Mr. Erik Bethel, and Mr. Paul Touw- Panel

First of all, let's test and see if the microphones work. Test, test. Hello, hello. Okay. Well, first of all, welcome, and thank you for hearing us out. This is a great event, and first of all, I'd be remiss in not saying thank you to Senator Cassidy and also to Congressman Pittinger, who put this on without you and the work of your staff, we wouldn't have this event. So this is a very important event, and thank you so much for having us. By way of background, I'm Eric Bethel, and until recently, I was the representative for the United States at the World Bank. Prior to my job at the World Bank, I spent 25 years or so in the financial industry at J.P. Morgan, at Morgan Stanley, and at other places, focusing on emerging markets. I grew up in Latin America with Latino parents, but I see that we have a lot of people here who speak English, so I'm going to continue speaking English. Also, my colleague here speaks English. At the World Bank, among other things, was trying to help tokenize World Bank loans to make sure that the money that was going to, and by the way, this is $80 billion a year ballpark, going to help people get out of poverty. Some of it, not all of it, but some of it was being misused, and so what we were trying to do is figure out a way to tokenize these World Bank loans so that you could see exactly where the money was going. Through this process, I met a number of very interesting people in Washington, and I ran into my old friend, Paul Tao, who came from Silicon Valley, but why don't you introduce yourself and tell us a little bit about yourself? Sure. Well, good afternoon, and thank you for listening and inviting us and including us, but I spent most of my career in Silicon Valley in B2B e-commerce, actually right at the beginning of the internet. It was 1996, and through that process, we built B2B e-commerce systems. We also did some of the first electronic payment systems, and so I've spent most of my career in tech, and then most recently, in the last three years, I've been at the U.S. State Department helping the United States with technology-related issues, and in particular, central bank digital currencies, or CBDCs. What did you do in the payments area? You were mentioning payments and B2B e-commerce. You founded companies, right? I founded a company called Ariba, actually, in 1996, and they do mostly business-to-business transactions, so these are the very complex commercial transactions that move through the supply chain, automating those types of transactions. And how big is Ariba? Today, Ariba does about three trillion U.S. dollars in transactions per year. Wait, three trillion? Three trillion. It's one of the largest commercial commerce automated systems on the planet. And so you left the world of Silicon Valley. You also founded DocuSign, is that right? I've worked at many tech companies since. Anyway, and so you left Silicon Valley to work for the State Department as the strategy officer, and your work was on central bank digital currencies. Yeah, when I joined the State Department, very few people knew what they were. In fact, we had a different name for it. We called it Central Bank Digital Currency. Today, about 80% of central banks around the world are looking into researching or piloting central bank digital currencies. So in a very short period of time, it has become a very... Let's hold off. No, wait, wait. Let's hold off a second. Stop checking your emails, folks. Who here, raise your hand if you have heard of a central bank digital currency? Who's heard of it? Who knows what a digital currency is? Not so many. I would say like 10%. Paul, what is a central bank digital currency? So obviously, central banks issue, regulate, manage the monetary policy of fiat currency, like the US dollar. And a central bank digital currency is simply a digital version of a fiat currency. So if I were to take $50 out of my pocket, and I were to turn it into digital form, in a simplest state, that is a digital dollar. It's on my phone. That's correct. That is what you would call a bearer instrument. So he who bears the instrument owns it. And one of the benefits of paper currency is the second I hand it to someone, they bear it, and they own it. So that transaction actually takes place instantaneously. Paper was a relatively fabulous invention. That's yours. About 1600 years ago. A digital currency in its simplest form works similarly. I have it on my device. I send it to you. And then instantaneously, you bear it, and then you own it. So that's one form of a digital currency. Taking that up a notch, a central bank can also act as the issuer of that digital currency. And what the central bank in that particular case would do is they would digitally own what's called a blind signature to that token. So they can verify whether that token is a valid token or an invalid token, or a valid digital coin or an invalid digital coin. But they may not know who that coin is being passed from where to whom. The second thing a central bank digital currency can do is you can make it so that that transaction only occurs once. With paper fiat currency, it moves through the economy maybe eight to ten times. With central bank digital currencies, every time it's used, we basically throw it away and reissue a new token to the new person. So one of the nice features, and particularly with regard to this conference, is