to say that about the US policy. But while we're having discussion papers that might come out in a few weeks about a CBDC, like our first white paper, China has already assessed the strategic direction of the economy. It has done research for several years on digital currency, it has produced just pilots white paper. And now it is solely trickling down into the rest of the economy, the financial sector, big banks, small banks, and they're falling in line. So it's not that we are waiting for them, but they are positioned differently. We have to figure out what's the US approach to innovation.
Michael Greenwald: (15:31)
So, Julia, on that point, since the United States is in the white paper phase. And we all know what happens when things go at committee and things go to white paper, usually not that much action in the short-term. Does the United States need to convene a new digital asset Bretton Woods, where even if the United States isn't ready yet to create a digital dollar, and we're a couple of years off, we can convene the EU key-allied central bank governors, New Zealand, Sweden, Japan, and create a new digital asset framework. We're all sitting here today and there's no guardrails, regulatory-wise, yet for the digital asset space. Everyone's yearning for it. Shouldn't the United States convene that group under a new digital asset Bretton Woods?
Julia Friedlander: (16:21)
I think it could be useful. I don't necessarily know if using the term Bretton Woods is putting a stamp on the format, especially because certain aspects of crypto and of the AML/CTF framework are being discussed in the Financial Action Task Force already. There are already a G7 working groups under the finance minister's track to discuss these things. But Michael, I think, you're right in the sense that we can develop a growing consensus first among partner nations who have a similar conception of the balance between privacy and regulation and free markets. And that's ultimately the bread and butter right there.
Michael Greenwald: (17:10)
So, Yaya, speaking of privacy, there's fear in the United States that if the United States creates a digital dollar, it'll follow the China's model. And that after 9/11, the PATRIOT Act used a lot of power to gain information about Americans. How can the United States create a balance, where it promotes the consumer, it promotes privacy, it promotes inclusion. Is that possible, and what type of framework would you envision around that?
Yaya J. Fanusie: (17:44)
Everything is possible right now because we're at this stage where CBDCs are being fleshed out. There is no one size fits all, there's no one way that... Everyone thinks is the way to go. Everything is really on the table. And so that's why it's important, in the US, for policy makers and the private sector to actually be asking that question, what does it look like?
Yaya J. Fanusie: (18:07)
I mean, I'll let you know that recently, I don't want to get too technical, but recently there was an academic research paper that came out of a university in Germany about how you could have a CBDC and have cash-like privacy. It's not really a policy question, it's a technical question. So we may say policy-wise, CBDC, they need to have a level of privacy. But then you need people to actually do the work and technically figure out the computer science of doing that. And there are people that are doing that. So we need to... Well, we have to get more in the game. I mean, that's an academic paper. Hopefully, our US policy makers have read it, since I got it.
Michael Greenwald: (18:46)
I've read it.
Yaya J. Fanusie: (18:47)
I sent them the email-
Michael Greenwald: (18:47)
I've read it.
Yaya J. Fanusie: (18:48)
Oh, you read it.
Michael Greenwald: (18:48)
I re-read all your stuff and Julia. Julia, let's pick back on privacy. So how do you envision the digital dollar working for the consumer? How would it work for all of us? Isn't all of our banking already digital? What does it mean for commercial banks? Will we need an Act of Congress? What do you think about the consumer, is this good for the consumer, or is this good for central banks because of responsive China?
Julia Friedlander: (19:21)
So they're all a bunch of different questions. I think the answer is that it really depends. The ability of CBDC, and this is a question that both of us received in our testimony in July in House Financial Services, was how do you actually reduce the cost of transaction essentially to nothing for underbanked or unbanked sectors of the population, those who did not receive their CARES Act checks in time, those who defaulted on loans as a result of friction in the payment system. Now, I mean, I think, Michael, you're correct to say there are improvements that can be made in commercial banking that would, I think, maybe take that role as well.
Julia Friedlander: (20:07)
And so what we also like to emphasize is that there is, again, in not creating this false dichotomy, is that central banks would never be able to implement this by themselves. They don't have the personnel, they don't have the technology, they don't have the client interface. And so the design of a central bank digital currency would, at least in the United States model assess, but defacto require cooperation with the private sector, which is a huge opportunity.
Michael Greenwald: (20:39)
So yeah.
Yaya J. Fanusie: (20:41)
I just wanted to jump on the issue, because I want to maybe give an example of like... Because you had asked before about the framework, what it should look like. So practically, most of the CBDC papers out there say that the government would not necessarily have direct access in real time to transactions. But here's the question, all of these proposals do say that for AML/CTF reasons, they'll be able to get this information. So here's a practical issue. So how do we manage the fact that government doesn't have access to your transactions? But let's say they can, let's say eventually they do. And let's say a bad guy went to your store. You own a store, bad guy went to your store, and they get not only his data, but your data. Now that they've unmasked you, what do they do with that data? You're not the suspect, but now it's in their database. So this is a policy question, and it's a technical question. This is why is practical [crosstalk 00:21:38]
Michael Greenwald: (21:38)
And this came up after 9/11 with SWIFT. And Julia, we all tracked terrorist financing, so that's become a key issue. So does a digital dollar make it easier for the United States to track terrorist financing? What are the illicit finance implications, as we know, terrorist financing moves outside of banks more than it does inside of banks right now. So what does it mean for those implications?
Julia Friedlander: (22:10)
I actually think that it provides an increasing incentive for illicit financial actors to leave the formal financial system. I think this is a conversation that we were having, in the context of China and saying, "Well, won't the Chinese designers reuse this with the purpose of evading US sanctions?" If I were a money launderer, I would absolutely not use a system that, regardless of the design choice implemented, provides greater oversight into where the money's moving. There are very good ways to launder money without a CBDC.
