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?

Jeremy Allaire: [00:16:58] 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 blockchains payments built on Stablecoins have really clearly become the killer app of blockchains with a growth surging. And 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 blockchains payments? And 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. On the flip side, are there boundaries of financial privacy for individuals? Are there is there a social contract, so to speak, around the financial system that sacrifices some degree of privacy for the benefit of society? And and fundamentally, are there risks that privacy, preserving technologies do pose to governments and their broader social mandates? A related issue is, is really around corporate and commercial privacy. Public Blockchains and stablecoins 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? And then more broadly, what are the technology and policy answers to these questions? So 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, and a firm that I know has done a lot of thinking on this topic specifically. And Paul Brody, a principal and global blockchains leader at Ernst and Young and one of the drivers behind the Nightfall project, which aims to enable privacy preserved payment transactions on a theory and while also enabling trusted third party audits of those transactions. Welcome, Jerry and Paul. [00:19:36][158.6]
Jerry Brito: [00:19:38] Thanks for having us. [00:19:38][0.6]
Jeremy Allaire: [00:19:39] Excellent. I'm really excited to have you guys today. Maybe we can just just start a little bit with just quick intros. Maybe. Jerry, just you have 30 seconds on on what you're up to and of any background on the topic. And then we're going to really dove into the topic, of course, to her. [00:19:57][17.7]
Jerry Brito: [00:19:57] Well, thank you, Jeremy, for having me. You know, for those who don't know, I'm executive director of Coin Center. And Coin Center is a independent nonprofit based in D.C. and we're focused on the public policy issues that affect crypto currencies and open blockchains networks. Right. So things like Bitcoin, it's Ethereum Z Cash, Monero and the like. And to date, those public policy issues that we've been focused on, which are many have included securities law, consumer protection law, tax, but 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. And so, 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 sort of need it right to privacy. And cash has been always sort of a main tool for achieving that privacy. And today, crypto is the new cash. And so we've been trying to figure out what what's the right balance there. And so hopefully we'll discuss. But that's that's one of our main focus. [00:21:18][81.3]
Jeremy Allaire: [00:21:20] Excellent. Thank you, Jerry. Paul, quick, quick introduction. [00:21:22][2.7]
Paul Brody: [00:21:24] Sure. So I'm Paul Brody. I'm the global blockchains leader at EY and we're obviously one of the world's biggest sort of accounting, tax and professional services organizations. I need all of our global blockchains teams. And the way that we really look at this is very, very focused on the enterprise side of things. Right. So as a consumer, I very much value and care about my privacy. But a lot of consumers seem pretty comfortable with exchanging some level of privacy for convenience. That's certainly a model that's been established for a while at the enterprise level. It's just a nonstarter. You don't have privacy in your business transactions. You're just not going to adopt almost any form of that kind of digital technology. So for us, you know, being focused on serving enterprises, that was early on one of our focuses. And it particular focus for us is how to do the maximum level of privacy that is fully consistent with the regulatory compliance. Right. You in your introduction, Jeremy, you brought up things like overreach and other topics. And, you know, we don't get to make all of the policy on that, but we have to be very, very focused on helping our clients be regulatory compliance. [00:22:34][70.1]
Jeremy Allaire: [00:22:35] Awesome. So, you know, there's very much, you know, what do individuals as sovereigns have vis-a-vie financial privacy? Obviously, corporations themselves are a nexus of of contracts and bound by a series of laws, but also deeply focused on privacy, as much so certainly as individuals. Maybe we can maybe bring this up a level. And and and 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? [00:23:14][38.6]
Jerry Brito: [00:23:15] So I kind of break it down into two parts, right? One is privacy from the state. Right. And that means basically your Fourth Amendment rights to be free from searches and seizures. Right. 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. So that's one kind of privacy that you have. And it's a privacy that's spelled out in the Constitution. There's a 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. And so that could be, you know, 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. And so my ability to keep certain things to myself and to reveal selectively those things to who I want to. That's true to financial privacy as well. So to me, it's sort of 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 some sort of security without lacking a warrant from the state. [00:24:40][84.4]
Jeremy Allaire: [00:24:41] And you sort of have these, you know, distinct boundaries. Right. There's the boundary of my my own, you know, as you said, personal artifacts, records and sort of a sanctity around that. But but we understand if we're if we're one to interact with the broader financial system, we do give up some privacy. Right. Certainly our identity and, you know, certainly within the broader global landscape, the records of our transactions, we know that those are all, you know, reportable to government subpoena, voted by government without our knowledge and without our consent. [00:25:18][36.9]
