Financial Privacy, Digital Currency and Stablecoin Payments

One of the major issues that has vexed policy makers and regulators, and is fundamental to the growth and adoption of crypto currency and blockchains is issues around financial privacy. How can we be assured of our privacy with blockchain payments? Are there risks of government and law enforcement overreach? On the flip side, what are the boundaries of financial privacy for individuals and what risks do privacy preserving technologies pose to governments? What about corporate and commercial privacy — public blockchains are transparent, how can a company adopt this and not disclose private transaction activity as a firm? What are the technology and policy answers to these questions?

Join us as we explore financial privacy, digital dollars, and stablecoin payments. Listen now!

Jeremy Allaire: Hello, I'm Jeremy Allaire, and welcome to The Money Movement. A show where we explore the issues and ideas driving this brave new world of digital currency and blockchains. One of the major issues that has vexed policymakers and regulators, and is really fundamental to the growth and adoption of cryptocurrency and blockchains are issues around financial privacy. This is coming even more into focus now as blockchain payments built on stable coins have really clearly become the killer app of blockchains with their growth surging. We're really, I think, very much entering an era that may really herald the mainstream era of digital currency for everyday payments and value exchange.

How can we be assured of our privacy with blockchain payments? Are there risks of government and law enforcement overreach? We're talking about not just the United States, but every country in the world and how they respect or don't respect financial privacy. Now, on the flip side, are there boundaries of financial privacy for individuals? Is there a social contract, so to speak, around the financial system that sacrifices some degree of privacy for the benefit of society? Fundamentally, are there risks that privacy-preserving technologies do pose to governments and their broader social mandates?

A related issue is really around corporate and commercial privacy. Public blockchains and stable coin payments that are running on those public networks are very, very powerful for corporations, but how can a company adopt this and not disclose private transaction activity as a firm with these public ledgers? Then more broadly, what are the technology and policy answers to these questions? A lot to cover here today and to help us explore these topics, I'm very pleased to welcome two exceptional guests, Jerry Brito, founder, and Executive Director of Coin Center. One of the preeminent think tanks on digital currency in a firm that I know has done a lot of thinking on this topic specifically.

Paul Brody, a principal and global blockchain leader at Ernst & Young, and one of the drivers behind The Nightfall Project, which aims to enable privacy preserve payment transactions on Ethereum while also enabling trusted third-party audits of those transactions. Welcome, Jerry and Paul.

Jerry Brito: Thank you.

Paul Brody: Thanks for having us.

Jeremy: Excellent. Really excited to have you guys today. Maybe we'll just start a little bit with just quick intros. Maybe Jerry, just 30 seconds on what you're up to and any background on the topic, and then we're going to really dive into the topic. Of course, too.

Jerry: Sure. Well, thank you, Jeremy, for having me. For those who don't know I'm Executive Director of Coin Center. Coin Center is a independent non-profit based in DC, and we're focused on the public policy issues that affect cryptocurrencies and open blockchain networks. Things like Bitcoin, Ethereum, Zcash, Monero, and the like. To date, those public policy issues that we've been focused on, which are many, have included securities law, consumer protection law, tax. One that really has been a major issue since our inception, about six years ago has been anti-money laundering, counter terrorism, financing, know your customer type policy that's all based in The Bank Secrecy Act.

As you were saying, we have to find a balance between the understandable need of law enforcement and government to investigate crimes with the people's need and right to privacy. Cash has been always a main tool for achieving that privacy, and today, crypto is the new cash. We've been trying to figure out what's the right balance there. Hopefully, that's what we'll discuss, but that's one of our main focuses.

Jeremy: Excellent. Thank you, Jerry. Paul, quick introduction.

Paul: Sure. I'm Paul Brody, I'm the global blockchain leader at EY. We are obviously one of the world's biggest accounting tax and professional services organization. I meet all of our global blockchain teams and the way that we really look at this is very, very focused on the enterprise side of things. As a consumer, I very much value and care about my privacy. A lot of consumers seem pretty comfortable with the exchanging some level of privacy for access to convenience. That's certainly a model that's been established for a while. At the enterprise level, it's just a non-starter. You don't have privacy in your business transactions, you're just not going to adopt almost any form of digital technology.

