The following is a transcript of the podcast episode David Birch on CBDCs and the “currency Cold War” between commentator and author David Birch and GRIP senior reporter Carmen Cracknell.
[INTRO]
Carmen Cracknell: So thank you for joining me David. I saw you speak a few weeks ago at the Digital Pound Foundation’s event and thought you sounded like you had a lot of knowledge and insight into CBDCs and digital payments. So please could you start by introducing yourself and your background and what got you into this area.
David Birch: Sure, so I’m Dave Birch. I’m an author, adviser, and commentator on digital financial services. I worked in the, actually I started off in the kind of secure communications world for the military and various other people, then moved into finance and payments and things like that and the more time I spent in payments the more interest that I got in, you know, the future not just of the technology but what it meant for the future of money itself.
And you know a few years ago I wrote a book about the history and future of money before Babylon Beyond Bitcoin, which I flatter myself was was reasonably well received, and then I got very interested in the very specific topic of digital currency because at the time I thought people weren’t paying. I mean this is you know a little way back. I thought people weren’t spending enough time, I thought it was a much more interesting topic than people were thinking.
So in 2020 I wrote a book called The Currency Cold War about the implications of the transition to digital currency and I’ve been working on that.
Carmen Cracknell: So your most recent book The Currency Cold War, why did you give it that name? What is the Currency Cold War and how did we get here?
David Birch: So people talk about the dominance of the US dollar in international trade and in the financial system and I remember reading something by Niall Ferguson, historian, and I’m paraphrasing because I don’t have it in front of me, but he said something like the power to denominate your own debt, you know, the US dollar, it’s greater than the power of having the Marines, you know, in terms of American soft power.
Then of course I wrote the book and then not that long afterwards we saw Ukraine and the sanctions and all this sort of thing, so it turned out to be right basically.
So my point was actually there’s another kind of Cold War fermenting where there are some countries that don’t want to use the dollar, there’s other countries that want to use the dollar, what happens under the process of digitization?
I had the sort of general view which I think has proved right really that you would go to cryptocurrency conferences and people would sort of start going on about Argentina and you know Venezuela and places like this and but I sort of had a feeling that the demand for cryptocurrency, certainly a lot of emerging markets, was actually really a disguised demand for dollars.
I mean what people really wanted was dollars, and cryptocurrency was a sort of way to get them. And that sort of led me to think well actually if there was a well-designed, fully functioning US digital dollar which America seems sort of against at the moment, I mean any mention of CBDCs in America is met with horror and actually some conspiracy theories as well.
Yet it seems to me absolutely obvious that a digital dollar would increase American power, so that’s why I sort of thought it as being analogous to the Cold War, you know, countries trying to increase their influence and their power and control through digital currency and I think it’s I think I’m sort of right about that actually.
Carmen Cracknell: So do you think this is mainly going to come through a kind of conflict of CBDCs issued by different central banks?
David Birch: Well, I think it’s simultaneously more complicated and more interesting than that. So if it was just about central banks, then it would be even more baffling as to why the US isn’t doing it, but if it was just about central banks that would be one story and that would be a story of a Cold War in the sort of 1960s sense of great power blocks and this kind of thing, but of course digital currency isn’t just about countries it’s about companies as well.
It’s also about Circle and Tether and bitcoin and ether and that makes it fascinating and much harder to predict which way things are going and so this I’ve kind of got obsessed with it but it’s such an interesting area you know.
Carmen Cracknell: For an average user can you explain the wholesale, retail and machine use cases for CBDCs?
David Birch: The overwhelming majority of the public have absolutely no idea what a CBDC is but the point about the different kinds of currencies I think is kind of interesting so I was using the particular example of the German banking associations response to the digital euro consultation which I thought was very thoughtful and they said well look you know really there are kind of three different kinds of digital currency that we’re looking for.
There’s the sort of retail digital currency, the thing that people will use to buy stuff in shops where you know to be honest there is no burning platform. You know you can see the advantages of going digital in the future but it doesn’t have to be tomorrow.