CBDCs can be tracked. And they can be colored, and we can put smart codes on them. And when they're taken out of the banking system or put back into this banking system, we can track them. So they're fabulously easier to prevent anti-money laundering, much easier to track counter-terrorist financing, and other forms of illicit trade. So Paul, how do you...so there's a benefit from an anti-money laundering and traceability standpoint, but how do you balance that with individual freedom? Like if I wanted to take my $50 and buy something anonymously with it, does...what you're discussing, is there a way to balance legitimate law enforcement needs with privacy and anonymity? And how would you... how do you fix that? At the State Department, we were looking at a whole variety of different designs. So there are many ways to do CBDCs. You heard about blockchain, distributed ledgers, digital tokens, their account-based systems. But the designs that we favored at the State Department were ones where the token is issued to a person, and as soon as that person spends it, that token is thrown away, and a new one is issued to the next person. So in a way, it's almost impossible to do money laundering. Because what is money laundering? It's taking cash and mixing it with other people's cash, and et cetera, et cetera, et cetera. So you can design CBDCs to literally wipe out money laundering. Every time it goes into a bank or back out of a bank, I can check it at that point of exit or the point of entry. And you can do other things to it. But in...to answer your question about protecting the anonymity, you don't want, you know, some governments around this...around the world, you'd be a little bit worried about in terms of a central bank digital currency. What you can have the central bank do is only know whether that coin is a...is a valid coin or an invalid coin. But the central bank would not know who holds the coin. So unless I put it back, take it out of a bank or put it back into a bank, that's the...that's a point in time at which I would know who actually either the coin was issued to or pulled back in. But that would be through the commercial banking system. So that way you couldn't have a bad government take over and then, you know, say, I'm going to take all my dissident parties and cut their digital coins away because they don't know who actually has the coins. So this would be very different than the digital currency that China is promoting right now, which basically the People's Bank of China, their government is going to be able to see everyone's individual transactions all the time. And if you are not in favor of the Chinese Communist Party, they can, you know, do...you know, erase your bank account. So this is different. What you're talking about is gives you more freedom and anonymity. That's correct. But it still has the capability, the technology has to completely prevent money laundering, as well as still provide the counter-terrorist financing and illicit checks. Because every time I go out of the banking system or back into the banking system with a digital coin, I can do my KYC checks, know your customer checks. So Paul, for people in the audience, many of the people in the audience, myself included, except for the $50 that I now have in my pocket again, I don't use cash, right? I have Venmo, I have Apple Pay, and I have credit cards. I'm already using digital money, right? I mean, what is...how is this different than using my own digital, you know... That is a great question and a very important thing for this audience to understand. And I'll use the United States as an example. In the United States, we predominantly, you know, most people don't use cash. A very small number of our transactions are now cash. Most people use credit cards, debit cards, Venmo, Apple Pay, you know, etc., etc. PayPal, if you've heard of PayPal. Those transactions ride on a banking system that was designed in the 1950s and 60s and 70s, and then on a credit card system that was designed in the 1970s and 1980s. So most of those transactions are riding on what we call the credit card payment rails. And that comes with about a 3% fee. If you do a transaction with PayPal, they add more fees. There's another 15 basis points that goes on top of that. Venmo has other fees on top of that. So those systems have substantial fees. In the United States, and this is almost shocking, but in the United States, those fees add up to about $470 billion a year. Wait a second. The credit card fees that are paid in the United States alone annually are $400 billion? No, actually, I'm sorry, $470 billion. Okay, $500 billion. And so, like, how does that compare to, I don't know, how does, what is $500 billion by comparison to other things? Well, certainly in the news lately has been the issue of actually any country's debt, but the United States debt has hit almost $30 trillion. And the interest costs on that debt is about $340 billion, so less than credit card fees. So the interest on the U.S. debt, national debt, is less money than what we pay in credit card fees. And what you're saying is that when you use Apple Pay or whatever, you're paying, that's where all the fees come in, so it's more expensive to use this. But if I use a central bank digital currency, there's no friction, and it just works automatically. That's correct, because all credit card transactions and most checks, most