Welcome to Breaking Banks, the number one global fintech radio show and podcast. I’m Brett King. And I’m Jason Henricks.

Every week since 2013, we explore the personalities, startups, innovators, and industry players driving disruption in financial services. From incumbents to unicorns, and from cutting edge technology to the people using it to help create a more innovative, inclusive, and healthy financial future. I’m J.P. Nichols, and this is Breaking Banks.

Welcome to Breaking Banks. This week, we go down under with the team at Breaking Banks Asia Pacific as they interview Professor Richard Holden. He’s the author of a new book called Money in the 21st Century.

He’s a distinguished professor of economics at the University of Sydney, and previously was at University of Chicago and MIT. In his new book, Money in the 21st Century, he talks about why he believes the West Fed needs to get going with Fed coin, and while global economics and the design of money is going to dramatically change over the next few years with autonomous systems, with the cashless world, and obviously the introduction of artificial intelligence. Check it out as Karis Palmer and Rachel Williamson interview Richard Holden.

Welcome to Breaking Banks Asia. I’m Karis Palmer, and I’m really pleased to be hosting this first episode of 2024 with Australian economist Richard Holden. I’ve known Richard for a while now since I was his editor when I was at The Conversation.

He’s always been able to articulate economics in both a real world and entertaining way, so I was super excited to hear of his new book, Money in the 21st Century. So Richard, your book looks at three trends, low interest rates, mobile money, and cryptocurrencies. How do you see these interacting, and how are they likely to impact the global economy in the future? Yeah, they interact in, I think, an interesting way, which sort of changes how we transact all around the world.

So mobile money is perhaps the easiest one to see. This is tap cards and Apple Pay and, you know, paying for things with your watch and not needing to carry around cash, and it’s basically a lot more convenience of digital transactions. Digital money is essentially crypto, and cheap money, it’s not quite as cheap as it used to be.

Low interest rates were when you zero for a really, really long time. They’ve obviously ticked up recently, but they’re still at historically pretty low levels in there. So what those three things do together is change the amount of money going around the world, the type of money, and what money can do, and it’s those three things that really change how we transact with one another all around the world.

I’m interested at the heart why you decided to write this particular book. Who do you hope reads it? Who are you trying to influence here? You know, one of the real motivations for writing it was that I think that the US government in particular taking the lead, but as I say, you know, other countries like Australia, I think will have to do this, really need to get their skates on in terms of creating what I call a Fed coin in the US Federal Reserve creating its own coin. I think that they need to really move aggressively and quickly on that because of how rapidly China is progressing their own digital currency, and I think that is a real race.

The other race that’s going on is between private digital currencies or at least the potential of private digital currencies, and while Bitcoin isn’t particularly useful for transacting many things, it’s very volatile, it’s not a very good store of value, you know, very few people go buy their groceries with it and so on. You know, Facebook tried very hard to create its own private digital currency, Libra, and it got very close to doing that and I don’t think that’ll be the last attempt from a major technology company to do that and I think there would be really big downsides for the government losing control of the creation of money. Yeah, I mean that was a really big turning point obviously in cryptocurrencies more generally and or I guess CBDCs as a separate entity.

Why do you think the US Fed, and you do talk a lot about in the book about, you know, the US being the reserve currency, the historical nature of how important that’s been, but why shouldn’t it be China that becomes the next reserve currency? I mean, you know, they’re making the right moves. I know it could be a political question, but why is it so important that it be a western country, I guess, that that leads this space? I don’t think it’s important to be a western country, but I don’t like the idea of a non-democracy being in charge of the world’s global reserve currency. Now maybe that’s just my pro-US bias.

I’ve lived in the US for a decade, you know, I’ve got my PhD there and the US is far from perfect and along a range of political dimensions, but I do worry about the kind of leverage that it would give a country like China. I think China’s been pretty clear that it’s willing to use whatever leverage it has in ways that put a lot of pressure on countries like Australia and for that matter the United States. And it’s not like the US doesn’t engage in real politic at all, but I think in terms of their, if you like, stewardship of the global reserve currency, they’ve been benign when they should be benign and I think the only real action we’ve seen in terms of trying to leverage their position has been against Russia after it invaded the Ukraine.

