February 3, 2025 • 43 mins
This document explores the evolving landscape of digital currencies, including Central Bank Digital Currencies (CBDCs), stablecoins, and cryptocurrencies. It analyzes their functionalities, advantages, and challenges, with a focus on the implications for the financial system, monetary policy, and payment technologies. The analysis includes a special emphasis on the development of the digital euro and the regulatory considerations in this rapidly changing sector. The document also focuses on the possible future scenarios.
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Episode Transcript
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Welcome back everyone. We're diving into a really fascinating world today,
digital currencies, and we've got a whole stack of sources here to help us unpack it all.
Academic papers, central bank reports, news articles, the works. Sounds like
we're going beyond Bitcoin 101 this time. You got it. We're doing a deep dive into
stablecoins, CBDCs, tokenized deposits, the whole landscape. What are the key
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differences? How do they actually function? And what impact could they have on the
future of finance? Buckle up. And say it's less buckle up and more like grab your
compass. Yeah. We're navigating some pretty uncharted territory here. I like it.
So let's start with the basics. Can you give us a quick rundown of what each of
these digital currencies actually is? Absolutely. Let's start with stablecoins.
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The idea is to create a digital currency that's pegged to a stable asset, like the
US dollar. So it doesn't have the wild price swings we often see with
cryptocurrencies. It's basically like a digital version of a dollar bill, but instead
of being issued by the government, it's issued by a private company.
Okay, so it's like a digital stand-in for traditional money, but outside the
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traditional system. Interesting. Then we have CBDCs, which are issued by central
banks. How do they fit into the picture? Exactly. A CBDC is basically the digital
version of a country's existing fiat currency issued in backed by its central
bank. It's like having digital cash, but with the full faith and backing of the
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government. Got it. So one is private, the other is government backed.
Seems like a pretty fundamental difference right off the bat. What about tokenized
deposits? How do those work? Think of it as a bridge between traditional banking
and blockchain technology. You're taking a regular bank deposit and representing
it as a digital token on a blockchain. So it's still a bank deposit, just digitized
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and put on the blockchain. What's the advantage of doing that? We're several actually.
Yeah. For one, it can really boost liquidity. Imagine being able to transfer
large sums of money instantly 24/7 with lower fees. Tokenization makes that
possible. It also opens up possibilities for more efficient settlement systems.
Okay. Starting to see how each of these digital currencies is trying to solve a
different problem or just a different need. Exactly. Stablecoins want to give you
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the stability of traditional currencies, but with the flexibility of digital
assets. CBDCs give governments a way to digitize their currencies and potentially
reshape the whole financial system and tokenize deposits, allow traditional
banks to tap into the benefits of blockchain technology.
This is a lot to take in, even for folks who follow this stuff closely.
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It's important to remember that these aren't just abstract concepts. We're already
seeing real world examples of these digital currencies in action.
Absolutely. China, for example, has already launched a pilot program for its
digital yuan, the ECNY. Now it's not based on blockchain technology, but it's a
huge step towards a cashless society in one of the world's biggest economies.
Good point. China is definitely moving full steam ahead with their CBDC.
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But even though they've opted out of blockchain for the digital yuan,
it seems like blockchain is still a major driving force in this space,
particularly with stablecoins. Definitely. And when you talk about stablecoins,
one thing that immediately comes to mind for a lot of people is the collapse of
Terry USD. It really shook people's confidence in the whole idea of stable
coins. It definitely raised a lot of questions, especially about how stable those coins really
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are. Right. It exposed some of the risks associated with
algorithmic stablecoins, which try to maintain their
peg to a fiat currency through algorithms and market incentives.
But if those mechanisms fail, like they did with Terry USD, the consequences can be pretty
disastrous. So these algorithmic stablecoins are essentially trying to maintain
stability without any stable assets backing them. Sounds a bit like juggling chainsaws.
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It can be. That's why it's crucial to understand the difference between types of stablecoins.
Fiat backed stablecoins, like tether in USD/C, are generally considered less risky,
because they're actually backed by reserves of real fiat currency.
Okay, so with those, it's more like the traditional system where you're tying the value to an
actual tangible asset. But our research suggests that even within the world of fiat backed stablecoins,
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there are some important nuances to consider, right?
Absolutely. Tether, for example, has a really diverse reserve portfolio, which includes cash and
equivalence, but also things like corporate debt and other assets. This is raised some concerns
about the transparency and liquidity of its reserves. USD/C, on the other hand,
takes a more conservative approach, fully backing its tokens with cash and short-dated
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US government obligations. So even if a stablecoin is pegged to the dollar,
how those reserves are composed can really impact its stability and risk profile.
Exactly. That's why it's so important to look under the hood, understand how a stablecoin is backed,
and what those backing assets are. Don't just assume all stablecoins are created equal.
Great advice. It seems like due diligence is just as crucial in the stablecoin market as it is
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with any other financial instrument. But let's shift gears for a moment and talk about CBDCs.
What makes them so potentially game-changing?
Well, one of the most compelling aspects of CBDCs is their potential to boost financial inclusion.
Imagine a world where everyone, regardless of location or socioeconomic status,
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has access to a digital wallet directly linked to their central bank.
I see where you're going at this. That could be revolutionary for people in developing countries where
access to traditional banking is often limited. Exactly. CBDCs could offer a safer,
more efficient, and more accessible alternative to traditional banking,
potentially bringing millions of people into the formal financial system.
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That's a really powerful argument. But our sources also point out some concerns about the level of
control central banks would have over people's money with CBDCs. Yeah, that's a valid point.
Privacy is definitely a major concern. Some people worry that governments could use CBDCs to track
every transaction, and these are more control over people's financial lives. That's understandable.
And it seems like different countries are taking different approaches to this with varying
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degrees of anonymity and privacy built into their CBDC designs. They are.
Some countries are exploring privacy preserving models, while others are less concerned about those
aspects. It's a tough balancing act, trying to promote innovation and financial stability,
while protecting individual rights. And speaking of different models, you mentioned two main types
of CBDCs earlier. Retail and wholesale. Can you quickly explain the difference again? Sure.
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Think of retail CBDCs as digital cash for everyday use by individuals and businesses.
It would be like having a digital version of the bank notes and coins we use now.
Wholesale CBDCs, on the other hand, would be used primarily by financial institutions for settling
large value transactions between banks and other big players. Got it. So retail is for the masses.
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Wholesale is for the institutions. It's incredible to see how much exploration is already happening
in this space. Our research shows that over 80 countries representing over 90% of global GDP
are already exploring CBDCs. It just goes to show you the potential of this technology to disrupt
the financial system as we know it. A great example is the European Union's digital Euro project.
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It's still in the investigative phase, but it shows that even major economies are seriously
considering the implications of CBDCs. The digital Euro does sound ambitious.
And speaking of ambitious projects, we can't forget about tokenized deposits.
JPM coin from JPMorgan Chase is a prime example of how traditional financial institutions
are dipping their toes into the blockchain world. It is. JPM coin is basically a tokenized
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representation of US dollars held in JPMorgan accounts. It allows for instant transfer of funds
between institutional clients, 204.7. So it's kind of like a private blockchain-based version of
a central bank's Wholesale CBDC? You could say that. But JPM Coin is limited to JPMorgan's own
clients and operates within their closed network. A CBDC ideally would be available to a much wider
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range of users and operate across multiple institutions and platforms. It's amazing to see all these
different forms of digital currency emerging and evolving. But as with any financial innovation,
the question of regulation looms large. How are we going to regulate this new landscape?
That's the million dollar question. Regulation is going to be key. We need clear rules and frameworks
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to ensure transparency, consumer protection, and financial stability in this space.
Striking that balance between fostering innovation and mitigating risk is a tough job for regulators.
It is. It's about finding that sweet spot where you encourage new technologies in business models
while protecting the integrity of the financial system and making sure consumers are protected.
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And it seems like different countries are taking very different approaches, right?
Absolutely. The US seems to be taking a more cautious,
weight and C approach, focusing on understanding the risks first. The EU, on the other hand,
is moving more quickly towards comprehensive regulation of crypto assets, including stablecoins.
And then there's China, which has basically banned cryptocurrencies and is laser focused on developing
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its own central bank digital currency. It's a real patchwork of approaches globally.
And it'll be interesting to see how these regulatory approaches evolve and impact the adoption of
digital currencies around the world. I'm particularly intrigued by the treleme of stablecoin regulation
that our sources highlight. Can you explain what that is? Basically it refers to the challenge of
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trying to achieve three goals at the same time. Promote financial innovation, maintain financial
stability, and ensure regulatory compliance. Sounds like it's tough to get all three right at once.
It is. It's a balancing act. If you focus too much on innovation, you might create instability or
loopholes for people to exploit. But if you over regulate, you risk stifling innovation and driving
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businesses away. So it's all about finding that Goldilocks's own, not too hot, not too cold, but
just right. We also can't forget about the whole issue of privacy and anonymity, which seems to
be a major point of contention in the digital currency world. Definitely. Some people see strong
identification requirements as crucial for preventing illegal activities like money laundering.
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Others worry that this goes against the whole idea of decentralization and privacy that drew
people to cryptocurrencies in the first place. Seems like finding the right balance between security
and privacy is going to be a defining challenge for the digital currency era. It is. And the decisions
we make now will have huge consequences for how we live, work, and interact in the digital world.
