Libra, Stablecoins, CBDCs and the Need for Digital Money
Today, we’re joined by Lex Sokolin to discuss recent developments in digital money, including stablecoins, CBDCs and a new Facebook Libra proposal.
A digital world needs digital money, and a few influential players are actively working to build it. China’s BSN initiative and Facebook’s Libra embody the East’s public sector led approach to building and owning the internet of value, and the West’s private sector led (and public sector challenged) attempt at cheaper commerce on the web. While the nature of the approaches may be different, the data and privacy considerations are eerily similar.
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Thank you very much for joining us today. Please welcome, Lex Sokolin.
Full transcript:
Will Beeson:
Lex Sokolin, welcome to Rebank.
Lex Sokolin:
Wonderful to be back. The quarantine continues.
Will Beeson:
It sure does. All right. So let's dive right in because I think we have limited time today. One of the things that you, I think, think about and write about a fair amount, which is rather prominent in the crypto community, stable coins is increasingly breaking into mainstream discourse about the future of money banking financial services. Can you high level describe what stable coins are and why they're relevant?
Lex Sokolin:
Absolutely. So it's one of these words that have bubbled up from the crypto ecosystem, but it's a really innocent idea and it's very familiar to most folks who know financial services. If you think about money, you've got cash, so just dollar bills, but then you have lots of cash equivalents, things that behave like cash and holds, you know, similar value and have a stable value. So think about something like a money market fund, which is trying to "not break the buck", right? You want the money market fund to essentially be parity with dollar value. Or if you think about cash sweep inside of a brokerage account, all of those are just the sort of the pocket change inside of a larger investment account. And then much bigger sort of overnight money market instruments or other bond instruments that function as a cash equivalent.
Lex Sokolin:
And so a stable coin is a tokenized instrument. It's native to a blockchain, so it's either a coin or a token, however you want to say it, but it sits on a blockchain network and it is denominated in a currency, a Fiat currency like the dollar or the Euro or the Sterling or the One. And its whole goal is just to be a representation or a digital equivalent of traditional money, but on blockchain based networks. And so this has been growing both in the concept of something like 5 to 15 billion of value is sitting on blockchains today in stable coin form, just equivalent again to U.S. dollars. And then on the other side, it's a concept that's been pushed by central banks as central bank digital currency. And these two concepts in my mind converge.
Will Beeson:
Okay. So if we maybe just strip out the underlying technology infrastructure that's supporting this, i.e., the blockchain references, basically what we're talking about is a digital representation of a Fiat currency that has all the benefits of a digital currency, but in theory all of the stability and fungibility of the fiat currency.
Lex Sokolin:
Yeah, exactly. It's, I forget which book it is, whether it's 1984 or some other dystopian tale where language is over time just made simpler and simpler and simpler. And so if something is extraordinary, you just say it's double good. And so stable coin is sort of like that, where one of the problems with cryptocurrencies, they're very volatile when they're denominated in Fiat, right? So Bitcoin's price goes up and down and so you just want something stable that looks like the dollar and you know, that's where the concept came from. And as the crypto economy and the capital markets grew, the usage of stable coins grew as well.
Will Beeson:
So I think like the very basic question that I think most non crypto specialists would be asking themselves is why, and what's the point? And I think where this is relevant and the point that you can probably speak to is how this fits into the broader DeFi future, i.e., if we're talking about foundational building blocks to support the increasingly digitized future of money banking and FS. This sounds like a very important one. Can you just talk about how this fits into that future framework?
Lex Sokolin:
It's unavoidably a can of worms and I think when you look at any new technology, the question of why do it, what's the point, there's no market yet, why does it exist? That's a very natural reaction, a very natural first reaction. I can't get away from saying you need blockchain based money in order to engage with blockchain based economic activity. And so there's lots of argument around more efficient payment rails, global infrastructure, multi-asset class infrastructure, having your payment rails and your banking infrastructure and your investment infrastructure all be the same. And often that's my go-to argument for why this stuff is important. But I think if you kind of put that to the side, there are a few interesting things happening simultaneously. So the first thing which you alluded to is decentralized finance. So one of the complaints around Bitcoin was always, well, you can't really buy anything with Bitcoin.
