The Future of Money and its Diversity

Seamus: [00:02:13] You have quite a long pedigree in the space. How long has the sector been around, and what’s the evolution of the business?

 

Kalin: SICPA started in Lausanne in 1927. We’re almost a centennial company by now. we’ve gone through many decades and many S-curves in technology, shaping, mastering and then serving the public on things that secure their livelihoods, but also their trust in what they share and what they have in common.

If you look at the bank notes, very few people take time to examine it, but it’s one of the most magnificent inventions of mankind, at least in the last couple of hundred years. Because on that little surface, you have so much technology packed in to make it trustworthy. It’s really impressive. Once you cross the line and understand a little bit more, it’s truly impressive.

 

Seamus: People tend to forget that paper money itself is an innovative technology. We may see it as a growth industry now, which has no limits. Well, it’s just probably good for your business as well!

One of the topics is digital money. I think that’s always a slightly ambiguous, because I have a Revolut account as most people do. For me, I hardly ever have post COVID any cash in my pocket. What for you is digital money, and is digital money the way you look at it, something more radical than just electronic transfers?

 

Kalin: There are many ways to look at this; there’s quite a few angles. Maybe first things first, digital money has been around for a long time. I think a good four or five decades. Now, large value payment systems, real-time gross settlement systems, pretty much everything on the backend has been digital. In the latest of decades, we’ve seen also things like high-frequency trading on the floor of stock exchanges, which by definition are digital.

What’s really interesting is that dematerialized money with various degrees of obstruction has been around also for decades. Think about checks, cards, plastic in general. But also wearables and the old things, convenience that we’ve seen in the last couple of years.

What’s really interesting about digital money when we speak about the central bank domain, is that it’s sort of a meeting place or convergence of universal access, general availability, digital or dematerialized. There is an interesting fork in the road where you have to pick your choice. Do you go public or do you go private? Do you do central bank money or private bank money? Do you do digital cash or Diem, do you do Swiss francs or login with Facebook?

It’s quite an interesting space. I think the easiest way to describe the landscape of digital money these days is to speak about a minefield filled with rabbit holes – each of these offering the opportunity to get lost in opportunities.

 

Seamus: Proverbial rabbit hole. We’re very familiar with that in the crypto space. From what you’re saying is, this definition of digital money, is this the next S-curve of evolution of money then? You mentioned S-curves earlier.

 

Kalin: The way we frame that conversation is very much around substrates. If you look at money or bank notes, they’ve been around for quite a while. We’ve seen paper, we’ve seen cotton, we’ve seen polymer of late, we also see hybrid bank notes. Digital is just the next substrate for money to exist in, strictly speaking about central bank money. Of course, we’ll see a flurry of others that will probably never have a material expression or a way for people to touch it with their hands.

But when we speak about central bank digital currency, the interesting part is that technology will serve the public good. All the innovation we’re seeing on the private side will ultimately funnel and trickle down to pretty much every transfer or value exchange that we see in the future.

To your question, yes, it is very much the next S-curve when we speak about money. But we have to sort of temper our anticipation, because the world of money is something that is quite slow, and usually it takes decades if not centuries to form or shape that new reality.

 

Who will issue digital money? Is the right way to frame cryptocurrency vs CBDCs as private vs public good money?

Seamus: [00:06:40] Well, in that context, the speed we’ve seen in terms of the cryptocurrency market, how would you frame let’s say the cryptocurrency versus CBDC? Is this just private versus public good money? What’s your view on that?

 

Kalin: I think that to a certain extent, yes, you can frame it as public versus private. At the same time, there is no clear owner per se of the Bitcoin network or the Bitcoin asset class. Maybe there is a nuance here to speak about public which have a clear lineage coming from the central bank. You have private, which is a huge variety of innovation coming from all sorts of angles: stock exchanges, the private banks, but also FinTech.

Then you have this new emerging class, which is completely novel as to the monetary system we operate in, and therefore presents new opportunities that are to be explored.

 

Seamus: It’s interesting that you mentioned the new opportunities, because I think just yesterday the head of the central bank of Denmark mentioned that cryptocurrencies are a speculative fad that will pass and central banks don’t need to pay attention to it. Is that your view as well? Or is there something, as you said, to be learned in this space?

