FTSE Russell Convenes | Episode 8, Season 1

Big Tech vs the Central Bank: The race for digital currency

January 20, 2022

During the 2021 World Investment Forum, as part of our FTSE Russell Convenes series, we interviewed some of the most prominent speakers on key trends influencing the investment industry and beyond. This time round our host Jamie Macdonald met with MIT’s Media Lab Director of the Digital Currency Initiative, Neha Narula, who shared her thoughts on how the advancing technologies around cryptocurrencies like Bitcoin and Ethereum is placing pressure on central banks.

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They started developing their own currency in two thousand fourteen.But it was really Facebook's announcement that got everyonesort of really excited and and interested in moving faster in this space.And now what you have is I think a lot of central banksfeel like if they don't do it, they might be left behind.Some view digital currency adoption as a race betweenpublic and private markets but the reality is that forms ofboth will ultimately coexist.In order to understand what that scenario looks like,I spoke to Nahan Narula,research director of digital currency at the MIT Media Labwho deliberately spends as much time researching central bankdigital currencies as she does stable coins like Bitcoin.Neija, thank you so much for taking the time to chat withus, this afternoon.Now I wanted to talk specifically to you about,central bank digital currencies and private market currencies.But before we do that,would you mind just introducing yourself and saying a littlebit about your background? Sure. So, my name is Nahanarula.I'm the director of the digital currency initiative,which is based out of the media lab at MIT.We're a group of technologists,and researchers who are focusing on cryptocurrency anddigital currency research and development. So,when you say do research on,are you you're working with central banks to help themdesign a digital currency? Is that right? Yeah.So we actually work in two areas.One area is in cryptocurrencieswhere we focus on decentralized networks.And then the other area is centralized digital currency.And, well, who has the biggest,centralized currencies out there at central banks?And they are starting to investigate the idea of issuingtheir own digital currency.And so we've had the pleasure of working with a few different central banks.And more recently,we've been doing a project in the past year with the FederalReserve Bank of Boston.In terms of roll out of a Central Bank Digital currency,I think you'll probably agree with me that it's inevitablethat they will at least try at some point.However, my question to you is,why don't central banks just kind of wait and let theprivate market make the mistakes. I mean,with all your amazing research, I'm sure they'll get it right,but you know,they could for free just wait and let the private market workout where the mistakes lie and then, you know,wait a few years and then produce one that's much betterbecause I assume that when central banks release a digitalcurrency, they wanna make sure that it's it's right.It's a good one. Yeah.There's a lot of pressure.There's a lot of pressure to get it right. What? Sorry.Let me let me ask you a follow-up quickly is that arethey under pressure because basically the likes of Bitcoinand Ethereum are just getting so big that had they stayed at,you know, lower numbers with market around ten, twenty billion,they wouldn't have been in such a rush,but because of the attention, these coins and,this this technology is getting,they feel that they're they need to be there faster. Yeah.So interestingly,it's not actually Bitcoin and Ethereum that are putting thepressure on Central Bank.Despite the fact that I think today crypto has a market caparound three trillion dollars.That's peanuts to a central bank. Right.The real pressure is coming from tech companies like Facebook.So when Facebook announced that they were interested indeveloping a digital currency in two thousand eighteen,That is what really woke a lot of central banks up becauseFacebook has three billion users.That is more than any country in the world. That is huge reach.And the idea that they might be able to launch their own currency,which would be instantly available to all three billionusers. That was a real wake up call for central banks.In particular, it was a wake up call for the,People's Bank of China, the Central Bank of China.They started developing their own currency in twenty fourteen.But it was really Facebook's announcement that got everyonesort of really excited and and interested in moving faster in this space.And now what you have is I think a lot of central banksfeel like if they don't do it, they might be left behind.So why didn't that work? Why didn't what work? Was it Libra?Was Facebook's currency? Yes.So it might I'm assuming it's about who owns the data. OrYeah. So Facebook's currency Libra now DM might work. Itjust hasn't launched yet.Yeah.It's it's it's sort of they're they're really taking taking itslow. They've committed to wanting to do it you know,very safely through proper regulatory means.And so, you know, they're spending a lot of time workingon it, trying to get it right.That means the launch has been a bit delayed.I think it's going to be an interesting question to seewhat does actually launch.They started out saying that they were gonna launch theirown currency and now they scaled that