Deep Dive Episode 210 – Cryptocurrencies: Money, Trust and Regulation

Dr. Oonagh McDonald’s latest book, “Cryptocurrencies: Money, Trust and Regulation,” discusses the nature of money, the introduction of the first cryptocurrency – Bitcoin – and the maturation of the space, how regulators have approached the burgeoning industry, and whether cryptocurrencies might ultimately be viable alternatives to “money” as we know it today. The Regulatory Transparency Project was pleased to welcome Dr. McDonald and Coin Center Executive Director Jerry Brito to discuss these important issues.

Transcript

Although this transcript is largely accurate, in some cases it could be incomplete or inaccurate due to inaudible passages or transcription errors.

[Music and Narration]

 

Introduction:  Welcome to the Regulatory Transparency Project’s Fourth Branch podcast series. All expressions of opinion are those of the speaker.

 

Jack Derwin:  On February 24, 2022, Jerry Brito and Oonagh McDonald joined the Regulatory Transparency Project to discuss “Cryptocurrencies: Money, Trust and Regulation.” The following is a recording from that event. We hope you enjoy. 

 

Nate Kaczmarek:  Hello, and welcome to this Regulatory Transparency Project webinar. Today we will be discussing Dr. Oonagh McDonald’s new book, Cryptocurrencies: Money, Trust and Regulation. With all the historic events that are occurring in the world and the dramatic geopolitical and financial implications, it’s our great fortune to have a very insightful guest join us this afternoon. 

 

My name is Nate Kaczmarek. I’m Vice President and Director of RTP. As always, please note that all expressions of opinion are those of our guests. Today, we are happy to have Jerry Brito join us to lead the discussion. Jerry, how are you?

 

Jerry Brito:  Doing very well. Thank you. Thanks for having me.

 

Nate Kaczmarek:  Well, we’re, again, happy that you could carve out the time to join us. Jerry is the Executive Director of Coin Center, a non-profit research and advocacy group focused on public policy issues facing cryptocurrencies. He has previously informed many policymakers throughout the executive branch, including the White House, and has been called upon by Congress to testify regarding cryptocurrency. His scholarly research and articles have been well-received and prominently published. Jerry is also a friend to RTP. And we’re very pleased, again, that he could be with us.

 

As indicated, we are also thrilled to have Dr. Oonagh McDonald, CBE, with us today. Dr. McDonald, how are you?

 

Oonagh McDonald:  Very well, thank you. 

 

Nate Kaczmarek:  Again, just very, very excited to have you with us. Glad that you could carve out time for us. I’m sure our audience is well aware of Dr. McDonald—that she is a Senior Advisor for Crito Capital. She is a former British member of Parliament and an international expert in financial regulation. She has previously advised authorities in a number of countries, including Sri Lanka, Indonesia, Ukraine, and Moldova. 

 

She is the author of numerous articles and seven books, including her most recent, which provides the basis for today’s discussion. If our audience would like to learn more about both of our guests, you can visit our website, RegProject.org, where we have more complete bios. In a moment, I will turn it over to Jerry. Once our guests have had time to thoroughly discuss our theme, we’ll go to audience Q&A. So please think of the questions that you’d like to ask. Audience questions can be submitted via Zoom using the raised-hand function. If you raise your hand, we’ll do our best to call on everyone in order. 

 

With that, thanks very much to you both. Jerry, I turn the program over to you.

 

Jerry Brito:  Well, thank you very much, Nate, and RTP, for having us. And by the way, thank you very much to Susan Dudley for suggesting that we have this conversation. So as you said, Nate, we’re here to discuss Dr. McDonald’s new book, Cryptocurrencies: Money, Trust and Regulation. And I thought what we’d do, Dr. McDonald, is I’m just going to ask you a series of questions to bring out the substance of your book. And along the way, I’ll probably challenge what I imagine will be some of your theses that I read in your book.

 

So I guess to kind of level-set, tell us, what is your book about?

 

Oonagh McDonald:  It is about — it starts, of course, with 2008, with the introduction of bitcoin, understandably, perhaps, in the middle of the financial crisis, when, typically, in America, I think, more so than in other countries, distrust of the central bank and distrust of financial institutions at high level — though I guess the latter affected everybody during the financial crisis. 

 

And what he sought to do was provide an alternative currency which was not dependent on any intermediaries or transactions from one person to another. And he designed this using blockchain. I think elements of blockchain were already in existence, but it was the way in which he thought that could be used. 

 

And what interested me was that the word “honest” kept occurring despite his attempts to make this a purely automatic transfer, not requiring any human intermediaries who, of course, are either honest or not honest, or honest sometimes, not honest at other times. But that word kept cropping up again. 

 

And so you have to try to understand why he thought that could only be used with reference to a node—which a node is a computer. And then the computer has to be programmed by someone. So to me, he did not actually ultimately remove human intervention, however hard he tried. And then you have to go on to consider what is money that [inaudible 00:06:09] failed as a currency, despite its being legal tender and also a better one? Very [inaudible 06:16] of that.

