Originally published on by Brookings Institute. Link to original report( 22 mins)
HEFFNER: I’m Alexander Heffner, your host on The Open Mind, I’m delighted to welcome today’s guest, Professor Eswar Prasad. He is the professor of trade policy at Cornell University and author of the upcoming book “The Future of Money: How the Digital Revolution is Transforming Currencies and Finance.” Thank you so much for joining me today, Professor.
PRASAD: It’s my pleasure, Alexander. Thank you so much for having me.
HEFFNER: An op-ed that you wrote in the New York Times on the future of crypto, cryptocurrency, what we know informally or formally as Bitcoin, Ether, it, it really resonated with me and in kind of bringing to bear the realities of this moment, which is that for many years we’ve now had an online storage facility for normal currency as it were, right, dollars or pounds, and now we are storing a currency that itself is a technology. When, when you think of where we are right now, just to begin with, does it surprise you, did you always think we would be at a place where a digital currency was worth $30,000 dollars in effect, and that this is at the time we’re recording this, this may change that at least in its infancy, it would be worth more than a dollar or a traditional currency?
PRASAD: So the fact that a cryptocurrency like Bitcoin has a price of about $33,000 dollars when it’s just a piece of computer code, is certainly a shock Alexander. But what is not a shock, is the fact that we are here, because of what Bitcoin started was an important technological revolution that was likely to happen at some point, in terms of making digital payments a lot easier. Now, of course, in the U.S. we have been moving towards digital payments, but in other countries, this move has been happening even faster, where people are essentially giving up cash and moving towards digital forms of payment. But what Bitcoin promises was something more than just digital payment. Right now, if you want to undertake a digital payment, you have to go through a bank or use some financial institution, maybe a credit card, a debit card, a swipe of your phone, a swipe of your credit card. What Bitcoin promised was something radical and fundamentally different from existing digital payments. That is promised a medium of exchange, that is an ability to conduct transactions, without involving any trusted third party, such as the Central Bank, which provides money for all the commercial banks. So that was the big promise of Bitcoin that it would allow us to conduct transactions much more easily, much more cheaply without involving the government or any financial institution. It turns out Bitcoin didn’t work very well in terms of delivering that promise. But instead Bitcoin is now being held as a store of value, that is, people are holding on to it as an asset. And of course, largely a speculative acid because Bitcoin doesn’t seem to have any intrinsic use. It’s not working very well as a medium of exchange. So somewhat paradoxically and to my surprise, and to the surprise of most of the economists that are watching this phenomenon, even though Bitcoin failed in its stated objective now people are holding onto it because they believe it’s value can go only one way, which is up.
HEFFNER: Do other currencies currently possess, other cryptocurrencies, fulfill the object, in the way that you say, you know, ultimately Bitcoin does not fulfill that object, the objective, but there are many cryptocurrencies that have emerged, and it seems like a new one has emerged every day. So are there ones that are actually fulfilling the promise that you describe?
PRASAD: So that’s an excellent point. Then it comes to the heart of what Bitcoin has set off. So if you think about why Bitcoin doesn’t work very well as a medium of exchange, it turns out that the process by which transactions are validated, because there is no trusted third party involved involves a lot of computation power. And this is very inefficient. It’s bad for the environment, but it’s also very cumbersome and slow. It takes about 10 minutes for a transaction using Bitcoin to be validated. And the cost of one Bitcoin transaction over the past year has averaged about $20 dollars. So obviously you can’t go out and buy a cup of coffee using that because the transaction costs would be much greater. Another thing that Bitcoin promised was digital anonymity. That is to say you and I could conduct transactions putting only our digital identities visible to the rest of the world. So in these dimensions, Bitcoin has not worked very well. And the additional issue is that the value of Bitcoin is very volatile. As you pointed out, the price of Bitcoin changes minute to minute, and by a large amount. It’s as though you could take a Bitcoin into a restaurant in one day, be able to afford just a cup of coffee and another day of full lavish meal. So what Bitcoin has kind of set off is a wave of cryptocurrencies that try to fix each of these flaws. There are some cryptocurrencies such as Monero and Zcash that provide greater anonymity but are much more cumbersome to use. There are things called stablecoins that have come up right now that try to provide more stable value. And how do they do that? Essentially they do that by holding stores of existing Fiat currencies issued by central banks. So for instance, there is one stablecoin called Tether, and each unit of Tether is fully backed by holdings of U.S. dollars. So the price of one unit of Tether has stayed relatively stable at about $1 dollar. So what we are seeing is this wave of cryptocurrencies that are really trying to address some legitimate needs in terms of better digital payments, both within countries and across countries. The technology is maturing, but it’s not quite there yet.