For us, being focused on serving enterprises, that was early on one of our focuses. A particular focus for us is how to do the maximum level of privacy that is fully consistent with regulatory compliance. You, in your introduction, Jeremy, you brought up things like overreach and other topics. We don't get to make a lot of that policy on that, but we have to be very, very focused on helping our clients be regulatory compliant.

Jeremy: Awesome. There's very much what do individuals as sovereigns have vis-à-vis financial privacy. Obviously, corporations themselves are a nexus of contracts and bound by a series of laws, but also deeply focused on privacy as much certainly as individuals. Maybe we can maybe bring this up a level. I'll turn to you first, Jerry, on this, but help us define financial privacy. What does that phrase mean to you? What's the essence of this idea of financial privacy?

Jerry: I break it down into two parts. One is privacy from the state. That means basically your Fourth Amendment rights, to be free from searches and seizures. If the state wants to come and look at your papers and effects, they need to get a warrant from a judge before they can do that. That's one kind of privacy that you have, and that's a privacy that's spelled out in the constitution. The other kind of privacy I would say is things that you want to keep to yourself, things about you that you want to keep to yourself and you want to reveal selectively to different people.

That could be clearly if you're going to open up a bank account, you're going to have to tell your bank certain facts about yourself. If you want to engage in a commercial contract with somebody, you're going to have to reveal certain things about yourself, but my neighbor doesn't need to know any of those things. My ability to keep certain things to myself and to reveal selectively those things to who I want to, that's financial privacy as well. To me, it's those two things. It's one is an ability to maintain certain things to myself or reveal them, the other is my right to have security without lacking a warrant from the state.

Jeremy: You have these distinct boundaries. There's the boundary of my own, as you said, personal artifacts, records and a sanctity around that. We understand if were want to interact with the broader financial system, we do give up some privacy. Certainly, our identity, and certainly within the broader global landscape, the records of our transactions. We know that those are all reportable to government, subpoenable by government without our knowledge and without our consent.

Jerry: That's where I think it gets a little tricky because when you've voluntarily disclosed something to some counterparty, does that mean you've weighed your Fourth Amendment rights? Maybe we don't have to go right to that, but that's actually something that--

Jeremy: It redacts.

Jerry: I don't think it's as clear-cut. With cryptocurrency, I think it's interesting because the basically government's authority to require, as you said, without even your knowledge that third-parties like banks report information about turnover information is predicated on the fact that you disclose it voluntarily to that bank. There's a third-party exemption to the Fourth Amendment requirement for a search warrant. Well, with cryptocurrency, if you're holding your own cryptocurrency in your own wallet, there is no third-party.

Jeremy: Yes. I want to come to the profound issues that exist with digital currency, in particular digital assets that are on public blockchains in a moment. Just tying back to this concept, the way I've articulated it is that basically, because of the way that the infrastructure of money works in the world today, those businesses that are licensed to interact with what are called money records later, database records called money are required by law, depending on where you are in the world, but let's just say it's the United States, are really required by law to be agents of law enforcement to actually act as the frontline of policing transactions.

In fact, if you don't, as a financial intermediary, proactively police transactions and report them to the government, you are in violation of your licenses and you can get fined, you can go to jail. I don't actually think most individuals don't realize the fact that the financial intermediaries that they interact with are in fact agents of law enforcement and are required to be so. That is the structure that we have today. You can obviously take it to the next level, which is, take a country like China where the electronic money systems, the government can dive right into the records straight away. They can access them, they don't need to ask, they don't need a subpoena, they can just dive right in and take a look at whatever they want. It's even less privacy there.

That is the status quo in the financial system today, which leads us to I think this world of cryptocurrency. I want to focus in most of our discussion today, not on the Bitcoins, the Moneros, and privacy-focused non-sovereign cryptocurrencies. Those are very one far end of the spectrum, but really zoning in on this world of stablecoins, theoretical Central Bank digital currency, but just for today maybe we focus on stablecoins where we're finally at a place where we have digital currencies that people want to transact for day-to-day things. They increasingly want to use those in commerce and in financial activities.

They do behave like as you said, digital cash and they act as bearer instruments on the public internet. It's possible for a person to self-custody these things. That raises a lot of issues. I'd love to hear you both talk a little bit about, from a policymaker perspective or from a corporate accountability perspective, maybe both of those, what issues come to the fore when you have a digital dollar stablecoin that's used on the public internet?