Jerry Brito: [00:25:18] And so that's where I think it gets a little tricky, because when you voluntarily disclose something to some counterparty, does that mean you've waived your Fourth Amendment rights? You don't have to go right to that. But that's actually something that Patriot Act, I don't think is as clear cut. Right. And with crypto crypto cryptocurrency, I think it's interesting because the basically good governance authority to require, as he said, without even your knowledge that third parties like banks report information about turn turnover, information is predicated on the fact that you disclose it voluntarily to the bank. So 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. [00:26:10][51.5]
Jeremy Allaire: [00:26:11] Yeah, yeah. So they're going to come to the to the profound issues that exist with with digital currency in particular, you know, digital assets that are on public blockchains in a moment. But, you know, just time back to this this this concept. I mean, the way I've articulated it is that, you know, 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, you know, money records or database records called money are are required by law depending on where you are in the world. 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 front line of policing transactions. And 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. And so I don't actually think most 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. And that is the structure that we have today. You can obviously take it to the next level, which is, you know, take a country like China where, you know, the the electronic money systems. Right. The government can dove right into the records straight away. They can get. They can access them. They don't need to ask. They don't need a subpoena. They can just dove right in and take a look at whatever they want. So it's it's even less privacy there. But that is sort of the status quo in the financial system today. Which leads us to. I think, you know, this world of cryptocurrency. And I want to focus most of our discussion today, not on the Bitcoins and Moneros and privacy focused, you know, non sovereign crypto currencies. Those have those are very one far end of the spectrum. But really zoning in on, you know, this 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 want to increasingly want to use those in commerce and in financial activities. And, you know, they do behave like, as you said, digital cash. And they are they act as kind of better instruments on the public Internet. And and it's possible for a person to kind of self custody these things. And that raises a lot of issues. And so I'd love to hear you both talk a little bit about, you know, from a you know, from a policy maker perspective or or or from a, you know, kind of corporate accountability perspective, maybe both of those, you know, what issues come to the fore when you have a like a digital dollar or stablecoins that's used on the public Internet. [00:29:20][188.4]
Paul Brody: [00:29:22] So from my point of view, right. That digital dollar, a digital dollar on a public blockchains is essential for public blockchains to become enterprise usable. And that's not because, you know, crypto currencies aren't particularly useful, but because enterprises are inherently risk averse. Right. If you know the model of how companies interact, it's basically I have money. You have stuff. And we're going to exchange those things. That system. Terms and conditions. Right. And 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. That it causes risk. That's foreign exchange risk. Companies hate risk. Unnecessary risk. So enterprises want to have they want to stay in the same currency from end to end. So 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 of productivity developing on public blockchains especially the work we're doing around zero knowledge proves that they have a potential to do two things. Number one, they make privacy practical. Right. 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. So that's that's making it useful, because if I have it in exchange, not only do on privacy, but with who I transacting and how much I'm paying, but also at the terms and conditions of my deal, also need to remain private. The second thing that's exciting to me is that the potential to change the way we interact with regulatory compliance in a way that's both consistent with the rules and potentially better for the first time with Zero Knowledge Proofs we have this ability 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. And once you've disclosed the data, it's now flowing freely across a bunch of different jurisdictions and rules. And so what I like about the potential with Zero Knowledge Proofs is I can prove to you something is true. Right. I can give you certain types of proof that you need them. Or a third party can provide proof. But the data is not out there, right. My data is not flowing freely. And 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. And that has a there 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. [00:32:12][170.4]
Jeremy Allaire: [00:32:13] And this is an I think when when a lot of people who operate in the existing, say, financial system or in other recordkeeping situations or situations where you're having to certify yourself in some way. Right. We've just all become so accustomed to the idea that, like, now you have to give your records and all of this information, all this personally identifiable information. And it's like we're spraying it all over the Internet. It's creating a lot of issues. And I think when people hear crypto, they're generally like crypto bad, like, you know, there's this kind of like this. [00:32:48][34.6]