And so, you know, I think they’re on the side of the angels on that one. And so I think the US as a democracy and as a member of the international community that has demonstrated good stewardship of the global reserve currency feels like a safer option to me. You tell your book, interestingly, through the lens of three people, which I think is what makes it such an entertaining and interesting read with the backgrounds of Janet Yellen, but also former Indian central bank governor Raghuram Rajan and Ethereum founder Vitalik Buterin.

Why did you choose these three? I think they were actually exactly the right people. Vitalik Buterin, the founder of Ethereum, came up with the idea and put into practice the idea, the idea of being able to contract with digital money so it could do something that Bitcoin can never do and that leads to smart contracts and all those things. In terms of Raghuram, who I had the great privilege of having as a colleague for a few years at the University of Chicago Booth School of Business, he’s just been completely central to thinking about what low interest rates from countries like the US and Europe can do to the developing world.

And he was obviously governor of the Reserve Bank of India. He was also involved in trying to sort of smooth off the rough edges, to put it mildly, of the demonetization that Narendra Modi put in place that I talk about in the book that was an example of what not to do in terms of getting rid of cash. And I think Janet Yellen has essentially been the most important economic policymaker, at least one of the two, along with Larry Summers, the most important economic policymaker of the last 50 years in the United States, possibly in the world, given that position.

I think her role has been very important on a range of dimensions. So just drawing on that discussion in the book about India’s rush to move the high denomination notes, which there was, you know, by many accounts, a colossal failure, although I guess, you know, with good intentions. But it’s clear from your book and your other writings that you think a global phase out of cash is inevitable.

So I’m interested in how you think governments can get the balance right on this, given, you know, it does often cause panic when people and governments talk about reducing cash. Yeah, we’ve seen quite a bit of that recently, certainly in Australia, as some commercial banks have made it harder to get hold of cash. You know, ATMs are becoming scarcer and scarcer.

So that’s definitely caused some angst. And it has to be dealt with in a sensitive way. The plan that I’ve talked about, and this is sort of peculiar to Australia, but it need not be, it could be used in the UK, for instance, or America could be used anyway, is to sort of phase it out over, say, three years, you know, you take out, say, the hundred and fifty dollar bill in Australia, and the next year, we phase out the 20 and 10, and then we get rid of the rest.

That gives people plenty of time to both turn in any cash that they have, you know, deposit any cash they have into bank accounts, and also those people who currently still transact primarily with cash, getting used to not doing that. Now, when I first started writing about this, I said, we’ve got to be really careful about young people and old people in all of this. I think you don’t have to worry too much about young people anymore.

Because, kids these days are pretty okay with transacting with digital things. You know, a lot of, say, school canteens already have preloaded, you know, sort of prepaid debit card effectively as the only means of being able to, you know, buy your lunch at school and things like that. But obviously, senior citizens are in a situation where at least some of them are not very comfortable with digital payments and internet banking.

And that needs to be addressed in a sensitive way. But I mean, it’s basically inevitable, the whole industry of cash is very, very inefficient. And so the fact that your local coffee shop, you know, still has to bundle up cash, have a float, take money to a night safe, and things like that, you know, pay for insurance in case they get robbed, although the insurance isn’t quite as expensive as it used to be, because they just don’t have as much cash on hand.

You know, that’s just a whole bunch of extra work and extra inefficiency that we really don’t need and can get rid of, and we are getting rid of. I guess that leads me to this discussion about CBDCs and the unbanked, because it’s not just, you know, the older people that are clinging to cash around the world, right? It’s the fact that banking is expensive, banking comes at a cost, a banking network is, you know, a network like any other network, there’s a lot of investment to build that network. So do you think that a CBDC in terms of the unbanked is a solution to some of these problems? Or to turn it on the other side, even if we had a CBDC, wouldn’t people still cling to cash because it’s still the cheapest form of currency for many people, particularly in developing economies? Well, I mean, I think if you create a CBDC, you’re going to get rid of physical cash.

I mean, that would be the point of doing it. I think having them run alongside each other in the medium term, makes a whole lot of sense. And look, cash is in one sense, I know why people say, well, it seems cheap, because I don’t, you know, see any transaction fees when I pay with cash, but they are, they are paying for it.

It’s actually the, you know, one of the most expensive parts of the system. There’s, you know, there’s the creation and distribution of cash. There’s all the, you know, keeping cash on hand and all that sort of stuff.

