Former US Treasury advisor predicts no ‘real action’ from Fed on CBDC

Transcript

Angie Lau: Will El Salvador trigger global Bitcoin adoption and why is the international community watching with such trepidation? What role will developing nations play for crypto or crypto for them? And will CBDCs silence the crypto parade? A lot of good questions we’re asking today.

Welcome to Word on the Block, the series that takes a deeper dive into blockchain and the emerging technologies that shape our world at the intersection of business, politics and economy. It’s what we cover right here on Forkast.News. I’m Editor-in-Chief Angie Lau.

Practice is over, it is showtime. Bitcoin is now legal tender in El Salvador. Bitcoin’s promise to bank the unbanked and bring forth financial freedom is now being put to the test. El Salvador will be the first national BTC experiment for the world. 

Meanwhile, on the other side of the globe, another experiment has been taking place — in fact, accelerating. China’s e-CNY, or digital yuan is already being used for public transport, retail business and so much more.

So now, we have the state-backed digital currencies and the decentralized digital currencies that are actually really shaping the new age of finance and technology. Can they both coexist? What does that mean for governments and people?

We’re going to dive into that right now with our next guest. Michael B. Greenwald is a longtime U.S. government advisor, was the first U.S. Treasury attaché to Qatar and Kuwait, serving in two presidential administrations from 2010 to 2017. He is now currently a director of Tiedemann Advisors and director for Digital Asset Education. By the way, also senior advisor to CEO Frederic Kempe of Atlantic Council and a fellow at Harvard Kennedy School’s Belfer Center.

Michael, I think your credentials are longer than this intro. This is how great it is to have you on this show, and especially on your birthday. So, blockchain, digital assets, crypto never sleep, including you.

Michael B. Greenwald: That’s right. It’s great to be here, Angie. Thank you.

Lau: So your credentials actually speak to why I think this is going to be a really interesting conversation and especially since we’re watching El Salvador very, very closely here. The news is out, officially taking on Bitcoin as a legal tender. Bitcoin’s first day in El Salvador was a little bit bumpy, but a lot of people are watching this. El Salvador is a nation that is part of the IMF. It’s part of the International Monetary System. It is part of the system. 

From your point of view and from the halls that you often frequent, what’s the perspective? What’s the observation? What are people’s opinions — and yours as well — about what’s happening in El Salvador and Bitcoin?

Greenwald: Well, Angie, this is a great inflection point for the digital asset space right now. El Salvador is certainly a pilot program, and I think that’s going to be a great experiment to see how it plays out. People in countries like El Salvador want more choices, and that is a core theme we’ve seen before Covid. Post-Covid is that the consumer needs more choices and they need to be able to move money cheaper and faster. El Salvador has chosen this path. It remains to be seen whether all the fundamentals will be in place and how the IMF will treat this. But it’s early innings. Other countries, especially central bank governors, are watching the pieces very closely.

Lau: Yeah absolutely, because what this actually means for developed nations, for the West, when we have a system that’s already in place — it’s a legacy system — and to have this experiment happen in real time. What are the unintended consequences, either good or bad, that can actually come out of what we’re seeing in El Salvador in the early days, as you’ve said?

Greenwald: Well, the good consequences can be that more people can have access to banking and financial services, and that can promote more small businesses, if it’s done securely. That still remains to be seen. Ultimately, it’s going to be the large central banks and what it means for them as they create a new digital asset framework. Ultimately, countries like El Salvador, they’re not going to have huge impacts on what the U.S. does or others do, but it definitely does bring the issue to the table and it raises alarm bells that you could see others.

Greenwald: Belarus, for example, the leader of that country has now been pushing its banking sector towards digital assets. And you’re seeing a divide between aristocratic governments and autocratic governments in a digital asset foreign policy, using it for control where others are trying to use it for equity and inclusion. That’s the divide in the conversation.

Lau: And what is the U.S.’ stance on all this? Especially, from the U.S. Treasury side, what are former colleagues and current colleagues and peers thinking about this?

Greenwald: I think right now there’s currently a debate at the Fed, whether to create a digital dollar, whether we need a digital dollar and whether a digital dollar or a FedCoin could live alongside stablecoins and the DeFi space. I think that you’re going to see a basket of currencies approach that they will all live alongside each other and they’ll all have different purposes. Some will be more for equity inclusion. Some will be for speed in getting payments, especially Covid payments and other disasters that we face in the future, quicker to Americans.