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Well, this has been a fantastic overview. It feels like we've only just scratched the surface,
but we've laid a solid foundation. I agree. Now that we have a basic understanding of the different
types of digital currencies and the key challenges they present, we can start to explore the finer
points of this fascinating world. Let's do it. Up next, we're going to take a closer look at stablecoins.
All right. So we've set the stage, but stablecoins seem to be making a lot of noise these days.
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It's like they're at the forefront of this whole digital currency revolution.
They are in a way. Yeah. And for good reason too. They offer this really interesting bridge
between the traditional financial world and the 247 decentralized nature of crypto.
But as with any bridge, you want to make sure it's sturdy before you cross it.
And the Terry USD collapse kind of showed that some of those foundations might be
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shakier than we thought. I mean, if the point of a stablecoin is stability, how could something like
that even happen? Well, the Terry USD case was a pretty harsh lesson in the complexities of
algorithmic stablecoins. You see, they rely on this delicate balance of market incentives and
algorithms to maintain their peg to a fiat currency. And when that balance gets disrupted,
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things can unravel pretty quickly. So it's not like they're backed by real assets. It's more like a
constant balancing act, right? Yeah, exactly. And if people start losing confidence in that balancing
act in the algorithm's ability to hold that peg, well, that's when things can get really messy.
Exactly. It becomes a self-fulfilling prophecy. People panic, rush to sell, the price drops even
further, eroding confidence even more, and so on. It's like a classic bank rent, but in the digital world.
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Not a pretty picture, but you said earlier that not all stablecoins are created equal.
Those fiat backstable coins, for instance, seem like they're a different story.
Well, they are because they are backed by reserves of actual fiat currency.
Yeah. You know, US dollars, euros, they offer a more traditional and arguably a more stable model.
It's more like holding a digital version of that physical cash, but with the added benefits of
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blockchain technology. Makes sense. But our research also highlights that even with those fiat
backed stablecoins, transparency in doing your due diligence are super important.
It seems like how those reserves are composed is a major factor in how risky a stablecoin is.
Oh, absolutely. A stablecoin is only as good as what's backing it.
For example, Tether, which is the biggest stablecoin by market cap,
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has faced a lot of scrutiny over the makeup of its reserve assets and how easily those assets
can be turned into cash when needed. Yeah, I've read that some analysts are concerned about Tether's
reserves, including a significant portion of corporate debt, which can be riskier and harder to
sell quickly compared to say cash. How does that compare to something like USDC? Well, USDC takes a
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much more conservative approach. They back their tokens mainly with cash and short term US
government debt, which are considered very low risk and very easy to convert to cash.
So even if a stablecoin is tied to the dollar, the details of those reserves really matter.
Absolutely. And this brings us back to the need for clear and strong regulation in the stablecoin
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market. Investors need to know that these tokens are actually backed by solid assets and that
the issuers are being properly supervised. You know, one of the reports we've been looking at from
the US Treasury Department really stresses this point. They say that strong regulation of stable
coins is critical to address risks like fraud, market manipulation, and even those digital bank runs
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we were talking about. It's a valid concern for sure. Regulators are definitely keeping a close eye on
the potential for systemic risk in the stablecoin market. It makes you think about how stable coins
and the traditional banking system might interact. Some of our sources suggest that stable coins could
actually trigger bank runs. Is that something we should be worried about? Well, it is a possibility.
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Especially if stablecoins become widely accepted and people start seeing them as safer or more
attractive than keeping their money in a bank. Imagine the situation where people start moving their
savings on mass from banks to stablecoins. Maybe chasing higher returns or worried about the bank
collapsing. Yeah, that could be a real problem. How are central banks responding to this potential
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threat? They're watching this situation closely and exploring different ways to mitigate those
risks. Some are thinking about tighter regulations on stablecoin issuers, while others are looking at
ways to design their own CBDCs that are more appealing and competitive than those privately issued
stablecoins. It's like a race almost, the private sector and the public sector, each trying to
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develop the most attractive and stable form of digital currency. You could say that. And whoever wins
that race will have a huge impact on the future of finance. So what do you think the future holds for
stablecoins? Do they have a chance in the long run or will they eventually get overshadowed by
CBDCs? That's a tough one to call. I think a lot will depend on how the whole regulatory landscape
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evolves. If stablecoin issuers can address those concerns about transparency, stability,
and compliance, then they could carve out a pretty significant role in the future of finance.
But if they fail to meet those challenges? Well, then they risk being overtaken by CBDCs, which
ultimately have the backing and the authority of central banks behind them. High stakes indeed.
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This has been a really insightful look into the world of stablecoins. They're clearly a powerful
force in the digital currency space, but they also come with their own set of challenges and risks.
No doubt about that. Understanding those risks and really evaluating different types of stablecoins
is going to be critical for anyone who wants to navigate this rapidly evolving world.
Well said. Okay, so we've unpacked stablecoins. Now let's shift gears and really dive into the
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world of CBDCs. We've touched on some of the key aspects already, but there's so much more to explore.
Oh absolutely. And I think it's important to keep in mind that CBDCs aren't just this one-size-fits-all
concept. There's a wide range of different models and approaches being explored around the world.
What works for one country might not work for another. That makes sense. Earlier, we talked about the
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potential for CBDCs to promote financial inclusion. It's a really compelling idea, especially in parts
of the world where access to traditional banking is so limited, but how would that actually work in
practice? Well imagine a world where everyone, regardless of their income or their location,
has access to a digital wallet that's directly linked to their central bank. They can get paid,
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pay their bills, save money, even access credit, all without needing a traditional bank account.
So it's like bypassing the whole traditional banking system and giving people a direct connection
to the central bank. Exactly. And in developing countries where people face high fees,
long wait times, and all sorts of barriers to accessing financial services, this could be game-changing.
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Our sources really highlight the potential benefits in those contexts. Lower transaction costs,
reduced reliance on cash, greater transparency, even the potential to move away from those
informal financial systems that can be pretty risky. Yes, all those are major advantages.
Think about a farmer in a remote village, for example. She could get paid for her crops directly
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into her digital wallet, without having to travel miles to a bank or pay those crazy fees to a money
transfer service. Or imagine how much easier and more efficient disaster relief efforts could be
if aid could be distributed directly to those who need it, without any risk of corruption or theft.
Those are powerful examples, but as with any new technology, there are potential downsides too.
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We've talked about privacy concerns, but what about the impact on those traditional banks?
Some experts seem worried that people could start moving their money from banks into CBDCs on a massive
scale could that happen. It's definitely a possibility. Especially if people start to see CBDCs as
safer or more attractive than bank deposits. If they start moving their savings on mass out of banks
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into CBDCs, with that could disrupt lending in credit markets, weaken the banks, and even potentially
lead to instability in the whole financial system. That's a scary thought. So how are central banks trying
to manage that risk? Well, they are very aware of it and are exploring different ways to address it.
One option that's been discussed is to limit how much CBDC each individual can hold.
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So like setting a cap on how much you can transfer from your bank account to your CBDC wallet?
Exactly. That way people would still rely on banks for their larger transactions and savings,
which would help keep the banking system stable. That makes sense. Another approach I've read about is
designing CBDCs in a way that encourages people to keep their money in banks. How would that work?
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One idea that's being floated is offering tiered interest rates on CBDC holdings.
So basically the more CBDC you hold, the lower the interest rate you'd earn.
That way people would be more inclined to keep bigger balances in their bank accounts,
where they could potentially earn higher interest. Smart.
It seems like central banks are putting a lot of effort into anticipating those potential
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challenges and designing CBDCs in a way that minimizes disruption while maximizing the benefits.
It's definitely a complex challenge, but it's crucial we want to transition to a more
digital financial system smoothly. Our research seems to suggest that most experts believe that CBDCs,
stablecoins, and tokenized deposits will probably coexist, each serving different needs and use
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cases. What do you think? I tend to agree. I don't think any one form of digital currency will
completely replace the others. We'll probably end up with this diverse ecosystem where they compete
and maybe even collaborate each playing to their strengths. So maybe CBDCs become the preferred
choice for things like government payments or those big interbank settlements, while stablecoins
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are more suited for cross-border payments or everyday transactions. Exactly. And tokenized deposits
could give those traditional banks a way to integrate themselves into this new digital financial world.
It's going to be interesting to see how these different forms of digital currency interact with
each other and how they all evolve. It really is. It's almost like we're witnessing
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the birth of a new financial order and we're only just starting to grasp the possibilities.
Okay, so we've talked a lot about the potential benefits and challenges of CBDCs in a broad sense,
but let's zoom in a bit and look at some of those specific design choices that central banks are
wrestling with as they develop these digital currencies. We mentioned the retail versus wholesale
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models earlier. Can you remind us what those terms mean and what the trade-offs are? Sure. A retail
CBDC, as the name suggests, is designed to be used by the general public, just like physical
caches today. Individuals and businesses could use it for their everyday transactions. A wholesale
CBDC, on the other hand, is intended for use by financial institutions to settle those large value
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transactions that happen between banks and other big financial players. Okay, so retail is for the
masses, wholesale is for the big institutions. Got it. What are some of the things central banks are
considering when deciding which model to go with? One key thing they're thinking about is the potential
impact on financial stability. A retail CBDC, since it would be available to everyone, could potentially
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cause these large-scale shifts of funds out of those commercial banks as we discussed earlier.