HEFFNER: Knowing that crypto is not just sort of a curiosity, but it can have a real-world effect on the market and jobs and people’s livelihoods, should we now think of it in that light? You know, that, that it is not necessarily the asset that it presents itself at the value that it is at any given day, but its fluctuations can have a significant impact on the market as a whole and the economy as a whole?
PRASAD: Yeah. The numbers are astounding, Alexander. Just about three months ago the total market value of all cryptocurrencies put together was a little over two and a half trillion dollars, that’s trillion with a T. Right now that number stands at about $1.4 trillion dollars. So more than $1 trillion dollars worth of value has been wiped out. And you might think, this has very serious risks, and maybe the government should do something about it because certainly having $1 trillion dollars vanish from financial markets in a relatively short period should give rise to all sorts of concerns. One concern is certainly that the speculative bubble, which is what these cryptocurrencies have turned into, could end up hurting retail investors. So as we saw in the GameStop phenomenon that was egged on by the Robinhood platform. The real risk is that retail investors might be coming much later to the party. These are people who have much less ability to maneuver around financially. They may put their life savings in this and realize that ultimately when the market crashes, that their savings have been completely depleted. So from an investor protection point of view, certainly there might be a role for the government, but one could take the alternative perspective. So long as the government and the Federal Reserve, or the central banks warn investors of the risks, then investors are on their own taking these risks, because we know that Bitcoin has no fundamental value and its value from an economist point of view should be pretty close to zero because it’s not delivering any real service. So then if investors go out and decide to invest, then it’s their problem. Another issue is whether there could be financial institutions that are exposed to cryptocurrencies and the risks they entail. After all, we had a major financial crisis just about 12 years ago as a result of various financial innovations. But most commercial and investment banks have been relatively cautious this time.
Certainly some of them have dipped their toes in the water. A few of them are making crypto-related products available to their investors to meet demand, but by and large the exposure of other parts of the financial system to the crypto market has been relatively limited. But there are still concerns on different fronts, not just financial stability, but if you have anonymous cryptocurrencies available, you know, it makes ransomware attacks a lot easier because of the anonymity of crypto coins we might have these cryptocurrencies, especially if the technology matures and makes them cheaper to use being even more widely used for money laundering, terrorism, financing, and other elicit activities. So those are the sorts of concerns about illicit activities, both within and across borders that I think is getting governments very concerned about cryptocurrencies.
HEFFNER: Right. So you have the threat of a bubble and its impact on other facets of the economy and really uncharted territory and not really understanding the extent of you know, exposure. You have the secretive exchanges that, you know, can be used for malevolent or downright illegal purposes as you just described. But at the end of the day, ultimately what makes sense most about crypto, in my estimation and you get at this in your op-ed, and I imagine you focus on it in the book, is the idea that crypto just makes sense for a globalized world. It, you know, it makes sense that the extent to which you don’t have barriers and interest rates that are governing peoples’ lives, but you have some kind of equity of exchange and of commerce. And, and that’s what like philosophically resonates or registers for me. In actuality, the idea that crypto is, as we say, at the moment, we’re recording this some $33,000 dollars relative to a dollar and a hard day’s work, which you, you know, be paid in a dollar or Euro or yen or whatever. That doesn’t really add up, that doesn’t really make sense. But the idea that we shouldn’t have a society in which currencies our boundaries to our equity and to existing in a world where, you know, we can equitably and transparently engage in commerce across border. That that makes sense. That idea of Bitcoin or crypto makes sense, to me.
PRASAD: That’s true. The notion of leveling the playing field so that the major financial institutions are no longer dictating economic destinies and where the masses have easy access to digital payment systems that don’t require them to set up expensive bank accounts where they need to maintain large balances. That is certainly an important issue. In fact, even predating Bitcoin, there is the use of mobile technologies around the world. Even in middle income countries or low-income countries such as Kenya, mobile technologies have played a very important role in giving people access, literally at their fingertips, to easy digital payments, which is good for customers, which is good for businesses that don’t need to access, don’t need to handle cash. So these are all very positive developments, and there is a real need to have cheaper and easier payments accessible to everybody, not just domestically.
You mentioned the international aspect, that is really huge. There are many economic migrants from say, Mexico from India who are working in the U.S. who send money back to their home countries, and they have to pay very large transaction fees on those on those amounts they send back to their home countries. It takes a lot of time for those payments to clear. It’s difficult to track those payments. So certainly the ability to use cryptocurrencies across national borders can generate much more efficient payments and get around all these impediments to payment, so it should be a very good thing. The problem is how one manages the fact that you have conduits for much easier, cheaper, and quicker payments and prevent them from being misused for elicit and illegitimate purposes. So that’s the balance that I think we are contending with right now.