back to launchingsomething that's more like a digital dollar.So, yeah, we kinda have to wait and see what happens. And, you know,I keep calling it Facebook currency and you call itFacebook's currency as well. And I think most people do.You know, they they they call it DM,and there's an organization called the DM Association.Which is supposed to be governing it. But, you know,I think Facebook is really the dominant player here.So when it comes to the central banks rolling out digitalcurrencies, what power do they have, if any, to now think, right,we're gonna be less accommodating about other coinsand and the private markets. And, you know, to some extent,we'll be able to slightly usher them out,or do our central banks in your opinion gonna be fine with you know,people having the option of using whatever coin they they want?Well, I think that, you know,there's what central banks want and what the regulators andgovernments can enforce and then there's what people want.So technology is kind of inevitable. It's really hard tostop a snowball rolling down a mountain.And so we've seen this in in plenty of areas, in in in tech,and where tech is run up against regulation and government.And if people are really using something and finding value init, then the regulation has to change.You can't change people finding value in something.So an example of this is Uber. You know, Uber pretty frequentlyflouted regulations to start their company and to start their business.And, you know, as people kind of tried to put a lid on that,they were really challenged. They were challenged politically.You know, Uber took out advertisements saying, you know,your politicians are trying to take this service away from youand people didn't like it. And so, you know,you can think about that analogy extending to money. Right.So it's it's gonna be really interesting to see what happens.And it it I think it really depends on where we seeuseful systems being built,applications that really make people's lives better. So,could you help me understand the issue of privacy a bit better?Cause I do feel there's a lot of misconception here and helpmaybe can it help explain it to me. Then in the future,we may use one digital currency to, you know, buy on Amazon orwhatever because we don't mind if we see our footprint,you know, out there for people to see, but we may,donate to a political party.We may wanna remain more anonymous using that,and that would be a different digital currency. Is that a,is that a possibility that we may face? Yeah,so I'm a computer scientist. I'm a systems researcher,and we try to build secure private systems.And it is extremely challenging. It is really,really challenging to get strong privacy in thesesystems. However, I think it's a paramount importance.Can you go into a bit more detail about that?Like, why is it so difficult to to build in? Yeah. So I think, you know,the way to think about this is Once information is out there,it's out there. And it's very hard to take it back.And so you really have to think about privacy very early on ina system. And It is so much easier to build privacy infrom the beginning than to try to tack it on later. You know,that's another thing.And and what we've seen is that the momentum is often in thedirection of,you know, revealing more and more and more days.It's always easier to kind of reveal a little bit more data.It's always harder to keep more data secret as time goes on. Sothis is a really challenging area, and I think know,just given all of the prevalence of technology in our lives,we've gotten kind of used to companies collecting a lot of our data.What we're starting to run into is that that might not be agreat idea, that that, you know,we are kind of giving up agency to our own data. With money,we have the opportunity to design that right from the beginning.Because we're designing these new digital currencies,we can think about privacy at the very start.We can think about how to build that in.And,we take a lot of inspiration from the cryptocurrency worldwhere we see these privacy preserving cryptocurrencies,Zcash and Monero being two of the biggest ones. Yeah. So,I mean, I think a few years ago,there was some resistance about, you know,cryptocurrencies or digital assets being able to use forcrime or or, you know, for more black market, sales or so.That seems to dissipate it as people understand more thatit's more that you can be held accountable if,if someone wanted to find out about a transaction they could.But what are the some of the,what are the some of the issues where you're seeing resistancefrom people keen to adopt these kind of assets? Yeah,there's a lot of resistance. Some of it is well founded.I wanna make that clear.But some of it isn't.I think that there is this misconception that the only usecryptocurrencies is in crime. And as far as I can tell,the data just doesn't bear that out. That's not true.It's actually a very,very small percentage that's used in criminal activity. And,I think the thing that's really important to note is that ifyou build a payment system,it will be used for crime in some way.There's no way to get zero crime. That's impossible.You know,but you try you try to to build it in such a way that that youcan reduce that amount. And I think, you know,also if you look at the existing regimes we have today,in the regulatory space for how we address this risk.It involves identifying people and it involves collecting awhole lot of data and it really puts the