Paul: From my point of view, a digital dollar on a public blockchain is essential for public blockchains to become enterprise usable. That's not because cryptocurrencies aren't particularly useful, but because enterprises are inherently risk-averse. The model of how companies interact is basically I have money, you have stuff, and we're going to exchange those things. That system terms and conditions.

As an enterprise, I want a couple of things. Number one, I want to minimize my risk. That means I don't want to convert my dollars, which I get from my customers and perhaps in retail stores, and to which I have to pay taxes on the other end of my earnings, I don't want to convert them to a different currency and then convert it back. It causes risk. That's foreign exchange risk, companies hate risk, unnecessary risk. Enterprises want to have-- they want to stay in the same currency from end-to-end.

By enabling stablecoins on public blockchains, you're making public blockchains usable for enterprises, provided you can offer them privacy. What is exciting to me about the privacy approaches that are developing on public blockchain, especially the work we're doing around zero-knowledge proofs, is they have a potential to do two things. Number one, they make privacy practical. We just didn't have a practical scalable mechanism for privacy on public blockchains previously that could handle not just a cryptocurrency but pretty much any type of asset and even business logic.

That's making it useful because if I have an exchange, not only do I want privacy about with whom I'm transacting and how much I'm paying, but also the terms and conditions of my deal also need to remain private. The second thing that's exciting to me is the potential to change the way we interact with regulatory compliance in a way that is both consistent with the rules and potentially better. For the first time with zero-knowledge proofs, we have the stability to prove something is true without disclosing the underlying data.

Historically, all regulatory compliance has been based on, to prove something being true, you have to disclose the data. Once you've disclosed the data, it's now flowing freely across a bunch of different jurisdictions and rules. What I like about the potential for zero-knowledge proofs is I can prove to you something is true, I can give you certain types of proofs that you need them or third parties can provide proof but the data is not out there.

My data is not flowing freely. When a regulator comes to me and says, “I need you to show me that you did something,” I can prove thanks to blockchain records and mathematical proofs, that I did comply with the rules. To me, there seems like there's great potential for positive proof of regulatory compliance and regulatory compliance without the disclosure of all of your personal information or business information.

Jeremy: Right. This is, I think, when a lot of people who operate in the existing, say, financial system or in other record-keeping situations or situations where you're having to certify yourself in some way, we've just all become so accustomed to the idea that, “No, you have to give your records and all this information. All this personally identifiable information.” It's like we're spraying it all over the internet. It's creating a lot of issues.

I think when people hear crypto, they're generally like, “Ooh, crypto bad.” There's this, unfortunately, this reaction that somehow if you're doing something with crypto or encryption, you're hiding something, which is really, really unfortunate because clearly, what you're articulating is, “Hey, we're in this digital age. There's this massive proliferation of interactions that we have as individuals and as businesses, and we want to speed that up, make that better but we want to do that without having all these risks of data breaches or intrusions, and zero-knowledge proofs.” Which for the audience that isn't familiar, as you said, is just using mathematical proofs to demonstrate that something is true without sharing the underlying data.

That is, it's a major, major breakthrough. This is, the crypto is not just good, it's great. It actually is critical to moving forward in the world in the digital economy and the like.

Paul: I believe that zero-knowledge proofs, crypto made the necessary for privacy but I believe they will have a transformational effect on data and analytics over time for exactly this reason. We store too much data and we have gotten in this mentality thinking more data, better. It's not. More data is more liability, more risk, more privacy breaches. More data isn't always better. If we want to steward our clients' data responsibly, we have to start thinking about less data.

Jeremy: Totally. Jerry, just, I know you talk to policymakers in DC a lot, you talk to agencies and staffers, and you have a lot of awareness on these issues. There's these hearings, I know you participate in quite a few hearings as well. There's always this question of these public blockchain digital currencies, even the stablecoins that are out today like USDC and others. There's still this question of, from a policy perspective, does this escape the anti-money laundering rules? Does this escape the requirements that the government has around the ability for law enforcement and the national security apparatus to do what it needs to do? What are you hearing on that? What do you think the current thinking is on that?