There’s wholesale digital currency which is for institutions, and we can all understand why institutions want…you know the reason why people like Larry Fink at BlackRock, I mean people who know a billion times more about finance than I do, the reason why they’re interested in the tokenization of money is because they want to be able to execute without clearing and settlement.
They want to be able to you know, the kind of straightforward delivery versus purchase smart contract blockchain blah blah you know, it’s not it’s not ideological it’s just it’s just it’s vastly cheaper to so wholesale you can completely understand and I understand the demand from institutions and you understand exactly why things like finality are going on. So retail you kind of understand but it doesn’t have to be tomorrow, wholesale you kind of understand and people are sort of moving along with that.
But they also said, look, one of the interesting things about digital currency is you could have digital currencies that are optimized for different supply chains and obviously they’re very much thinking on what they call industry 4.0 and the whole internet of things and this idea that actually a lot of the transactions in the future will actually be machines paying other machines rather than people paying each other.
I actually got in touch with one of the or one of the professors in Switzerland that had input in this and I spoke to him about it and I was really rather convinced by this idea that actually you know rather than just have sort of one kind of money that’s used for everything, this idea that you might design specific kinds of money that work in specific kinds of circumstances like you know, and I know it sounds like a silly example but you know if you’ve got a machine that needs to order tires to put on a car or something then why not just let the machine order the tires and pay for them?
I mean, why have you know a system that that could go down actually that sits behind all of this? And so all three of those cases seem quite interesting to me. Now when we were talking about digital pound of course we were talking very specifically about the retail case and in the retail case this question comes up from time to time about what difference would it make to people and I think there’s two different views you could take of the future there.
So one is, and I probably tend towards this view but I mean I’m open to sort of persuasion, one view is actually people will neither know nor care whether they’re using CBDC or not. So you know you go strolling around Waitrose you’ve got your Waitrose app and you know you wander out a thing pops up on your phone which says you owe 37 pounds 50 pence, you hit okay, and you can you can see there are at least three different pathways that could be taken.
You could have the conventional money pulled through like a debit card over the conventional card rails, you could have as you’re increasingly beginning to see in various places, you could have the money pushed over instant payments directly from your bank account to Waitrose’s bank account. Or the money could go by digital currency and never go near the banking system at all, the money could just go from your phone directly into Waitrose’s system without ever going near the banking network, which I suspect in the long run would be the cheapest option.
Now the question is, would you as a consumer know or care about that? It’s not clear to me at all that that’s true. I mean the money comes out of your bank account, it shows up in Waitrose’s bank account, I mean do you really care how it got there? So one answer is I mean people may and of course the other things I mean you read every week in the paper I mean literally every week in the paper there’s a story- oh nobody could buy anything at Tesco yesterday because you know something had fallen over somewhere and cards, well you know the Co-Op cards were all down or something like that.
But you can sort of imagine a situation where you wander out of Waitrose, you go okay, you know your smart agent in your phone negotiates with Waitrose’s smart agent and you know and you decide- well okay I want to pay with my Amex and Waitrose is saying no do you really have to pay with your Amex, can’t you pay with your something cheaper we’ll give you some extra points like I want those points.
But if you’ve got, I mean this is nanoseconds right, I would never even know this is going on so they come to some sort of agreement they agree to pay by card and oh the card system’s down so okay well whatever then we’ll just pay by CBDC instead and because CBDC and the banking system run independently one of them runs over the internet one of them runs over banking networks hopefully it’s harder to imagine they would all be down at the same time so there could even be a lot of decisions made about this so one view is certainly that actually people may neither know nor care.
And remember, don’t you think Carmen most people ever really care about any of this stuff, I mean it’s only people like us right? I mean normal people don’t really care about it, so there’s one view and the other view is that the there will be certain things that you can do which will absolutely require digital currency, things that require instant clearing and settlement.
You know paying your mate down the pub when the electricity network’s gone down. That will only be possible with a CBDC or maybe there will be some online activities and this could well be true of the metaverse, which is one of the reasons why I’m interested in this where you want just straight delivery versus payment, you don’t want any banking involvement at all. So there might be some other circumstances where actually digital currency of one form or another is the only way of doing something. So you know I mean these these are evolving spaces and I think both points of view are very interesting and open.