 

And so then, people were worried particularly about extreme volatility of Bitcoin intraday and from day-to-day. And so, they introduced the notion of stable coins. Stable coins are maybe linked to gold or platinum. Or they may be based on an algorithm designed to alter the supply so that the reference to fiat currency could be retained. And sometimes—and most importantly, I think — of the stable coins are the ones that are directly one-to-one exchange, usually with the dollar, but also with the Yen, Euro, — Yen and Euro, in particular. And then, of course, lots of questions arise about, particularly, trying to turn that into a global stable currency, which we know was Zuckerberg’s attempt.

 

And I think it would be interesting to discuss further why that one failed and stable coins in general. So I think it’s better for me now than you because I’ve done quite a detailed introduction. So I’m sure there are questions that you want to ask me. 

 

Jerry Brito:  Sure. So, yeah. So your book covers cryptocurrencies first, then stable coins, and then, towards the end, also central bank digital currency or CBDC. And you are critical of cryptocurrency and stable coin and CBDC, I would say. So let me just say one quick thing about the use of the word “honest” in the Bitcoin whitepaper by Satoshi Nakamoto, which I totally picked up was a driving issue for you. 

 

I don’t think Satoshi Nakamoto ever claimed to or intended to take out human intervention from the system. By definition, he was a human who created it. And the miners and the nodes were going to be operated by humans, and that was perfectly, I think, evident to him. I think his use of the word “honest” is the whole point of the — I think what he did want to remove, or, at the very least, minimize, was trust—the necessity to trust—and to trust the honesty of actors in the system. 

 

And the way that he sought to do that was by rather than having to employ trust, one can employ mathematic verification of somebody’s claim. And so that’s what I think he meant by the word “honest.” Right? He was trying to say some people might want to cheat, and we can verify whether they are trying to do that or they’re indeed providing the real — attesting to some fact that you can verify mathematically. 

 

Oonagh McDonald:  Actually, I quibble with the term “mathematically,” —

 

Jerry Brito:  Okay.

 

Oonagh McDonald:  — because it’s often presented as solving a complex mathematical problem in various descriptions of his work. 

 

Jerry Brito:  Yeah.

 

Oonagh McDonald:  That’s where I think — in the UK, I’d call it a fruit machine, which I think I mean a slot machine. 

 

Jerry Brito:  Yeah.

 

Oonagh McDonald:  And basically, you have to keep banging away until you find the right combination of numbers. And that is why, contrary to his initial expectations of “you could do this on your desktop using free electricity from your hotspot,” — I wish that was the case. But of course, as you know, the computers have become more and more and more powerful. And the miners and the machines became more and more concentrated, at least until China disposed of Bitcoin and the possibility of mining Bitcoin. 

 

The possibility still exists, but they don’t want to use so much fossil fuel energy on the very powerful computers. That, I think, is only a cover reason. Frankly, I think it’s because the Chinese government wants to eliminate anything that could transfer money from one person to another, except through their CBDC. So that’s the issue with Bitcoin. And it is therefore possible to have the 51-cent takeover and could have been possible, certainly, with the Chinese concentration of miners. 

 

Jerry Brito:  Sure. And we’re getting far afield, I think, pretty quickly. But when I say, “mathematically verify rather than trust,” I’m not referring exclusively to the proof-of-work consensus mechanism, which is what you’re describing. And you’re right — the lottery system component of Bitcoin. I’m talking about simply using cryptographic proofs to prove, for example, that the Bitcoin that you are attempting to send, you have previously received, etc. etc. And I agree, it’s not merely math. It’s math and game theory. Right? So a combination of the ability to use cryptographic proofs and the game theory of incentives. 

 

And you’re right that he did not foresee — I don’t think he ever foresaw that this would be free electricity. I think he was — he did not foresee that it would be — he thought it would be one computer, one boat, people using. But nevertheless, that doesn’t undermine the design of the system. And I think we’ve seen since that you don’t have to use a proof-of-work mechanism for consensus. There are other consensus mechanisms available as well.

 

Oonagh McDonald:  [inaudible 00:12:45] privacy in your public [inaudible 12:46]. And as we both know, [inaudible 12:48] created very different difficulties. 

 

Jerry Brito:  What? Can you say that again? I’m sorry.

 

Oonagh McDonald:  Private and public keys condition created other difficulties and people losing their private keys. 

 

Jerry Brito:  Yes. That’s right. So it is — so your private key controls your funds. And so you want to be very sure that you don’t lose that, the same way you wouldn’t want to lose a hundred-dollar bill. But public-private key inscription is something that has been around with us since the ’80s, the ’70s—well, for much longer than that, 70s, 80s—and undergirds much of our financial system today. So it’s not something esoteric or exotic. 

Oonagh McDonald:  [inaudible 00:13:35] used and upgraded — 

 

Jerry Brito:  Yeah.

 

Oonagh McDonald:  — the old cryptographic system. Yes, I’m aware of that.

 

Jerry Brito:  Yeah. So let me ask you, just at root, what is your critique of cryptocurrency?

 

Oonagh McDonald:  Basically that I think it is not workable, ultimately, because of the volatility involved and because of the [inaudible 00:14:00] which, as you know, have not increased aid. And they have been long and slow, by comparison with other transfer mechanisms. And therefore, one of the aims of Bitcoin hasn’t turned out to be the case. That is why people moved on—partly why—one of the reasons why people moved on to [inaudible 00:14:29] and using theory, and so on, as the means of making transfers, so that these would be speedier and, therefore, more acceptable. 

