FTSE Russell Convenes | Episode 9, Season 1

Digital Assets: The intersection of markets and policy

February 13, 2022


Professor of finance at Georgetown University's McDonough School of Business Dr. Reena Aggarwal predicts an explosion in digital assets as more countries move and adopt central bank digital currencies. As emerging economies are considering crypto and digital assets long-term, Aggarwal finds technology firms entering many financial related businesses, while regulators try to determine what to regulate and how to regulate.

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So on the one hand,regulators are quite concerned about a lot of digital assets,whether it's stable coins or it's cryptocurrencies,but on the other hand, we see an explosion in digital assets.And I find it interesting. It's not just the financial sector,right? You see companies like Amazonhiring experts in this area. You see companies like Walmart.So I think businessesare feeling like They don't want to be left out.There's an enormous amount of research being written aboutcentral bank digital currencies, but so much of itis dependent on what the regulatory framework will looklike in the future.Perfectly positioned to describe the cross section ofboth is doctor Reina Agarwal,professor of finance at Georgetown University,with whom I spoke about how and when countries will beadopting such currencies.Doctor. Echo Wall, thank you so much for taking the time to,chat with us today.Now we're going to be talking, particularly about the worldof, digital assets, where we are today,how we see the next few years, rolling out for the assetclass. Sure.And I'm delighted to be here talking to you about digitalassets. So my work is at the intersection of markets and policy.So I'm interested in, how do markets impact what happens? Inthe financial markets in terms of pricing and the and for example,the role of institutional investors And I'm alsointerested in how regulation makes a difference. Mhmm.And there's actually a lot going on that right now that isat that intersection.So I've studied issues like capital raising,corporate governance,and we're doing a lot more work in digital assets.And we're also doing a lot more work on the ESG front.Again, two very important areas from both a market's point ofview. And also policy point of view. So those are thekinds of issues that I focus on. Okay. So that'sinteresting. So before we move into digital assets then,going to more on your academic hat.How is the world of digital assets affecting corporateculture and, and, the way that business is being done today?It's still new. Right?We're still trying to figure out what's going on withdigital assets. So it's really interesting.On the one hand,you have regulators trying to figure out what to regulate,how to regulate. And on the other hand, in some ways,in this institutionalizationof digital assets. Right?It's become we're talking about several trillion dollars now.So on the one hand,regulators are quite concerned about a lot of digital assets,whether it's stable coins or it's cryptocurrencies,but on the other hand, we seean explosion in digital assets. And I find it interesting.It's not just the financial sector. Right?You see companies like Amazon, hiring expertsin this area. You see companies like Walmart. So I thinkbusinesses are feeling like they don't want to be left out.They don't we don't know exactly what the future is.But even you're not just talking about financial firms.Right? If you're not just talking about, technologyfirms, but the Walmart's of the world,the Amazons of the world, they wanna make sure that they are ready,and, and have the infrastructure laid outbecause, customers are using digital assets.So you just touched on something just then,which is the explosionof dishlatch ads in terms of market cap size.I mean, we're talking sizable,as a sizable industry now.Now has that accelerated a government's interactionperhaps before they have wanted to? And and let me explain.I do feel that central bank digital currencies areprobably inevitable,but it feels like governments are now sort of hurrying to getthem out because the private market is is is growing somuch. So they need a competitor to it. ButWhy don't governments just sit back and wait and wait for theprivate market to make all the mistakes and then design theperfect digital currency afterwards?Yeah, I don't think governments can wait.It's been amazing to see how much has happened just in thelast six months.So now that there are something like more than eighty countries,looking at, you mentioned central bank digitalcurrencies. So there are seven who've already moved on andadopted and have central bank digital currencies but thereare many more that are in the works. Right. And so why whyare they thinking about it? Why why do we need these CBDCs?And and there's no right or wrong answer. I think itdepends partly on,the state of the economyand so you have,on the one hand, you have the e yuan from China and youalso have the Nigerians have a CBDC.So different countries are sort of approaching it a little bitdifferently, depending on what their needs are.So for China would be because they want data.They just want to know where people are spending their money.They want data but but a lot countries are also reallyinterested in the financial inclusion aspect. Right. So,so in many countries,you have a number of people who are unbanked.So that that's one aspect. Another aspect is countrieswant more control over their monetary policies.So if you have all these private currencies that comeinto the market and you're the cryptocurrenciesand you have stable coins, then,you've seen what happened in China.They've been now cracking down that the technology firms weregetting into manyfinancial related businesses,and the country felt like they've got to put the brakeson that and and stop that.And, probably the rest of the world has learned somethingfrom that. And so before it gets laid,I didn't think the countries can just wait and see, okay,let the private sector go ahead because then it becomes verydestructive in a in a bad way. That then you try to stop theprivate sector from doing what they've they've come a long way.So it's much better to get involved earlier But at the same time,you're trying to the countries are trying to figure out.Do we need it or do we not need it?Can we do financial inclusion some other way? Can be,have more efficient payment systems, in some other ways.And I thinkeconomies where things are working pretty well and theiradvanced economies, they're more hesitant about it.Right? While while, emerging economieswhere there's probably more need for it with the more sense of urgency.But, but obviouslyChina has been at the forefront,and, you have to think of this from a long term perspective.It's not just about tomorrow or five years, but it really hasto be about the next twenty, thirty, fifty years. And