Carmen Cracknell: Yeah like you say I guess people, the average person doesn’t think too much about how the actual process of the payment works but kind of I think the biggest arguments I’ve heard from opposing sides about CBDC is on the one side people have privacy concerns, those are the people who are critical of these currencies, and on the other side organizations like the Digital Pound Foundation are saying that this could you know “bank the unbanked”. What’s your view on both of those arguments?
David Birch: Well, my bumper sticker version of that is that unbanked isn’t the problem and banks aren’t the solution. What most people want most of the time isn’t really a bank account, it’s if you like a payment account. It’s a way to pay and get paid, and actually bank accounts are very expensive ways to try and deliver financial inclusion and we see in the UK where it’s the law that you have to give people basic bank accounts, that is the law isn’t it?
I mean I’m not absolutely sure about this but I think it probably is, something along the line, I mean the banks have to give people basic bank accounts right and yet there’s a million people without bank accounts and that’s not because there’s a shortage of banks I can assure you.
I mean there are other reasons for this right? So the idea is, would an awful lot of people benefit from having a simple payment account where they could? Yes, does that have anything to do with CBDC? Well, not really you know I think I think the two things are sort of like I don’t think one depends on the other you know solving this issue of people not having access to the system because they can’t get bank accounts and providing instant value transfer with no clearing and settlement. I mean in my head these are kind of separate things.
You know the point you made first about privacy concerns. I mean I have privacy concerns you know it’s not like other people have privacy concerns and people that want a digital currency have never heard of any of this stuff, that’s not true. In fact my privacy concerns are probably more well-founded than a great many other people’s because I understand how the system works you know so is the solution to have anonymity.
I mean people say well you know cash is anonymous so therefore we should try and build a digital system, but I don’t think like that, I think you know we need to think like what money do we need in the future and let’s build that I don’t see where we get from building an electronic simulation of the cash that we had in the past, because that was the way they did it you know under the reign of Kublai Khan.
We’re not trying to make a simulation of that, in fact it gets quite misleading some ways isn’t it because people talk about digital cash and cash and they’re not really the same thing at all it’s apples and oranges. But just as a general point I would say one area where I am militant is that I think people who advocate you know essentially unlimited anonymous electronic cash I think are for want of a better word, naive.
I think you know if if you really could have unlimited amounts of electronic cash that you could move around the world in complete secrecy and no one would know then you know that’s a world of warlords and I suppose some of the bitcoin people think that they’ll be they’ll be the warlords ruling this post-apocalyptic landscape I guess.
But I think most of us want to live in a society and in a society you want things to be under the control of the government, the democratically elected government, and the idea that you would say, well you know rich people can do what they like and they can move their money around and it’s none of your business who’s funding the president it’s none of your business who’s moving money from here to there it’s none of your business what I’m buying with my money, that’s not really true if you want to live in a society.
So I’m really rather negative about the anonymity where exactly you set the dial on the privacy, I’m nervous about having technologists set that dial. I think it should be society that sets that dial and decides.
I mean from a technological point of view we can implement either end of that spectrum If you want complete surveillance I know how to implement that, if you want complete anonymity, I know how to implement that I don’t think we want either of those we want it somewhere in the middle and it’s you know it’s completely doable.
Carmen Cracknell: How can more people be involved in the conversation about this and sort of you know what could be a once in a generation payment shift?
David Birch: That’s a really, that’s a really tough question you know and and to be honest it’s you know this is the very edge of my expertise in these kind of things. I mean I sense that in order to get civil society to make some sound decisions about what to do with digital currency and essentially tell technologists what to do, they need to be vastly more informed about what the options are and how they could work and I don’t feel we’re close to that at the moment.
You’ve got a you know there’s like a bell curve and on one end you’ve got a very noisy 0.01% who are militantly anti-CBDC, at the other end you’ve got another 0.01% who are militantly pro-CBDC. But the vast bulk of people are in the middle and how you go about education…I mean I always think things like for example if you did say something, what would be the impact of a digital currency on old people for example, right? People like me.