But I think that we are admiring other countries right now, especially China. We are saying that China can not internationalize the digital yuan. There are many steps that they need to take in order for cross-border payments to occur or for them to become a regional Asian digital yuan.

The United States is not being as proactive as it could be on this issue. The white paper by Powell and the Fed will be telling. But let’s remember there’s a divide of the Fed right now. You’ve got Randy Quarles and Lael Brainard, where one is pushing a stablecoin approach and one is pushing a central bank digital currency. And so I think that that’s going to continue to be the debate for the coming years without any real action.

Lau: Yeah, and that’s something that we have been covering here at Forkast. We often talk about ‘when is going to be the official launch of China’s e-CNY, CBDC?’ In our editorial opinion, that’s already happened. This is a soft launch that is launching across the country. You can hop on a bus now with your CBDC. You can go buy your groceries, you can get your salaries done. These pilot projects are rolling out with the kind of intensity and momentum that really speaks to something beyond just a trial.

When we see the speed in which China is doing this, how is it regarded? From even your point of view, where does he United States, where the West sits on this? How much of a gap there is and what needs to happen?

Greenwald: I think that China has been wanting to move away from the dollar for years, and we’ve been in an era of dollar dominance, since 9-11 and since all of our sanctions tools have been used against Al-Qaeda, Iran and Russia and elsewhere. Countries like China have been frustrated by the dollar’s power and the weaponization of the dollar.

And so this is a very strategic move by China to gain control on the consumer and to slowly cut away at the dollar’s influence. I don’t see that happening any time soon, but it should be a cause for concern for the United States. And I think that rather than remain in an era of dollar dominance, we need to transition to an era of dollar innovation.

The United States has a responsibility as the global reserve leader to gather its like-minded countries into a digital Bretton Woods and to create a framework, perhaps a digital asset bill of rights for how countries should be using these digital assets and make a stark difference from what China is doing, which is all control and ultimately its using its financial power to control its citizens and surveillance.

Lau: That is certainly one aspect of it, and we often talk about the institutional perspective that is baked into whatever that sovereign currency could be and for all the bells and whistles and all of the concerns that exist about essentially a central government that is China, versus what’s happening in the U.S. side where, could a smart dollar, a digital U.S. dollar could then also be baked into the constitutional values and the political values, the societal values that is very specific to the U.S. side. How do these coexist in an international monetary system?

Greenwald: I think the cross-border issue in a future digital wallet, that’s definitely one of the issues the Fed is looking to tackle in the coming months to years. I don’t think we have a good answer yet. I don’t think they’re going to coexist right now. I don’t see a digital dollar in the same wallet as a digital yuan right now.

But I do see a digital dollar in the same wallet as a digital yen or a digital euro or a digital pound. There’s going to be a great use case as long as we remain the values of equity, in inclusion, in remaining to protect privacy. If the United States does go down this road, you’re going to need an act of Congress and you’re going to need a framework that explains why privacy is being used and why this is better for the consumer. Given the current system we have right now,

Lau: What excites you about the conversation that you are having right now in Washington?

Greenwald: We’re in this era where the future of money, there’s so much potential and there’s so much creativity occurring, especially in the art world. So I would say the art world and how the major auction houses, in my view, Christie’s, Sotheby’s and Phillips, they’re the central banks of the art world. They’re way out in front of this and that excites me.

It’s exciting to see how the art world is playing a key role, how smart contracts are helping artists gain royalties and rights for the future.That, to me, really excites me. And it’s a whole new generation of creativity, which is what the United States was founded upon — proactivity and innovation. Going back to those values and being able to have a new technology adoption, I feel like we’re still in the early 90s, or some would say early 70s when it comes to technology adoption. 

And I find these conversations to be fascinating. You meet people where they are and some are in the metaverse and some are more traditional, but they like collaborating together. So it’s this laboratory, Angie, where the digital asset space is being so creative. And they’re open, and they’re open to new ideas. For me, that and what is happening in the art world, really excites me.

Lau: I totally agree with you. Another thing that excites me is that policy makers, I’ve noted, are really kind of evolving their understanding of this space. We all hear about the ones that we’d love to — please go educate yourself a little bit more. But I think this momentum of policymakers engaging beyond just the superficial headlines and beyond just the basic narratives that are being thrown about and really understanding the power of that.

I’m curious — you mentioned the art world, obviously, NFTs is becoming a huge thing that is an incredible asset class. I wonder how the government is thinking about that, especially inside the Beltway. Is it something that is of interest? Is it something that they’re watching? I’m just curious, how this is all converging in conversations in the halls of power?