Jeremy Allaire: [00:32:48] Unfortunately, this this this reaction that somehow if you're doing something with crypto or encryption, you're hiding something which is really, really unfortunate because, you know, you know, when 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 we want to speed that, make that better. But like, we want to do that without having all these risks of data breaches or intrusions and and Zero Knowledge Proofs, which for for the audience that are as unfamiliar as you said, is just using mathematical proofs to demonstrate that something is true without sharing the underlying data. And that is it's like it's a major, major breakthrough. And this is the crypto is is not just good. It's great. [00:33:35][47.3]
Jeremy Allaire: [00:33:36] It actually is like critical to moving forward in the world of the digital economy and the like. [00:33:43][7.0]
Paul Brody: [00:33:44] And I, I believe that Zero Knowledge Proofs within 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. Why do we 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 more privacy breaches. It is not more data isn't always better. And we if we want to steward our clients data responsibly, we have to start thinking about less data. [00:34:15][31.3]
Jeremy Allaire: [00:34:17] Yeah, totally. Jerry, just you know, I know you talked. To policymakers in D.C., a lot you talk to, you know, agencies and staffers and, you know, you have a lot of awareness on these issues. When you when you you know, there's these hearings and you participate in quite a few hearings as well. There's always this question of, you know, these public blockchains, digital currencies, you know, even the stablecoins that are out today, like USDC and others, you know, there's still this sort of question of like, you know, you know, from a policy perspective, does this escape the anti money laundering rules? [00:35:00][43.3]
Jeremy Allaire: [00:35:00] 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 what do you and what do you think that that the current thinking is on that? [00:35:17][17.4]
Jerry Brito: [00:35:19] So I think that there is there's a spectrum of thinking on this. Right. And it sort of 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 of higher, you go up on a chain all the way up to cabinet, president, Congress, you have a different view. And I would say that a very high level. There is misunderstanding. Oftentimes there is skepticism, but it's it's just a matter of education at a lower level, at a more direct contact with the technology level. There's a great deal of understanding. And there's also an understanding of what's possible and what's not possible. And that, I think, leads to good policy. Right. Once you understand the parameters within which you have to work with what you can't expect to be revealed to you, which can't, I think that leads to good policy. So right now, I would say that we're at a good spot when it comes to, say, Stablecoins, because the law is pretty clear. Right. So fence on issued guidance in May of last year. And that guidance was very clear. And so if you're a stablecoins issuer, then, you know, you're a financial institution that needs to be registered with Bentson. And you have to know your customers. And you have to follow suspicious activity reports. And have any money laundering program, et cetera. I think where there may be sort of questions that come up is, well, you have to know your customer and clearly your customers. Anybody who comes to you to exchange a dollar for a Stablecoins or who comes to you with a Stablecoins to exchange it for a dollar. Clearly your customer. But in between you've got lots of different people who might come to possess that stablecoins the same way that a dollar bill. The bank knows who you are. And the bank knows who comes to it with a dollar. Right. But in between, that dollar could pass lots of hands. Dollar bills, we really can't. There's nothing we can do. We can't really track those. But on a public blockchains, you can. So the question is, would at some point regulators come to the conclusion that a stablecoins issuers customers are everybody, whoever possesses that coin? [00:37:54][155.3]
Jerry Brito: [00:37:54] I think that's problematic for a whole host. Yeah. I think that's one thing. And the other thing I would say, I totally agree with Paul that we if we want to protect consumers and protect our own privacy, we want to limit where this information goes and where it's information information's reported. And so things like zero knowledge proofs are great because you can prove it. You're compliant without showing sharing the info. But I see financial intelligence goods like Vinson increasingly think of themselves as big data operations. Yeah. Right. They see themselves as the people in government who are able to spot trends and spot things that need to be further investigated. And they can't do it unless they have a big dataset. And so when you go to them, hey, guys, great news we can prove to you are complying with us sharing the data. I wonder how they'll react to that. [00:38:50][55.3]
Jeremy Allaire: [00:38:50] Yeah, I mean, it's it's it's fascinating. I mean, there's. Do we have the Financial Action Task Force guidelines on the record keeping obligations of virtual assets service providers, whether whether you're a cryptocurrency exchange or stablecoins issue or any of the above. And it's sort of taking the rules that fence and had prior established around, you know. You know, your customers customer and follow that that money as it moves around the financial system and sort of superimposing that on top of digital currency. And, you know, the industry is obviously doing a lot to 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 escrowed access to data and other things that could be done with crypto. But, you know, 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've got to do that. And it you know, from my perspective, this could lead to actually a mass of a mass proliferation of PII into more places on the Internet that create more honey pots for hackers. And so, you know, the digitalization of PII and its and its transmission. And this is one of the things we've got to be able to fix. And things like zero knowledge proofs can do that. But we we need we probably need amendments to rules or adjustments to be able to to be able to get there. But it's interesting. I mean, what what are you know, from your perspective, again, from both, you know, what are the risks of overreach? And we don't need to go Orwellian here. I mean, we live in a obviously a very complex world right now that is fast moving, a lot of different vectors right now and and challenging in many ways. And so it's 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 happen here? What what could go really badly for individuals and businesses? [00:41:12][141.6]