ATMs still get filled up by people who drive big armored vans and, you know, carry guns while they, you know, put that stuff in. That’s, that’s, in some cases, quite dangerous work and certainly expensive work. So people are paying for that.

They’re just paying for it in roundabout ways through, you know, account keeping fees and things like, and things like that. So I think actually a central bank digital currency and the phasing out of cash should allow banking to be a lot cheaper. You basically are going to take quite a lot of cost out of the system.

And, you know, it needs to be passed through. And one of the difficult things is that in many countries, there’s quite a highly concentrated banking industry. There’s not a lot of competition in the banking industry.

So it is important that if we do take cost out of the system that gets passed through, but there’s obviously a very large regulatory apparatus. And so just one more thing, which is the model of a central bank digital currency that I outline in the book, maintains a role for commercial banks. They’ll still deal with customers, originate loans, maintain those relationships.

I think that’s the best approach, but there is an alternative approach. And people have, you know, started thinking more about this after things like the Silicon Valley bank collapse, which is that a central bank would basically just take over banking and there would be no need for commercial banks. And you would have, if you’re in the US, you’d have an account at the Fed.

Now it would be an account on your phone or computer or whatever. That’s not the preferred model, certainly not my preferred model, but it’s certainly a very respectable viewpoint that some very serious people have suggested, you know, could work. So there is that route.

And then the government really can make banking free for everyone. But then the government becomes a bank. And I think there’s not a lot of appetite, even in some of the developing countries, for them to provide banking services, right? If the central bank has to have a call centre, we talked to Bill Winters, the CEO of Standard Chartered Bank, about this last year.

And he was firmly of the view that central banks need to stay in their lane, less commercial banks like his start to decide where to stop investing in their networks because of fear of a CBDC that might start to cut their lunch. Now, he didn’t use those exact words, but that was the implied sentiment of his comments, I think. And because that’s the first question that I’ve always asked is if you’re in a developing economy where banking is expensive and people are unbanked because of that, the government could subsidise them now.

The government could subsidise banks. Unfortunately, many of those governments are not rich governments. You know, they can’t, they don’t have the money to do that.

We’ll be back after this short break. This show is brought to you by Alloy Labs. As much as we love talking on the show, we believe that action is more valuable than talk.

Alloy Labs is the industry leader in helping fearless bankers drive exponential growth through collaboration, exclusive partnerships, and powerful network effects that give them an unfair advantage. Learn more at AlloyLabs.com. Alloy Labs. Banking Unbound.

We’re talking to Richard Holden about his vision of the future of money. Welcome back, Richard. How do you see this kind of private versus public currencies debate playing out? The whole time I was reading the book, I was just asking myself, you know, who’s going to win here? Like, surely this is a decentralisation versus centralisation battle.

And as you just said, the whole point of Bitcoin when it emerged was to get away from banking in a centralised way. And you’re arguing that it’s going to come full circle, I guess, and that centralisation will ultimately win. Why do you think that that’s the case? Well, I think it’ll win only if the government acts with great intent.

And I think one of the fears I have is one of the sort of two races I talk about. There’s the race with China, but then there’s the race with private companies. The US government could easily lose to a private company.

And I’m very worried about that. And apropos of our earlier discussion about who should be in control of the whole financial system, I do have my concerns with China being in control. I’ve got even graver concerns about a particular private company, which could amount to with dual stock structures and things like that, an individual being in control of the world’s global reserve currency would be an extraordinary, an extraordinary and bad thing to have occur.

And even if people go into that with the best intent in the world, it would give them enormous leverage. And I talk about this in the book, enormous leverage about, you know, hey, we control your money supply, US Federal Reserve. So we were thinking that we don’t really want to pay any tax anywhere.

And, you know, if you can go along with that, then, you know, we could probably see our way to doing what you want us to do with the money supply. Or, you know, when Libra was being discussed, there was going to be a basket of physical currencies that were traditional fiat currencies, that were that backed Libra as a stable coin, and they were going to be in there in a particular proportion. And again, you could imagine, in this case, it would have been potentially Mark Zuckerberg, who I’ve got a lot of respect and admiration for, but this would have given him a lot of power.

And you can imagine, you know, Mark Zuckerberg or a successor or somebody saying, actually, we don’t think your country, your country’s currency should be as heavily weighted in the basket. And so we’re going to actually just have the weight in the basket, which could have all kinds of bad effects for that country and extract, you know, all kinds of things from the leaders of that country as a result. So I think that’s an important race.

