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 what?
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 it published.
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 ideas.
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 infrastructure.
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 individual?
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 population.
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 this.
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.