Lex Sokolin:
There are merchants that now accept Bitcoin. But essentially what happens when you swipe a card or use it for online shopping is that there's an FX transaction that happens between your card and your wallet just in time for you to make that purchase. So there's still a translation mechanism. And then there's volatility risk that goes on the merchants, and this is why some folks don't love that model. With stable coins, number one is you get rid of that FX risk. But more importantly, things did not get denominated in Bitcoin within blockchain economies. Like goods and services are not priced in Bitcoin. They're still priced in dollars. And so if you want to interact with applications in decentralized finance on a Ethereum, you want to take out a loan or you want to earn interest or you want to underwrite some insurance risk or place some trade, things are still going to be denominated in dollars and so you're going to need a money that looks like a dollar in order to interact with those and just like buy things that you want.
Lex Sokolin:
And so there's a very tangible set of use cases today where you use stable coins to buy stuff on Ethereum within the DeFi infrastructure. The other two things I'll flag without opening up cause I'd love to get your view too, is there are two massive, massive projects that are looming on the horizon, which essentially will create government backed or heavily regulated versions of these instruments. Like stable coins today are "permissionless", meaning that people can just go and convert into them and use them. But there's two projects which are really big, which use a lot of the same concepts. So the first project is Facebook's Libra version 2.0 where a consortia of the largest technology companies in the world is building a blockchain infrastructure for the U.S. dollar, for the Euro and the Sterling essentially as a basket. And they've been through the regulatory grinder, but now they've reconfigured to just represent those currencies within the Libra blockchain and network and so on. So that's very big.
Lex Sokolin:
And then number two is the Chinese government. And so for China and the communist party, one of the core fundamental existential paths for global competition is leading a blockchain strategy. And that means both a digital currency as well as blockchain applications. And so they've just announced a launch of this massive thing called the blockchain service network, which integrates into everything from IBM's Fabric to Ethereum to lots of other chains. So it's inevitable.
Will Beeson:
Yep. Yep. Okay. So in terms of my thoughts, firstly I think that you kind of described, at least started out by describing stable coins as kind of like the grease that oils the permissionless blockchain machine, the Ethereum network, and various decentralized apps that run on top of it. And I'm sure it is that, that to me feels a bit fringe still. And you know, if past experience is any indicator, might remain kind of fringe. I could be proven wrong. Where stable coins potentially like in my mind at least become more and more relevant, and I think this is what you're getting to with some of the central bank digital currency stuff, is basically as the digital equivalent for Fiat currency. And sure, like you know, dollars and Euros and pounds are currently displayed as zeros and ones within computer systems and bank balances and electronic transfers happen, no problem.
Will Beeson:
But it's still a very high friction world. Like to send an international payment like the time, the cost, it's super high friction. You can send an email for free instantly. You can send money via FedEx faster than you can via Swift. There's something fundamentally not working, fundamentally analog about that system despite the fact that we may have digital bank apps on our phone and be able to TransferWise each other money back and forth. So to the extent that the future of currency has to be increasingly digital, and to me the biggest, the most relevant piece year round, stable coins is effectively that conversion of Fiat into highly functional, highly secure, truly digital representations of currency, which I think is very much where we're going. And I think that's the big piece here. And there are all sorts of knock on effects and implications there in terms of monetary policy, ability to distribute cash to people who need it when they need it.
Will Beeson:
All the sorts of challenges that we're currently grappling with from whether it's U.S. SBA lending type perspective, whether it's stimulus checks, whether it's other parts of the world and getting money in the hands of the people in businesses who need it. In terms of the Libra and Chinese initiative, so I kind of scratched my head around Libra and I think that Facebook made a mistake by launching such a crypto-forward anti-establishment plan from the beginning. And I think that they're in a very difficult spot now in terms of backtracking on some of the more crypto anarchist components of the plan because of where they came from, where they started. I don't think plan 2.0 which is kind of a more structured, less disruptive blockchain and crypto based plan, I don't think that addresses the concerns that policy makers had in terms of Facebook getting involved in kind of circumventing the traditional way of Fiat monetary system.