And that could really impact the stability of the entire banking system.
So it's a balancing act for central banks. They want the benefits of a retail CBDC,
like greater financial inclusion and efficiency, but they also need to be super careful about
the risks to the stability of the financial system. Exactly. That's why a lot of central banks
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are initially focusing more on wholesale CBDCs, which are less likely to disrupt the existing
financial system. That makes sense. Another big decision they have to make is whether to go with an
account-based system or a token-based system. What's the difference between those? An account-based
system is kind of like how your traditional bank accounts work. Each user would have an account with
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the central bank and transactions would involve moving funds between these accounts. A token-based system,
on the other hand, is more like using physical cash or cryptocurrencies. Each unit of the CBDC would
be represented by a digital token that could be transferred between users directly, without needing
a central intermediary. So account-based is more centralized with the central bank keeping track of
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every transaction, and token-based is more decentralized with transactions happening directly
between users. Exactly. And each approach has its pros and cons. An account-based system gives the
central bank more control and transparency, but it also raises concerns about privacy and surveillance.
A token-based system gives more privacy and anonymity, but it makes it harder to track and monitor
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transactions, which could raise worries about illicit activities. It's interesting how these different
choices reflect different values and priorities. Some central banks seem to be focused more on control
and security, while others are leaning towards privacy and decentralization. You're right. There's
no one-size-fits-all answer. The ideal approach is likely to depend on each country's specific
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circumstances and goals. Another issue that central banks are grappling with is how to make sure
CBDC systems are secure and resilient. Cyber-tax and fraud are always a concern with digital currencies.
Definitely. And central banks are taking this very seriously. They're investing a lot in cyber-security
and working with experts in the field to develop systems that can withstand attacks and protect
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users' data. One thing that really jumped out at me from our research was this concept of offline
functionality. It seems like a lot of central banks are thinking about how to make CBDC's work
even when people don't have an internet connection. Why is that so important?
Well, it all comes down to ensuring access and inclusivity. In many parts of the world,
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internet access is spotty or nonexistent. If we want CBDCs to be truly accessible to everyone,
they need to work offline too. So someone could use their mobile phone to make a payment,
even if they're in a remote area with no internet coverage. Exactly. And that could be a real
game-changer for people in developing countries or in communities that are underserved by traditional
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financial institutions. But how do you make that work technically? Making sure transactions
are secure and preventing people from spending the same digital money twice when they're offline
seems really challenging. It is. And there are different approaches being explored. One idea is to
use Near Field Communication and FCE technology, which is already used for things like
contactless payments with credit cards and mobile wallets. So you could imagine two people
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tapping their phones together to transfer CBDC even if they're both offline. That's the idea.
And the transaction could be verified and recorded later when one of them can expect to the internet.
That's amazing. It really shows the potential of CBDC is to change how we think about and use money.
It does. And we're just starting to uncover what's possible.
Okay. So we've talked about retail versus wholesale, account-based versus token-based security,
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offline functionality. What else are central banks focusing on as they design CBDCs?
Well, one aspect that's generating a lot of interest and maybe a bit of controversy too is this idea
of programmability. Programability? What does that even mean when we're talking about CBDCs?
It means that a CDDC could be designed with certain rules or conditions written into the code.
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For example, a CBDC could be programmed to release funds only when certain conditions are met.
Can you give us an example of that? Sure. Imagine a government that wants to give financial aid
to low-income families. But they want to make sure those funds are actually spent on essential things,
like food or housing. They could issue a CBDC. They can only be used at certain stores or for
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specific categories of goods. Oh, I see. It's like taking the idea of targeted benefits and actually
building it into the money itself. Exactly. And the possibilities are pretty mind-boggling.
CBDCs could streamline government payments, manage supply chains and force smart contracts,
even create new types of social programs. That's powerful stuff. But having that level of control
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also raises concerns about privacy and potential misuse, right? It does. That's why we need to have
open and transparent conversations about the ethical and social implications of this idea of
programmable money. I think this is an area where we're going to see a lot of debate and innovation
in the coming years. Absolutely. Yeah. programmable money could revolutionize how we think about
and use money, but it comes with risks that need to be addressed carefully.
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Okay. So we've covered a lot of the technical and design aspects of CBDCs, but I want to step back
for a minute and consider the bigger picture. How are these digital currencies going to impact the
global financial system as a whole? That's the big question, isn't it? It's one that economists and
policymakers are still trying to wrap their heads around. But one thing's for sure, the rise of CBDCs
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has the potential to reshape the global financial landscape in a major way. Yeah. Our research
suggests that CBDCs could lead to things like increased competition in the payments sector,
more efficient cross-border payments, and even a shift in the balance of global economic power.
Let's break those down one by one. Sounds good to me. Let's start with competition. How could
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introducing CBDCs shake up the payments industry? Well, right now the payments industry is
dominated by a few big players like Visa, Mastercard, PayPal, they charge fees for processing transactions,
and those fees can be quite hefty, especially for small businesses and consumers. Right. So how would
CBDCs change that? If central banks start offering their own payment systems through CBDCs,
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they could undercut those fees, making it cheaper for consumers and businesses to make payments.
It's like introducing a public option for payments. That would really shake things up.
It could. Existing players would have to innovate and become more competitive on price and features.
Now, what about those cross-border payments? We talked before about CBDCs having the potential
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to make them faster, cheaper, and more transparent. I think it's worth diving into that a bit more.
I agree. Right now, sending money across borders is a slow, expensive, and often opaque process.
You often have to deal with several intermediaries, currency conversions, high fees,
it can take days for the money to arrive. And our research talks about the impact on remittance costs.
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For people sending money to family and friends in other countries, those fees can be a real burden.
Exactly. The World Bank estimates that over $700 billion was sent in
remittances globally in 2023, and the average cost of sending those remittances was around 6%.
So we're talking about billions of dollars in fees every year just for sending money across borders.
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That's right. And CBDCs could really disrupt that system by offering a faster, cheaper,
and more transparent alternative for international money transfers.
That would be huge for people who depend on remittances to support their families.
Absolutely. It could also have a big impact on international trade,
making it easier and less expensive for businesses to operate across borders.
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So we have increased competition, more efficient cross-border payments.
What about that potential shift in global economic power?
That sounds pretty dramatic. It does, doesn't it?
The US dollar is currently the king of the hill.
It's the dominant global reserve currency, meaning it's the most widely held and treated currency globally,
used to settle most international transactions.
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But how could CBDCs change that?
Well, if countries start issuing and using their own CBDCs more and more,
it could potentially reduce demand for the US dollar.
So for example, if countries start holding and using more ECNY, the Chinese Digital U-1,
that could chip away at the power and influence of the US dollar.
It's a possibility. And it's a possibility with big geopolitical implications.
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The currency that dominates global trade and finance has a lot of power.
A shift away from the US dollar could have major consequences for the global economy
and the balance of power between nations.
This is getting really interesting.
So we've got potential impacts on competition,
cross-border payments, even the global balance of power.
CBDCs could really be transformative.
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They definitely have the potential to be.
But we need to keep in mind that this is all still very much up in the air.
We're in the early stages of this digital currency revolution.
So it's impossible to predict exactly how it will all play out.
True, but that's what makes it so exciting.
We're witnessing a fundamental shift in how money works
and it's fascinating to see how it unfolds.
I agree.
And it's not just about the technology.
(31:24):
It's about economics, politics, even our social values.
How we design and implement CBDCs will have a huge impact on the future of our society.
Speaking of social values, let's talk about one of...
Privacy.
We've touched on it throughout this conversation,
but I think it deserves its own deep dive.
(31:44):
Absolutely.
Privacy is a fundamental human right.
And we need to think carefully about how to protect it
as we design any digital currency system.
But as we've discussed, CBDCs raised some very specific concerns about privacy.
If the central bank has access to all your transaction data,
that could be used for surveillance and control.
(32:05):
It's a valid concern,
and it's why so many experts are pushing for privacy-preserving designs
that limit how much data is collected and shared.
One solution that I saw mentioned in one of our sources is the idea of
anonymity vouchers.
What are those and how would they work?
Anonymity vouchers are an interesting idea.
It's about finding a balance between privacy and transparency.
(32:25):
Basically, each user would get a certain number of these
vouchers every year, and they could use those vouchers
to make a limited number of transactions anonymously.
So, it's like having a set amount of digital cash
that can't be traced back to you?
Exactly.
It would give people some privacy for their everyday transactions,
while still allowing authorities to keep tabs on bigger or suspicious transactions.
Makes sense.
(32:45):
But how do you decide how many vouchers each person gets?
That seems like a tough balance to strike.
It is. If you give out too many vouchers,
it could undermine efforts to combat money laundering and terrorist financing.
But if you give out too few, people might feel like they're constantly being watched,
which could erode trust in the whole system.
Finding the right balance is going to be crucial.
(33:08):
Are there any other technical or policy solutions that could help protect
privacy in CBDC systems?
Definitely.
Encryption is essential to protect user data,
and this is a principle called data minimization,
which means only collecting the data that is absolutely necessary
and getting rid of it as soon as you don't need it anymore.