 

Kalin: Let me preface that answer by saying this is my own opinion. I do believe that Bitcoin is a lot more than a passing fad. Speaking about Bitcoin, maybe we should make a little bit of a distinction. There are two components to it: the Bitcoin network, and then the Bitcoin asset class. I believe that the Bitcoin asset class has the possibility to replace basically all commodities that are out there today, that we extract from earth. That will no longer be the case 20 to 30 years from now.

If you think of oil, for example, once this is no longer a commodity that is in the market, I think we will truly see the rise of digital gold or asset classes that are not owned or controlled by a single sovereign, emerge and fill that space, offering an asset class therefore that is trustless and transcending single borders.

 

Seamus: High-quality global bearer asset.

 

Kalin: I feel like Bitcoin is often used in conversation, but not all the nuances unpacked. Bitcoin can be a better asset. But it can also not be one. We’ve seen the rise of companies like Chainalysis and multiple agencies developing that internal muscle that allows for the public ledger to be analyzed, for transactions to be made transparent or traced. We’ve seen also initiatives coming from financial action task force, the G20 countries, that aim to basically make it transparent or to control the custody wallets in a way that will assign ownership to whoever controls the private keys.

In a certain way, it cannot offer this functionality, but in certain scenarios we can totally see how this can work. If you have a fixed value wallet and you have a paper wallet on the back of that, where you transact with paper wallets versus transactions on ledger, this can be achieved.

The answer to Bitcoin is bearer asset, is both yes and no. It can be in certain scenarios.

 

Seamus: [00:10:14] Maybe just going to a slightly different angle. You mentioned earlier about identity, how do you see identity tying to this digital money space?

 

Kalin: Maybe the best way to frame it is to say that currency has an identity problem. Let me unpack this a little bit. As we see currencies available to the general public dematerialize, there is a point in time where the boundaries between payments and currency, or currency at rest and currency at move basically blur, which means that increasingly we should have confidence as to how compliance is exercised. We see that, as I mentioned, the G20 countries are quite prescriptive and have issued multiple guidance (the travel rule is something which is quite known in our domain) as to identifying the beneficial parties at the end of each transaction.

I you think of central bank money in the future or payments at large in the future, there is an identity component which has to be handled. It has to be handled also in the context of things like GDPR or the California Act, where personally identifiable information should be handled with care.

I think also if we look into the not too distant future, there is certainly a merge or convergence of identity and currency, and it has to do with multiple dynamics in the background on both the issuance but also the actual usage of currency.

I would venture to say, it’s an important part of currency identity, at least the future we’re looking into.

 

What is the right trade-off between full central bank oversight and 100% anonymous transactions?

Seamus: [00:12:01] 100% agree. With that regulatory oversight that you mentioned, or basically the push for regulatory oversight, how do you see the trade off or the balance between the anonymity we have with cash right now and the movement into what we call the CBDC? What could potentially be at an extreme, something like the DCEP project in China, which was to many degrees more about surveillance and control? How does that get balanced?

 

Kalin: That’s a whole conversation on its own. I think that one of the things that makes me proudest to work with the team that I work in and also the larger community around me, is we were never afraid to tackle or to challenge the foundational nature of things.

To your question, I think very often the conversation is framed around either/or, or exclusivity. You should pick one. You should either feel safe and then forego your privacy, or you should have privacy but then bad things can happen. One of the things we did very early on in the journey around CBDC was to completely reframe the questions we’re asking. We said it shouldn’t be either/or. You should have the privacy, but then you should also have the compliance. You should be comfortable that you are not tracked by 165 companies or however they are listed in the DCEP or Ali Pay in terms of service. However, if you are a malicious actor, you should fully expect that you will be brought to justice and you will not be able to impact society.

Many of these things we took on early in the journey. Things like privacy and compliance, for us it’s not either/or. We firmly believe that these are things which are mutually reinforcing and they form a flywheel of sorts. All the things that come to mind offline and online is another one of those sovereignty of the state, sovereignty of the monetary policy, while still retaining the global nature of trade, for example interoperability is another that comes to mind.