 

So I think — and I think that has also been demonstrated with the shift in people’s attitudes to Bitcoin, i.e. it’s — well, apart from criminal use of Bitcoin because of its anonymity, I think that that’s why people have seen it as a speculative investment. And their dream, when purchasing Bitcoin, is that overnight they will become much richer than they were. But you have to pick the right day.

 

Jerry Brito:  So what I’m hearing is that your critique is not so much of cryptocurrency, but of Bitcoin in particular because you’re saying that Ethereum, for example, it sounds to me like you’re saying, might be a more efficient or faster or speedier or better crypto system.

 

Oonagh McDonald:  [inaudible 00:15:33] although, I gather Ethereum’s technology is now considered to be rather old and becoming slower. But for people who wanted an alternative — really, I’m taking people through. Well, first we had Bitcoin. Then, what was wrong with Bitcoin? Ah, the answer to Bitcoin was stable coins and particularly those related to a particular fiat currency.

 

I have to say, I don’t particularly like them being called fiat currencies because that, to me, is, “Oh, we just make an announcement that this is free currency.” Whereas, currency, to me, is dependent on the management and nature of the economy of the country issuing its own currency. 

 

Jerry Brito:  So you’d rather call them like national currencies or something like that?

 

Oonagh McDonald:  Yes. Fiat is just — it’s a quibble. It seems misleading to me.

 

Jerry Brito:  Okay. Okay, so this is interesting. I’m trying to really ascertain what the critique is because, for example, you say that first came Bitcoin. And Bitcoin proved not to be stable in value. And so, therefore, people invented stable coins. Of course, stable coins — and by the way, there are many different kinds of stable coins. I think for purposes of this discussion, we should limit ourselves to the stable coins that you’re addressing in the book that make up a vast majority of the market, which are stable coins backed by a particular currency or basket thereof. Right?

 

So stable coins, number one, provide a completely different function from a cryptocurrency. So I don’t really see one as substituting for the other wholesale. And number two, stable coins depend on cryptocurrency networks. So something like USDC runs on top of the Ethereum network or the Solana network. So it depends on the cryptocurrency network. So they’re not perfect substitutes. 

 

Oonagh McDonald:  No, I think — I actually think it would be useful—I didn’t really explore this so much in the book—to separate the Ethereums, the various blockchains, because those certainly can have other uses. For example—if I can briefly give an example—very useful in Hong Kong with its trade-finance project where they found that a number of businesses in Hong Kong got the necessary loans for trade finance from more than one bank, and then disappeared with the money. 

 

So blockchain became very useful for being able to identify straight away which company had borrowed from which bank. And once you knew that, other banks in the group who involved themselves in the project did not offer trade finance for that particular trade, as Bank A had already done it, so Banks B, C, D, and E would not have responded. 

 

So I’d like to do that because I think it’s quite important to separate.

 

Jerry Brito:  And so did they do that on the Ethereum network?

 

Oonagh McDonald:  Yes. 

 

Jerry Brito:  Okay.

 

Oonagh McDonald:  Separate those out from the use that’s typically made of them with the particular stable coins, and that’s why central banks and others, and particularly for wholesale market, are, in fact, looking at those networks for their speed and efficiency.

 

Jerry Brito:  So that’s interesting. Yeah. So again, so your critique seems to be not of cryptocurrency writ whole, but of Bitcoin in particular, and maybe of Bitcoin because it does not manage to maintain stable value. 

 

Oonagh McDonald:  And then, of course, I do move on to criticisms about the ways in which stable coins — and here, I am referring very specifically to the stable coins that are dependent on a particular fiat currency. 

 

Jerry Brito:  You just said, “fiat,” Dr. McDonald. 

 

Oonagh McDonald:  That’s because we’re all used to it. 

 

Jerry Brito:  Sorry. I had to catch you on that.

 

Oonagh McDonald:  I know. You’re right. But I managed to substitute national for fiat in my book. That’s subsequent thoughts. Oh dear.

 

Jerry Brito:  Okay. So maybe we should move on and talk about stable coins. I just want to say that there are any number of uses of cryptocurrencies beyond simply using it as day-to-day payments money. And I would say that that includes Bitcoin. Bitcoin has any number of uses beyond just day-to-day payments, which it’s not really well-suited for that, I would agree with you there.

 

But on stable coins, for example, Tether was probably one of the very first stable coins. And it was first issued on top of Bitcoin. It was — today, it mostly runs on top of Ethereum. But it was originally running on top of Bitcoin. And indeed, you have a lot of development work, especially led, most recently, by Block, formally known as Square, to develop the kind of advances that you see on Ethereum on the Bitcoin network. 

 

But going to stable coins, what it your critique of stable coins?

 

Oonagh McDonald:  Well, it’s interesting that you mention Tether, as Tether has gone to suggest that it is one-to-one with the dollar. First of all, I have to say I really have two questions to which answers have been given in the past. And the answers involve financial inclusion and [inaudible 00:22:01], and there are other ways of ensuring financial inclusion. I would say that America is probably the advanced country that’s least up to speed on that. Although there are payment systems in the process of development or extensions of them, such as PayPal, which is now possible to use for international transfers.