Paul Brody: [00:41:13] From a business perspective. Right. The biggest risk of regulatory overreach set no particular US law issues or other country law issues, the risks that exist. Overall, it's a historically, whether it's regulators or large enterprises. Everybody wants control. And the problem with having control and this is what made people initially so uncomfortable about the Internet and what makes them uncomfortable about public blockchains is the lack of control. But what we found last year, what we find over and over again is if one party controls the network, the other parties don't want to join. So the biggest risks of kind of overreach is that people decided they don't want to adopt new technology because it presents too much of a substantial risk. And I'll give you a very good example. One of the main ways that manufacturing companies connect to each other is domestic and called EDI Electronic Data Interchange. [00:42:04][50.1]
Paul Brody: [00:42:05] It's literally as old as I am, which is obviously in my early 20s. But it actually dates in the 1970s and it's a point to point messaging system and it doesn't work really well. If you think about the fact that large supply to business operations actually involve dozens or hundreds of companies across many different countries. Right. This is basically think I'll only allow you to send a message from one person to another. You're playing a game of telephone and inevitably that message gets delayed and you get to Kabul and cause a spike in foul ups. Right. 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 stream up supply chains, improving the flow of data, reducing inventory, improving working capital, speeding up payments. But they 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. So the bottom line is, if overreach exists, people will not, a company especially will not adopt the new technology if they believe their business security, their business privacy, their strategic value is at risk. [00:43:18][73.0]
Jeremy Allaire: [00:43:18] And that's a good argument for an enterprise or public chains as the right infrastructure because it's not aligned. Right. It's it's not it's not aligned. [00:43:28][10.1]
Paul Brody: [00:43:29] It's not controlled. You know, we see very force 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. Right. It's got to be built on open standards. Right. That's the kind of stuff that that that will get adopted. And I think that, you know, that's the big downside. We're going to 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. [00:44:00][31.4]
Jeremy Allaire: [00:44:01] Yeah. [00:44:01][0.0]
Jerry Brito: [00:44:02] So what I worry about with government overreach is politicization of financial intermediaries. Right. And what I mean by that is this in an increasingly cashless world, right. Where almost all transactions are meaningful, transactions are going to be digital. You're going to have to employ an intermediary. And that intermediary is sort of beholden to their regulators or their supervisor. And that ultimately is a political actor. And, you know, right now to date, you know, we haven't seen too many abuses. But you can imagine that political person saying don't process transactions for my political enemies. And we've seen this. Right. So an example that I like to point out some folks aren't aware of is because almost two years ago this started happening where Governor Cuomo in New York, after a terrible, terrible school shootings, basically said he directed the New York Department Financial Services to basically tell its regulated banks and insurance companies to stop doing business with the NRA. Then it it didn't do stop doing business with the NRA. They would be investigated and maybe their licenses would be in question. Now, you know, whatever you may think about the NRA, the NRA is a nonprofit that does what it uses, its First Amendment rights to speech and association in order to defend another Consitutional. Right, a Second Amendment. And look, Governor Cuomo is basically saying, I'm going to put it out of business because they disagree with me on policy. And I'm going to do that by saying you cannot transact in this country because of intermediaries. [00:46:01][118.2]
Jeremy Allaire: [00:46:02] We're obviously seeing enormous politicization of all kinds of things these days and a disregard for constitutional mandates. The thing, so it's. Yeah. The risks are real and they're and they're not theoretical. And we're not just talking about China because everyone likes to watch China's. Or an authoritarian government. Those risks certainly are real, which actually maybe it's a Segway a little bit into. We have this private sector universe. We've got the decentralized, non sovereign digital currencies. We've got, you know, private private sector issued stablecoins going to, you know, big arrangements that kind of make those work and scale. But we also have, you know, proactive discussion on the government issuing its own digital currency. Although what China is doing and this is something, you know, lots of governments are contemplating and, you know, potentially, you know, theoretically inserting themselves into the identity and transaction history relationship at the at the token holder level. And, you know, it is in the dialogs around this. It's certainly, you know, these privacy questions are really coming into play. And on the one hand, you are saying this, this could get very dystopian and we need to maintain some of the boundaries that we have. But I know that's something that that you guys, Coin Center have been plugged into and thinking about a bit. [00:47:40][98.1]