Right, and then we need clear, legal frameworks in place to protect user data
(33:31):
and prevent unauthorized access or misuse.
Exactly.
Regulation will be key to making sure that CBDCs are designed and implemented
in a way that respects privacy and protects individual rights.
It's good to see that these privacy concerns are being taken seriously.
It's a complex challenge, but one we absolutely need to get right if we want to create
a digital financial system that works for everyone.
(33:54):
I completely agree.
We can't afford to sacrifice privacy as we move towards a more digital future.
Okay, so we've explored the potential benefits and challenges of CBDCs
delved into the key design choices and talked about the importance of privacy.
Are there any other key takeaways that our listeners should be aware of as they try to navigate
this complex and evolving landscape?
(34:15):
I think the most important thing to remember is that this is all still very much in flux.
The technology is changing rapidly and regulations are still being developed.
What we think we know today could be outdated tomorrow.
So staying informed and being open to new developments is essential.
Exactly.
Don't be afraid to ask questions and challenge assumptions.
(34:36):
The future of finance is being written right now and we all need to be part of that conversation.
Another key takeaway is that CBDCs aren't some magical solution that will fix all the problems
with our financial system.
Right. They have their own set of challenges and potential risks.
So we should be cautious and do our research.
But at the same time, we shouldn't underestimate their potential to drive innovation
(34:57):
and improve financial inclusion for a lot of people.
Absolutely.
They have the potential to create a financial system that is more efficient,
more equitable and more resilient for everyone.
It's really fascinating to see how it all unfolds.
But before we wrap up this deep dive, there's one more thing I want to touch on.
The relationship between CBDCs and other forms of digital currency, especially stablecoins.
(35:20):
We talked about stablecoins before, but now that we understand more about CBDCs,
I'm curious to hear your thoughts on how these two might interact.
That's a great point.
The relationship between CBDCs and stablecoins is one of the most interesting things to watch in this space.
Will they be competitors?
Will they work together?
Or maybe a bit of both?
I think it'll likely be a combination of the two.
On the one hand, they are both vying for the same users and use cases.
(35:44):
Right.
They both offer the potential for those faster, cheaper, more efficient payments,
both domestically and across borders.
Exactly.
And in some cases, a CBDC might even be seen as a direct competitor to stablecoins,
especially the ones that are pegged to a specific fiat currency.
So if a country issues a digital version of its own currency,
(36:06):
why would people use a private stablecoin pegged to that same currency?
That's the question stablecoin issuers are asking themselves right now.
But on the other hand, there could also be opportunities for them to work together, right?
Absolutely.
For instance, some central banks are exploring using stablecoins as a way to distribute
their own CBDCs to the public.
So instead of building their own digital wallets and distribution networks from scratch,
(36:30):
they could leverage the infrastructure that stablecoins have already built.
Exactly.
And that could be especially helpful in countries that already have well-established
stablecoin ecosystems.
It's also possible that stablecoins could adapt and focus on specific
nuishes within a system dominated by CBDCs.
That's another possibility.
They could be used to make cross-border payments between countries that have different
(36:51):
CBDCs systems or to provide specialized financial services or products that aren't as easily
available through CBDC channels.
The relationship between CBDCs and stablecoins is definitely complex
and multifaceted.
It'll be fascinating to see how it all shakes out.
Agreed.
It's a dynamic and unpredictable space, that's for sure.
(37:12):
One that's going to keep us all on our toes.
Well, I think that wraps up part two of our deep dive into the world of digital currencies.
We've really explored the ins and outs of CBDCs and what the future might hold.
We've made some good progress.
Amazing to think how much we've covered in such a short time.
Ready to wrap things up in part three?
Absolutely.
Let's bring it home.
Okay, we're back for the final stretch of our digital currency deep dive.
(37:37):
Feels like we've been on quite a journey.
It has been a whirlwind tour, hasn't it?
From those stablecoin intricacies to the potential shake-up from CBDCs,
but there's still so much more to uncover.
Absolutely.
One theme that keeps popping up in our sources is the global impact of all this.
It's not just about changing how we buy our lattes.
(37:57):
It's about potentially reshaping the whole financial world order.
Hit the nail on the head.
We touched earlier on how CBDCs could challenge the US dollar's dominance as the global reserve currency,
but that's just the tip of the iceberg.
So what else should we be thinking about?
Well, consider the impact on developing economies for starters.
Many of those countries have huge populations that don't even have bank accounts,
(38:20):
or they have very limited access to financial services.
They rely heavily on cash and informal systems,
which can be inefficient and risky.
And that's where CBDCs could really make a difference, right?
Our sources highlight their potential to boost financial inclusion in those regions.
Exactly. Imagine a world where everyone,
no matter where they live or how much money they make,
(38:40):
has access to a secure, affordable, digital wallet
linked directly to their central bank.
They could receive wages, pay bills, save money, even get access to credit,
all without needing a traditional bank account.
Wow, that would be transformative.
It's like leveling the playing field and giving everyone access to the same
financial tools and opportunities.
(39:01):
That's the idea.
And it could have this incredible ripple effect throughout the economy,
potentially boosting growth, reducing poverty,
and empowering individuals in a way we haven't seen before.
It's exciting to think about the possibilities,
but like with any big change, there are potential risks and challenges too.
We need to consider those as well.
Of course.
One concern that comes up a lot is that CBDCs
(39:24):
could make financial systems,
especially in countries with less developed financial infrastructures
more unstable.
How so?
Well, if CBDCs become really popular and widely used,
it could become much easier for people to quickly move their money at a commercial banks
if there's a crisis, or even just a rumor of trouble.
We talked about this happening in developed economies,
but it seems like it could be even more of a problem in countries with less developed
(39:47):
financial systems.
Yeah, the stakes are even higher in those situations.
Imagine a rumor start circulating that a bank is in trouble.
If people can instantly and easily transfer their savings into a CBDC,
well, you could have a full-blown bank run on your hands,
and that could lead to a collapse of the entire banking system.
That doesn't sound good at all.
Are there ways to prevent that kind of scenario?
(40:09):
There are some things that could be done.
One idea is to design CBDCs with safeguards
that limit how much money can be withdrawn or transferred
within a certain time frame.
So, like, putting speed bumps in place to prevent everyone from rushing for the exits all at once?
Precisely.
Another idea is to offer those tiered interest rates on CBDC holdings that we talked about before.
(40:31):
That would encourage people to keep more of their money in their bank accounts,
where they could potentially earn more interest.
Seems like central banks have a lot to juggle.
They want to encourage financial inclusion and innovation,
but also protect the stability of the whole system.
It's a tough balancing act,
and it's good to require careful planning,
smart design,
and a lot of collaboration between everyone involved.
(40:52):
Another big challenge that our sources point to is the need for interoperability.
If we want a truly global system of digital currencies,
all these different CBDC platforms need to be able to work together seamlessly.
That's essential.
Imagine trying to make a payment to someone in a different country
that uses a different CBDC platform.
If those systems can't talk to each other,
(41:15):
it would be a logistical nightmare.
It'd be like trying to jam a square peg into a round hole.
Exactly.
That's why it's so important for central banks to collaborate on developing
common standards and protocols
that ensure all these different CBDC systems can work together without any hiccups.
And it's not just about compatibility between different CBDCs either.
We need to think about how they'll interact with existing payment systems
(41:37):
and the entire financial infrastructure we have in place today.
Right. We're not trying to build a whole new system in a vacuum here.
The goal is to integrate CBDCs into the existing financial world
to make things more efficient, less costly,
and more accessible for everyone.
Sounds like a huge undertaking.
But if they can pull it off,
the potential benefits are enormous.
If we can get this right,
(41:59):
we could have a global financial system that's faster,
cheaper, more transparent, and more inclusive than anything we've ever seen before.
That's a really exciting vision.
It's something worth working towards for sure.
You know, as we've been exploring this topic, it's really struck me that this is about
more than just changing technology.
We're talking about a fundamental shift in the nature of money itself.
(42:21):
That's a really profound insight.
For centuries, money has been primarily physical cash and bank deposits.
Now we're moving into this new era where money is increasingly digital, programmable,
and maybe even tied more closely to our identities.
It's a future that's full of possibilities, but also potential risks.
Without a doubt.
And it's a future that requires us to think critically,
(42:43):
talk openly about these issues,
and be willing to embrace new ideas while challenging the old ways of doing things.
So as we wrap up our deep dive into the world of digital currencies,
I want to leave our listeners with a question.
What role do you want to play in this new world?
Will you be one of the early adopters,
diving headfirst into these new forms of money?
Or will you take a more cautious approach,
(43:05):
waiting to see how things shake out before jumping in?
However you choose to engage, the important thing is to stay informed, ask questions,
and be part of the conversation.
The future of money is being shaped right now,
and we all have a role to play in writing that story.
Thanks for joining us on this journey.
We hope you found it insightful and maybe even a little bit inspiring.
Keep exploring, stay curious, and never stop learning.
(43:27):
Until next time.
[Music]
(00:20):
[Music]
(00:47):
Welcome back everyone. We're diving into a really fascinating world today,
digital currencies, and we've got a whole stack of sources here to help us unpack it all.