transactions that go through the Federal Reserve, that go through Latin America, that go through the various SWIFT and CLS money transmitter systems, those all cannot happen instantaneously or autonomically, right? They take time, and I don't know whether the other, there's money in the other digital account, so what ends up happening is you always have to take, somebody has to take on counterparty risk. Is that person going to pay his credit card? I don't know. Well, American Express is going to take on that risk, and they charge a fee for that. There's also fraud in credit cards. We all know about fraud in credit cards. So a digital token is like a credit card with a 4,000-digit credit card number that's encrypted. It's very hard to hack that, whereas a credit card only has eight digits, and it's easy to hack. So we're going to be running out of time soon. We wanted to have some questions. Yes, I think so. This conversation between you has been so interesting. We hope to hear some questions from the public. I think that this opens up a lot of questions, and so my question is, how safe is this digital payment system? How safe is this digital payment system? What a good question. How safe is using a central bank digital currency? Can it be hacked? Can someone put some malware on it? If you're going to have a digital limpida or a digital balboa, what if somebody hacks into it and creates a problem? Well, most of our cash today is stored in banks, which people theoretically can hack into. As it turns out, a bank is a central source of information, so that's kind of scary. Well, it's not easy to hack into, but there's a lot of money stored in a single database at a bank. In this particular case, the money is highly encrypted. It is so safe a quantum computer can't hack it, and then secondly, it's stored on your device or it's stored in the cloud in lots of disparate places where hackers don't want to go hack your cell phone to hack $100, like if you only have $100 of cash. So you create thousands of targets that are not that interesting for hackers to hack, as opposed to, say, a small... The central bank, in our particular case of CBDC, isn't actually storing the money. It's just a database that validates the encryption of whether that coin is a valid coin or an invalid coin, and if that database gets blown up by a nuclear bomb, you can actually reset everyone's coins that are in their current wallets. So it is extraordinarily safe. It's actually much safer than credit cards, much safer than cash, and if you're comfortable storing money in a bank, it's as equally or more safe than storing it in a bank. So Paul, we were going to have some time for questions, but I've got one more question for you, the last one, I promise. Who is doing central bank digital currencies? Is this like a one-off thing, or are there many people doing it? And how many central banks are interested? About 80% of central banks in the world are either researching, starting pilots, or a very small percentage have actually launched a central bank digital currency. China is the furthest along. They issued their central bank digital currency in February of 2020, right after the pandemic started. And then you have a couple of other local scenarios of digital currencies. You've got one in the Bahamas, and one in, I believe, in Vietnam. Eastern Caribbean. Maybe we can answer some questions. Hello, Angela Hakis from the Dominican Republic. My question is the following. How will interoperability work with different central banks in the world? For example, you have a dollar, which is a very strong currency globally. How will that kind of interoperability work with digital currency? So one of the things that, when I talked about money moving inside the United States via credit cards and checks, that problem is multiplied in spades for moving money between countries in different central banks. Vastly more complex. You have to trade currencies at the same time that you have to actually move those currencies around the world through different central banks and through different banking systems. So one of the benefits of a CBDC is that because it's an atomic bearer instrument, if I know the currency trading amount, I can present that CBDC cross-border and instantly settle it once I hand it to someone. And then the central banks can resolve that and say, well, I'm just going to give you so much of my CBDC in return for your CBDC, so they can resolve the currency. So fundamentally, CBDCs may be the best way to solve the cross-border payment problem that has sort of plagued the world for the last 20, 30 years. We actually foresee, right now, even U.S. money coming in the form of remittances to Latin America can cost 8%, 9%, 12%. That can go to zero through CBDCs. So in the case of, say, Honduras, money in the United States is, obviously, circulates to the U.S. banking system, but would be routed up to the master account at the Fed of Honduras. It's their own bank account at the Fed. And then Honduras would instantaneously issue new Lempida to the local recipient. So there's no time in that transaction. It can happen almost immediately. So it's also, for inter-Latin American payments, a potential huge breakthrough for Latin American countries for moving money. Because it's easy if you want to go through the U.S. dollar, but it's very difficult to move money between various countries inside Latin America, because