Jerry Brito: [00:47:41] Yeah. So it's funny because something like a central bank, digital currency is kind of outside of our agreement. But obviously being digital currency experts, we we have ideas about it. So I 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. Right. In my mind, there's all the value that you would want would 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 if you're looking to expand access. But the real opportunity in creating a digital currency for the dollar is making it barer, making it programable. Right. Making making it universal. And so if I'm in Rwanda and I want to engage on a regular contract and payment with somebody in Pakistan. Right. And I want to use the dollar because the dollar is the best money there is. I really can't open a Fed account. Right. So that excludes me. So it's got to be a token based. And 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. [00:49:20][98.2]
Jeremy Allaire: [00:49:20] Yeah. Yeah. I mean, this is something that I'm sure you both have had reflections on. But, you know, the Internet has given us, you know, peer to peer communications. It's given us, you know, peer to peer data exchange. It's given us permission, this decentralized infrastructure for all of these things. And, you know, if you would have gone back 30 years ago and said, you know, anyone in the world can kind of, you know, broadcast privately, securely to anyone else, you know, for free without any eavesdropping or whatever, you know, be like, what are you out of your mind? You know, there's so many things that the open Internet has allowed for which, you know, fundamentally just kind of 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, you know, the Internet has allowed this and, you know, token based stablecoins or what or whether they're there somehow there is a, you know, a backing that is official, i.e., you 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 that's and programable and all these things that you talked about. That's like a really big breakthrough for the world. And, you know, it strikes me that, you know, we really ought to defend that and and defend the possibilities that come from that. And what that means for people and what that means for for businesses. [00:51:09][108.4]
Paul Brody: [00:51:10] And I firmly cite. Well, I wouldn't 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 right. It has become we have been raising the barriers to entry. I one of my early jobs, I worked in West Africa. Right. 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. Right. And I can actually remember holding at what to me it seemed like terrifying amounts of cash, but it was really useful because a dollar was such a reliable and stable currency. I think you do a completely private token based dollar would be a boon to money money launderers and drug dealers and terrorists. And that's not something I want to see. But I also don't want to see it become impossible for individual users to add some personal privacy and for there to be relatively low barriers to entry. [00:52:20][70.0]
Paul Brody: [00:52:21] One of the things that is being looked at in China and people have talked about is a kind of a blended model where up to a certain amount of digital currency, you can have it and it operates like cash, effectively anonymous. There's no kind of barrier to entry and things like that. I think 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. [00:52:46][24.8]
Paul Brody: [00:52:47] Right. I think if you left the country, you moved around with more than a certain amount of money, you had to declare it. But, you know, nobody bothered you if you had a bit of cash in your wallet. Right. And I think we need to figure out how to do that. But if we don't, to me, there's a big economic policy implications for the loss of the dollar as a global global reserve currency. And then secondly, I think that the question that we often turn over in our minds is, you know, central bank to digital currency. They sound nice, but we keep what's obscured in this conversation all the time. It's fact that almost all central bank transactions are already digital. And I have not heard in many cases, a really compelling explanation for why central banks want to build a private blockchains that's not cut from accessible. That doesn't support public blockchains transactions. That sounds to me like just another digital interbank payment system. And 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. And that's not been clearly articulated yet. And 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 you. [00:54:00][73.0]
Jerry Brito: [00:54:01] Yeah. You know, digital currency enthusiast and bitcoins for a long time have pointed out each CTP error, 402 I think, which is no payments. It's saying, look, you know, we we we we're ready for, you know, web native digital payments. But that never happened in Bitcoin or something like it was gonna be it. And that hasn't happened in large part because Bitcoin volatility. So stablecoins now have the promise of being that being, say, a dollar stablecoins being that programable money that can be the native money of the Web. But the problem here is you've got lots of different standards, lots of different kinds. That's what I think. You know, if I was making policy for the U.S. and central bank digital currency, what could you imagine what a door official dollar coin would be? Now, I think if you game it all out and I've done a lot of thinking about it, if you give it all out, I think Paul is right to do that. That's 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 it is technically possible with a token based model. [00:55:19][77.5]