Academic papers, central bank reports, news articles, the works. Sounds like
we're going beyond Bitcoin 101 this time. You got it. We're doing a deep dive into
stablecoins, CBDCs, tokenized deposits, the whole landscape. What are the key
(01:10):
differences? How do they actually function? And what impact could they have on the
future of finance? Buckle up. And say it's less buckle up and more like grab your
compass. Yeah. We're navigating some pretty uncharted territory here. I like it.
So let's start with the basics. Can you give us a quick rundown of what each of
these digital currencies actually is? Absolutely. Let's start with stablecoins.
(01:30):
The idea is to create a digital currency that's pegged to a stable asset, like the
US dollar. So it doesn't have the wild price swings we often see with
cryptocurrencies. It's basically like a digital version of a dollar bill, but instead
of being issued by the government, it's issued by a private company.
Okay, so it's like a digital stand-in for traditional money, but outside the
(01:51):
traditional system. Interesting. Then we have CBDCs, which are issued by central
banks. How do they fit into the picture? Exactly. A CBDC is basically the digital
version of a country's existing fiat currency issued in backed by its central
bank. It's like having digital cash, but with the full faith and backing of the
(02:11):
government. Got it. So one is private, the other is government backed.
Seems like a pretty fundamental difference right off the bat. What about tokenized
deposits? How do those work? Think of it as a bridge between traditional banking
and blockchain technology. You're taking a regular bank deposit and representing
it as a digital token on a blockchain. So it's still a bank deposit, just digitized
(02:33):
and put on the blockchain. What's the advantage of doing that? We're several actually.
Yeah. For one, it can really boost liquidity. Imagine being able to transfer
large sums of money instantly 24/7 with lower fees. Tokenization makes that
possible. It also opens up possibilities for more efficient settlement systems.
Okay. Starting to see how each of these digital currencies is trying to solve a
different problem or just a different need. Exactly. Stablecoins want to give you
(02:58):
the stability of traditional currencies, but with the flexibility of digital
assets. CBDCs give governments a way to digitize their currencies and potentially
reshape the whole financial system and tokenize deposits, allow traditional
banks to tap into the benefits of blockchain technology.
This is a lot to take in, even for folks who follow this stuff closely.
(03:20):
It's important to remember that these aren't just abstract concepts. We're already
seeing real world examples of these digital currencies in action.
Absolutely. China, for example, has already launched a pilot program for its
digital yuan, the ECNY. Now it's not based on blockchain technology, but it's a
huge step towards a cashless society in one of the world's biggest economies.
Good point. China is definitely moving full steam ahead with their CBDC.
(03:43):
But even though they've opted out of blockchain for the digital yuan,
it seems like blockchain is still a major driving force in this space,
particularly with stablecoins. Definitely. And when you talk about stablecoins,
one thing that immediately comes to mind for a lot of people is the collapse of
Terry USD. It really shook people's confidence in the whole idea of stable
coins. It definitely raised a lot of questions, especially about how stable those coins really
(04:06):
are. Right. It exposed some of the risks associated with
algorithmic stablecoins, which try to maintain their
peg to a fiat currency through algorithms and market incentives.
But if those mechanisms fail, like they did with Terry USD, the consequences can be pretty
disastrous. So these algorithmic stablecoins are essentially trying to maintain
stability without any stable assets backing them. Sounds a bit like juggling chainsaws.
(04:31):
It can be. That's why it's crucial to understand the difference between types of stablecoins.
Fiat backed stablecoins, like tether in USD/C, are generally considered less risky,
because they're actually backed by reserves of real fiat currency.
Okay, so with those, it's more like the traditional system where you're tying the value to an
actual tangible asset. But our research suggests that even within the world of fiat backed stablecoins,
(04:54):
there are some important nuances to consider, right?
Absolutely. Tether, for example, has a really diverse reserve portfolio, which includes cash and
equivalence, but also things like corporate debt and other assets. This is raised some concerns
about the transparency and liquidity of its reserves. USD/C, on the other hand,
takes a more conservative approach, fully backing its tokens with cash and short-dated
(05:17):
US government obligations. So even if a stablecoin is pegged to the dollar,
how those reserves are composed can really impact its stability and risk profile.
Exactly. That's why it's so important to look under the hood, understand how a stablecoin is backed,
and what those backing assets are. Don't just assume all stablecoins are created equal.
Great advice. It seems like due diligence is just as crucial in the stablecoin market as it is
(05:40):
with any other financial instrument. But let's shift gears for a moment and talk about CBDCs.
What makes them so potentially game-changing?
Well, one of the most compelling aspects of CBDCs is their potential to boost financial inclusion.
Imagine a world where everyone, regardless of location or socioeconomic status,
(06:01):
has access to a digital wallet directly linked to their central bank.
I see where you're going at this. That could be revolutionary for people in developing countries where
access to traditional banking is often limited. Exactly. CBDCs could offer a safer,
more efficient, and more accessible alternative to traditional banking,
potentially bringing millions of people into the formal financial system.
(06:23):
That's a really powerful argument. But our sources also point out some concerns about the level of
control central banks would have over people's money with CBDCs. Yeah, that's a valid point.
Privacy is definitely a major concern. Some people worry that governments could use CBDCs to track
every transaction, and these are more control over people's financial lives. That's understandable.
And it seems like different countries are taking different approaches to this with varying
(06:46):
degrees of anonymity and privacy built into their CBDC designs. They are.
Some countries are exploring privacy preserving models, while others are less concerned about those
aspects. It's a tough balancing act, trying to promote innovation and financial stability,
while protecting individual rights. And speaking of different models, you mentioned two main types
of CBDCs earlier. Retail and wholesale. Can you quickly explain the difference again? Sure.
(07:11):
Think of retail CBDCs as digital cash for everyday use by individuals and businesses.
It would be like having a digital version of the bank notes and coins we use now.
Wholesale CBDCs, on the other hand, would be used primarily by financial institutions for settling
large value transactions between banks and other big players. Got it. So retail is for the masses.
(07:33):
Wholesale is for the institutions. It's incredible to see how much exploration is already happening
in this space. Our research shows that over 80 countries representing over 90% of global GDP
are already exploring CBDCs. It just goes to show you the potential of this technology to disrupt
the financial system as we know it. A great example is the European Union's digital Euro project.
(07:54):
It's still in the investigative phase, but it shows that even major economies are seriously
considering the implications of CBDCs. The digital Euro does sound ambitious.
And speaking of ambitious projects, we can't forget about tokenized deposits.
JPM coin from JPMorgan Chase is a prime example of how traditional financial institutions
are dipping their toes into the blockchain world. It is. JPM coin is basically a tokenized
(08:19):
representation of US dollars held in JPMorgan accounts. It allows for instant transfer of funds
between institutional clients, 204.7. So it's kind of like a private blockchain-based version of
a central bank's Wholesale CBDC? You could say that. But JPM Coin is limited to JPMorgan's own
clients and operates within their closed network. A CBDC ideally would be available to a much wider
(08:43):
range of users and operate across multiple institutions and platforms. It's amazing to see all these
different forms of digital currency emerging and evolving. But as with any financial innovation,
the question of regulation looms large. How are we going to regulate this new landscape?
That's the million dollar question. Regulation is going to be key. We need clear rules and frameworks
(09:04):
to ensure transparency, consumer protection, and financial stability in this space.
Striking that balance between fostering innovation and mitigating risk is a tough job for regulators.
It is. It's about finding that sweet spot where you encourage new technologies in business models
while protecting the integrity of the financial system and making sure consumers are protected.
(09:25):
And it seems like different countries are taking very different approaches, right?
Absolutely. The US seems to be taking a more cautious,
weight and C approach, focusing on understanding the risks first. The EU, on the other hand,
is moving more quickly towards comprehensive regulation of crypto assets, including stablecoins.
And then there's China, which has basically banned cryptocurrencies and is laser focused on developing
(09:48):
its own central bank digital currency. It's a real patchwork of approaches globally.
And it'll be interesting to see how these regulatory approaches evolve and impact the adoption of
digital currencies around the world. I'm particularly intrigued by the treleme of stablecoin regulation
that our sources highlight. Can you explain what that is? Basically it refers to the challenge of
(10:09):
trying to achieve three goals at the same time. Promote financial innovation, maintain financial
stability, and ensure regulatory compliance. Sounds like it's tough to get all three right at once.
It is. It's a balancing act. If you focus too much on innovation, you might create instability or
loopholes for people to exploit. But if you over regulate, you risk stifling innovation and driving
(10:31):
businesses away. So it's all about finding that Goldilocks's own, not too hot, not too cold, but
just right. We also can't forget about the whole issue of privacy and anonymity, which seems to
be a major point of contention in the digital currency world. Definitely. Some people see strong
identification requirements as crucial for preventing illegal activities like money laundering.
(10:53):
Others worry that this goes against the whole idea of decentralization and privacy that drew
people to cryptocurrencies in the first place. Seems like finding the right balance between security
and privacy is going to be a defining challenge for the digital currency era. It is. And the decisions
we make now will have huge consequences for how we live, work, and interact in the digital world.
(11:15):
Well, this has been a fantastic overview. It feels like we've only just scratched the surface,
but we've laid a solid foundation. I agree. Now that we have a basic understanding of the different
types of digital currencies and the key challenges they present, we can start to explore the finer
points of this fascinating world. Let's do it. Up next, we're going to take a closer look at stablecoins.