Jerry: I think that there's a spectrum of thinking on this. It changes from the more direct connection you have with the technology and government where you're actually prosecuting cases or you're working on intelligence, you have a certain view, whereas folks have, higher you go up on the chain all the way up to Cabinet, President, Congress, you have a different view. I would say that at a very high level, there is a misunderstanding oftentimes, there is skepticism but it's just a matter of education. At a lower level but a more direct contact with the technology level, there's a great deal of understanding.

There's also an understanding of what's possible and what's not possible. That I think leads to good policy. Once you understand the parameters within what you have to work with, what you can expect to be revealed to you, what you can't, I think that leads to good policy. Right now, I would say that we're at a good spot when it comes to, say, stablecoins because the law is pretty clear. FinCEN issued guidance in May of last year and that guidance was very clear. If you're a stablecoin issuer, then you know, you're a financial institution that needs to be registered with FinCEN. You have to know your customers and you have file suspicious activity reports and have an anti-money laundering program, et cetera.

I think where there may be questions that come up is you have to know your customer. Clearly, your customer is anybody who comes to you to exchange a dollar for a stablecoin or who comes to you with a stablecoin to exchange it for a dollar, clearly your customer. In between, you've got lots of different people who might come to possess that stablecoin. The same way that $1 bill, bank knows who you are and the bank knows who comes to it with $1, but in between that dollar could pass lots of hands. Dollar bills, there's nothing we can do, we can't really track those, but on a public blockchain, you can.

The question is, would at some point regulators come to the conclusion that a stablecoin issuer’s customers are everybody, whoever possesses that coin? I think that's problematic for a whole host of reasons. That's one thing. The other thing I would say I totally agree with Paul, that if we want to protect consumers and protect our own privacy, we want to limit where this information goes and where this information is reported. Things like zero-knowledge proofs are great because you can prove that you're compliant without sharing the info, but I see financial intelligence here.

FinCEN increasingly think of themselves as big data operations. They see themselves as the people in government who are able to spot trends and spot things that need to be further investigated. They can't do that unless they have a big data set. When you go to them, "Hey, guys, great news. We can prove to you we're compliant without sharing the data." I wonder how they'll react to that.

Jeremy: Yes, it's fascinating. We have the Financial Action Task Force guidelines on the record-keeping obligations of virtual assets, service providers, whether you're a cryptocurrency exchange or a stablecoin issuer, any of the above. It's taking the rules that FinCEN had prior established around know your customers' customer and follow that money as it moves around the financial system, and superimposing that on top of digital currency.

The industry is obviously doing a lot to ultimately be compliant with that but what's interesting to me is that there's this huge opportunity right now to simultaneously meet that record-keeping obligation while enhancing the privacy-preserving characteristics through the use of things like zero-knowledge proofs, or multiple signature escrow access to data and other things that can be done with crypto, but the regulators are not hearing anything on that. They're basically saying, "No, this is the way it's been done. This is the way it works, you got to do that."

From my perspective, this could lead to actually a mass proliferation of RPI into more places on the internet that create more honeypots for hackers. The digitalization of PII and its transmission, this is one of the things we got to be able to fix and things like zero-knowledge proofs can do that. We probably need amendments to rules or adjustments to be able to get there. It's interesting.

From your perspective, again, from both of you, what are the risks of overreach? We don't need to go Orwellian here. We live in obviously a very complex world right now, that is fast-moving, a lot of different vectors right now and challenging in many ways. It's not hard to imagine government overreach, not just in China but in the United States or in other jurisdictions around the world that are in crisis right now. Lots of things can happen, incentives can change. What are the real risks that happened here? What could go really badly for individuals and businesses?

Paul: From a business perspective, the biggest risks regulatory overreach set aside particular US law issues or other country law issues. The risks that exist overall is a historically, whether it's regulators or large enterprises, everybody wants control. The problem with having control, and this is what made people initially so uncomfortable about the internet, what makes them uncomfortable about public blockchains is the lack of control. What we found last year, what we find over and over again, is if one party controls a network, the other parties don't want to join.

The biggest risk of overreach is that people decided they don't want to adopt new technology because it presents too much of a substantial risk. I'll give you a very good example. One of the main ways that manufacturing companies connect to each other is through a system called EDI, Electronic Data Interchange. It's literally as old as I am, which is obviously in my early 20s, but it actually dates in the 1970s. It's a point-to-point messaging system and it doesn't work really well if you think about the fact that large supply chains and business operations actually involve dozens or hundreds of companies across many different countries.