HEFFNER: In a sense, you’re saying that that the problem does exist or the notion of not erasing currency exchange but having some more transparent and open system that that really is a need in a globalized society. And that our current system is antiquated, obsolete and betting against the masses and controlled by a few people. But you’re saying crypto is not the solution. It’s not the solution to that problem. At least in the way that it’s currently devised. And I just ask on top of that question, when we hear about Chinese miners of crypto and the threat of the integrity of crypto on that basis, and the availability of crypto, some of these currencies could be infinity. Some of them have a max of a certain number of coins in distribution, but, but ultimately the question about hegemony, financial hegemony, dominance is very much related to Bitcoin. And some folks’ skepticism that Bitcoin is being used or deployed as a Trojan horse to advance the Chinese currency specifically.
PRASAD: So there is a lot rolled into the points you made, Alexander. One of the issues to begin with on Bitcoin is why people think it is going to have any value. And it seems to be largely driven by the fact that that is hardwired into the Bitcoin algorithm, a specific cap. There can only be 21 million Bitcoins mined at the end of the process. We know it is uncertain. So far about 18 and a half million Bitcoins have been created. And this seems to alluring to investors, in motion that just like gold, that is this very scarce thing. And unlike central bank money, which, you know, the Fed can go out and print that. Well, the fact that this thing is scarce is maybe what gives it value. Of course, to economists, this sounds very strange, the scarcity certainly helps, but just the fact that something is scarce cannot possibly create value, especially when that object, digital or otherwise has no intrinsic use at all. But you’re certainly right that right now, what Bitcoin has created in terms of its legacy, whatever happens to Bitcoin itself, is a move towards digitalization of payments. And there is a very interesting phenomenon that we are beginning to see right now, which is central banks beginning to issue digital versions of their own currencies. So in fact, the Chinese central bank has started experimenting with the digital version of the Chinese currency, the renminbi. And it’s likely that sometime in the next three to five years, they will roll that out nationwide. So why are they doing that? They’re doing that because in China, digital payments are right now the norm, but there are two digital payments providers, Alipay and WeChat pay, which are doing a fantastic job of providing very cheap and reliable payments, but the government doesn’t want the central bank money to become irrelevant. So they’re essentially digitizing the central bank money, so that renminbi still remain relevant to the economy. In the U.S. there is some talk of moving towards a digital dollar. It could be again to provide better payments, but also to give people much easier access to a digital payment system without having a bank account. So we are seeing some big transformations in the nature of money coming thanks to Bitcoin.
HEFFNER: Yeah. I mean, isn’t it true that we’ve, we’ve effectively had the digital dollar since we’ve been able to manage our finances online? I mean, it almost feels as though we do have that, even though we don’t, if you know what I mean,
PRASAD: That’s right. The reality is that payments are becoming increasingly digital. I mean these days most of us conduct transactions using a debit or credit card, or more often with just a swipe of a phone connected to Apple Pay, or perhaps you and I might split a dinner check using Venmo. So that is certainly becoming the norm. And that raises the question in the middle of all of this, what role does official central bank money still have? Do we even need it anymore? And if you look at the long arc of history, this is quite a fascinating development because, you know, two or three centuries ago before central banks were created, you had various kinds of private currencies circulating and competing with one another based on how much faith people had in whoever was issuing them. And then you had a period of competition between private currencies and our government money. And then the emergence of central banks basically wiped away private currencies. So only official currencies issued by central banks really have been dominant in virtually every country for the last few decades. But now we are once again seeing private currencies competing with government currency. And again, as an economist, I think competition is good, so long as it is managed. And what central banks are dealing with right now is how to make sure that their money still remains relevant and of practical value in the economy.
HEFFNER: I see what you’re saying, but when we know that we can store our hard dollars as in effect digital currency, it doesn’t, it kind of make the point moot. I mean, with respect to the question of a digital dollar or, you know, a digital Euro. I just, to me, it’s kind of hard to fathom it. But I do understand the point you’re making about competition. I just think effectively we already have that. I, you know.
