This week we sat down for an interview with Eswar Prasad, the Tolani Senior Professor of Trade Policy at Cornell University. Last month he published his new book, “The Future of Money: How the Digital Revolution is Transforming Currencies and Finance”.
What are some of the biggest misconceptions about digital currencies?
The term digital currency now has become much broader, it includes not just cryptocurrencies such as Bitcoin that have an unstable value, but also new types of cryptocurrency called stablecoins. Stablecoins maintain stable values, as the name suggests, because they are backed up by stores of fiat currency, such as the US dollar. A stable coin linked to the US dollar will have stable value because it is backed up by a reserve of US dollars. There are other types of cryptocurrencies that are trying to fix Bitcoin’s weakness. There are some currencies that provide greater anonymity or are more efficient to use than Bitcoin.
What are some things that central banks should consider when they are regulating and managing risks with digital currencies?
Low cost digital payments are not easily accessible to parts of the population, especially in many low income and developing countries. Even in a country like the US, which is a very advanced rich economy. Even here, about 5% of the adult population is believed to be unbanked or under bank. That is, they don’t have easy access to bank accounts or credit or debit cards. If you think about using a digital payment method on your phone, such as Apple Pay, which is quite easy to use. The problem is that you need to have Apple Pay linked up to a credit card or to a bank account and if you don’t have either of those to start with, you do not have easy access to digital payments. Now, cryptocurrencies are supposed to provide better payments.
Given the potential benefits that could be accrued from cryptocurrency technology, even if not from cryptocurrencies, themselves, I’m hopeful that we will find a middle path where the government is able to accrue the benefits of this innovation without squelching them completely. While ensuring that there is adequate investor protection and financial stability risk mitigation in place.
Are there innovative opportunities for how we use digital currencies that we cannot currently do with traditional currencies?
Digital payments are a lot more efficient and can generate real gains for businesses and consumers. It’s not just domestic payments, if you think about international payments, they are very expensive, slow, cumbersome, and difficult to track in real time. If you think about exporters and importers who are conducting trade with other countries, economic migrants sending remittances back to their home countries, they face a lot of barriers, in terms of making those international payments. The technology underlying cryptocurrencies has the potential to make those digital payments much more efficient, cheaper, and opens up the possibility of tracking them in real time.
Decentralized finance, in my view, has a lot of potential for the provision of easy access of not just digital payments, but also basic banking products and services, such as instruments for savings, for credit, for insurance, and to make those products easily accessible to the masses, even people who might not have access to a bank account or a formal financial institution that they have an account with. There are opportunities for increasing the inclusiveness of the financial system through these new technologies.
What should governments and users consider when it comes to privacy and security with digital currencies?
There is a trade off here. From the point of view of a government, it wants to make sure that any currency it or the National Central Bank issues is not used to finance, illicit or nefarious activities of any sort. That requires auditability and traceability of transactions, and when you have auditability, and traceability, that is going to make it much harder to maintain confidentiality of financial transactions. There is going to have to be a balance struck between these competing objectives. We would all presumably like to have as much privacy in our financial lives as possible, but the government wants to make sure that certain types of activities are constrained, especially when it comes to the use of its own money. We’re going to need to have conversations about this, not just in terms of the economic or technical issues involved, but at a societal level about the trade offs that we’re going to be facing.
How do you collaborate with researchers at Cornell Tech on this topic?
Cornell Tech has been crucial to the writing of this book. There are many colleagues, especially in the IC 3d initiative for cryptocurrencies, who’ve been extraordinarily helpful in guiding me through some of the technical aspects of cryptocurrencies and about many of the technologies that underpin them and are also being created right now. Much of this decentralized finance architecture that I spoke about, is in fact being developed by some of the leading researchers at Cornell Tech.
There were a number of collaborations that I’ve had, and continue to have with colleagues at Cornell Tech, in terms of some of the technical issues related to Central Bank digital currencies, but also about how to think through issues related to regulation. The existence of Cornell Tech, and the fact that I have so many colleagues there that are the frontiers of research on these issues has been tremendously valuable to the book, and it’s in many ways shaped certain chapters in the book in important ways.