They certainly can. I mean, that's always a problem right now with dollarization. In most countries, there's a lot of rules that try to stop it or prevent it. It's a lot harder to stop stablecoins than confiscating currency that people may be hoarding in their bedroom. It's a little harder to take it off the blockchain and the internet. Okay, let's talk crypto more broadly now beyond stablecoins. You know, the Fed working with the private sector, as we talked about the history of the Fed, same thing goes back to 1913. This is what the Fed is supposed to do: work with the private sector in this country. But now we have this new rising emerging class of assets in this country, crypto assets. And how do you see that crypto more broadly beyond stablecoins interacting with the traditional banking sector?
Well, I think in the crypto world, I focus on things in the crypto world that look like payments. The other objects that might have properties that look like a commodity or may look like a security, those are out of my remit. Those are things that would have to be dealt with by other agencies. So I don't spend a lot of time thinking about how to do things with those types of assets. I only worry about payments that look more like bank deposits if it's a payment instrument. So that's the stuff I'm particularly interested in. But in the crypto world in general, many people have heard me say, but I think of the crypto world as always there's three buckets: there's an object that's being traded, there's a technology for doing that trade, and then there's a technology for recording the history of that trade and proof of that trade. Now when you go to the grocery store and you buy an apple, the apple's the object, you pull out your credit card, there's a reader, you tap it, that's the technology for doing the transaction, and then it spits out a receipt. Okay, in the crypto world, the object is a crypto asset of some type. Smart contracts, tokenization are the technology for doing the payment, and then the blockchain is just the receipt, it's the record of the transaction happening. Those last two things are just technology. There's nothing to be afraid of from those two things, but they've been kind of blocked into this crypto thing, and so everybody says blockchain and they freak out that this is terrible, oh my God. So it's, you know, that's why we want to, like even at the Fed, the stuff the Digital Assets Group that I kind of oversee, we spend a lot of time thinking about digital payments and how to use technology and what the possibilities are and how to innovate with these things. It has nothing to do with the crypto object, it's just a way of doing payments. So that's what I, that's kind of how I look at it. Whatever the crypto object is, knock yourself out. You know, like I said, people buy, people spend a million dollars or more for a baseball card. Go ahead. I'm not going to, but you know, you're free to do what, buy whatever collectible object you want, and you know, that's your choice, and there shouldn't be a lot of opposition to it in some sense unless there's real danger involved.
So you're focused on the crypto from the rail side, the payment side. The rail and payments, that's for me personally, that's my, that's what I view as my lane, and that's what I'm trying to stay in. Do you think the Fed has a good sense, and because we think about this a lot from our research side, of how much crypto is being used in payments? Sometimes it's hard to understand this data in close to real time.
Well, I think if you look at the data, almost all payments in the crypto world are done with stablecoins, right? There is always a medium of exchange that becomes the common standard for how you do payments for whatever object you buy going in or out of exchange changes, and that's kind of what happened with stablecoins. So they're right now they're mainly used in the, um, you know, the Ethereum world, and that's a completely separate set of rails from what we do on our day-to-day life. But you know, someday those rails may interchange and figure out a technology that you can move back and forth across these relatively easy.
I'm going to go to central bank digital currency in a moment, but there's seven or eight questions online on the crypto front. You're going to be shocked to hear this about the idea of a Bitcoin strategic reserve.
Yeah, I leave that to the government to deal with. You know, if they want to create a strategic reserve, first of all, then whatever objects they want to buy, that's not my problem. Okay, but it could become part of the Fed's responsibility in theory.
Well, no, I don't think it would be. I wouldn't be running this. I don't think, I haven't heard that because part of the legislation is to sell, go Fed sell gold certificates to pay for the purchase of Bitcoin.
I mean, I guess you could if you wanted to. Like I said, I just don't have any comment on it.
