Is the World Ready for a Federated Currency?
Incorruptible. Improved funds flow. Transparency and traceability. These are all promises of blockchain / digital technology to help the modern-day issues of cash-based economies. But should this responsibility be held by companies or governments? David Shrier, author of upcoming book from MIT Press in November 2019, “Trusted Data,” dives into the debate of a digital currency, sparked by Facebook’s Libra Project, and how governments are reacting with their own Central Bank Digital Currency (CBDC)… or is there a third way? Shrier puts on his futurist hat to answer what is a “federated currency” and why this could be a solution of the future.
- Blockchain, like artificial intelligence, like big data analytics, and other technologies are transforming all aspects of society on a level comparable to the industrial revolution.
- The main problem with Libra is that there is no consent of the governed. No one involved in Libra Consortium was elected or even appointed by an elected official. With the potential to reshape the financial lives of 2-2.5 billion people, there’s no kind of governance from any standpoint of what could be viewed as a true representative of the will of the people.
- Federated currency is tied market forces. It can provide smoothing mechanisms and offset volatility by creating a hedge basket of different commodities that tie together in a global trade currency.
See related article: Opinion | The Future of Money Isn’t Libra or Chinacoin, it’s Federated
Listen to the podcast version
Angie Lau: Welcome to this special edition right here in
Paris, I’m Forkast.News Editor-in-Chief Angie Lau here at the OECD Global
Blockchain Policy Forum, where we are at the intersection of policymakers and
regulators from around the world. Sitting alongside block chain thought
leaders, one of those thought leaders is right here with me right now. David
Shrier is Oxford, MIT Futurist.
He is also a globally recognized leader, a thought leader
in the financial innovation space. So, David, it is great to have you here with
us, because financial innovation is the only thing, it seems, that regulators
and policymakers are talking about right now.
We have Bruno Le Maire’s remarks on the threat of Libra
on monetary sovereignty of nations. We have the PBoC possibly coming out with
the world’s first central bank backed digital currency. And then we have the
outgoing BoE governor Mark Carney saying that the world needs a global reserve
digital currency. And here we sit. You just wrote an article about the need for
David Shrier: So
what we need is a federated currency. And I’ll explain what that means in a
minute. But it’s important to not get swept up in the hype. So it is true that
new technologies like blockchain, like artificial intelligence, like big data
analytics, these are all transforming financial services in a fundamental and
structural way, just as they’re transforming other aspects of society on a
level comparable to the industrial revolution. However, the PBoC, for example,
is not the first central bank to issue a digital currency.
One of the very first in this new era was Barbados, working
with a company called Bit. So that that was a few years or three years ago now.
So central bank digital currencies are an idea that has, if you’ll pardon the
expression, gained currency in recent years because digital technology can help
solve some of the problems of a cash-based economy. Things like transparency
and traceability. So we can reduce corruption and improve funds flow. We can
reduce monetary friction by introducing these digital currencies that can help,
for example, lower cost of cross-border remittances. So the cost of sending
money to and from a country in Africa has gone from 15%, to .1% of the
transaction value. That is transformational for lives. So these are some of the
reasons why central banks are getting excited about digital currencies.
Then you brought up Libra and you brought up the PBoC, so
let’s take them in turn. Libra has a lot of the right ideas, but one of the
major challenges is it has some of the wrong players involved. My main problem
with Libra is that there is no consent of the governed. No one involved in
Libra Consortium was elected or even appointed by an elected official. And so
you’re creating the potential to reshape the financial lives of 2-2.5 billion
people, maybe even more. And there’s no kind of governance from any standpoint
of what could be viewed as a true representative of the will of the people.
Angie Lau: It’s purely from the standpoint of a
commercial backed interest vs. sovereign.
David Shrier: There
are a lot of things. So within the blockchain world, a lot of people are really
excited about the idea of, you know, getting rid of government. And, you know,
the current commercial blockchain was born out of people who didn’t trust
government and didn’t trust conventional financial institutions. Well, it may
be cool sitting around drinking coffee late at night to say government sucks,
but the reality is that government helps provide a stabilizing force in its
ideal form. I’m not saying all governments are perfect, but ideally
governments, central banks, regulators, finance ministries provide stability, monetary
stability, financial stability. They provide consumer protection. So the
poorest, the illiterate, the most underserved by society have a sword and
shield protecting them from predatory actions.
If you remove those controls and make it purely commercial,
you run a lot of risks. I also have a significant problem with Facebook’s
prominent role in Libra. And the reason is that and I’ve written about this
extensively. Facebook has had extremely poor track record around things like
personal privacy, personal data and digital security. So if you think about
what are the characteristics I would like around my money and how it’s handled,
I’d like it to be private. I’d like it to be secure. And I want my money to
remain my money and my information about my money to be private. I don’t want
I don’t want it leaked. Facebook recently had yet another
cybersecurity hack where 540 million passwords and user accounts were
compromised, and that was just earlier this year. So the expression uses, you
know, handing over your financial affairs to Libra and Facebook is kind of like
giving the keys to your house, to the gang that just graffitied your car. It
just doesn’t make sense.