But very early on, we literally allowed ourselves to have a clean slate and then start from scratch. Imagine what digital currencies should look like, if we were to embark on that journey day one. We didn’t try to take the easy way; put everything on the blockchain and then just market it that way, but rather try to rethink the entire ecosystem, make sure that central bank retains the control of the monetary policy and stays within mandate, financial stability, and trust in the currency. Whereas also allow for everything else to exist when it comes to the private sector, deposit taking, credit, interchanges, convenience, wearables, you name it.

I’m probably taking a detour, but this is one area where I feel like Metaco and SICPA are very much close in mindset. The engineering approach of thinking of things as ecosystems, where it is not about us building a walled garden that we control and hold the keys to, as opposed to being a good actor and a force for good within an ecosystem.

Very often people tend to speak about cash as something that is fading away, but before doing that we took a good look at what cash and bank notes represent. The reality is, it’s very much an ecosystem on its own.

We’re moving into this new direction by challenging ourselves, but also challenging the conversation and reframing things around inclusive questions and inclusive answers. The answer to your question is: we believe privacy and compliance can be achieved in each transaction.

 

What is the role of commercial banks when everyone has a bank account at the central bank?

Seamus: [00:15:52] I appreciate it. The nuance of the view is important. It’s very good to hear that. I often find it funny when we see different central banks, whether it’s China or others, saying that the primary use is elicit activity; whereas the tools are much more effective in this space if you can get the balance right in terms of tracking and privacy. You have a lot more transparency than you do in cash.

As we move to a CBDC world, we have central bank digital currencies, what’s the relevance of commercial banks if everybody has an account with a central bank? Or is that not the model that you think is most likely to evolve? Is it a wholesale or retail model? How do you think this looks?

 

Kalin: I think that there is no future, or at least no foreseeable future in our lifetimes, where we will see people holding accounts in the central banks. It has to do with the current monetary system.

First of all, we exist in a world of fractional reserve. Second of all, we have very clear separation of concerns when it comes to the commercial space and the central bank space. This is a world where central banks do not handle mortgages or credit creation. This is clearly the pre-vis of the commercial sector.

Essentially what you speak of when you mentioned accounts in the central bank is flat banking. Flat banking is not something that can be a rip-and-replace exercise in a span of a lifetime. The current world finance is so interconnected and so interdependent, that this is not a real possibility. You mentioned earlier DCEP; China is that pioneer ahead of everyone else that gets pointed at and critiqued. But China took the cautious approach where they have a two-tiered system. The central bank essentially operates with a small group of tier one banks, and then cascading down they make everything around currency holding or currency in a traditional sense, and also electronic payments, possible. But the central bank is essentially removed or two layers apart from citizens.

Very often in conversation where this pops up, I pull out this example and say, “Okay, can you ever imagine central bank having a call center, answering calls about: I forgot my pin code. Or, I’m actually late on that payment, can you maybe postpone it two weeks into the future?”

The world we know today is very much one with very clear separation of concerns. Every central bank that has ventured into CBDC has basically agreed on key principles, and one of these principles is: do no harm. Central banks have no intention, at least from my observations, to either cross the line into deposits (which is a funding line for commercial banks), or to offer products which may be competing. If you look at central bank money, it’s a very high quality asset. It’s not by chance that people flock to cash and they withdraw money or run on the bank. Happens and people exit into central bank money, because it is infinitely redeemable and also a high quality asset.

It’s not a competition. I think the future is very much inclusive. Commercial banks will have to find new roles. It’s not only limited to commercial banks. If you look at payment operators, the last one was I think 10 days ago or so, where you had Swift imagine their future or challenged themselves to imagine the future. Even though they are the messaging backbone of the world of finance, they start speaking of things like identity provision.

I think that there is quite a lot of understanding to be had, quite a lot of conversations to be had, before this whole opportunity that is ahead of us (the new S-curve) is truly materialized and people find their new ways.