All right, let's go to central bank digital currency. I want to put another chart up here. So this is a key area of research for us here at the GeoEconomics Center. And what we've shown over the past, how four years we've looked at this, is we started with 30 countries exploring CBDC, they're 130 now. But not all of those are in a serious form of exploration. There's sometimes what we call CBDC FOMO, you know, just saying should I get into this? We estimate there's about 60 countries that are in a serious phase of CBDC exploration. They've gone past research, they're in development pilot, they're putting real resources behind it. How do you see retail CBDC just from your perspective? We know where things are domestically, but just as a concept of retail CBDC.
Yeah, so I gave a speech back in August of '21 when the FOMO was everywhere, that everybody had to have a central bank digital currency. And I did what I think a standard economist would say, which is: what is the major market failure in the payment system that requires this object and only this object to solve that problem? That was a question I posed in August '21. Just tell me what you're fixing. What's the problem you're trying to fix with this solution? And no one's given me a really good answer in almost three and a half years. So I kind of look at it, and what I argued in the speech was, if you look at the US payment system, it works incredibly well. I don't know what you're going to gain by having the Fed step out front and start dealing with the retail customers in terms of payments. So let me just rephrase this. Since our founding, which we talked about, we've taken a very straightforward model of the payment system. We will be in the back of the house, and we will let the banks deal with the front of the house and all the retail customers, and then we'll sit in the background and make sure all the money flows between the banks. So what I would like to know is: what is wrong with that model? What has changed that requires the central bank to now get out in the front of the house and compete directly with the banks? I just don't see the case for that. So that was what I did in the speech. I just didn't see really what this was solving. Now, if you have a bad banking system or unreliable or some other things, then maybe you might. I'm not saying it's for everybody, shouldn't do it, but you got to identify the problem. Just don't start throwing stuff, you know, like an infomercial. Look, we got a CBDC, we can do this, we can do that, we can do this. That's what infomercials do. It minces, it dices, it mashes. And the whole point of an infomercial is to make you avoid asking the question: do I really need this thing? And that was the FOMO that was going on. And I think a lot since that speech, I think a lot of central banks have stepped back and started asking, okay, why do we need this thing? They may come up with an answer, a good answer for it, but today, as you said, only a handful of banks are even seriously talking about doing this.
Yeah, there's three fully launched, nine pilots. Of course, China we consider it a pilot, but 200 million users, so that's a big pilot. I want to talk about the digital euro in particular, because they seem to be moving forward. From an ECB perspective, I think they're going to go in. We consider them in pilot, but they're going to do real live use testing pilot next year. Digital yen moving forward. Bank of England has said they want a digital pound by the end of the decade. So my question is: if we get to 2030 and there is a digital euro, a digital pound, and a digital yen, does that matter for the Fed?
No. No, they're basically going to do an account-based CBDC mainly. When you go to your bank, you can have a bank, a checking account that's backed up with commercial bank money, or there's a checking account that's backed up by CBDC. So you can pay your electric bill with either one. I don't know what the big deal that is, it's so important. But you know, one of the big reasons the ECB has announced that they are going to do this is that they want to directly compete with the private sector to drive down payment costs. That's a philosophical point of view. My view, and what we've always done in the US, is the government and the central bank, we do not compete directly with the private sector. That's not our job. We do not use taxpayer dollars to go out and directly compete with the private sector. That's purely a philosophical point. So the ECB is free to do whatever they want, but that argument would not fly in the US, I think, very well.
And the international standards, this is something we hear a lot when we talk to central banks around the world. They're trying to figure out how to do privacy in CBDC, offline payments in CBDC. And sometimes, even though the US isn't going to do one domestically, they wish the US was there to help them answer these issues. Is it anything you think about from the Fed's perspective about all these CBDCs proliferating around the world? We might not have one, but we might be interested in how these others operate.