Julia Friedlander: (22:47)
I think you touched a nail in the head here, in the sense that US authorities currently have to go through a due diligence, subpoena process to have access to financial data that is possessed by or held by a commercial entity. With a CBDC, there is a potential that there would be direct access by the central bank. That's not necessarily true. You were talking about Act of Congress. Most people believe that there would have to be amendment to the Federal Reserve Act to be able to implement a CBDC, you can write in privacy and consumer protections into that.
Michael Greenwald: (23:27)
So, Yaya, moving forward. It seems that there's a lot of competition right now at digital asset space. That stablecoins have one narrative, CBDC have the other narrative, Ethereum is pushing its own narrative and others. What is the argument you see where stablecoins and a digital dollar can coexist given, like we saw during COVID, getting payments to people quicker, a stable coin couldn't do that. So can't they coexist?
Yaya J. Fanusie: (24:07)
Yeah. There's not going to be one coin to rule them all, necessarily one digital currency to rule them all. And I think the reason why that would be the case, the reason for coexistence, it doesn't say which one would be prominent or most prominent. But the reason for coexistence is simply because you can't put the technologies back into the bottle. And so even as regulators figure out, as the US decides, "Okay, we're going to go with the CBDC, or we're going to regulate stablecoins in this way." Even as we do that, I don't think there's anything we can do to say, stop cryptocurrencies from existing. That just doesn't exist.
Yaya J. Fanusie: (24:44)
So I think the world we are going to see is one where these different formats of digital money exists. Some of them will have certain use cases. Some of them may become less prominent, or their uses will shift. Maybe stablecoin once they get more regulated, they're going to be used for a specific thing. Maybe Bitcoin is going to be used for a specific thing. Maybe more people will be using CBDCs, but I think they will all exist to different degrees.
Michael Greenwald: (25:09)
So building on that, Julia, you know that I follow the art market very closely. And I think that speaking of markets, the art market has truly legitimized digital assets in the last couple years. And we've seen how it's playing out. How do you envision markets like the art market using a digital dollar? Won't it be easier, won't the compliance costs in others be less because it's a digital dollar and it's governed to buy the central bank?
Julia Friedlander: (25:42)
It's possible. I know you moderator here, but to put it back on you-
Yaya J. Fanusie: (25:49)
Ask him.
Julia Friedlander: (25:49)
Yeah, exactly. I'll ask you a question. I mean, do holders of physical assets of value actually see... I mean, obviously there's frictionless movement of payment and potentially a greater transparency in the providence of a... If that's where you're going with, but do you actually see that taking off?
Michael Greenwald: (26:11)
Well, I think that when it comes to the art market, reputational risk is everything. And so these auction houses want to make sure they know where it's coming from. And I think they don't always know the beneficial owner, as we discussed. And so I think if there's a system where they can use a digital dollar and there's a framework in place, you could see more of a surge in art sales because of that, because it's quicker, cuts faster. So I think it's going to have to be part of whatever framework comes as speed, efficiency, but also protection. One thing that I want to touch on with you is predictions. And do you envision the digital dollar becoming a political issue where this could be on the debate eight stage in the next presidential election?
Yaya J. Fanusie: (27:05)
I don't know if that would ruin the ratings of debates if they're talking about CBDC by then. Actually, I'm going to take a different tack. So the CBDC could be a political debate issue. I could actually see it. But you know what? Maybe more prominent, something we haven't mentioned, which I should have, the idea of digital ID. Digital ID, digital identification, like a national ID is something that probably has to happen for a lot of this stuff to work. A lot of the CBDC stuff, a lot of the privacy stuff, a digital identity. And that's something that we don't have in the United States. A lot of countries are trying to figure it out. So I can imagine a world where we figure out we want a CBDC, but then we figure out, "Oh, well, maybe we need to have a digital ID to make that work." And I could see that being a huge debate issue and a provocative controversial one.
Julia Friedlander: (27:59)
But hard to imagine that being necessarily partisan. Because I think we see in the regulation of a digital space, even if you're talking about anti-trust or taxation, there are different coalitions that are not Democrat or Republican, necessarily. So if it's coming up on the debate stage would be very interesting. I think, for me, I see the question about government-sponsored finance versus private enterprise being the way that it's framed.
Michael Greenwald: (28:29)
So last lightning round question. We have around a minute and a half left. Yaya, so we're at the Beijing Olympics, and we've got the digital asset awards ceremony. And right now, would you consider that the gold medal in the digital asset space goes to Beijing, and you've got probably Sweden, given their work on central bank digital currencies, are they getting silver? And then you have perhaps the Euros getting bronze. How do we help the United States not be in the stands watching this ceremony and get on the medal stand?
Yaya J. Fanusie: (29:09)
Understand that we're in the trials right now. So we have to show up. We have to show up to the trials, figure out where we want to focus and what our training regimen would be. But we just have to, I think, realize that the games are going on. That's step one.
Michael Greenwald: (29:25)
Julia.
Julia Friedlander: (29:28)
I like the metaphor. I agree that we need to put our imprint on this now. I'm not necessarily concerned that next year, if China pilots a CBDC at the Beijing Olympics for limited trials, that it is any imminent threat to US personnel who are there, or to the potential for the United States to leap frog.
Michael Greenwald: (29:53)
Julia, Yaya. It's a pleasure. Thank you very much.
Yaya J. Fanusie: (29:56)
Thank you.