I don’t think it’s generally well appreciated how close Facebook got to establishing Libra in a way that would have, I think, quickly mushroomed into at least a rival, like a meaningful rival to the US dollar. They came awfully close to that. And had it not been for basically the taint that came from Facebook’s involvement in the 2016 presidential election in the United States, and frankly, just the kind of farsightedness of Janet Yellen in not approving a pilot that Jay Powell, you know, it’s been widely reported that Jay Powell was kind of sort of pretty, and he’s a brilliant person, but he was willing to go along with a trial that, you know, could easily have turned into a full blown private digital currency.

And so I think that possibility is there again, and I give a couple of examples with, you know, cute names like Bezos Bucks and things like that. But a big tech company in a market with a lot of network externalities, where it puts buyers and sellers together. Amazon’s an example.

Apple, particularly through its app store, is an example of kind of a tech company with a lot of customers that matches people on sides, two sides of markets through platforms with a great brand could have another go at this. And, you know, I think that that needs to be kind of headed off at the pass. But I guess more broadly, people have been arguing for some time that the tech giants, you know, Apple, Amazon would move into banking in a more wholesale way than they are now.

You know, bankers say they don’t want to do it because they don’t want to deal with the regulation that banks have. Of course, they would say that. I’m just wondering if you think that this kind of Web3 world will shift that dial, because often the way that innovation works is we say something’s going to happen for a long time.

And then after a while, it doesn’t happen. And we say it will never happen. And then, lo and behold, it happens.

So just wondering if, you know, you see something akin to that happening here. Yeah, I don’t see Apple or a company like that getting into sort of traditional banking. And I think traditional banking is, as you say, is a highly, highly regulated enterprise.

And I can’t imagine a tech company wanting to take on those headaches. I think it would be, you know, a real cultural clash. You have, you know, one of the most sort of old economy, old world, boring industries with kind of the opposite.

And so how you have an organization where you marry those two things together, I’m not really sure. We’ve even seen, speaking of Apple through the card that they put together with Goldman Sachs, you know, Goldman Sachs trying to get into a little more into commercial banking. Apparently, that hasn’t gone very well.

So it’s hard. It’s even hard for sort of investment banks to get into commercial banking, let alone for tech companies to get into commercial banking. But as you say, the Web3 route, you know, you could easily imagine how this could be the case.

And, you know, decentralized finance of DeFi is, you know, is heading down this heading down this path. Now, that’s something that tech companies could see as, you know, much more congruent with their values and culture, but also connected to some of the other products that they offer and that they’re into. And I think, indeed, if there was a central bank digital currency that powered the Web3 of the future, which is, you know, part of the argument I make for it in the book, then I think you could see a lot of financial innovation of a very interesting and beneficial kind, exactly from companies like Apple and, you know, Amazon and Microsoft and a whole bunch of others.

I’m interested who you think will win in the China kind of race, but you do talk a little bit about whether they’ll go down the retail or commercial route. And obviously, that has implications for the rest of the world, you know, where China chooses to invest. So have you given some thought to, you know, where China might ultimately go, you know, in favor in terms of the commercial versus retail? Yeah, I mean, they’re progressing so rapidly that it’s sort of hard for me to see them not wanting to go down the retail path.

But it is certainly possible that they won’t. I think you’re quite right to identify part of the original impetus for China developing and then rolling out the ECNY was to clip the of the two big tech companies that had, you know, precisely because of inefficiencies in the Chinese financial system, managed to create their basically their own financial system. I mean, even 10 years ago, if you went to Beijing and did the touristy thing and went to sort of touristy sites and saw people begging for money, they would have written in English on cardboard, I only take WeChat pay and they have a QR code for you to scan.

I mean, these are some of the most destitute people in the world. And it’s like, that’s their banking. It’s like cash.

I don’t want cash. Get rid of that. Give me WeChat pay.

Now, that obviously created a kind of political problem for an authoritarian government. And we saw, you know, Jack Ma say something, you know, that in most parts of the world, I think would be seen as pretty innocuous. And, you know, all of a sudden, the financial IPO is no more.

And I don’t know how close he came to never being heard of again, but probably a lot closer than he would have wanted and a lot closer than most people would have thought. So that was the sort of original impetus, obviously, for the ECNY. But now that it’s going where it’s going, I think you can imagine it going down the retail route and particularly with a government that, you know, has done things like try to limit the amount of time people can spend playing video games.