Greenwald: Prior to Covid, the U.S. government, especially the Treasury Department and the Senate, had a report out about what the regulation of the art market could look like, and that was just coming about. I think that they are still keeping an eye on it. It’s one of the few last unregulated markets. I believe that and the equestrian market are still two unregulated markets. I think that they’re keeping an eye on what that means for kleptocrats and others around the world who are moving money without true beneficial ownership. 

But listen, there needs to be a tremendous more education in the halls of Congress and across the private sector and the U.S. government, and part of my role at Tiedemann as heading up Digital Asset Education is to help families try to understand where we are, how did we get here and what this all mean and to provide a compass on what’s coming next and what does this mean for you and me?

So I think that there is a tremendous amount of FOMO right now and everybody wants to have exposure. But most importantly, I think they want to understand what this digital transition means and how can they be part of it?

Lau: I want to pull it back to the role of Bitcoin in all of this, because on the private side, the innovation with the NFTs, it’s really creating opportunities in industry, and then from the policy side, when you have the Panamas and the El Salvadors and, all of these other countries of the world — one could argue tier two, tier three — that are in the macroeconomic financial legal space because they are now bringing Bitcoin into the mainstream.

I wonder how this tension coexists with people’s perspectives here. They’re kind of driving the mainstream adoption in the real world and bringing Bitcoin really to the people. I know you’ve got a law background — what kind of issues… Does this actually create legal precedents, a kind of new thinking in terms of how people engage with it legally that creates a whole host of different questions to be answered?

Greenwald: One of the dilemmas is that there’s no digital asset framework right now that the regulatory guardrails are very vague. In this period, it’s very hard to interpret where you’re stepping on kryptonite or not. And so I think that there’s a group of people that are trying to be overcautious and overly risk averse and stay out of it until there is a regulatory framework.

I would hope that in the coming months to years, you’ll see the United States create a digital asset framework on the same lines of what I think hasn’t been created yet on cyber, in what are the rules, cross-border, working with other countries and what should be allowed, how should central banks be deploying these digital assets. 

I mean, you’ve got over 80 central banks right now in central bank digital currency pilot programs. Some like Sweden and Japan are further along but there’s no framework. There’s a Financial Action Task Force, which is the global anti-money laundering provisions. You’re going to need the same sort of digital asset framework so that people understand the regulatory guardrails, but ultimately there is no legal precedent yet. That’s the confusing part.

I’m sure there’s going to be many law review articles in the coming years about the future of money, and I’m excited for those. Those are great cases in great case law. But we need to have more of a framework in place so that people understand how to navigate. It’s a responsibility of not just the government but of the private sector. Just like on cyber to come together and to realize what moment we’re in right now.

Lau: There is, to your point, inherent conflict that is coming. If Bitcoin is currency, then this is foreign exchange. There’s completely different rules on how we regard Bitcoin, versus right now, you sell it and you have capital gains while now you have to pay capital gains tax, and the IRS and Uncle Sam are coming calling. 

There is an inherent conflict that these two perspectives of the same thing are emerging. So if El Salvador is considering it as a currency and if that is going to be the precedent or the emerging dominant perspective on what Bitcoin actually is, there’s actually a massive ripple effect from the tax point of view, from a regulatory point of view. That’s just curious how everybody is thinking about that even.

Greenwald: It’s hard to take the next chapter seriously until you can pay your taxes in Bitcoin. That’s a flag in the ground. El Salvador and the Bahamas are examples of what we’re going to see moving forward because as I mentioned earlier, people are frustrated by lack of choice and they need choices. There’s many unbanked individuals who lack financial services. Those remittances, I think, are going to be key. That’s one reason you’re going to see a Facebook wallet come out in the coming months to years, is to try to solve that problem, and many other companies in the private sector try to get into that game.

You’re seeing companies who are traditional start to adopt this new technology and start to make that transition. Even people or banks that said that they did not believe it was legal tender before. I still view it under the digital assets umbrella until there is more regulatory guardrails in place.

Lau: You educated the space. You really educated the top one of the 1%. When we talk about families and wealth generation and assets under management. When you think about the art world, NFTs, digital assets, all the rest, what do you think is the next phase of excitement, interest that not only families, but all of us should be starting to think about educating ourselves in.

Greenwald: Understanding the pendulum and the escalation ladder of this technology adoption, so the art world is certainly having its moment right now. The term metaverse in gaming has really come to age during this moment.