All right. So we've set the stage, but stablecoins seem to be making a lot of noise these days.
(11:41):
It's like they're at the forefront of this whole digital currency revolution.
They are in a way. Yeah. And for good reason too. They offer this really interesting bridge
between the traditional financial world and the 247 decentralized nature of crypto.
But as with any bridge, you want to make sure it's sturdy before you cross it.
And the Terry USD collapse kind of showed that some of those foundations might be
(12:04):
shakier than we thought. I mean, if the point of a stablecoin is stability, how could something like
that even happen? Well, the Terry USD case was a pretty harsh lesson in the complexities of
algorithmic stablecoins. You see, they rely on this delicate balance of market incentives and
algorithms to maintain their peg to a fiat currency. And when that balance gets disrupted,
(12:25):
things can unravel pretty quickly. So it's not like they're backed by real assets. It's more like a
constant balancing act, right? Yeah, exactly. And if people start losing confidence in that balancing
act in the algorithm's ability to hold that peg, well, that's when things can get really messy.
Exactly. It becomes a self-fulfilling prophecy. People panic, rush to sell, the price drops even
further, eroding confidence even more, and so on. It's like a classic bank rent, but in the digital world.
(12:50):
Not a pretty picture, but you said earlier that not all stablecoins are created equal.
Those fiat backstable coins, for instance, seem like they're a different story.
Well, they are because they are backed by reserves of actual fiat currency.
Yeah. You know, US dollars, euros, they offer a more traditional and arguably a more stable model.
It's more like holding a digital version of that physical cash, but with the added benefits of
(13:13):
blockchain technology. Makes sense. But our research also highlights that even with those fiat
backed stablecoins, transparency in doing your due diligence are super important.
It seems like how those reserves are composed is a major factor in how risky a stablecoin is.
Oh, absolutely. A stablecoin is only as good as what's backing it.
For example, Tether, which is the biggest stablecoin by market cap,
(13:35):
has faced a lot of scrutiny over the makeup of its reserve assets and how easily those assets
can be turned into cash when needed. Yeah, I've read that some analysts are concerned about Tether's
reserves, including a significant portion of corporate debt, which can be riskier and harder to
sell quickly compared to say cash. How does that compare to something like USDC? Well, USDC takes a
(13:58):
much more conservative approach. They back their tokens mainly with cash and short term US
government debt, which are considered very low risk and very easy to convert to cash.
So even if a stablecoin is tied to the dollar, the details of those reserves really matter.
Absolutely. And this brings us back to the need for clear and strong regulation in the stablecoin
(14:19):
market. Investors need to know that these tokens are actually backed by solid assets and that
the issuers are being properly supervised. You know, one of the reports we've been looking at from
the US Treasury Department really stresses this point. They say that strong regulation of stable
coins is critical to address risks like fraud, market manipulation, and even those digital bank runs
(14:39):
we were talking about. It's a valid concern for sure. Regulators are definitely keeping a close eye on
the potential for systemic risk in the stablecoin market. It makes you think about how stable coins
and the traditional banking system might interact. Some of our sources suggest that stable coins could
actually trigger bank runs. Is that something we should be worried about? Well, it is a possibility.
(15:00):
Especially if stablecoins become widely accepted and people start seeing them as safer or more
attractive than keeping their money in a bank. Imagine the situation where people start moving their
savings on mass from banks to stablecoins. Maybe chasing higher returns or worried about the bank
collapsing. Yeah, that could be a real problem. How are central banks responding to this potential
(15:23):
threat? They're watching this situation closely and exploring different ways to mitigate those
risks. Some are thinking about tighter regulations on stablecoin issuers, while others are looking at
ways to design their own CBDCs that are more appealing and competitive than those privately issued
stablecoins. It's like a race almost, the private sector and the public sector, each trying to
(15:44):
develop the most attractive and stable form of digital currency. You could say that. And whoever wins
that race will have a huge impact on the future of finance. So what do you think the future holds for
stablecoins? Do they have a chance in the long run or will they eventually get overshadowed by
CBDCs? That's a tough one to call. I think a lot will depend on how the whole regulatory landscape
(16:06):
evolves. If stablecoin issuers can address those concerns about transparency, stability,
and compliance, then they could carve out a pretty significant role in the future of finance.
But if they fail to meet those challenges? Well, then they risk being overtaken by CBDCs, which
ultimately have the backing and the authority of central banks behind them. High stakes indeed.
(16:27):
This has been a really insightful look into the world of stablecoins. They're clearly a powerful
force in the digital currency space, but they also come with their own set of challenges and risks.
No doubt about that. Understanding those risks and really evaluating different types of stablecoins
is going to be critical for anyone who wants to navigate this rapidly evolving world.
Well said. Okay, so we've unpacked stablecoins. Now let's shift gears and really dive into the
(16:52):
world of CBDCs. We've touched on some of the key aspects already, but there's so much more to explore.
Oh absolutely. And I think it's important to keep in mind that CBDCs aren't just this one-size-fits-all
concept. There's a wide range of different models and approaches being explored around the world.
What works for one country might not work for another. That makes sense. Earlier, we talked about the
(17:12):
potential for CBDCs to promote financial inclusion. It's a really compelling idea, especially in parts
of the world where access to traditional banking is so limited, but how would that actually work in
practice? Well imagine a world where everyone, regardless of their income or their location,
has access to a digital wallet that's directly linked to their central bank. They can get paid,
(17:34):
pay their bills, save money, even access credit, all without needing a traditional bank account.
So it's like bypassing the whole traditional banking system and giving people a direct connection
to the central bank. Exactly. And in developing countries where people face high fees,
long wait times, and all sorts of barriers to accessing financial services, this could be game-changing.
(17:55):
Our sources really highlight the potential benefits in those contexts. Lower transaction costs,
reduced reliance on cash, greater transparency, even the potential to move away from those
informal financial systems that can be pretty risky. Yes, all those are major advantages.
Think about a farmer in a remote village, for example. She could get paid for her crops directly
(18:16):
into her digital wallet, without having to travel miles to a bank or pay those crazy fees to a money
transfer service. Or imagine how much easier and more efficient disaster relief efforts could be
if aid could be distributed directly to those who need it, without any risk of corruption or theft.
Those are powerful examples, but as with any new technology, there are potential downsides too.
(18:38):
We've talked about privacy concerns, but what about the impact on those traditional banks?
Some experts seem worried that people could start moving their money from banks into CBDCs on a massive
scale could that happen. It's definitely a possibility. Especially if people start to see CBDCs as
safer or more attractive than bank deposits. If they start moving their savings on mass out of banks
(18:59):
into CBDCs, with that could disrupt lending in credit markets, weaken the banks, and even potentially
lead to instability in the whole financial system. That's a scary thought. So how are central banks trying
to manage that risk? Well, they are very aware of it and are exploring different ways to address it.
One option that's been discussed is to limit how much CBDC each individual can hold.
(19:23):
So like setting a cap on how much you can transfer from your bank account to your CBDC wallet?
Exactly. That way people would still rely on banks for their larger transactions and savings,
which would help keep the banking system stable. That makes sense. Another approach I've read about is
designing CBDCs in a way that encourages people to keep their money in banks. How would that work?
(19:43):
One idea that's being floated is offering tiered interest rates on CBDC holdings.
So basically the more CBDC you hold, the lower the interest rate you'd earn.
That way people would be more inclined to keep bigger balances in their bank accounts,
where they could potentially earn higher interest. Smart.
It seems like central banks are putting a lot of effort into anticipating those potential
(20:03):
challenges and designing CBDCs in a way that minimizes disruption while maximizing the benefits.
It's definitely a complex challenge, but it's crucial we want to transition to a more
digital financial system smoothly. Our research seems to suggest that most experts believe that CBDCs,
stablecoins, and tokenized deposits will probably coexist, each serving different needs and use
(20:26):
cases. What do you think? I tend to agree. I don't think any one form of digital currency will
completely replace the others. We'll probably end up with this diverse ecosystem where they compete
and maybe even collaborate each playing to their strengths. So maybe CBDCs become the preferred
choice for things like government payments or those big interbank settlements, while stablecoins
(20:46):
are more suited for cross-border payments or everyday transactions. Exactly. And tokenized deposits
could give those traditional banks a way to integrate themselves into this new digital financial world.
It's going to be interesting to see how these different forms of digital currency interact with
each other and how they all evolve. It really is. It's almost like we're witnessing
(21:06):
the birth of a new financial order and we're only just starting to grasp the possibilities.
Okay, so we've talked a lot about the potential benefits and challenges of CBDCs in a broad sense,
but let's zoom in a bit and look at some of those specific design choices that central banks are
wrestling with as they develop these digital currencies. We mentioned the retail versus wholesale
(21:29):
models earlier. Can you remind us what those terms mean and what the trade-offs are? Sure. A retail
CBDC, as the name suggests, is designed to be used by the general public, just like physical
caches today. Individuals and businesses could use it for their everyday transactions. A wholesale
CBDC, on the other hand, is intended for use by financial institutions to settle those large value
(21:51):
transactions that happen between banks and other big financial players. Okay, so retail is for the
masses, wholesale is for the big institutions. Got it. What are some of the things central banks are
considering when deciding which model to go with? One key thing they're thinking about is the potential
impact on financial stability. A retail CBDC, since it would be available to everyone, could potentially
(22:14):
cause these large-scale shifts of funds out of those commercial banks as we discussed earlier.