risk in a place whereit's the incentive of the bank or the payment service providerto collect a ton of data and to flag anything at all that mighteven look slightly risky. Yeah.And so you end up with things like, you know,I hear all these stories about people who pay, you know,might pay a relative in another in another country once amonth. And every single time that gets flagged, as, as a,you know, possibly fraudulent transaction or people who,you know, are,buying some for the first time from a new merchant.That merchant doesn't have a lot of history.Their funds get frozen, you know,and they don't have access to their funds for thirty days.So the systems we have right now just aren't efficient.They aren't doing as good a job as they could,and we have the opportunity to redesign them from the groundup using things like photography and verifiability.Now you mentioned just now that you said some of thereservations that you see today are warranted.Could you mention some of those? Yeah, so I think,something that maybe people don't think about enough is thetechnology risk behind some of these,behind some of these cryptocurrencies and digitalpayment forms. So I wanna make it clear.I'm I think this technology is incredible.I think it's gonna change the world.It already is changing the world. However, that said,it is brand new technology.So Bitcoin has been around the longest,for about twelve years, and a lot of people like to say,well, it's never been hacked.It's never been hacked and it's out there. And, you know,obviously if someone, you know, someone would hack it, if they could,and I just don't think that's that's exactly true.I think that, these systems actually, you know,there's a lot of different dynamics going on.And, you know,we're still learning how to secure them effectively.That's a lot of the research that my group works on. Mhmm.And when you talk to the developers of these systems youknow, they they use words like, well,this is still an experiment and we're still building.We're in the early stages. We're, you know,there's going to be problems,but we're gonna find them and we're gonna fix them. Right.But then you talk to some of the investors and they're usingwords like, well, this is hardened.You know, this is this is government proof.This is this is hack proof. This is totally secure.And so there's we've noticed this divide between thedevelopers and the investors, which is fine.I mean, it's a new technology, but I just think, you know,people need to be able to understand that risk.Price it appropriately. So are you surprised that,a currency like Bitcoin hasn't been hacked yet?Yeah. I am kind of surprised actually. You know,there's been some Sounds like if anyone could do it, youcould. I I don't know about that.But but I I I think I do know people in the world who Yeah.Right. And, you know,a lot of them don't because they don't want to.They want Bitcoin to succeed.Yeah. Well,that's the difference is there's a lot of people who, you know,see this as the future and they want this to succeed becausethey can see all the benefits attributed to it. Exactly. But,I mean, I think, you know, we,we want this to work even in the most adversarial of cases.So,it's gonna take a little bit more time and and researcheffort to really, really get the foundation secure.So if you don't mind me asking a kind of a crystal ballquestion, If you looked out five years to twenty twentysix, what do you think the world of,currencies and digit asset looks like then?Roughly speaking.And what are the sort of issues we'll be talking about,do you think? Yeah. Well,it's it's so hard to predict because the last five yearshave been so surprising.Everything is just accelerated so much faster than I everthought it would. So twenty twenty six, I think that givessome central banks enough time,some major central banks enough time to launch their owncurrency. So I think we see a top six.I don't know if it'll be the dollar,but I think we'll see at least one top six What I'm gonna holdyou to this dollar? At least one of them,has launched a digital currency. I think that,the cryptocurrency space is gonna be bigger than ever. Yeah.And, you know, just like with, with, you know,seen these use cases come up that were a little bitsurprising, but really exciting and took the world by a storm,DIFY, NFTs. We're gonna see even more of those. So you know,we're gonna see new business models built on top of thesecryptocurrency platforms.I also think we might see a much smaller number of cryptocurrency.Days. I think the space is gonna, is gonna winnow a littlebit, whether that's due to regulation or hacks or, youknow, whatever might happen. Well, Neja,I feel like I've talked to you for hours and hours,and thank you so much for spending the time chatting ustoday. And, I hope we get to chat again in the future.Yeah. That was great. Thank you for Jamie.The debate is over as to whether digital currencies willbe a part of our lives or not. They emphatically will be.The question is how and when will they be adopted and whowill win between the private and public markets.Is there room for both?Well, the race is on, and the winner is likely to appear inthe next few years.And that's why it's crucial to be learning about this now.If you'd like to read more on this topic,please go to footsie russell dot com forward slash researchwhere you'll find much more information.

June, 3, 2021 at FTSE World Investment Forum

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