Under that umbrella, you’re going to see individuals who can’t own a home, want a digital home, want digital real estate, and they’ll be able to have that. That’s part of how they are expressing themselves. 

I think philanthropy is going to be disrupted in the coming years on how you engage locally and what the meaning behind charity will look like, especially with the rise of NFT auctions and artists wanting to have it more of a direct relationship. You’re already seeing that with luxury items, but the gaming sector is just beginning. That’s really, even more than NFTs, getting into the gaming mindset.

When I speak with NFT artists and collectors, they have that gaming mindset. Some would rather have a Helen Frankenthaler physical piece of art in their home. Some would rather have some visual art. And so I think it’s just a matter of interpretation, and it’s all about how people can express themselves moving forward. That’s what I see.

Lau: I totally agree with you. I mean one of the hottest stories we are covering right now from our perspective as we cover the space in Asia is play-to-earn. It’s a cross-section of real-world issues that are being solved in the metaverse by play-to-earn games.

Philippines, perfect example. You know Axie Infinity, we’ve been talking about it. I think everybody’s talking about it. In the Philippines, where more than 70% of the adult population is unbanked, then you have Covid, then you have traditionally a very economically challenged nation. Then all of a sudden you can play-to-earn or play to mine tokens and actually be able to feed your family.

The market here in Asia is enormous. The use case and demand also exists. The challenge of addressing unbanked populations in developing nations in Southeast Asia is being answered. And I’m curious from your perspective — as you have conversations in the U.S., in Europe — how do people regard what’s happening in Asia from that perspective?

Greenwald: Well, what I’ve been watching very closely in Asia is NFT sales and auction houses really starting to pick up. Christie’s has a whole NFT department now, and they’ve been having some strong Asia sales numbers as well as Sotheby’s, and you’re starting to see pace in that space as well. So I’m watching how the NFT sales are rising in Asia and what it means for them. At the same time, you’re seeing China trying to crack down on video games.

So you’ve got this friction between the authoritarian governments and artists locally. So if you go to the contemporary art museum in Hong Kong, where many of the great artists used to be featured, they’re gone. They all went to Berlin, because they can’t express themselves there anymore.

So it’s going to be fascinating to see how these governments’ crackdown on gaming and how people can have an outlet. But I think having the right type of contemporary art museum and being able to create culture, that’s power. You’ve seen that in the Middle East with their collections. Obviously, you’ve seen that in Europe and how they’ve used their sway diplomatically. And I think Asia, we’re going to see more visual art and NFT sales, and that’s going to be their next chapter, the champion. I’m watching that space for people,

Lau: To your point about China, they are clamping down on games, for social reasons, they don’t want their young people… but NFTs, totally fine. There is a hot market in China right now.

Greenwald: Once the NFT starts to get critical or too out there, it’ll be interesting to see how China cracks down and what that means. But that’s going to be part of how authoritarian governments are going to be operating. I look at it from China, Russia, Iran, now Belarus. What does that mean for young people who want to express themselves through NFTs? How will the governments crack down on them? We’ve seen it with the internet previously. And this is just another technology chapter.

Lau: It’s also a missed opportunity if you think about it, which serves everybody else well. You see the adoption, you see the integration. But if that shuts down that demand and that interest has already grown, it has to go somewhere. It has to go somewhere.

Greenwald: It does. And I think people are hungry for outlets. You mentioned that they want to provide for their family, they want to express themselves, and this is a great way. If you look at art history, artists came about through very trying difficult times. This is an opportunity for a new era of visual artists to express themselves and to explain what’s happening in their countries, what’s happening that cannot be expressed to the outside world. So I think embracing that space, whether it’s physical or nonphysical, is going to be incredibly important.

Lau: It’s culturally important, technologically important [and] innovatively important. You are so right.  I’m also wondering about your perspective. You manage a lot of families and you really help with this kind of guidance in cryptocurrencies. It is very interesting to note that in a recent report by Capgemini that they surveyed — I think, 2,600 families — 72% have already invested in cryptocurrencies. That’s already in place. Does that surprise you? Do you think that like the speed in which that has happened? I think really in just the past 12, 18 months since Covid landed on everybody. Does that surprise you? And where do you see this space going among high-net-worth individuals?

Greenwald: Family offices are still in the early innings, truly giving understanding a compass for families, some have more allocations personally than others. We’re focusing at Tiedemann on educating our families, explaining where you already have technology exposure and if families would like to have more exposure, that is possible. But I really still think that many families are a little risk averse, at least the families that come to us, they’re looking to maintain their wealth. And so I think it just depends on the variety of a family and where they are.