And that could really impact the stability of the entire banking system.
So it's a balancing act for central banks. They want the benefits of a retail CBDC,
like greater financial inclusion and efficiency, but they also need to be super careful about
the risks to the stability of the financial system. Exactly. That's why a lot of central banks
(22:37):
are initially focusing more on wholesale CBDCs, which are less likely to disrupt the existing
financial system. That makes sense. Another big decision they have to make is whether to go with an
account-based system or a token-based system. What's the difference between those? An account-based
system is kind of like how your traditional bank accounts work. Each user would have an account with
(22:58):
the central bank and transactions would involve moving funds between these accounts. A token-based system,
on the other hand, is more like using physical cash or cryptocurrencies. Each unit of the CBDC would
be represented by a digital token that could be transferred between users directly, without needing
a central intermediary. So account-based is more centralized with the central bank keeping track of
(23:21):
every transaction, and token-based is more decentralized with transactions happening directly
between users. Exactly. And each approach has its pros and cons. An account-based system gives the
central bank more control and transparency, but it also raises concerns about privacy and surveillance.
A token-based system gives more privacy and anonymity, but it makes it harder to track and monitor
(23:44):
transactions, which could raise worries about illicit activities. It's interesting how these different
choices reflect different values and priorities. Some central banks seem to be focused more on control
and security, while others are leaning towards privacy and decentralization. You're right. There's
no one-size-fits-all answer. The ideal approach is likely to depend on each country's specific
(24:05):
circumstances and goals. Another issue that central banks are grappling with is how to make sure
CBDC systems are secure and resilient. Cyber-tax and fraud are always a concern with digital currencies.
Definitely. And central banks are taking this very seriously. They're investing a lot in cyber-security
and working with experts in the field to develop systems that can withstand attacks and protect
(24:26):
users' data. One thing that really jumped out at me from our research was this concept of offline
functionality. It seems like a lot of central banks are thinking about how to make CBDC's work
even when people don't have an internet connection. Why is that so important?
Well, it all comes down to ensuring access and inclusivity. In many parts of the world,
(24:46):
internet access is spotty or nonexistent. If we want CBDCs to be truly accessible to everyone,
they need to work offline too. So someone could use their mobile phone to make a payment,
even if they're in a remote area with no internet coverage. Exactly. And that could be a real
game-changer for people in developing countries or in communities that are underserved by traditional
(25:07):
financial institutions. But how do you make that work technically? Making sure transactions
are secure and preventing people from spending the same digital money twice when they're offline
seems really challenging. It is. And there are different approaches being explored. One idea is to
use Near Field Communication and FCE technology, which is already used for things like
contactless payments with credit cards and mobile wallets. So you could imagine two people
(25:31):
tapping their phones together to transfer CBDC even if they're both offline. That's the idea.
And the transaction could be verified and recorded later when one of them can expect to the internet.
That's amazing. It really shows the potential of CBDC is to change how we think about and use money.
It does. And we're just starting to uncover what's possible.
Okay. So we've talked about retail versus wholesale, account-based versus token-based security,
(25:56):
offline functionality. What else are central banks focusing on as they design CBDCs?
Well, one aspect that's generating a lot of interest and maybe a bit of controversy too is this idea
of programmability. Programability? What does that even mean when we're talking about CBDCs?
It means that a CDDC could be designed with certain rules or conditions written into the code.
(26:18):
For example, a CBDC could be programmed to release funds only when certain conditions are met.
Can you give us an example of that? Sure. Imagine a government that wants to give financial aid
to low-income families. But they want to make sure those funds are actually spent on essential things,
like food or housing. They could issue a CBDC. They can only be used at certain stores or for
(26:40):
specific categories of goods. Oh, I see. It's like taking the idea of targeted benefits and actually
building it into the money itself. Exactly. And the possibilities are pretty mind-boggling.
CBDCs could streamline government payments, manage supply chains and force smart contracts,
even create new types of social programs. That's powerful stuff. But having that level of control
(27:02):
also raises concerns about privacy and potential misuse, right? It does. That's why we need to have
open and transparent conversations about the ethical and social implications of this idea of
programmable money. I think this is an area where we're going to see a lot of debate and innovation
in the coming years. Absolutely. Yeah. programmable money could revolutionize how we think about
and use money, but it comes with risks that need to be addressed carefully.
(27:24):
Okay. So we've covered a lot of the technical and design aspects of CBDCs, but I want to step back
for a minute and consider the bigger picture. How are these digital currencies going to impact the
global financial system as a whole? That's the big question, isn't it? It's one that economists and
policymakers are still trying to wrap their heads around. But one thing's for sure, the rise of CBDCs
(27:47):
has the potential to reshape the global financial landscape in a major way. Yeah. Our research
suggests that CBDCs could lead to things like increased competition in the payments sector,
more efficient cross-border payments, and even a shift in the balance of global economic power.
Let's break those down one by one. Sounds good to me. Let's start with competition. How could
(28:07):
introducing CBDCs shake up the payments industry? Well, right now the payments industry is
dominated by a few big players like Visa, Mastercard, PayPal, they charge fees for processing transactions,
and those fees can be quite hefty, especially for small businesses and consumers. Right. So how would
CBDCs change that? If central banks start offering their own payment systems through CBDCs,
(28:30):
they could undercut those fees, making it cheaper for consumers and businesses to make payments.
It's like introducing a public option for payments. That would really shake things up.
It could. Existing players would have to innovate and become more competitive on price and features.
Now, what about those cross-border payments? We talked before about CBDCs having the potential
(28:51):
to make them faster, cheaper, and more transparent. I think it's worth diving into that a bit more.
I agree. Right now, sending money across borders is a slow, expensive, and often opaque process.
You often have to deal with several intermediaries, currency conversions, high fees,
it can take days for the money to arrive. And our research talks about the impact on remittance costs.
(29:12):
For people sending money to family and friends in other countries, those fees can be a real burden.
Exactly. The World Bank estimates that over $700 billion was sent in
remittances globally in 2023, and the average cost of sending those remittances was around 6%.
So we're talking about billions of dollars in fees every year just for sending money across borders.
(29:33):
That's right. And CBDCs could really disrupt that system by offering a faster, cheaper,
and more transparent alternative for international money transfers.
That would be huge for people who depend on remittances to support their families.
Absolutely. It could also have a big impact on international trade,
making it easier and less expensive for businesses to operate across borders.
(29:54):
So we have increased competition, more efficient cross-border payments.
What about that potential shift in global economic power?
That sounds pretty dramatic. It does, doesn't it?
The US dollar is currently the king of the hill.
It's the dominant global reserve currency, meaning it's the most widely held and treated currency globally,
used to settle most international transactions.
(30:16):
But how could CBDCs change that?
Well, if countries start issuing and using their own CBDCs more and more,
it could potentially reduce demand for the US dollar.
So for example, if countries start holding and using more ECNY, the Chinese Digital U-1,
that could chip away at the power and influence of the US dollar.
It's a possibility. And it's a possibility with big geopolitical implications.
(30:41):
The currency that dominates global trade and finance has a lot of power.
A shift away from the US dollar could have major consequences for the global economy
and the balance of power between nations.
This is getting really interesting.
So we've got potential impacts on competition,
cross-border payments, even the global balance of power.
CBDCs could really be transformative.
(31:02):
They definitely have the potential to be.
But we need to keep in mind that this is all still very much up in the air.
We're in the early stages of this digital currency revolution.
So it's impossible to predict exactly how it will all play out.
True, but that's what makes it so exciting.
We're witnessing a fundamental shift in how money works
and it's fascinating to see how it unfolds.
I agree.
And it's not just about the technology.
(31:24):
It's about economics, politics, even our social values.
How we design and implement CBDCs will have a huge impact on the future of our society.
Speaking of social values, let's talk about one of...
Privacy.
We've touched on it throughout this conversation,
but I think it deserves its own deep dive.
(31:44):
Absolutely.
Privacy is a fundamental human right.
And we need to think carefully about how to protect it
as we design any digital currency system.
But as we've discussed, CBDCs raised some very specific concerns about privacy.
If the central bank has access to all your transaction data,
that could be used for surveillance and control.
(32:05):
It's a valid concern,
and it's why so many experts are pushing for privacy-preserving designs
that limit how much data is collected and shared.
One solution that I saw mentioned in one of our sources is the idea of
anonymity vouchers.
What are those and how would they work?
Anonymity vouchers are an interesting idea.
It's about finding a balance between privacy and transparency.
(32:25):
Basically, each user would get a certain number of these
vouchers every year, and they could use those vouchers
to make a limited number of transactions anonymously.
So, it's like having a set amount of digital cash
that can't be traced back to you?
Exactly.
It would give people some privacy for their everyday transactions,
while still allowing authorities to keep tabs on bigger or suspicious transactions.
Makes sense.
(32:45):
But how do you decide how many vouchers each person gets?
That seems like a tough balance to strike.
It is. If you give out too many vouchers,
it could undermine efforts to combat money laundering and terrorist financing.
But if you give out too few, people might feel like they're constantly being watched,
which could erode trust in the whole system.