 

So financial inclusion — I just mentioned briefly that the UK has done very well by making banks establish — it’s now a legal obligation on the leading banks to provide basic bank accounts. And that means that the unbanked households — there are about 28 million households in the UK, but only a quarter of a million where no one in the household has access to a bank account. And so there are other quicker, simpler means of doing that. I think the EU has followed that process as well. But it’s much more difficult to get the numbers of how — as to how effective that has been.

 

And secondly, cost. You see very often with stable coin; some exchanges allow you to exchange dollars for their stable coin—their dollar stable coin—without cost. Many do not. And you still have the cost of exchange rates, transfers. And the person at the receiving end in some other country may not be able to do this. This was one of the reasons that Zuckerberg offered for his stable coin, first Libra and then Diem, dependent on a basket of currencies, for which he failed to get a license from the Swiss regulator authority, called FINMA, which didn’t surprise me greatly. I never expected him to get that, partly, but not only because FINMA had 20 central banks consulting them. 

 

And I would add another point here that, given the way in which Facebook has misused people’s personal data and sold it in days gone by, there was a lack of trust there. No one trusted Zuckerberg to have that degree of power, which, assuming that all his Facebook followers, WhatsApp, and so forth, all bought Libra or Diem, then that would have given him a huge market. But I think his interest has really always been in data and the use of data. So anyway, that’s one.

 

Jerry Brito:  Agreed on that. So maybe we can get back to Libra in a minute. But first, you mentioned — I guess what you’re saying is that there are claims on the part of stable coin issuers that this will help with financial inclusion. And I agree with you completely that financial inclusion is really not a technological problem, let’s say, in the developed world, certainly not in the United States. There is a relatively small number of unbanked people in the United States. And they are — if you look at federal reserve surveys, they are not unbanked for lack of access. They are unbanked by choice in many cases. And we can then discuss what can we do about that. 

 

So I think that when stable coin issuers make claims about inclusion, I would hope — what I imagine them to mean, and what I hope they would mean is that they’re thinking about global inclusion. And so, there are parts of the world where there isn’t the same kind of access, where, perhaps because people don’t have identification, people don’t have local providers, there isn’t access. But yet, they probably do have a smartphone. And as long as you can get a free software wallet on your smartphone, you can receive cryptocurrency or stable coins, let’s say dollars. So that’s the kind of inclusion that this certainly makes available. 

 

Oonagh McDonald:  Yes. But I think here, you really need to spend much more time looking at India, which has provided people with identity extraordinarily quickly—their new identity. And people have their mobiles, their smartphones, very cheaply. And they buy a new SIM card, which you can buy apparently, at every local shop. Well, that has made a huge and interesting difference. So I think –.

 

Jerry Brito:  Well, I agree completely. Right? So when you have a government with the will to create the conditions for that kind of access. But there are places in the world where there is — there is not that kind of government, whether there is a will or not. 

 

Oonagh McDonald:  I’m not quite sure that externally one can do a huge amount about that. But –.

 

Jerry Brito:  No, but by virtue of having access to smartphones with connections to the internet, they can now have access to financial transactions that they wouldn’t have before. 

 

Oonagh McDonald:  That is widely and cheaply available to them.

 

Jerry Brito:  Yes.

 

Oonagh McDonald:  They may not be too keen on doing that. 

 

Jerry Brito:  No.

 

Oonagh McDonald:  Let’s move on from that because my way of approaching stable coins — first of all, I do think that they are simply parasites. And their value rises and falls with the management of the economy or the particular currency that they have chosen—national currency, shall we say. And what I would do with stable coins by way of regulation —

 

Jerry Brito:  Yeah.

 

Oonagh McDonald:  — at both the president’s working party — now, I wouldn’t be—initially, anyway—trying to regulate them as banks and the FSB’s latest report is much more, I guess, of a — how can I say — slightly handwringing. Yeah. You’ve been talking about this for three of fours years now. Why haven’t you done more?

 

Jerry Brito:  Yeah.

 

Oonagh McDonald:  So that’s it.

 

Jerry Brito:  So that’s interesting. I completely agree with that. So you mentioned Tether earlier. And your main critique there. 

 

Oonagh McDonald:  [inaudible 00:29:16]

 

Jerry Brito:  Excuse me?

 

Oonagh McDonald:  Tether has had a difficult history, shall we say.

 

Jerry Brito:  Yeah. And so your main critique there is that there is no assurance whatsoever that Tether is backed one-to-one. And indeed, as far as I’m aware, Tether is not supervised by any authority. 

 

Oonagh McDonald:  In the British Virgin Islands.

 

Jerry Brito:  Okay.

 

Oonagh McDonald:  [inaudible 00:29:39] is registered. 

 

Jerry Brito:  Yep.

 

Oonagh McDonald:  And I have not been able to ascertain — and I have read in the press a blank denial that it is registered by the small regulatory authorities. 

 

Jerry Brito:  Right.

 

Oonagh McDonald:  But having to do with Tether. Okay, if you’re going to be sold on exchanges here and in other countries as well, this is what you have to do. Your website must show various things. First of all, it must show where the company is headquartered. Who are the senior executives? How do I contact you if anything goes wrong? 