Well you know I’m not sure I know and I’m not sure my views on it are really that important because I come from a very very particular sort of substratum. So who do you go to to find that out well there are bodies that represent older people and you know look after their concerns and so basically you go and educate those bodies and try and get feedback from them but again you’re still talking about a three, four, five year process I think.
I think the bank of England’s very realistic view that this is a few years away is actually not not only correct but it’s also right. I mean I don’t think we should rush. I am very pro digital currency but I don’t think we should rush into it.
Carmen Cracknell: What do you think is the timeline and where are we at right now with developing a CBDC in the UK? And maybe if you could contextualize with other countries.
David Birch: I think a lot of the pilots and trials that are going on at the moment you know they don’t really mean anything. They certainly don’t really mean anything for us in the UK I mean how China decides to organize its digital currency.
I mean we’re never going to implement a digital currency like China’s it has a very culturally specific locus it has a very culturally specific set of requirements and goals. It satisfies their needs but they’re not the same as our needs so does their experience inform us?
I mean it’s not obvious. I mean there are one or two things we can learn from there I think but I think in terms of certainly developed countries. I mean you you are definitely looking at three to five years I think to get the first serious the first serious pilot programs off the ground and you’re probably you’re probably heading towards a decade away from sort of mass market rollout. That’s for retail. For wholesale I think is a completely different story and of course I think the evolution of the machine side of things, especially with the progress in AI, I mean if you’re just looking out of the corner of your eye that’s where some of the surprises might come that all of a sudden you’ve got machines all around the world that are trading Nvidia currency or something like that and that might make it hard to measure and manage the economy because if you can’t see those flows you know in some ways you don’t really know what’s going on, right?
Carmen Cracknell: So what do you think of bitcoin and other cryptos? Are they more than speculative assets in your view?
David Birch: I’m absolutely open to persuasion about this but personally I still see them as being kind of really to do with speculation. I don’t see any convincing use case. Using those technologies to implement digital asset exchanges and you know I can see that completely I’m very pro the tokenization but the cryptocurrencies themselves I’m I’m skeptical I mean I listen to what people are saying about all of this but it’s funny because I write for a couple of magazines so my inbox every day I get you know these comment pieces that PRs are sending in and they remind me of astrology.
I mean they are like astrology it’s like bitcoin’s gone up, so here’s why this is great for the bitcoin market. Bitcoin’s gone down, here’s why this is great for the bitcoin market. Bitcoin stayed the same here’s why this is great for the bitcoin market.
Carmen Cracknell: A lot of it is about the price, it overly focuses on the price.
David Birch: Yeah. So I wrote a couple of pieces a while back, only slightly tongue-in-cheek, but I mean I you know some people were talking about regulating cryptocurrencies under gambling regulations rather than under financial services regulations and that’s not a completely mad approach, especially when you look at the statistics as to who it is that’s losing money and who’s making money and this kind of thing.
So I remain skeptical, but it could be there’s an amazing use case that I just haven’t seen yet and I don’t count evading foreign exchange controls of democratic elected governments as a bonafide use case, letting people sort of buy drugs or child pornography or nazi memorabilia you know without fear of censorship isn’t really a use case so I just think we haven’t seen it yet.
Carmen Cracknell: How do you think stablecoins like Tether and USDC can be and will be regulated?
David Birch: Well actually I mean I wouldn’t I wouldn’t put those two in the same category really because you know I’m not an expert on these kind of things but it’s not entirely clear to me how Tether is or is going to be regulated. I mean Circle’s a different matter, it’s a responsible organization.
Look, in in Europe we already have the example of electronic money institutions, we’ve already seen those work where the example I always use for this actually is Wirecard because, you know, in the UK when Wirecard went down you know I mean the bond holders were wiped out, the stock holders were wiped out, but customers didn’t lose a penny because in the UK it was an electronic money institution under the electronic money institution rules.
The balances had to be held in tier one capital which is basically bank accounts in other countries, so the idea that you could have something a bit like electronic money regulation which I think is really what people are talking about at the moment to regulate stablecoins just doesn’t seem that complicated to me, so if you go to Circle and say okay you know you can issue the coins but the balances have to be held in you know certain restricted kinds of assets, you know, tea bills and whatever, I don’t know that doesn’t seem like an insurmountable barrier does it to large-scale use and as I say in a great many cases if there was like a federal reserve digital dollar people wouldn’t hesitate to use it.