But I do see more kids and grandkids of these families wanting to get in. I help advise a few grandkids’ NFT companies, who are really coming of age during this time. And the question always is, if you had ‘x’ amount of money, would you allocate it to Ethereum, or to Bitcoin or to a stablecoin? What I try to do is I try to meet families where they are and break down the language, create no barriers and to really explain to them where we’re going. Then, if that’s something they’re comfortable with, after explaining all the lack of regulatory guardrails that we have right now, we’re able to do that.

But I do think that you’re going to see more and more families want this technology adoption. And most importantly, they want exposure. They want to be able to be part of this new technology future.

Lau: Geographically, what’s more comfortable? Asia, Europe, the U.S.?

Greenwald: We’re a global firm and some families have dual citizenships, so they’re able to operate cross-border depending on where they are.There is a bit of a risk aversion right now given China, and I do think that it’s going to be important to watch how that develops going forward. Certainly, the United States and Europe are easy to operate in. Some have different banking laws, and so we have to be very mindful of those. With regards to Singapore, it’s always been a booming part for family offices. So I see that wanting to be formalized more going forward.

Lau: We’ve touched on so many hot topics through, Michael. I think we can go on for a little while longer. But in the interest of our audience, how do you regard Bitcoin right now, circling back to how we started this conversation in the first place. El Salvador is adopting it as a currency. How do you regard the future of Bitcoin? And then do you think there’s legitimacy of it as a currency, as an international currency? And what does it all actually mean as it flows down?

Greenwald: I view Bitcoin still as very volatile. There haven’t been certain building blocks yet that have given me more confidence in how it’s playing out, withstanding what El Salvador and others are doing, I’m really looking at how central banks are treating Bitcoin and what the E.U. and the Fed and others, how they regard Bitcoin.

I think you are seeing more favorability towards Ethereum in what they are doing regarding their environment and their energy use case. But I think on Bitcoin, it’s still very early. For me, you would have to understand how other central banks are going to operate in this basket of currencies. I do believe Bitcoin will be part of that basket of currencies and that future global digital wallet. I think it will just be an option, and I think people will use Bitcoin and Ethereum and Cardano and others alongside stablecoins and the digital dollar or a digital euro for specific purposes. Some may be for art, some may be for transacting for small businesses, but each of them will have a different purpose. And that’s how I see the evolution of this future global wallet evolving moving forward. 

Lau: Do you think U.S. policymakers are ready for that?

Greenwald: I don’t. I think U.S. policymakers are very much in studying mode. I really see that we first need to recognize that this era of dollar dominance is waning and it’s no longer, in my view, a long term threat. We can no longer kick the can down the road. We have to be proactive. And I think there are some short and medium term areas, and that’s where I think we need to innovate and where dollar innovation.

I would like to see, probably in the next national security strategy, this transition play out. Rather than admiring what other central banks are doing and watching China’s digital yuan rise as we go towards the Olympics, I really hope that the United States take this digital asset torch and run with it, and run with innovation rather than watching. We’ve never been a country that’s admired. We’ve always been a country of action. But I don’t think we’re ready yet. Given the amount of problems, I still believe we’re going to be in reactive mode. But I’m hopeful that we can be more creative moving forward. 

Lau: Who’s going to be the more powerful voice in this journey for the U.S.? J. Powell from the Federal Reserve, or President Biden’s Administration.

Greenwald: Powell has been a steady hand since the last administration going into this administration. Obviously, the central bank has played an incredibly important role. I think history books, looking back at this moment, will talk about how the central bank was never more important than it is right now. So I think that it’s going to likely be a combination of Powell and Brainard. And they will work closely with Yellen, and this is going to be a collaborative effort. I think you’re going to need all hands on deck ultimately to approach the array of challenges and the speed of change. These things are happening so quickly in real time. And so I think this administration will have to deal with it very technocratic rather than in a political way. 

Lau: Well Michael, I know that you are one of those hands when it comes to all hands on deck. You remain truly one of those voices that are part of the discussion and conversation in D.C. and also internationally. It was a pleasure to talk with you and get this perspective. I think you’re absolutely right. The challenges are thick, but the opportunities are even richer than that.

Michael Greenwald, it was a pleasure having you on the show today. 

Greenwald: Angie, thank you so much for having me. It was a real pleasure.

Lau: And thank you, everyone, for joining us on this latest episode of Word on the Block, I’m Angie Lau, Editor-in-Chief of Forkast.News. Until the next time.