Finding the right balance is going to be crucial.
(33:08):
Are there any other technical or policy solutions that could help protect
privacy in CBDC systems?
Definitely.
Encryption is essential to protect user data,
and this is a principle called data minimization,
which means only collecting the data that is absolutely necessary
and getting rid of it as soon as you don't need it anymore.
Right, and then we need clear, legal frameworks in place to protect user data
(33:31):
and prevent unauthorized access or misuse.
Exactly.
Regulation will be key to making sure that CBDCs are designed and implemented
in a way that respects privacy and protects individual rights.
It's good to see that these privacy concerns are being taken seriously.
It's a complex challenge, but one we absolutely need to get right if we want to create
a digital financial system that works for everyone.
(33:54):
I completely agree.
We can't afford to sacrifice privacy as we move towards a more digital future.
Okay, so we've explored the potential benefits and challenges of CBDCs
delved into the key design choices and talked about the importance of privacy.
Are there any other key takeaways that our listeners should be aware of as they try to navigate
this complex and evolving landscape?
(34:15):
I think the most important thing to remember is that this is all still very much in flux.
The technology is changing rapidly and regulations are still being developed.
What we think we know today could be outdated tomorrow.
So staying informed and being open to new developments is essential.
Exactly.
Don't be afraid to ask questions and challenge assumptions.
(34:36):
The future of finance is being written right now and we all need to be part of that conversation.
Another key takeaway is that CBDCs aren't some magical solution that will fix all the problems
with our financial system.
Right. They have their own set of challenges and potential risks.
So we should be cautious and do our research.
But at the same time, we shouldn't underestimate their potential to drive innovation
(34:57):
and improve financial inclusion for a lot of people.
Absolutely.
They have the potential to create a financial system that is more efficient,
more equitable and more resilient for everyone.
It's really fascinating to see how it all unfolds.
But before we wrap up this deep dive, there's one more thing I want to touch on.
The relationship between CBDCs and other forms of digital currency, especially stablecoins.
(35:20):
We talked about stablecoins before, but now that we understand more about CBDCs,
I'm curious to hear your thoughts on how these two might interact.
That's a great point.
The relationship between CBDCs and stablecoins is one of the most interesting things to watch in this space.
Will they be competitors?
Will they work together?
Or maybe a bit of both?
I think it'll likely be a combination of the two.
On the one hand, they are both vying for the same users and use cases.
(35:44):
Right.
They both offer the potential for those faster, cheaper, more efficient payments,
both domestically and across borders.
Exactly.
And in some cases, a CBDC might even be seen as a direct competitor to stablecoins,
especially the ones that are pegged to a specific fiat currency.
So if a country issues a digital version of its own currency,
(36:06):
why would people use a private stablecoin pegged to that same currency?
That's the question stablecoin issuers are asking themselves right now.
But on the other hand, there could also be opportunities for them to work together, right?
Absolutely.
For instance, some central banks are exploring using stablecoins as a way to distribute
their own CBDCs to the public.
So instead of building their own digital wallets and distribution networks from scratch,
(36:30):
they could leverage the infrastructure that stablecoins have already built.
Exactly.
And that could be especially helpful in countries that already have well-established
stablecoin ecosystems.
It's also possible that stablecoins could adapt and focus on specific
nuishes within a system dominated by CBDCs.
That's another possibility.
They could be used to make cross-border payments between countries that have different
(36:51):
CBDCs systems or to provide specialized financial services or products that aren't as easily
available through CBDC channels.
The relationship between CBDCs and stablecoins is definitely complex
and multifaceted.
It'll be fascinating to see how it all shakes out.
Agreed.
It's a dynamic and unpredictable space, that's for sure.
(37:12):
One that's going to keep us all on our toes.
Well, I think that wraps up part two of our deep dive into the world of digital currencies.
We've really explored the ins and outs of CBDCs and what the future might hold.
We've made some good progress.
Amazing to think how much we've covered in such a short time.
Ready to wrap things up in part three?
Absolutely.
Let's bring it home.
Okay, we're back for the final stretch of our digital currency deep dive.
(37:37):
Feels like we've been on quite a journey.
It has been a whirlwind tour, hasn't it?
From those stablecoin intricacies to the potential shake-up from CBDCs,
but there's still so much more to uncover.
Absolutely.
One theme that keeps popping up in our sources is the global impact of all this.
It's not just about changing how we buy our lattes.
(37:57):
It's about potentially reshaping the whole financial world order.
Hit the nail on the head.
We touched earlier on how CBDCs could challenge the US dollar's dominance as the global reserve currency,
but that's just the tip of the iceberg.
So what else should we be thinking about?
Well, consider the impact on developing economies for starters.
Many of those countries have huge populations that don't even have bank accounts,
(38:20):
or they have very limited access to financial services.
They rely heavily on cash and informal systems,
which can be inefficient and risky.
And that's where CBDCs could really make a difference, right?
Our sources highlight their potential to boost financial inclusion in those regions.
Exactly. Imagine a world where everyone,
no matter where they live or how much money they make,
(38:40):
has access to a secure, affordable, digital wallet
linked directly to their central bank.
They could receive wages, pay bills, save money, even get access to credit,
all without needing a traditional bank account.
Wow, that would be transformative.
It's like leveling the playing field and giving everyone access to the same
financial tools and opportunities.
(39:01):
That's the idea.
And it could have this incredible ripple effect throughout the economy,
potentially boosting growth, reducing poverty,
and empowering individuals in a way we haven't seen before.
It's exciting to think about the possibilities,
but like with any big change, there are potential risks and challenges too.
We need to consider those as well.
Of course.
One concern that comes up a lot is that CBDCs
(39:24):
could make financial systems,
especially in countries with less developed financial infrastructures
more unstable.
How so?
Well, if CBDCs become really popular and widely used,
it could become much easier for people to quickly move their money at a commercial banks
if there's a crisis, or even just a rumor of trouble.
We talked about this happening in developed economies,
but it seems like it could be even more of a problem in countries with less developed
(39:47):
financial systems.
Yeah, the stakes are even higher in those situations.
Imagine a rumor start circulating that a bank is in trouble.
If people can instantly and easily transfer their savings into a CBDC,
well, you could have a full-blown bank run on your hands,
and that could lead to a collapse of the entire banking system.
That doesn't sound good at all.
Are there ways to prevent that kind of scenario?
(40:09):
There are some things that could be done.
One idea is to design CBDCs with safeguards
that limit how much money can be withdrawn or transferred
within a certain time frame.
So, like, putting speed bumps in place to prevent everyone from rushing for the exits all at once?
Precisely.
Another idea is to offer those tiered interest rates on CBDC holdings that we talked about before.
(40:31):
That would encourage people to keep more of their money in their bank accounts,
where they could potentially earn more interest.
Seems like central banks have a lot to juggle.
They want to encourage financial inclusion and innovation,
but also protect the stability of the whole system.
It's a tough balancing act,
and it's good to require careful planning,
smart design,
and a lot of collaboration between everyone involved.
(40:52):
Another big challenge that our sources point to is the need for interoperability.
If we want a truly global system of digital currencies,
all these different CBDC platforms need to be able to work together seamlessly.
That's essential.
Imagine trying to make a payment to someone in a different country
that uses a different CBDC platform.
If those systems can't talk to each other,
(41:15):
it would be a logistical nightmare.
It'd be like trying to jam a square peg into a round hole.
Exactly.
That's why it's so important for central banks to collaborate on developing
common standards and protocols
that ensure all these different CBDC systems can work together without any hiccups.
And it's not just about compatibility between different CBDCs either.
We need to think about how they'll interact with existing payment systems
(41:37):
and the entire financial infrastructure we have in place today.
Right. We're not trying to build a whole new system in a vacuum here.
The goal is to integrate CBDCs into the existing financial world
to make things more efficient, less costly,
and more accessible for everyone.
Sounds like a huge undertaking.
But if they can pull it off,
the potential benefits are enormous.
If we can get this right,
(41:59):
we could have a global financial system that's faster,
cheaper, more transparent, and more inclusive than anything we've ever seen before.
That's a really exciting vision.
It's something worth working towards for sure.
You know, as we've been exploring this topic, it's really struck me that this is about
more than just changing technology.
We're talking about a fundamental shift in the nature of money itself.
(42:21):
That's a really profound insight.
For centuries, money has been primarily physical cash and bank deposits.
Now we're moving into this new era where money is increasingly digital, programmable,
and maybe even tied more closely to our identities.
It's a future that's full of possibilities, but also potential risks.
Without a doubt.
And it's a future that requires us to think critically,
(42:43):
talk openly about these issues,
and be willing to embrace new ideas while challenging the old ways of doing things.
So as we wrap up our deep dive into the world of digital currencies,
I want to leave our listeners with a question.
What role do you want to play in this new world?
Will you be one of the early adopters,
diving headfirst into these new forms of money?
Or will you take a more cautious approach,
(43:05):
waiting to see how things shake out before jumping in?
However you choose to engage, the important thing is to stay informed, ask questions,
and be part of the conversation.
The future of money is being shaped right now,
and we all have a role to play in writing that story.
Thanks for joining us on this journey.
We hope you found it insightful and maybe even a little bit inspiring.
Keep exploring, stay curious, and never stop learning.
(43:27):
Until next time.
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