PRASAD: To a large extent we do you’re right. If you think about the functions of money, we have prices when we go to a store denominated in dollars. So that’s the unit of account function, which will certainly remain. Then there is some medium of exchange function, which is the use of the dollar in transactions and barrier, right? That many of these transactions are already in dollars, even though our bank accounts may still be denominated in dollars and, and sorry, the transactions may be purely digital without involving central bank money. And then there is a store of value of functional, the sense that assets that are denominated in dollars are still going to have value. So we might actually see a separation of these different forms of money. So we might continue to have prices denominated in dollars. The dollar might still be very important as a store of value, but as the medium of exchange official currencies might become much less important than they are right now in giving, largely, displacing existing currencies. And this is actually happening in some countries in Sweden, for instance, the use of cash has almost completely disappeared. And in Sweden, you know, the digital payment systems like Swish work perfectly well, but even there, the Swedish central bank Riksbank, is issuing the digital version of its currency or experimenting with a digital version of its currency, E-krona. Why? Because they want to keep central bank money relevant in case there are some problems with the private payment system, so that you still have a digital central bank payment system that can function at a time of financial worries about the private payment system. So it could end up becoming a backstop rather than anything fundamentally important in the economy.
HEFFNER: In the Swedish example, one print dollar is no more valuable than one digital dollar, right?
PRASAD: That’s correct. The value of the two is exactly the same. But the print version of the currency might cease to exist and it might all become digital, but during the transition period, the two will have exactly the same value.
HEFFNER: And your op-ed seems to suggest that the storage of real dollars or the storage of money through a central bank system, like the way you might store your money online with a U.S. bank, that that is still far and away safer than storing cryptocurrency?
PRASAD: That is certainly, if we now are in a position where the Federal Reserve, the U.S. Central Bank which I would refer to as the Fed could offer each of us an account. But so that we have an account with a Fed, unlike a bank account, it would have no fees, we could just you know, connect it to an app on a mobile phone and then we would start using central bank money just digitally, rather than in the form of dollar bills. But that has certain risks. I mean, it sounds very convenient to use, but what if all of us decided that we’d rather move our money to those central bank accounts and take our money out of the commercial bank accounts, that would be a bit of a problem because commercial banks are still very important in the economy in terms of creating credit, that allows us to buy automobiles, houses, that allows firms to invest. And you don’t want the central bank to be in charge of allocating credit and the economy.
The other concern, which I think we need to think very seriously about is if all payment methods were only in terms of digital forms either to say Visa or MasterCard other forms of cards, or central bank digital money. There are concerns about whether we would have any privacy and confidentiality left in our transactions. And maybe some might say that the horse has already left the barn and we have no privacy anymore, but I wonder if we really want to live in a world where anytime I buy you a cup of coffee, either the financial institution or the government is going to know about it.
HEFFNER: In an age of ransomware though, you’re, you’re saying pretty definitively that you are more protected with your dollars stored in a traditional bank than you are with your crypto on one of these various platforms?
PRASAD: That’s correct.
HEFFNER: Are major U.S. banks, basically less hackable than crypto platforms?
PRASAD: There are other protections as well that make it more likely that if you lose money that you have in your bank account, the bank is going to make you whole because they are in-turn insured to some extent by the government. The wonderful thing about crypto is that in many cases, such as in the case of Bitcoin, no one is in charge, which means that nobody can prevent you from using it. Nobody can be, you know, censored from using that network. But at the same time, if you lose your password to what is called your digital wallet, there is nobody to go to, you can’t pick up your phone and call your bank and say, can you please reset my password. Your money is gone.
HEFFNER: Who decided that it was going to be capped? You know, you said, basically you can write your own destiny, but in the seconds we have left, who decided that there would be a maximum X number of Bitcoins, for example?
PRASAD: That is the remarkable and wonderful thing about Bitcoin. We do not to this day know who the creator or the creators are. But whoever designed the algorithm has designed it in a really interesting way. A lot of these issues about how Bitcoins are issued, what is the process by which data points entered into circulation? What the cap is on Bitcoins? These were all hardwired into the algorithm. If everybody in the Bitcoin community agreed they could change it. So this is my people power becomes really important. The Bitcoin community now can make decisions, but all of this stuff was designed in a really remarkable be in the technology itself is a marvel. So the last one I believe you with no matter what happens to Bitcoin five, 10 years from now, it’s value may be zero. Its value might be a million dollars. It’s really set off a revolution in money that is going to affect every one of us for a long time.
HEFFNER: Eswar, Professor. I want to encourage all of our viewers to check out your upcoming book “The Future of Money: How the Digital Revolution is Transforming Currencies and Finance.” We have to have you back here on The Open Mind, because I don’t think you are just inspiring revolution in currency and finance. What dictates currency and finance? Borders. What dictates borders? Security? I think ultimately, we may be talking about war and peace, and I think the crux of your answers get at that very point, whether it’s us and China or other countries involved in the preservation of their systems and a lot hangs in the balance, especially if folks are going to move away from their own central banks. So I look forward to you joining us again in the future, Professor Eswar Prasad, Thank you so much for your time today.
PRASAD: Thank you. Alexander, I enjoyed our conversation, and I look forward to talking about geopolitical and other issues at more length on another occasion. Thank you very much.
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