 

Then it must also state — so there are two points. There’s a second point about payment services that I will come on to. But first, I want to exhaust this point. The second point is you must explain in clear and simple terms exactly how and how certain you can be that you can redeem your dollars—your stable coins for dollars—at any time. And this applies to all the stable coins, by the way. So I’m not making an exception for Tether here. The third point is that you have to have full — not an attestation. Attestation is worthless. Just pay someone to give you an attestation. 

 

Jerry Brito:  Yep.

 

Oonagh McDonald:  Or take the fees and run. But where’s the proof? So for that, you need full accounts offering the reserves and the profits and the losses that you have made. And then, as I said, it may not even be as fast as originally claimed because it appears that some of the blockchains, the technology, needs updating in some way. 

 

Jerry Brito:  So my question about that is – I mean, the way I read the state of the regulatory landscape in the US — essentially, everything you just outlined is the law already here. 

 

Oonagh McDonald:  Yes.

 

Jerry Brito:  And so, is the fact that there is this question of risk related to Tether an indictment of stable coins, or is it an indictment of the authorities in the United States? Because Tether is available to Americans. It’s available at major exchanges here. And short of a little bit of inquiry on the part of the New York Attorney General, federal authorities—at Treasury, at the FCC—have done nothing about Tether. 

 

Oonagh McDonald:  Exactly. 

 

Jerry Brito:  So is that really an indictment of stable coins? Or is that because — I then look at something like the USDC, which is the second-largest stable coin after Tether—Tether is like 70 billion dollars in assets; USDC is like 50, something like that—and USDC provides everything that you’ve just described and is licensed in all the states in which it does business, etc. So there’s a distinction there, right?

 

Oonagh McDonald:  Well, yes, there’s a distinction there. My only concern, I think, with that particular one is the finances part of their operation.

 

Jerry Brito:  Of USDC? 

 

Oonagh McDonald:  Yes. I think so.

 

Jerry Brito:  Okay.

 

Oonagh McDonald:  Anyway, that’s my problem. Yes, why not apply it. And I think if all of that was made clear — and let me say that I don’t think Tether is in a hurry to provide any such transparency. It hasn’t so far, only has got as far as attestations. And that applies to some of the others as well, I have no doubt. 

 

So I say if you really think that the stable coin is going to do anything for you and you know exactly what you’re doing, well, maybe go ahead. The only serious anxiety, I think, on the part of the FSB, is the possibility of another global stable coin, which is what Circle wants to introduce.

 

Jerry Brito:  So maybe you can help clarify because we’ve — I’ve only ever heard of stable coins. And then there’s this term “global stable coin.” And so I’m wondering about these distinctions. And maybe, for example, you could draw the distinction between what’s the difference between a stable coin and PayPal?

 

Oonagh McDonald:  PayPal is only a payment service, and it –.

 

Jerry Brito:  Essentially, you deposit a dollar with PayPal. They issue you, essentially, a PayPal dollar in your account. And they invest that dollar that you gave them into assets that are allowed under money-transmission statutes. And then they keep the interest. And at any moment, you or your counterparties can trade that PayPal dollar for a bank dollar back. USDC, to me, seems like it’s doing exactly the same thing. So what’s the difference?

 

Oonagh McDonald:  I think my question, ultimately, for stable coin is what is the point? Why should I buy a stable coin in order to transfer money when — and here I think it’s worth looking at the UK, which has — they are supervised and regulated by the FCA and are extremely clear. I’ve looked at a couple of their websites. And what you get on the website is you want to transfer X amount from your account—your bank account—to someone in another country. It will tell you. It gives the amount that you want to transfer, the exchange rate, and the amount the other person will receive. And it’s as clear as day and extremely simple and extremely quick. 

 

And I think there’s no need for the invention of some other coin above that, except various import international transfers of that kind. I’m aware of people who use these regularly in the UK to transfer money to India or money to France. And there you are, all done. So to me, it’s why am I exchanging my dollars for this coin that, of course, doesn’t exist?

 

Jerry Brito:  No. It exists as much as a dollar in your PayPal account exists.

 

Oonagh McDonald:  Yeah. I know. 

 

Jerry Brito:  Yeah. So what I’m hearing is, we’ve kind of shifted from a critique of the risk of stable coins, maybe establishing a similar risk to PayPal, and we’ve moved to a why-should-I-use-this—a what’s-the-use case. Maybe they’re not risky. Or they’re as risky as PayPal — and more of a question of, “well, why do I want to use this?” 

 

And so, to that, I think what a stable coin issuer would say is, “If you use PayPal, you can only pay other people who use PayPal. And if you use something like USDC, you can pay anybody with internet access who is willing to download a free Ethereum wallet.” And that kind of interoperability has potential. Whether it takes off or not, I have no idea. But I think that would be the answer.

 

Oonagh McDonald:  Even so, I think you have to pay at certain points. Not on all exchanges. You pay to buy a stable coin. So why would you do that when you can just put the money into — you just transfer the money from your bank to — I think the UK systems are excellent, actually — into a transfer, what’s called TransferWise. It’s now just called –.

 

Jerry Brito:  Yeah. These are competing systems. And so let’s let the market decide. Yeah.

 

Oonagh McDonald:  But I think Tether, in particular, is in a difficult position because [inaudible 00:38:22] –.