This is basically saying, I'll only allow you to send a message from one person to another. You're playing a game of telephone, and inevitably, the message gets delayed and it gets garbled, and causes a supply chain fallacy. That technology is still the primary technology used because companies are reluctant to put their data into somebody else’s centrally the operating system.

Blockchains could have a huge impact on string of supply chains, improving the flow of data, reducing inventory, improving working capital, speeding up payments, but it won't happen if every company or country thinks, “I don't want to sign up for a system that's controlled by a rival government, by a potential competitor.” The bottom line is if overreach exists, companies especially will not adopt the new technology if they believe their business security, their business privacy, their strategic value is at risk. That [unintelligible 00:26:31] enterprise.

Jeremy: This is a good argument for public chains as the right infrastructure because it's not aligned. Right?

Paul: Right. It's not aligned. It's not controlled. Governments with a lot of foresight, like the government of Singapore, they've been very explicit. When they've asked us to work on stuff for them, they've said it's got to be open source, it's got to be public domain. It's got to be built on open standards. That's the kind of stuff that will get adopted. I think that's the big downside. We're going to say, "No, thanks." To a lot of productivity gains, if somebody decides that they must have control or they must have the data over others.

Jerry: What I worry about the government overreach is a politicization of financial intermediaries. What I mean by that is this. In an increasingly cashless world, where almost all transactions or meaningful transactions are going to be digital, you're going to have to employ an intermediary. That intermediary is beholden to their regulator or their supervisor, and that ultimately is a political actor. Right now, to date, we haven't seen too many abuses but you can imagine that political person saying, "Don't process transactions for my political enemies." We've seen this, right?

An example that I like to point out that some folks aren't aware of is, I think it's almost two years ago. This started happening where Governor Cuomo in New York, after terrible school shootings, basically said, he directed the New York Department of Financial Services to basically tell its regulated banks and insurance companies to stop doing business with the NRA. If it didn't do stop doing business with the NRA, they would be investigated and maybe their licenses would be in question.

Now, whatever you may think about the NRA. The NRA is a nonprofit that does what? Uses its First Amendment rights to speech and association in order to defend another constitutional right, a Second Amendment. Look, Governor Cuomo is basically saying, "I'm going to put it out of business because they disagree with me on policy." I'm going to do that by saying you cannot transact in this country because of intermediaries.

Jeremy: We're obviously seeing enormous politicization of all kinds of things these days, and a disregard for constitutional mandates and other things. Yes, the risks are real and they're not theoretical. We're not just talking about China because everyone likes to point to China or an authoritarian government. Those risks certainly are real. Which actually, maybe it's a segue a little bit into, we have this private sector universe. We've got the decentralized non-sovereign digital currencies. We've got private sector issued stablecoins, big arrangements that make those work and scale, but we also have proactive discussion on the government issuing its own digital currency.

I love what China is doing. This is something lots of governments are contemplating and potentially theoretically inserting themselves into the identity and transaction history relationship at the token holder level. In the dialogues around this, it's certainly these privacy questions are really coming into play. On the one hand, people are saying this could get very dystopian and we need to maintain some of the boundaries that we have. I know that's something that you guys at Coin Center have been plugged into and thinking about a bit.

Jerry: Yes. It's funny because something like a central bank digital currency is outside of our remit but obviously, being digital currency experts, we have ideas about it. I'll just tell you what my personal ideas about it are and it's this. Is that there's basically been discussion about two possibilities for a digital dollar or central bank digital currency. One would be account-based, where basically the Fed opens up accounts for individuals. The other is token-based. In my mind, there's all the value that you would want which is in a token-based system.

An account-based digital dollar system is basically a public option for banking, which maybe that's great if you're looking to expand access but the real opportunity in creating a digital currency for the dollar is making it bearer, making it programmable, making it universal. If I'm in Rwanda and I want to engage on a regular contract and payments with somebody in Pakistan, and I want to use the dollar, because the dollar is the best money there is, I really can't open a Fed account, so that excludes me. It's got to be token-based. If it's token-based, to really, again, meet its potential, it's got to be private. If it's not private, again, it doesn't work.