What is really important in this transition period, I believe, is for these conversations to take place and for people to ask themselves: if this is a reality and we have a future where the central bank provides wholesale money to stock exchanges and financial institutions, what would happen to all the actors there? How would the stock exchange function? Well, they will have instant settlement of all trades in central bank money. What does that mean for a commercial bank? Well, it depends. What does that mean for a retail bank? Again, it depends. Do they have retail CBDC; yes or no.

The role of the central bank is evolving. I see it as an opportunity for them to step up and have a much more dominant role in securing the public goods. ‘Dominant role’ means a leading role, not so much oversight or, as you alluded in an earlier question, possibly surveillance. I don’t think that anybody reasonably expects that or works toward that.

 

Seamus: [00:20:55] That’s a pretty comprehensive answer, thank you. How do you see things like stable coins fitting into that framework? We’ve seen stable coins rise from relatively small market cap to almost a hundred billion now, in terms of the tethers of the world, USD, et cetera. Still small in relative terms, but growing very rapidly. How do you see that world with central bank issued digital currencies and these private initiatives?

 

Kalin: I think in the future, we’ll see pretty much everyone and everything issue value or their own currency. Whether this currency is universally accepted or it’s just loyalty points for the local bowling alley is to be seen.

Speaking about stable coins, I still firmly believe that they are disproportionately under leveraged and therefore high risk assets. It has to do with simple mechanics. Right now, federally insured deposits only go to a hundred thousand or so, depending on which territory you reside in. Therefore, to have a hundred billion on a bank account that is insured to a hundred thousand, might not be exactly the smartest move.

What is really interesting is that professor Catalini from the Diem initiative recently went on record and threw quite a lot of people off, in saying that once there is a digital dollar issued by the federal reserve system Diem will no longer use a stable coin as a means of exchange or fueling the transactions inside the Diem network. To be honest, there’s quite good reasons to do so. If there is something which is a passing fad, I think that it’s stable coins. Once there is central bank issued digital currency, that is infinitely redeemable and the highest quality of assets (speaking about both liquidity and the quality of the packing), there will be no reason for stable coins to exist. You will have instant settlement, you will have the liquidity provider of last resort backing that asset.

It makes perfect sense for fintechs and other companies, including large ones like stock exchanges, to adopt CBDC. This probably built a little bit on the earlier question where all actors, tier one and all the way to the mom and pop shop, will benefit from the issuance of central bank digital currency.

 

Seamus: I hadn’t seen that Diem comment, that is indeed very interesting. Speaking of Diem, how do you look at Diem? My perception is this is, when they announced what was Libra (now Diem), it really woke up the central banking community to this whole notion of digital money. How do you see that evolving? It’s not live yet from what I can tell, but what’s your view on Diem?

 

Kalin: Diem I think will be a case study in Harvard Business School here in five years or sooner. I think it is a masterfully played plan. There are very smart people behind it, obviously.

What is really interesting, my personal observation – I insist on that – my personal observation is that we are seeing something very similar to what happened in the ‘60s and ‘70s, where the sugar industry stirred up a number of reports pointing the finger on obesity and assigning this to fat. Where you had this explosion of new products which were low fat, zero fat, and God knows what; but then the obesity problem continued to rise. It is only five decades later we find out that it wasn’t the fat, it was the sugar. Now the counter trend begins, where everything is zero sugar.

I think media, whether on their own or independently, quickly pointed at Libra as a challenger to the state of money issuance or central banks. They basically had this as the clash of the titans of sorts, where they described Libra as this threat on the sovereignty. Reality is, this is one of the monopolies of the state. It will probably never be let go of.

We’ve seen that over time Diem has scaled down from a global synthetic currency, as Mark Carney described it, or replacement of the SDR, to a single territory stable coin. Now they’re even saying, “Well, if there is a digital dollar we’ll just adopt it and use it.”

This extends a little bit to your question, who was the real counterparty of Diem, if there is one? My answer to this one is: I believe that the payment service providers and all intermediaries that basically charge a fee at the point of sale are the counterparties. They are the people who should be most concerned by the arrival of a FinTech that will have near zero cost or super low cost convenience, and then day one 2.4 or 2.7 billion people on their accounts.