 

Jerry Brito:  Yeah.

 

Oonagh McDonald:  And that’s why I would want to make Tether and other stable coins come clean.

 

Jerry Brito:  Yeah. No disagreement there. So you mentioned Libra. What was the significance of Libra?

 

Oonagh McDonald:  I think what the significance of it — because it never actually got off the ground. I think the significance of it was mainly to central banks. And I think it very much was one of the major triggers before central banks looking at CBDC.

 

Jerry Brito:  Yeah.

 

Oonagh McDonald:  And I just want to say very quickly, thinking about the way in which central banks — I have a lot of criticism of them — but to make it — using CBDC. But let me just take one topical one. If you want to eliminate cash, just think about what you heard on the news today. People in Ukraine are grabbing as much cash as they can from the ATMs because it is quite possible that none of these systems will be working because of the intention to wreck them through cyberattacks. 

 

And so I think if we want to think — I just wanted to make that point because Sweden very much looks at the decline—or Central Bank Governor does—looks as the decline of cash and thinks that that in and of itself is a good reason to have CBDC. And I say, “Think about them,” —

 

Jerry Brito:  Yeah.

 

Oonagh McDonald:  — always necessary. And of course, there were signs, many indications that during the pandemic, that people began hoarding cash as well because of their fear, also the effects of the pandemic.

 

Jerry Brito:  Yeah.  No — agreed there. So maybe quickly before we run out of time and we move over to questions from the audience, let’s talk about CBDC, which you just mentioned. So I think we’re probably going to be mostly agreed on CBDC. The US already has digital dollars. Do we need the government to create a CBDC?

 

Oonagh McDonald:  Oh, I don’t think so. And of course, it carries risk with it. And there are two risks, depending partly on the setup that is ultimately in place. All too easily — and we need to look at why China has done it, which is — and shouldn’t assume that that could just apply to China. China is doing it because it gives the Central Bank access to everybody’s individual accounts and what they spend on what, and could, from that point of view, be used as much more effective way of monetary policy. When questioned on this in the UK in a select committee hearing, the chairman raised this issue within the committee, raised this issue with the Governor of the Bank of England, who, of course, said, “Well, no. We wouldn’t want to use it for that,” to which the chairman replied, “Maybe not you, but maybe later.”

 

Jerry Brito:  Right.

 

Oonagh McDonald:  And that’s a very important — and then, secondly, there is the effect on commercial banks. And we would squeeze commercial banks out of existence. And I think that’s extremely dangerous. Although people may not like the system in which the commercial banks make money — which on the other hand, I [inaudible 42:47] the activities of the commercial banks, not only in creating money, but in lending and in lending creatively and with a true knowledge of what they were doing. 

 

And I really don’t think that there are occasions in which I would like to have been trying to get a mortgage from some bureaucrat at the central bank or [inaudible 00:43:21] or however — whatever waivers propose to deal with such issues. So I think Central Bank Digital Currency, no.

 

Jerry Brito:  Yeah. So I agree with you. But that actually leads me to think that — I can imagine a world where it’s not just China that adopts a completely surveilled, controlled —

 

Oonagh McDonald:  Exactly.

 

Jerry Brito:  — Central Bank Digital Currency. I can see Western nations doing the same. After seeing the way that the Canadian government has behaved over the past few weeks with its engagement of The Emergencies Act, etc., it wouldn’t surprise me if Chrystia Freeland would be perfectly in favor of a completely controlled and surveilled monetary system in Canada. And if that was the case, would I not want, as a Canadian citizen, an alternative to be able to transact in an autonomous and private manner?

 

Oonagh McDonald:  If you could.

 

Jerry Brito:  Well, in that situation, I might try to take whatever I can and help to build it to make it as close to perfection as I can.

 

Oonagh McDonald:  If you’re in that situation, yeah. 

 

Jerry Brito:  Yeah. But it’s probably best not to wait to be in that situation.

 

Oonagh McDonald:  Perhaps.

 

Jerry Brito:  I mean, the Canadians find themselves in that situation right now. 

 

Oonagh McDonald:  Well, I think it’s just ended. 

 

Jerry Brito:  Well, yeah.

 

Oonagh McDonald:  Yes. I’ve been following that one as well. 

 

Jerry Brito:  Yeah. Not good. 

 

Oonagh McDonald:  I think also again, there could well be the issue of trust. So long — could be actually trust. The other system, which might well be — I would say, if we take DAO as a decentralized system, thought of — I can see something like DAO as a decentralized system actually as not really being decentralized at all. It’s gone the path, or inevitably will go the path that the mutual building societies went in the UK. Nationwide still exists as a neutral that operates here as well. 

 

But in fact, all their decisions are taken by a central management. 

 

Jerry Brito:  That’s –something, certainly, to guard against. 

 

Oonagh McDonald:  Yeah.

 

Jerry Brito:  Okay. I see we have 15 minutes left in the hour, so let’s take some questions. Please feel free to raise your hand if you want to ask a question. I see some that have come in on the chat. And let’s see. I’m trying to find one that would be relevant. Let’s see. 