Jeremy: This is something that I'm sure you both have reflections on but the internet has given us peer-to-peer communications, it's given us peer-to-peer data exchange, it's given us permissionless decentralized infrastructure for all of these things. If you would have gone back 30 years ago and said anyone in the world can broadcast privately securely to anyone else for free without any eavesdropping whatever, you'll be like, “What are you out of your mind?” There's so many things that the open Internet has allowed for, which fundamentally just mowed over existing institutional understandings, even policy and regulatory frameworks that existed.

One could argue about some of those maybe have gone too far but nonetheless, the internet has allowed this and token-based stablecoins or whether somehow there's a backing that is official, i.e., it's the reserves are in a central bank or whatever that model is. The internet gives us this ability to transact with anyone, anywhere directly over a public network in this bearer instrument way and programmable, and all these things that you talked about, that's a really big breakthrough for the world. It strikes me that we really ought to defend that and defend the possibilities that come from that, and what that means for people, and what that means for businesses.

Paul: I certainly-- sorry, go ahead.

Jerry: No, go ahead, Paul.

Paul: I was going to say, I certainly think from a public policy perspective, we need to find a way to balance the regulatory compliance with the privacy component because the dollar is the world's de facto currency, but it will not stay that way if there's no way easily for people outside the United States to make use of that. We have been raising the barriers to entry. One of my early jobs I worked in West Africa, the dollar was a de facto currency. People paid their bills in dollars business to business transactions were done in dollars, but they were done in cash.

I can actually remember holding what to me seemed like terrifying amounts of cash but it was really useful because the dollar was such a reliable and stable currency. I think a completely private token-based dollar would be a boon to money launderers and drug dealers, and terrorists, and that's not something I want to see. I also don't want to see it become impossible for individual users to have some personal privacy and for there to be relatively low barriers to entry. One of the things that is being looked at in China and people have talked about is a blended model where up to a certain amount of digital currency, you can have it and it operates like cash.

It is effectively anonymous. There's no barriers to entry and things like that. We have to think about something like that. I think in a way back in the good old days when we traveled internationally, you remember those just a few months ago? I think if you left the country, you moved around with more than a certain amount of money, you had to declare it but nobody bothered you if you had a bit of cash in your wallet. I think we need to figure out how to do that. If we don't, to me, there's big economic policy implications for the loss of the dollar as a global reserve currency.

Then secondly, I think the question that we often turn over in our minds is central bank digital currency, they sound nice, but we keep what's obscured from this conversation all the time, is the fact that almost all Central Bank transactions are already digital. I have not heard, in many cases, a really compelling explanation for why central banks want to build a private blockchain that's not customer accessible, that doesn't support public blockchain transactions. That sounds to me like just another digital interbank payment system.

I'm not clear always on the value proposition of why it should be a blockchain, a DLT, or some kind of other token-based system. That's not been clearly articulated yet. I think that's one of the reasons why you have seen a fair amount of experimentation, but not a specific push in a particular country outside of [unintelligible 00:37:12]

Jeremy: Yes.

Jerry: Digital currency enthusiasts and Bitcoiners for a long time have pointed out HTTP error 402, I think, which is no payments and saying, "Look, we were ready for web native digital payments, but they never happened and Bitcoin or something like it was going to be it, and that hasn't happened, in large part because of Bitcoin's volatility." Stablecoins now have the promise of being that, being say $1 stablecoin being that programmable money that can be the native money of the web but the problem there is you've got lots of different standards, lots of different kinds.

That's what I think if I was making policy for the US and central bank digital currency, what could you imagine what the official dollar coin would be? Now, I think if you gave it all out, and I've done a lot of thinking about this, if you give it all out, I think Paul's right, that the settlement that makes the most sense at the end of the day is going to be having cash-like properties up to a certain amount but above that, have it be traced in some way. The problem is I don't see how that's technically possible with a token-based model.

Paul: I do.

Jeremy: We think about this all the time, obviously, at Circle with USDC. I think in fact, the work that FATF has put forward and this work around travel, it basically defines a way to do this. It basically says, “Look, these are token-based, they're bearer instruments, they can exist on a public blockchain, but if you're a vast or you're an intermediary that's dealing in these, which is now becoming pretty uniform around the world, that if you're dealing in these things, as a business, you have to do this with these rules. You need to keep records for things above $1,000.” That's the compromised position.