Will Beeson:
What it feels to me like Facebook is trying to achieve is basically an interchange freeway of facilitating commerce on its platform. And I think that they could have gotten there in a much more direct, much less controversial way had they just started from something pretty basic and straightforward that leverages the ways that countries, governments, policymakers are used to seeing things like this work. And in fact, they probably didn't need to have a bunch of congressional hearings defending plans. They probably as a private company could have just developed some sort of value transfer mechanism, which leveraged traditional tools. So I'm not quite sure what the benefit is to either Facebook or the world at large of this Libra 2.0 plan, which still relies so heavily on these crypto components.
Lex Sokolin:
Yeah. So there's a lot there. Look, I want to respond to all of it, but I'm going to forget. So I'll just kind of footnote a couple of ideas. So the first point is that we're painting with a broad brush two separate asset classes. One is the cash sweep inside of investment activity, right? So you have $100, you buy $98 worth of stock or Bitcoin of Ethereum, and you have $2 leftover in your portfolio and that's basically your stable coin. Or alternately, you have $100 invested, the world blows up, you sell it and put it into cash. Well you don't want to take it off of Coinbase, right? You don't want to take your $100 off of blockchain networks, put it back in the banking system, wait eight days for the ACH to hit, and then have your dollars and then the market's on again and you're trying to get back in.
Lex Sokolin:
So the stable coins solve that problem as a percent of the global capital markets inside of the crypto trading ecosystem, right? That's quite different from currency moving around to pay people. And so I did a little bit of hand waving and comparing CBDCs and stable coins because one is payments and one is an investment use case. But the crazy thing about blockchain is it's the same infrastructure. You don't need to differentiate. Which brings me to CBDCs and the Libra bet. And you know, in the old world, the Ripple bet, XRP bet, and in the payments use cases, you split things out into retail and wholesale. So most money that's moved around is moved around in wholesale ways between banks, you know, international flows. I forget the ratio, but it's something like one to five.
Lex Sokolin:
So the five being the wholesale commercial banking flows of money between businesses. And so that is actually fairly easy to solve with central bank digital currency because you have fewer transactions and they're much larger. And so having kind of a chunky system that is a shared ledger of record between the banks in a permissioned way overlaps very neatly with enterprise blockchain. And so second, wholesale payments, they come embedded with predone KYC and the KYC is done at the corporate level. So it's corporate identity, not human, not individual identity, right? So the issues about privacy and Bitcoins for the people, like that stuff, crypto anarchism, when you touch wholesale business payments it is entirely irrelevant because if you're Maersk paying IBM, if you're Apple paying Foxconn, you don't care at all about anonymous and private in the crypto sense. You just want a shared ledger that you can use for your whole supply chain.
Lex Sokolin:
And so wholesale payments and CBDCs is kind of like the easy thing to do next. And so the question there, we know that many central banks are working through this, supporting the fixed income markets directly as you saw with the fed, the small business payments through Fintechs. I think those are all steps that make the idea of a direct relationship between a network that's hosted or supported, or overseen by the fed and then these market participants, it just makes it closer and closer and closer. And so the question there is which architecture are you going to pick? And there's not that many you can pick from. And so like looking at the Chinese case, the question is which blockchain and architectures are they using? Where do they come from? It's really interesting. Ant Financial and Alibaba have a chain. Ping An has its own chain.
Lex Sokolin:
There's the Western ones. And so it's a very discreet kind of question. Then there is the much, much more existential crazy difficult question, which is retail, retail CBDC or retail digital currency, which today is not really used in a high volume, small transaction payments context. Today's blockchains have a little bit of work to do before they can scale to Visa level transactions, although that is coming, that is on the path. But today it's hard. And then second on top of that, putting money on government issued blockchain, it's a step for the fed to have a CBDC. But it's also a step for me as a consumer to say, yeah, I want to be tracked, surveilled and KYC'd into every purchase that I make. Which is why China wants to have a blockchain CBDC because to transact on that network and to transact on the proposed LIBOR network, you have to KYC and bring your real identity and that is a very sort of 2020 type of issue. That is a very fundamental, what does the world look like in the future type of issue.