There’s millions of people, billions of people all around the world that would prefer to have that.
Carmen Cracknell: What are the biggest challenges right now with digital identity in the context of payments?
David Birch: The relationship between payments and identity is absolutely intimate and it’s also asymmetric in the sense that if you know who everybody is, like, if you know who all the parties to a transaction are, payments are pretty trivial.
I mean you’re updating some spreadsheets somewhere. I mean it’s not that complicated if you know who everyone is. I mean, like a lot of the complexity in the payment system is dealing with risk and fraud and and all this kind of thing because you don’t know everybody is but you know, you could imagine it and certainly if you’re talking about a kind of tokenization delivery versus payment no credit risk.
If you know who people are, payments really are very easy if you know who everybody is and that’s kind of where the complexity comes in because the scale of fraud right now is absolutely astonishing.
I mean you see the figures coming out UK, Australia, US, continental Europe the amount of fraud is absolutely it’s titanic and so you’ve got to sort of wonder.
I’ll give you one really very specific example which I think is very interesting because when you say digital identity people tend to think about the identity of people but the digital identity of companies is a massive problem and look at what happened in the pandemic in the US and in the UK. So the government has the sort of whatever they were called the pandemic support loans or whatever that’s not identity that’s the right name but you know what I mean.
So people made up bogus companies which is trivial at Companies House because Companies House doesn’t check anything. You can set up a company in five minutes time with the directors Mickey Mouse and Donald Duck and Companies House will give you a company registration number. They don’t check anything. It’s policy. You know, so people made up these bogus companies and got billions in these loans and then vanished.
I mean, I can’t remember what the national audit office latest figures are but, you know, there’s billions that is never going to be recovered and you would think that for a tiny fraction of that cost we would have some form of digital identity infrastructure for companies, you would think, like you go to a register a company, maybe they do one of those passport things. I mean, you know like you do Yoti to go and get a parcel at the post office and you scan your passport and get the app and all this sort of thing. Companies House – nothing.
So you would think that the business case for doing something about digital identity is so overwhelming. I mean did you see all that stuff going around a couple of weeks ago I think was it um TSB I can’t remember, they went to look at some they went to look at some things on Facebook marketplace and basically everything they looked at was a complete fraud you know it’s like because there’s no KYC you know and this sort of stuff you would think that the business case would be there to do something about digital identity and yet still we seem paralyzed about it which drives me crazy because you would think that by now the banks have got together to do something about it.
We’ve got laser beams and helicopters on Mars but I still can’t open a Lloyds account using my Barclays identity and it seems we’ve got a long way to go on that sort of thing, so yes it’s a massive problem, yes it demands attention. In my personal opinion the banks are the obvious people to do something about it but it’s baffling. I don’t know I think that having a digital identity like in the UK maybe we see this as a it’s something they have in France so we don’t want it you know.
Carmen Cracknell: Is it kind of, it’s more common in Europe?
David Birch: Well I think people in Europe would think that if you try to explain well look when you go to open a bank account you don’t have an identity card so you take an old British gas bill and a photocopy of some bank statement they think you’re insane.
Carmen Cracknell: I see what you mean yeah because they all have ID cards. Yeah. Let’s move on to the metaverse – the topic of your latest book. I’ve kind of heard about sort of metaverse tokens, like Axie infinity comes to mind. What’s going on with payments in the metaverse?
David Birch: Well actually there’s a BIS report just came out a couple of weeks ago called I think it’s actually called The Economic Implications of the Metaverse, BIS paper 144. I mean this is actually how in a way this is sort of the genesis of the book because I took part in a book launch in the metaverse and it was really lots of fun because you know you’re going around meeting people you haven’t seen for a while and chatting and everything and everyone was an avatar you know.
It was fun you know and we were all well we’re all a bit slimmer for one thing actually which was good but it was fun except when it came to buying the book because to actually buy the book you had to come out of the metaverse and scan a QR code which then took you to a page where you put your credit card details in and I was just thinking like this can’t be how it’s going to work.