I mean, there’s a there’s a fair amount of social control that Xi Jinping is pretty keen to exercise over the Chinese people. And once you’re going to start getting involved in what amount of parenting decisions, I think retail banking doesn’t seem like too much of a stretch. One of the things you talk about in the book is the blocks that are happening.

Yeah, Enbridge, yeah. Yeah. So we’ve given the move by a lot of large regulators in Asia, like the Singapore Monetary Authority, for example, to be part of these blocks.

Do you see that having an impact economically and regionally? Should those become kind of the path forward rather than one country being the more dominant player here, as you proposed in the book? Yeah, that’s certainly possible. I mean, the way I see what’s happening there, at least at the moment is more on the sort of the wholesale side of the commercial part of things. And so I think that there’s no question, and we’re already seeing it, that international money transfers being done on blockchains is going to become more and more of a thing.

And it’s really when you get into the details of it, it’s a bizarrely Byzantine world of like how you actually send money from one side of the world to the other that depends literally on time zones of who’s open, what day of the week and sort of weird things. And when you can replace them with a blockchain based solution with a really cool name like Atomic Swap, where you can do this thing in a second, rather than like three, four, five days, that’s going to be very, very beneficial. Now, they’re going down one path with that, that you outline, and it is also a decentralized, you know, sort of blockchain based path.

I mean, I think the real question is whether that will become redundant, if there is a Fed coin, and then whatever other countries end up doing in terms of having their own central bank digital currency, and then thinking about plugging that into the international financial system. I think if you had, you know, a number of major economies, if you had the euro, the UK, and the US, all having a centralized ledger based central bank digital currency, and they would obviously plug into each other, I’m not quite so sure what the role would be for these other blocks and so on. But, you know, it’s far from clear how things are going to shake out.

And so I think they’ll have certainly a role for an extended period of time, and maybe, you know, more permanently. Do you think that this is a route to a kind of ongoing hegemony where, you know, the larger infrastructure rich nations like the US, like Singapore, ultimately will still dominate the way they have with the dollar? Because I imagine if you’re in the decentralized camp, this kind of fills you with horror. That essentially the biggest commercial banks and the biggest central banks around the world are positioning themselves to do extremely well, the same way they always have, and the smaller developing economies, despite innovation and new technology that they could tap into, are not gaining a benefit from that.

Yeah, I mean, I do worry about that, but I’m not sure really what’s changing. You know, you sort of paint, I think, a very accurate picture of the kind of pretty bad circumstances that a, you know, a small developing economy faces in terms of being dependent on foreign sources of capital, and exactly how that capital flows and what the form of that capital is doesn’t get you away from the fact that, you know, small developing countries have been dependent on foreign capital for centuries, and will probably continue to be. I think what it raises, and I don’t talk about this in the book, but this would have made a good additional chapter.

I think it does raise the question of how the major international financial institutions, I’m thinking here primarily of the World Bank and the International Monetary Fund, about how they think about interacting in a central bank digital currency world, and how that will look. They obviously play an incredibly important role in terms of helping shore up the financial systems of certain countries, and also in providing, you know, development loans and financial support and so on. In one sense, none of that need change.

But then, you know, there may be both challenges and opportunities that arise from a world that’s sort of run on and powered by central bank digital currencies. I tend to think that there’d be more opportunities for good things to happen, rather than challenges. But that’s something that presumably the World Bank and the IMF, I’m sure they’re already thinking about it to some degree, but we need to think about more over coming years.

We’ll leave it there. That’s really great. Thanks so much, Richard.

Thanks. Great questions, Karis. I appreciate it.

That’s it for another week of the world’s number one fintech podcast and radio show, Breaking Banks. This episode was produced by our US-based production team, including producer Lisbeth Severins, audio engineer Kevin Hirsham, with social media support from Carlo Navarra and Sylvie Johnson. If you liked this episode, don’t forget to tweet it out or post it on your favorite social media, or leave us a five-star review on iTunes, Google Podcasts, Facebook, or wherever it is that you listen to our show.

Those actions help other people find our podcast, and in return, that helps us build an audience that can be supported by sponsorship, so we can continue to provide you with our award-winning content every week. Thanks again for joining us. We’ll see you on Breaking Banks next week.