We will acknowledge and this is something I do think is
important to mention. There are a lot of people who actually are what I would
call positive commercial forces involved with Libra as well. People like
MasterCard and Visa who have a demonstrated track record of protecting their
cardholders and working in the interest of their cardholders rather than sort
of for it for other purposes. I also will note that women’s world banking,
which is a very prominent and worthy non-profit, is involved with the Libra
consortium, and I think that is a voice for the people. But we don’t have
elected officials involved. And I think that is a problem.
So, OK. You say that’s not going to work. What do you do
now? Well, the PBoC has said, hey, don’t worry about Libra. We’ve got something
that’s better, that works better, which is going to be our own RMB coin or
China coin. And the problem with that? Well, Mark Carney kind of highlighted
this idea. We don’t want to replace U.S. dollar hegemony with RMB hegemony. We
need a truly global currency that improves flow of trade, that improves flow of
money that reduces costs and friction in the financial system. And so can’t we
have something like that?
The good news is some collaborators of mine have actually
proposed this was on the cover of Scientific American a couple of years ago.
They call it trade coin. So Professors Alex Pentland and Alex Lipton, two very,
very smart gentlemen, have created an architecture that describes how various
countries can collectively participate in a global digital currency while
retaining sovereignty over their own sort of financial affairs. So it’s an
interesting variation on a theme that allows you to have the benefits of a
federated currency without some of the challenges of giving up local control
like the Euro has been criticized by some because each individual country has
given up their sovereignty to the European Commission, European Union, ECB.
This is this is something that seeks to address some of the
deficiencies that have been identified in other efforts to create this more federated
or multilateral currency. And so like the OECD, for example, could be an
organization that could convene people or the Commonwealth Secretariat could be
an organization or the Asian Development Bank. These groups that they bring
together, multiple nations could be a way of addressing this.
Angie Lau: At the end of the day, when we talk about
global reserve currency. We talk about the strength of the U.S. dollar, why
it’s actually regarded, because it’s actually, you know, one of the, you know,
if not the primary economic engine of the world. And so by default, doing trade
with the U.S., you’re almost tying to the monetary policy of the United States.
We’ve seen how nations and cities and states that have pegged to the U.S.
dollar then adopt a monetary policy that doesn’t necessarily make sense to
current or local economic policy. How would all of these conversations actually
be taking place so that you equalize for every sovereignty?
David Shrier: I
mean, if you’re talking about a federated is not the same things equal, OK?
There’s a difference between equitable and equality. These are two different
Angie Lau: But it’s still an artificial application.
It’s still an artificial algorithm. Not necessarily market forces.
David Shrier: That’s
right. It is tied to market forces. It’s just creating smoothing mechanisms.
See, you can offset volatility. You know, the ideal scenario is that you have
counter parties and trade. People already do a lot of business with each other
as countries. Yes. Will then be able to have a smoother management of this
trade of goods and services.
So if your primary export is corn or wheat or rice, then
that becomes part of your basket that gets contributed into this federated
currency. If your primary export is tantalum, then that’s your contribution.
And so you create this hedge basket of different commodities that tie together
in a global trade currency.
Angie Lau: And in this decentralized world, the where we
have cryptocurrencies from Bitcoin all the way down to some alt coins that I
can’t even remember the name of.
David Shrier: Two thousand plus of them, who knows?
Angie Lau: Right? But some would argue that Bitcoin
already exists as an alternative global reserve currency. What’s your view?
David Shrier: Yeah,
I mean, I’ve gotten an earful from the Bitcoin folks since I published my
article about, you know, Bitcoin already exists and it’s doing it all already.
It is the federated goal. Well, you know, first of all, it’s not federated.
Second of all, despite the descriptions of it, Bitcoin is not actually
decentralized. There’s a very, very, very small number of individuals, fewer
than 10 who personally control a significant portion of the Bitcoin
So it’s not decentralized, even though it started out that
way. There’s been consolidation. And finally, I personally speak to dozens of
central bank officials and finance ministry officials, and they don’t trust
Bitcoin. And more importantly, they’re not going to give over their ability to
modulate the wild swings in their economy to Bitcoin, which is, you know, it
looks like an EKG.
Angie Lau: Notorious for wild swings.
David Shrier: If
you can’t feed someone using bitcoin because the price is so volatile that what
you’re paying your worker one week is going to be completely different the next
week. And so you can’t anchor your economy on that.
Angie Lau: The governance of a so-called federated coin.
Where does that come from?