Yeah, I mean, the privacy thing, again, this is a technology issue about how you set the thing up. So for example, you know, when all we do right now is we get a notice from Bank A: make a payment to Bank B. I don't know what it's for. I don't know who initiated it. I just get Bank A says move some money from my account to this bank's account. You could do a very similar thing with CBDC in the sense that I don't know why the CBDC is moving, I don't know who's sending it or what the transaction was. So in that sense, there isn't any real privacy issue. But a retail CBDC where I have, you have a direct account with the Fed, I'm going to see everything, right? And that is another reason for privacy, despite the fact that you would have to have access to a master account, which we're not allowed to do. So Congress would have to change that. But that's what I mean. There are ways of doing this that you would have some privacy protection. But this is just in general now a huge issue in the payments world: how much privacy do we need in terms of payments, particularly when you're trying to think about illicit finance, anti-terrorism, money laundering? You got to have some visibility into the payments if you want to do those things.
I remember a few years ago there was all this talk about direct Fed accounts. I think every central bank in the world has said if they have a CBDC, they're going to intermediate it for all the reasons that it doesn't make sense. You know, I don't think central banks are great at being customer-facing institutions. That's not their remit. But let's talk wholesale CBDC, because that's a different ball game. And there we're talking about cross-border payments between banks or domestic payments between banks. And sometimes the nomenclature, I think, gets a little confused here between the retail space, central bank digital currency, and wholesale, which is a very different kind of question.
Yeah, so yeah. In fact, at the Fed, we've dropped this whole language, this term wholesale, because we already have a central bank digital currency wholesale, which is called bank reserves. It's digital. It's how the banks settle up and pay, and we've used it for decades and decades and decades. There's nothing, so unless you're talking about creating a new central bank liability, we already have it. Now the better thing to do is think about how you can use technology to improve on the payments, how we do it, how banks can use their reserves to settle in a better way. That would be tokenization or platforms of blockchains. You could think about banks trading reserves in a more efficient way. Certainly the correspondent banking system could be done better, but it doesn't mean we create a new liability. It's just how you take the existing liabilities, use technology to move money faster and safer. And the US, I think, has a vested interest, it's fair to say, in being part of that improvement process. And our commercial banks are interested. Yep, they all are. It's that's very different than creating a new liability, central bank liability. So we've dropped this whole nomenclature at the Fed. On the retail thing, we don't talk about it. We just say we do digital payments, which any object can be used for that, bank money, whatever. We're just trying to understand how digital payments.
Just to put a practical example on that, you have a bank, they want to tokenize their deposit. That's their choice, and they might have a master account at the Fed, but how they transfer it cross-border, that's between them and the banks they're working with.
Yeah, I mean, we used to do checks. People still do, I wish you'd stop. You know, debit card, there's all kinds of ways that the banks tokenize their deposits and move money across. In a sense, how they do the payment, excuse me, just how they do the payment. But in the back end, it's still just us moving the money back and forth across bank accounts. That's it.
So is the US then still involved in Project Agora? Or, however you say the word, the BIS always corrects me. The other, I feel like I do it one way and then they say it's the other. However you pronounce it, I'll pronounce it.
So yeah, I mean, that project is really not about creating a wholesale CBDC. It's like taking bank reserves that we have now and how can you trade these on a platform to cut out intermediate steps, make the correspondent banking system more efficient. We're not trying to replace anything. We're just simply saying, you know, when you think about the correspondent bank, my bank goes to this bank, goes to that bank, goes to that bank to get a payment to somebody in Italy or Switzerland. Can't we do that a little more efficiently and faster without all these steps? Can't we get the banks somehow all tied to the same platform so that we don't have to do the intermediation across several banks? I mean, this is just about efficiency. This has nothing to do with the liability itself. It's the same liability. It's just how do we make it move faster and more efficiently.
So New York Fed will stay involved in that project?
Yeah, I mean, that's really about correspondent banking. That's not about wholesale CBDC. That's like I said, we just stopped, we completely have stopped using this word, this nomenclature, as you put it.
So let's talk more international on the BRICS side. This is a big area of focus for us. We run the Dollar Dominance Project here at the Atlantic Council, CBDC tracker. We talk about CIPS and SWIFT. There's a range of countries, but China in particular, who are building alternative financial networks. China's mBridge is a wholesale CBDC project. They have their CIPS network, which is not CBDC, it's just traditional settlement and messaging. How do you think about that from the Fed's perspective? Does this challenge the dollar in any way or challenge our financial networks in any way?