there's just not a lot of liquidity in those markets. So that's another way that CBDCs can fix those problems. Thank you, Paul. We have another question there, but before the other question... Sorry. What about the cryptocurrency and the possibility to track and trace the coin? So the nice thing about CBDCs is you can set at what level you want to track them. So, for example, if you want a certain level of anonymity up to, say, $1,000, you can allow that amount of anonymity to occur in the system. And then above that level, you might require KYC or Know Your Customer rules. You might have increasing KYC rules. And then you might have increased traceability if it gets up into the million dollars of money. So, yeah. Fascinating. Fascinating segment. Thank you very much. A couple of quick questions. Where is the United States currently? And what area of development are at the pilot program? Obviously, you're a former now. How's the continuity of the program? And then wherever we are, wherever the United States is, where do you see the things that may stop us from getting digital currency? So the United States, a year ago, I would have said they're nowhere. Actually, Chairman Jerome Powell was our Fed Chairman, actually somewhat against CBDCs. A year later, things have changed dramatically because of the introduction of the Chinese digital currency. The pandemic saw the use of cash plummet in the United States. We had other problems in deploying cash. We literally have to write checks, and that can take six weeks to get cash in people's hands. A CBDC can do that in the middle of a pandemic instantly. And now you've got almost every other country around the world looking at CBDCs. And so Jerome Powell has come around tremendously, and now Jerome Powell has a very high priority project underway to study CBDCs. So there are a lot of complicating factors in the United States. We have to go through a lot of processes to do something, but it's possible in the next three to five years. Yeah, the United States, because it's the world's reserve currency, has too much at stake for this to fail. So it's got to do things the right way. The other thing that the United States has is we have to balance security issues and the reserve currency status of the dollar with privacy and anonymity issues. Plus, we have a lot of stakeholders. We have the OCC that regulates banks. We have the CFTC. We have the SEC. We have Capitol Hill. We have the Fed. We have Treasury. So there are so many stakeholders, and they all weigh in on it. And so it can be a challenge, and it's going to take time, but I'm certain that when the United States gets the ball rolling, it's going to get done very well. My question, who supports that currency that you're talking about, the digital currency? What is the difference to Bitcoin, then, and other virtual coins? Okay. So a central bank of any currency is the bank of last resort, the bank of reserve, if you want to think of it that way. And a central bank of a country is backed up by their economy, in effect. In the United States, we have a combination of things that back up our federal reserve. One of them is the fact that we have payments coming into the Treasury, and we pay our notes back, and we have good faith and credit. But we also have an enormous amount of assets in the United States, $11 trillion of gold, about $90 trillion of SDRs, which is another form of currency with the IMF. So there's a lot of assets that are backing up the U.S., and the U.S. economy itself is considered kind of a backup of that. Bitcoin, there is nothing backing up Bitcoin, okay? So gold, you at least have a precious metal that you can sell, but Bitcoin has virtually nothing behind it, other than the fact that people, it's a scarce resource, and people demand it. Bitcoin can be traced, because the ledger is known, but the people who are actually making the transactions can hide. So Bitcoin has been used for illicit trade and illicit transactions, and that's one of the reasons that I think it's important that countries seriously consider developing a CBDC, or a central bank digital currency, because if they don't, that will leave the door open for cryptocurrencies to come in. Panama does not have a central bank, so then we do not come into the market. Panama does not have a central bank, therefore we cannot join this market then. I'll come back, and let me answer your first question. What country are you from? Panama, okay. So let's think that you are from a country, let's say it's Argentina. What backs up the Argentinian coin, or any coin, it's their reserves, it's their reserves in the country. Bitcoin, just like my friend Paul mentioned, Bitcoin is backed up by nothing, it's a virtual currency. In the case of Panama, the reserves of Panama, Panama is backed up by the dollar, so you're able to issue a digital currency, but it would be more like a stable coin, which is a synthetic coin, rather than a Bitcoin. If you'd like, I can talk about it with you specifically later, because I think we're running out of time. Synthetic coin, digital coin, just keep your $50, I would like that better. Paul and Eric, thank you so much. I think we've run out of time for questions, and I think that maybe you can speak on one-on-one a little later. Spain has a question, but I think maybe you could follow up later. Thank you so much, Paul and Eric, thanks for sharing the floor with us.