David Shrier: It
ultimately comes into how you architect the coin. And there are a few different
ways to handle it. So this is not new thinking. This predates digital, even
there’s game theory and their predecessors to game theory on basically how you
make decisions with people who have disparate power. So, for example, one way
to handle it would be to have a plutocracy.
If you’re a rich country and you contribute more than you
have a bigger vote, that would disadvantage the poor countries that we’ve just
described being whipsawed. I wouldn’t recommend a plutocracy approach. Another
way would be to try and balance regional size and monetary contribution in some
formula. And there’s been a lot of modeling on kind of what are optimal ways to
do that. So the simplest idea is you have proportionate representation.
If you’re a big country, you get more votes, plus every
country gets a certain number of votes and you can therefore kind of balance
out if you’re Bangladesh with 100 and what is it, 150 million people or your
Bermuda with 60,000 people and 3 million visitors, that you can still collaborate
together because there’s a way of counter weighting, but also accounting for
the fact that Bangladesh does have more people and so therefore has some human
capital function becomes an input.
Angie Lau: What about
the individual that has been so disillusioned? And no matter where you are in
the world there, there have just been frustrations on a political level and on
a real term level all the way from Venezuela to the US to the UK and across
Asia. How do you balance it for the individual who is participating in a global
economy, the promise of blockchain returning that economic power back to the
individual? How does that federated token coin digital currency work for the
David Shrier: Well,
so it works in a few ways. The thing to bear in mind is that people who
actually have even heard of blockchain are very small percentage of the world’s
David Shrier: The
average poor farmer in Kenya will notice the cost of their transactions has
gone down, but they’re not necessarily going to know what a bitcoin mining note
is. And so one way that we need to kind of address this is, of course, better
financial literacy and better technological and data literacy. Another way is
to provide tools for central banks and for policymakers so they can provide
better services for their citizens. Properly implemented a blockchain system
can provide greater transparency and offer citizens more trust in the system.
So, for example, in a number of emerging economies, tax
avoidance is extremely high, not because people don’t want to be good citizens
and not because people don’t want the benefits of paying taxes for services.
It’s that they worry about graft and corruption. They worry that too much of
their taxes are going to line pockets rather than being used for health
services or or protection or or agriculture or infrastructure or whatever it is
that their taxes are supposed to be paying for.
So if we can wrap this new technology around that and
provide those citizens with more understanding what’s going on with their money
and with their government, then they will have more confidence and trust in
their governments and we will have more stable governments. Government
stability is actually a good thing. It means less war, less poverty, less
interruption of services, better health services, a lot of benefits of
government. And we don’t get rid of that. We want to make it stronger.
Angie Lau: Do you think that governments are going to
want to provide that level of transparency? Because what you’re talking about
is super powerful, but it also gets rid of a massive civil administration class
federal level of employees.
It really disrupts the system. But if you can truly say
that your taxes are going and then you can see that’s going to health care,
education to pay for your lamp post or garbage collection.
Yeah, that’s truly powerful.
David Shrier: It
will change people’s lives.
Angie Lau: But do you think we’ll get there?
David Shrier: Not
overnight. That’s the important thing.
Angie Lau: You are the futurist, so you can tell me.
David Shrier: I
am a futurist. And therefore, I tell you, it could take us 20 years. This is
not an overnight thing to reach that level of change, because if we tried to do
it too fast, we would run into resistance from the civil administration, from
the infrastructure. But but we do have governments that are starting to work on
And as more and more governments begin to practice this way,
they can begin exerting pressure on other governments to become more
transparent and more open. And so we’ve seen this work already in everything
from, you know, sweatshop labor to energy practices and pollution, to… You
name it. I mean, there have been successful coalitions that have come together
to have positive effect for global causes.
I’m wearing my U.N. Sustainable Development Goal PIN for a
reason. Because in about 10 years, we’re hopefully going to achieve a number of
important benefits for society writ large. And it’s these kind of positive
multilateral efforts that I’d like to see have a little more ammunition, have a
little more progress. And that’s why I do what I do.
Angie Lau: And I share that enthusiasm of seeing
potentially the impact of this technology for this collective future that we
will share. It is truly powerful to talk about technology that actually will
drive best practices. And of course, it’s all in the execution.
David Shrier: But
it’s important to remember people don’t buy technology. They buy solutions to problems.
So a lot of work I do is focused on this question of how do we help
policymakers understand how to achieve a solution they want and then how
technology can play in that. So I’m working on a fintech policy toolkit for the
Commonwealth. So the 53 nations that used to be the British Empire, the central
bank governor, said, we need to understand fintech we understand block chain.
We have to understand why. And we want to have then tools to drive outcomes to
benefit our citizens. And so that’s my current project.
Angie Lau: Can’t wait to learn more. We will continue
this conversation another time.
David Shrier: Absolutely.
Angie Lau: David, thank you so. Thanks so much.