if youlook down the road and twenty years from now,do you expect there to be a private market and a centralbank digital currency market as well coexisting.So that I I if I look for the next ten, twenty, thirty years.I think the central bank market will still be a very importantmarket. It's not -- You mean cash will still be with us. You know,a digital central bank currency instead of a private currency.So there might be some role for private currencies,but the central bank, you know,which is backed by the central bank.It's the liability that money is the liability of the centralbank. That's still going to be really important.And, and it's a way for central banks to control the monetarypolicy. Right? And when you have something like COVID,I think it really made it clear. So during COVID,you were trying to get money in the hands of people quickly.Anduh-uh if you had a digital currency,it would be much more efficient to do it. Right.In emerging markets, you have a lot of problems withmanipulationand leakage and, all of that could be avoided with thedigital currency.So it's not surprising that there are almost ninetycountries that are looking at what do we do in this space? Andeven though they might not introduce it immediately,I think they have to be ready.The infrastructure has to be set.The research has to be done,and they have to be ready so that they can start turning iton. Whenever it is the right time for the country.So we're talking specifically about the private market then.When you think about regulation,and government oversight of that. Is there anything you think,regulators like the SEC or the CFTC could do to try andderail the momentum that these currencies have.Absolutely. I think regulators can do a lot. Right?In some countries, crypto,because they seem to be quite accommodating now.I mean, they allowed the the the Bitcoin and ETF.There there just seems to be some rather accommodatingnoises coming from them unless I've Yeah. Yeah. It's it's I'dsay it's still too early to tell.Right. So we have a Bitcoin ETF,but but there are a whole lot of other products that themarkets would like to introduce.There's also been pushback by the regulators.And and I completely get the viewpoint of the regulatorsbecause this is an unregulated space and a lot of people canget hurt and So if you think about cryptocurrencies that aretrading on all kinds of exchanges that are notregulated, right?And It needs to say that about the hedge fund world when I was there,that it was an unregulated industry that where peoplecould lose a lot. But Yeah.But the hedge fund world is different. In the hedge fundworld, you have or credited investors.Right. Okay. And with cryptocurrencies,it is it could be small retail investors. Who are piling in.And I think one of the things COVID has done is people weresitting at home. Right?And so they started getting Now they've got their robin hoodaccount. Exactly.Exactly. I asked my students on the first day of class.These are undergraduates. These are, you know, eighteen,nineteen year olds. And I said,so we met in person for the first time. And I asked them,so how many of you have heard of these popular platforms?And almost on the Ninety five percent. Yeah. Right.And then I asked So how many of you have actually tradedon these platforms and a whole lot of hands went up?Sothen I'm thinking, okay, is this a good thing? And,I think it is a good thing because I'm thinking, okay,So what does it mean? Ten years down the road?Fifteen years down the road.These kids are going to be more financially literate thansomebody who had never been exposed to the markets.You don't worry that there are students who are looking atthis as a way to get rich quick and maybe not put the hard workin to stay. Yeah. That's a good point.But along the way somewhere, the markets will turn southRight? And they will lose. You you have to have both lessons.It can just be about the markets going up.And so I'm always okay with when there is a market connectcorrection, and then you learn that the markets go up,but they also go down.You need that reminder every now and again.You you absolutely do. And that will happen,and so they've they would have hopefully seen that it goes upand their investment goes up and why they should save andand that's a good thing and effect of compounding and all of that.And then they'll see this risk also and how they should bethinking about the risk but I think overall it's going to bea good thing that maybe the future generations are going tobe a little more financial literate. So if I was to ask you,looking out five years to twenty twenty six, let's say,what the world of investment looks like then.How would you think the world of investment would look like,what would be the kind of issues that we would be debating then,whether it's different interest rates or digital assets,just make up a very large portion of people's portfolio then. Yeah.So we've already started talking about does the sixtyforty rule work anymore? Right. Sixty percent equity, fortypercent bonds of fixed income. Does that work?I thought that was over, like, last year or Exactly.So that's over. And then it's, okay, what what allocation,at least from institutional investors'perspective is private equity or the all space,but then it's going to be,not just for institutional but also retail investors,what allocation with digital assets have. And, right now, it's tiny.From an allocation point of view. So I do expect it toincrease the allocations to digital assets.I'm curious to see what happens in the next few months. Forexample, with the inflation picking up. And then I'm also watching. Okay.What's going on with gold? Right? Gold was the traditionalinflation hedge. And is that going to be replaced?By,by digital,by cryptocurrencies in some form or shape.So it's a very interesting time financial markets. I I thinkthey're really getting transformed the way we investand the markets in general. On the one hand, we have thiswhole new asset class digital assets,then we have,ESG, right?A lot of interest in ESG, and funds that are flowing intoESG products.And, and both are the both are areas with a lot of regulatory issues.The third one I would say, but I'm watching carefully is,so what happens with retail investors?This trend that started during COVID,is this going to continue what influence will that have on thefinancial markets?And and the whole industry financial services. And,so so it's very interesting times,to be in the markets. Dogtag, well,I think we're gonna have to schedule another interviewbecause there's still so much to talk about,but I just wanna say thank you so much for your time today.It's been a real pleasure. Shell, thank you.I'm delighted to be here. Thank you. Take care.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.

Video recorded on June 3, 2021 at FTSE World Investment Forum

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