 

“Once the existing –” this is from Chip Hartley. “Once the existing central banking cartels develop their own centralized surveillance blockchain-based currencies, do you expect they will use their capture regulatory agencies to crush independent crypto competitors that can evade those [inaudible 00:46:42] control structures?” That’s a pretty loaded question. But I’ll let you answer it. And please raise your hand if you want to ask questions. I think it would be much better if you just came on and quickly asked your question.

 

I guess how — if I could rephrase the question. How much of a threat do you think central banks and other government agencies see crypto as being? Do they see it as more of a consumer-protection challenge that needs to be overcome? Or do they see it as a legitimate threat?

 

Oonagh McDonald:  I think with — I think, actually, with Diem, they saw it as a threat. And I said that that was, to a large extent, because they could see the enormous number of potential participants that Zuckerberg would have, and also because of the lack of trust in Zuckerberg. You have to actually believe that they — and we do this. I mean, we offer each other, as I like to say, colored bits of paper in exchange for goods and services. And we believe we’re going to get what we paid for, as far as the exchange of colored bits of paper or a string of numbers in our bank accounts. 

 

And I think because of his potential misuse of all of that, not trusted. Now, Circle, which would like to establish a global currency, has its chief executive, Dante Disparte, who was the vice president for Libra/Diem. So I guess what he’s looking at very carefully is, “Where did my previous boss go wrong? And can I achieve a global currency, global alternative currency, but much more carefully?”

 

Jerry Brito:  Yeah. And you know, it’s funny because I certainly saw that concern when Libra was launching, that it would present such massive scale, given Facebook’s scale. But this was typically said by people who also saw no point to stable coins and did not understand why anybody would use it. So it’s kind of like a mismatch. If you think this thing is useless—there’s no — there shouldn’t be any demand for it—then why would you be afraid that it’s going to have billions of people using it?

And also, to be honest, I never — and even if you thought there was value to stable coins, I mean, Facebook has had digital payments. Now, they’ve had Facebook coins and Facebook dollars forever. And they’ve had no take-up. 

 

And then, lastly, I would ask you — you just said—and in the book, you say this—that this was Facebook’s coin, that this was Mark Zuckerberg’s plan, etc. But of course, understanding that that would be a criticism of them, what they did was to not make it theirs. They initiated the idea. But they created an association, Libra Association, composed of a couple dozen firms. And they were aiming to have a hundred, including Visa and Spotify and Uber. I’m sorry. I think you might be — I can’t hear you.

 

Oonagh McDonald:  Yes. And others dropped out pretty quickly. 

 

Jerry Brito:  Yes. Absolutely, after they saw the political backlash. But I guess, so what Facebook and Zuckerberg, I think, tried to do, in order to address that very concern that they could foresee critics having—that they had a deficit of trust—in order to mitigate that, what they did was to say, “Hey, we’re going to make ourselves but one vote in an association of many other independent companies,”—like Visa is independent, PayPal is independent; they were all members—”we’re going to make ourselves one vote in this association.” Do you think that that was all a façade and all these other companies were going along with whatever Facebook and Zuckerberg wanted?

 

Oonagh McDonald:  I think a number of companies who watched the big fight really happen and so they’d better join and examine the competition. And then, as you rightly say, when they saw the political backlash and, I think, looked much more closely at the way in which the Libra Association would run and what powers it would have and how it would establish the reserves — and I looked at one or two of the members and I wasn’t convinced that they had the necessary skills and experience of banking —

 

Jerry Brito:  Yeah.

 

Oonagh McDonald:  — and what they were doing. Though I think that the whole thing, having, as it were, alerted central banks to such a possibility, saw it off, basically. 

 

Jerry Brito:  Yeah.

 

Oonagh McDonald:  I think the relationship with FINMA helped to see it off.

 

Jerry Brito:  Yeah. No, I agree with that. So there’s a question from Jeffrey Wood. He asks — or he says, “I believe I’ve heard financial regulators say that it’s actually easier to trace transactions involving crypto, even allegedly anonymous blockchains like Bitcoin”—and I would quickly say, Bitcoin is the furthest thing from anonymous—”than traditional currency, paper, specie, or even checks, especially if they get a cooperating intermediary. The Silk Road, itself, is quite a cautionary tale. Do either Mr. Brito or Dr. McDonald agree or disagree with this assessment?

 

Oonagh McDonald:  I think it’s not as easy to break into blockchain and to identify those holding the private key, or the individual because it tends to be very concentrated in a few hands, so we gather. I’m not quite sure how anybody really knows that. But that’s what is assumed. I think, initially, and for some long time, it was not quite as — it would really have been very difficult to identify the holder of the private key. 

 

I think in the — I think as time went on, that regulatory experts have found it possible but time-consuming to identify the owner of the private keys. And as we have seen—what I’ve read about the current case, as described in the New York Times—what it seemed to me there was that this couple were really rather careless in other bank accounts, transfers that they’d made. 

 

And if, of course, you can be identified through the dark web, as I understand it, and you can get your IP address, then you can identify the holder of the private key. And that has been done in some cases. But I think it’s moved from being impossible to much more difficult, time-consuming, and expensive because of the people you have to hire to do it.

 

Jerry Brito:  Yeah. So to answer Jeffrey, I would say that you’re generally correct. I’ve talked to several law enforcement officers, federal law enforcement officers, who tell me how much more they prefer working on cryptocurrency cases where they have access to the blockchain, in which every transaction is recorded. And it’s a permanent record that criminals leave behind of their transactions. And it’s actually quite easily and inexpensive to trace all the transactions. 