They're all the same underlying digital cash instruments, they're all still the same. It's just, if it's above $1,000, you're going to have to exchange a little bit more data, et cetera. They ultimately still allow for individuals to self-custody as well but it's the same thing. I could self-custody $1 million in $100 bills. I have the ability to do that. If I show up at a bank with that, they're going to want a lot of information from me in order to convert that into something that they're holding or investing on my behalf. These cash-like rules and these record-keeping rules, I think they can work and they can apply, and still give that access in West Africa or that programmability, or that base layer of privacy that people are interested in.

Jerry: I totally agree with you that it's doable today, but when CBDC is being designed from scratch, and so what are its-- what abilities will it provide for individuals are being designed from scratch? Will a state designer make it such so that it mimics cash completely? I fear not. They're going to listen to the Ken Rogoff's of the world and say, “No, there's no real legitimate reason why anybody has to have a million dollars.”

Jeremy: This is a bigger question.

Paul: I think this is where the power public blockchains comes in. This gets debated over and over again. I really encourage people. There was an article I don't want to say 15 years ago in Wired Magazine, it was called The Net Heads Versus the Bell Heads. It was about the early origins of the internet and the transition to IP. I'll tell you all the really smart people said that there was no scope for this chaotic unstructured protocol, it's never going to scale, people aren't going to use it. It doesn't have quality of service. I think the market tends to speak very effectively in that respect.

I think if you design a system that doesn't provide for a lot of flexibility, that doesn't support open access, that isn't built on a genuinely open-source model, you won't get a lot of adoption. Certainly, you'll find some people who will adopt it. We could have a whole separate episode on what I think is actually some very farsighted and thoughtful regulation thoughts that are coming out of mainland China with regards to their market. I think particularly in the US and Europe, if it's not open-source, if it's not public domain, if it doesn't run blockchains, people can design whatever they want. I'm not sure it's going to get adopted.

There's hundreds and hundreds of private blockchains and they have like zero traction. They're empty shopping malls.

Jeremy: I'm totally with you on that and I think private sector is racing ahead. The open standards, open-source world is racing ahead. Ultimately, I think that's what's going to get the adoption and traction, and central banks will have supervisory standards, right? Versus like, we're going to go clean room, build this. Well, there's a lot we could continue to talk about here. This has been an excellent conversation today and would love to have you guys back on other topics as well. Thank you so much for joining today.

Paul: Thanks, Jeremy.

Jeremy: Absolutely. Very interesting juxtaposition of issues here, and we're really right now right in the thick of it as stablecoins take off, as policy makers respond and set standards, as the entire industry, both the digital currency industry and traditional financial institutions are figuring out, “Okay, now, how do we do this at scale with mainstream adoption?” These financial privacy issues are at the forefront, and we'll come back to that topic again.

Next week we're going to be having some guests for what I think is going to be a very timely episode of The Money Movement, where we're going to be talking about banking meets stablecoins. Obviously big news was this week where the treasury department issued guidelines for federally chartered banks that said that they are permitted to and in some ways were encouraged that they could custody cryptocurrency and crypto assets.

That's a very significant impact. I think the banking sector, it opens up tremendous opportunity for the banking sector to get more involved with cryptocurrency and with stablecoins in particular. At Circle, we're seeing accelerated interest from neonbanks, from Fintechs, from global banks on adopting digital currency and stablecoins as a payment and settlement medium. We expect this to be a major theme in the coming year.

Joining us next Thursday are three guests; including Oliver von Landsberg-Sadie, the founder and CEO of BCB Group, a European noebank embracing stablecoins as a core payment medium. Julian Hawle, who's the Head of Blockchain Lab Bank Frick, Company AG, similarly, a fast-growing European noebank that has adopted USDC as an alternative to SWIFT for international dollar settlements. Michael Moro, the chief executive officer of Genesis, who is perhaps the largest institutional lending facility in crypto, and whose firm is driving and building significant stablecoin-based credit markets. Some very interesting convergence of what we think of as banking with stablecoin.

Looking forward to next week. Until next time, stay well, stay safe and stay informed. Thank you.

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[00:45:38] [END OF AUDIO]

Paul R Brody
Principle & Global Innovation Leader, Blockchain Technology Ernst & Young
Jerry Brito
Executive Director, Coin Center

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