We can have this conversation back and forth, what’s really interesting here is asking the second order question, the third order question, which is: what if Facebook achieved that? What if Facebook financial achieved that vision.

Here we are coming to, again, the earlier part of the conversation around privacy, where the interesting question is: if you cross the social graph with the transaction graph, who is the surveyor now? Is it China with the DCEP, or is it this private company that suddenly has pre-vis or peek into people’s lives beyond any imaginable impact?

This is again, coming back to re-imagining the role of the central bank. I think central banks will play both hats. There will be at times an oversight entity that will make sure that there is no abuse of power when it comes to money or transactions. Sometimes they will be the innovators that will be leading the way by issuing central bank digital currencies, retail or wholesale. Most probably both.

It’s a very, very interesting future from where I stand.

 

What do you see as the waves of innovation that will come with digital money?

Seamus: [00:27:20] You’ve raised some points there that could be a subject of another discussion altogether. Indeed, I agree that with Facebook, as you said, the medium is not necessarily the story. Basically they’re potentially flattening the entire payment landscape, particularly around the critical corridors. It felt like in Philippines, everyone’s got to a Facebook account as opposed to a bank account, and they’re probably all paying double digit fees through the payment mechanism. It could be revolutionary, whatever the mechanism of value exchange is, basically.

Well, I think we’re last minute here. Any comments around near term innovation in this space that you want to round things out on? What waves of innovation would you expect to see in the near term in digital money, if any?

 

Kalin: That’s a bold prediction to be made, but I’ll give it a swing anyway.

I feel like some of the early pioneers in the space of digital currency are wearing off, in the sense of giving up on having both offline peer-to-peer payments and then privacy and compliance or similar things. I think there was a bank in the Nordics that recently went on saying, “We have completely written off offline.”

I think that this time, if any, is a truly a call to stage, where central banks should be very clear and very prescriptive on what is a priority. Privacy and resilience, offline, all of these things should be on the table. There is no pressing need, especially in developed contexts or economies to have that innovation. If we are doing it, let’s make sure that it serves something that we don’t have today.

I believe that the private sector is already innovating quite extensively when it comes to the payment space. When it comes to core currency or central bank issued currencies, this is the moment where, I’m having in my mind this flashback to bank of England saying policy before technology. I think these kinds of snippets or statements will come more often and louder from central banks and they will be guiding the development of technology.

To your question, I think what we’ll see is things that we haven’t seen before. We will see true digital cash that works, operates, and behaves very much like banknotes and coins. We will see this fitting in the larger landscape of payments. It will be a seamless switch between digital cash and account in all forms and mediums and interfaces, whether it’s wearable, screens or no screens.

As you and I met in Geneva a couple of years ago, we said that the future is so exciting, nobody can predict it. Maybe the best way to frame this one would be to say: we find ourselves at the very early days of the web. We’ve had the internet for a while, but it’s all been black screen, green text, command line, and not so exciting. We now have the emergence of browsers. Now we have the web. Now we have this thing on top, which is going to create things we never imagined. I mean, 1990, did anybody know that Facebook will be a reality? I don’t think so. We have this call on Zoom; we’re streaming to God knows how many people live. We didn’t know this was going to be there. We didn’t know that we can survive three years of lockdown and companies to stay afloat. We didn’t know that we can not travel and still have this meeting 10 times zones across, without the jet lag, and keep abreast with everything that’s happening.

If I have to make a prediction about the future, it is a lot will happen, a lot that we cannot imagine. But now is the time to be bold. Now is the time to push the envelope and ask for things that may seem impossible on the surface, but some companies that shall remain unnamed, have solved them.

 

Seamus: [00:31:21] Kalin, I think we need to have you back and dig into many of the subjects in more detail. Thanks very much for joining us today. Super interesting, and I look forward to the next time.

 

Kalin: Pleasure as always, Seamus. Thank you very much for having me. Bye-bye.

 

Seamus: Thanks, Kalin. As mentioned, the recordings can be found on our website, also on YouTube, Spotify, and Apple Podcasts. We’ll see you next week. Thanks for joining us today.