 

The trick is tying a real-world identity to the records on the blockchain. And this actually presents the same problem that we have with the legacy financial system. So it used to be the case that law enforcement would have a suspect, and the suspect would have a bank account. And they would know who the suspect was but not know what the suspect’s transactions were. And so, they would have to go get a warrant or a subpoena to go to the bank and say, “Hey, here’s our suspect. What are this person’s transactions?” 

 

Today, what they have is the inverse. They have all of the transactions. Right? They can go to a dark web market, see all of the drug sales, see all the transactions. But they don’t know who it is. So what they can do now is take the transactions and go to a cryptocurrency exchange and say, “Who is the person associated with these?” And using a blockchain forensic software, it’s actually not that difficult to identify which addresses are associated with which exchanges. So they can go and see. And of course, this is why you want to have good regulation for exchanges, so those aren’t going to be subject to bank secrecy act regulations, etc.

 

Let’s see, a question from —

 

Nate Kaczmarek:  Jerry?

 

Jerry Brito:  Yeah.

 

Nate Kaczmarek:  I think we have an audience member, —

 

Jerry Brito:  Oh, good.

 

Nate Kaczmarek:  — Jessica Kong, who’s raised her hand.

 

Jerry Brito:  Okay. Great. 

 

Jessica Kong:  Hi, Jerry. Hi, Dr. McDonald. Can you hear me okay? 

 

Jerry Brito:  We hear you. 

 

Jessica Kong:  Oh, great. Okay. Thanks for hosting this event. I guess my question — I had a comment before when you were talking about central bank digital currencies. And Dr. McDonald, I think it’s important you highlighted how setup is important. But then you talked about intent—the intent for setting up a CBDC—as one major reason of sort of why you would go against the idea of one. 

 

And then I was thinking about — and I definitely agree with China, sort of like the privacy concern and having more control and access. But I also was thinking about how China—as well as Sweden, with the eKrona—they have — they’re experiencing a large reduction in the use of cash. And so, when their economies are more digital, I guess it’s a central banks question on how do we address this when your monetary policy tools don’t really have control in a cashless economy. So I don’t know if the argument there is for if your country’s experiencing that, like in Sweden, if it’s sort of arguing that there shouldn’t be a central bank role in helping to support financial markets. 

 

And then I also think about in the Bahamas with the Sand Dollar, that they’ve implemented that to help rural populations that don’t really have access to these sort of means. And while there’s definitely private organizations that you show — like M-Pesa, in Kenya, has been tremendously successful to help alleviate poverty. And so we see that private industry can help be the solution. But then, is that to say that the central banks should rely on the private industry for those sort of cases?

 

Oonagh McDonald:  Well, as indeed, the central bank relies on commercial banks as an essential part of the economy, if you give all of that totally to a central bank, then I’m not suggesting that this would be immediately misused. But there are always circumstances in which a temptation would be there for elected officials and for the governor of the central banks so to use it. And that I think is the danger. 

 

It’s very interesting that, given the level of distrust in America over central bank, which is higher than in other countries—other advanced countries—that anyone here should contemplate the notion of the federal reserve issuing a CBDC. You can’t — it’s very difficult to prevent the central bank from having clear access to the transactions that are taking place. This is done in, as it were, bulk form, at the moment, but not which individual is spending what on what. And I do think that that’s a real danger. 

 

And by the way, even in Sweden, where the introduction of CBDC is subject to a parliamentary commission, which doesn’t report until November this year—and yes, there has been considerable decline of cash—there are strong arguments from public and public-representing, particularly, sections of the population such as elderly people — are against the total digitalization of their currency, which is interesting. And remember the example I just gave you of the Ukraine. There are times when you want cash, and only cash will do because the systems break down, not accidentally, but they are being destroyed, as they will be in Ukraine.

 

Jerry Brito:  All right. Well, I think that is all the time we have. Dr. McDonald, thank you so much for having this conversation. And I’ll turn it back to Nate.

 

Nate Kaczmarek:  Yes. I wish we had more time. This has been, I think, as advertised, an excellent conversation. And we are certainly grateful to Jerry and Oonagh for the benefit of their expertise today. Again, Dr. McDonald’s new book is Cryptocurrencies: Money, Trust and Regulation. To learn more about it, you can visit the link we’ve provided for you in the description of today’s program. We welcome audience feedback by email at [email protected] RegProject.org. Thank you all. Have a great one.

 

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Conclusion:  On behalf of The Federalist Society’s Regulatory Transparency Project, thanks for tuning in to the Fourth Branch podcast. To catch every new episode when it’s released, you can subscribe on Apple Podcasts, Google Play, and Spreaker. For the latest from RTP, please visit our website at www.regproject.org.

 

[Music]

 

This has been a FedSoc audio production.

Oonagh McDonald

Senior Adviser

Crito Capital


Jerry Brito

Executive Director

Coin Center


Financial Services & Corporate Governance

The Federalist Society and Regulatory Transparency Project take no position on particular legal or public policy matters. All expressions of opinion are those of the speaker(s). To join the debate, please email us at [email protected].