Jeremy Allaire: [00:55:20] This idea that we think about this all the time, obviously at Circle with with USDC. And I think, you know, in fact, that the work that the that Fatta has put forward and this work around travel, it basically defines a way to do this. I mean, it basically says, look, these are token based that are bare instruments. They can exist on a public blockchains. But if if if you're a vast for euro, an intermediary that's dealing in these, which is, you know, 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 just need to keep records for things above a thousand dollars. And and that's that's sort of the that's sort of the compromise position. They're all the same underlying digital cash instruments. They're all still the same. It's just if it's above a thousand dollars, you're gonna have to exchange a little bit more data, et cetera. And they ultimately still allow for individuals to self custody as well. But it's the same kind of thing I like. I can self custody, you know, a million dollars in hundred dollar bills. Like I have the ability to do that. But if I show up at a bank with that, they're gonna want a lot of information from me in order to convert that into something that they're they're holding or investing on my behalf. And so, you know, these sort of cash like rules and these recordkeeping rules, I think they can work and they can apply and and still give that access in West Africa or that programmability or that, you know, base layer of privacy that that people are interested in. [00:57:04][103.5]
Jerry Brito: [00:57:06] I totally agree with you. I just I totally agree that it's doable today. But when the CBDC is being designed from scratch and so what are it's abilities will provide for it for individuals or be designed from scratch? Will a designer. Well, as a state designer make it such so that it mimics cash completely? And, you know, I fear not. You're going to listen to the Ken Rogoff of the world and say, no, there's no real legitimate reason why anybody has to have a million dollars. [00:57:44][38.6]
Paul Brody: [00:57:45] A bigger question, but I think this is this is where the power of public blockchains comes in. And I get to debate it over and over again. And I really encourage people that there was an article to say fifteen years ago on Wired magazine was called The Neck Head versus the Bell Head. And it was about the early origins of the Internet and it transitioned to IP. And I'll tell you, all the really smart people said that, you know, there was no scope for this this chaotic, unstructured Internet protocol. It's never gonna scale. People aren't going to use it. It doesn't have quality of service. All right. 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. You know, certainly you'll you'll find some people who will adopt it. And I could have all we could have a whole separate episode on what I think is actually some very far sighted and thoughtful regulation thoughts that are coming out of mainland China with regard to their market. But I think, you know, particularly in the US and Europe, if it's not open source, if it's not public domain, if it doesn't run on public blockchains, you know, people can design whatever they want. I'm not sure it's going to get adopted. Right. Hundreds and hundreds of private blockchains and they have like zero traction. They're not like empty shopping malls. [00:59:03][78.4]
Jeremy Allaire: [00:59:04] I'm totally with you on that. And I think, you know, kind of private sector is racing ahead. The open standards, open source world is racing ahead. And and ultimately, I think that's what that's what's going to get the adoption and traction. And central banks will have supervisory standards. Right? They'll versus like we're going to go clean room, build as well. There's a lot we could continue to talk about here. This has been an excellent conversation today. And we'd love to have you guys back on other topics as well. But thank you so much for joining us today. [00:59:39][34.8]
Paul Brody: [00:59:40] Thanks. [00:59:40][0.0]
Jeremy Allaire: [00:59:42] Absolutely. [00:59:42][0.0]
Jeremy Allaire: [00:59:43] So a very interesting juxtaposition of issues here and where we're really right now, right in the thick of it, as Stablecoins take off, as policymakers respond and set standards as the entire industry of the digital currency industry and traditional financial institutions are figuring out, OK. Now, how do we do this at scale with mainstream adoption of these these financial privacy issues are are are at the forefront. And we'll come back to that topic again. So next week, we're gonna be having some guests for what I think is going to be a very timely episode of The Money Movement, where we're gonna be talking about banking meets Stablecoins. And obviously big news was this week where the Treasury Department issued guidelines for federally chartered banks that said that they are permitted to and and in some ways we're encouraged that they could custody cryptocurrency and crypto assets. That's a very significant impact. And 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. So, you know, at Circle, we're seeing accelerated interest from NEO banks, from fintech, from global banks on adopting digital currency and Stablecoins as a payment and settlement medium. And we expect this to be a major theme in the coming year. So joining us next Thursday are three guests, including Oliver von Landsberg-Sadie, the founder and CEO of BCB Group, a European neo bank embracing Stablecoins as a core payment medium. Julian Hawle, who's the head of Blockchains lab at Bank Frick and Company A.G. similarly, a fast growing European neo bank that has adopted USDC as an alternative to SWIFT for international dollar settlements. And 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 Stablecoins based credit markets. So some very interesting kind of convergence of what we think of as banking with Stablecoins. So looking forward to next week and until next time, stay well. Stay safe. Stay informed. Thank you. [00:59:43][0.0]

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