Will Beeson:
Yeah. Okay. So that, I think brings us squarely to this Chinese initiative, which I believe is called the BSN.
Lex Sokolin:
Blockchain Services Network.
Will Beeson:
That I think is a monstrous piece of news in that basically the concept is that the Chinese government with the involvement of a bunch of the biggest Chinese companies, including telcos and payments companies and tech and financial services companies are basically running this project where, and you can correct me if I'm mischaracterizing anything. Basically they're building like an abstraction layer on top of a bunch of underlying blockchains, which make it easier to develop on top of blockchains in an almost like network agnostic sort of way. So it's much easier to just kind of like build applications or build functionality without having to deal with all of the underlying infrastructure. And part of that I think it gets to then if you can try and in this case can create the standard and can do so with such large commercial players and can then roll that standard out through certainly its sphere of influence but much of the world, to what extent can they kind of own the information, the data and in fact potentially some of the insight into activities and personal information that's then flowing through that network?
Will Beeson:
That to me raises alarm bells and in my humble opinion, I think there very much needs to be credible alternatives to infrastructure like that, which is surely extremely functional, extremely valuable for the world to have. Can we do that? Can we in some way come together to do that in ways that would seem to protect privacy better than this Chinese arrangement is likely to?
Lex Sokolin:
Yeah, and who wants to protect privacy and why? Certainly all governments, whether Chinese or American or any other in today's world, find personal data very delicious, as a thing to be consumed by intelligence agencies. I think Europe is probably the leader in this space with GDPR and protection of personal data. But this is a temptation across the world. Look, this stuff can get really abstract and I think it's still fair for people to be like, why does blockchain matter? Should anything be built on it? And the only thing, my counter argument to that, is you don't need to engage in the substance of why, just look at who's doing it, right? So if the global international technology battle is over, who owns the internet of value in the future, right? Because the U.S. owns the internet of information and the U.S. owns kind of media and Hollywood, and it owns the reserve currency.
Lex Sokolin:
And so it's got all of these magnificent incumbent advantages and from the point of view of a country like China, your vectors of geopolitical competition are the frontier innovation. So it's going to be, you can't win with just a great firewall. You need to be the best in artificial intelligence. You need to be the best in 5G and telecom infrastructure and you need to be the best, most likely in IOT, and then things like blockchain, so the next internet. And you can think of what they're trying to do as like Apple putting together the app store. The app store made the iPhone because it generated millions of apps and developers building in that operating system in that one place. And that became the default where the consumer goes and the developer goes. And so if you think about this Chinese operating system that sits on top of interoperable between the Western blockchains that are private like Fabric, a lot of supply chain is using that, or public like Ethereum, or proprietary to the Chinese economies like Ant Financials, open chain. It's an operating system that's trying to be on top of that and give a place for developers and businesses somewhere to build in a very cheap and efficient way.
Lex Sokolin:
I don't think it's going to win in the West, but it can definitely win in the East and that would include the middle East and it would include Africa as the spheres of influence for sort of like a growing international Chinese technology power. There are a few alternatives because in the free market you can't have that type of centrally planned outcome. So the only real alternatives I see are Libra standing up or the Ethereum efforts graduating into much more institutional broad software, which is Consensus, and what I do in my role day to day is creating that operating system that sits on top of private and public Ethereum, essentially make it easier for developers to build stuff. Or it's going to be an IBM or r3 Corda type of solution.
Will Beeson:
Interestingly, all private sector led, whereas the Chinese approach is public sector effectively.
Lex Sokolin:
Today, that's the case. Yeah. Today that's the case.
Will Beeson:
Yeah, so now we're to that interesting, interesting question and ever more relevant question of the role of private sector versus public sector in dealing with a lot of these emerging challenges. This is phenomenally rich subject matter. It's very clear listening to you that the future of technology, of value of commerce will incorporate a lot of these pieces that seem esoteric to many but are kind of core to your day to day work now. We'll definitely pick it up, continue to weave it into our conversations as relevant and keep a close eye on all this.
Lex Sokolin:
Absolutely.
Will Beeson:
Lex Sokolin, thank you very much for joining us today.
Lex Sokolin:
Glad to be here. Wash your hands, everybody.