Like in the metaverse surely I should have just given somebody some sort of token and they would have given me a token and I probably would have given them a fungible token which is some kind of money and they probably would have given me some sort of non-fungible token which is the book and then and that’s it and there’s no clearing and settlement, there’s no credit risk there’s nothing happens outside the metaverse, and that sort of set me thinking about well how exactly would it work?
Then as I started to look into what people were experimenting with that took me towards Web3 and the whole decentralized finance kind of world but of course none of that works unless you got the digital identity that you were just talking about. And so then that sort of gave me the idea and when I started to think about that, that started to draw me towards digital wallets as the sort of coordinating thing I don’t know that much about digital wallets but I know a woman who does Victoria Richardson and I asked Victoria if she would be interested in writing with me and yeah and so so we worked on the book together basically.
But the essence of the idea I think is actually I think people they got a bit fed up with the metaverse and they mucked about with the sort of Facebook bubble people with no legs and they’re like “well this sucks” and so and then of course along came Apple and Apple said well we’re going to do the headsets and they’re going to be three thousand dollars and everyone’s like uh no one’s going to pay three thousand dollars for these headsets.
Wrong of course because I will apart from anybody else you know so I think people are underestimating just how big and important the metaverse is going to be. I was saying it yesterday to somebody, we were just talking about one or two things and I said if you were going to charge me, I have a Woking season ticket and so I’m away in the States the week after next I won’t be able to get to the game so could you charge me a fiver to watch the game online you could, no problem.
I’d pay a fiver to watch the game online, but suppose I could watch the game with my mate like we both put our headsets on and we’re both sitting there in the stand together and we’re watching the game together, would that be 20 quid, 25 quid, 50 quid? I don’t even know you know.
It’s like people are thinking of it as a sort of TV set but it’s this connection stuff that’s really going to be huge you know the ability of spatial computing to connect people in these new ways.
Of course that means business will go into the metaverse and if business goes into the metaverse that means payments and financial services go into the metaverse and so then when you begin to think well how financial services are going to work in the metaverse, wow that takes you into some really interesting space.
You know for example if you and I are currency traders, let’s say. So we’re meeting in a metaverse which is optimized for currency trading, I mean let’s imagine we’re in a metaverse and I don’t know the size of the hills is the volumes of the different currencies and the density of the trees is how many trades are taking place right now, and you or I we’re trying to find a path through together. I mean I can’t even imagine because I’m not smart enough to see how that would work, but that’s not going to be the same metaverse where some car engineers go to discuss fixing up cars.
It’s not going to be the same metaverse where you and I go to go and watch a pop concert or something. It’s not going to be the same metaverse where I go with my son to play dungeons and dragons, you know. There’s actually going to be lots of metaverses, but they will all need some form of digital assets some form of digital identity some way of trading one for the other. Anyway and that’s why I think now is the right time for the book.
Carmen Cracknell: So these tokens that already exist, are they kind of filling that role at the moment?
David Birch: No, I think I think there’s a lot of imagination and development going to be there because on the one hand you can sort of imagine tokens like stablecoins or USDC or whatever or digital dollars for that matter but I just have a kind of suspicion, I can’t prove it to you with a bar chart or a spreadsheet or something but I think there’s going to be a lot of private energy going into that space.
There might be very good reasons why I want Nike tokens for example. I mean and and you know if you pay me to do a poetry recital in the metaverse and I have the choice maybe I’d want Nike tokens, I mean I’d probably want dollars but you know I think you’ve got to be open to innovation in that space. Now when it comes to the actual assets themselves I think the argument for tokenization of assets is unarguable, turning things into liquid assets that could be traded that’s well I mean that’s an inevitable direction of markets isn’t it great.
Carmen Cracknell: If people want to find out more about you and what you do in your um work and publications where where should they look?
David Birch: Uh, just come to www.dgwbirch.com, dgwbirch on linkedin, instagram, twitter, blue sky. You know, I mean everywhere it’s dgwbirch.
Carmen Cracknell: Great. Well, thank you so much David.
David Birch: You’re welcome
