The Economist’s Swarup Gupta on cash, privacy and data in a digital future

The Economist’s Swarup Gupta on cash, privacy and data in a digital future

Joe Kornik: Welcome to the VISION by Protiviti interview. I’m Joe Kornik, Editor-in-Chief of VISION by Protiviti, a global content resource examining big themes that will impact the C-suite and executive boardrooms worldwide. Today, we’re exploring the future of money, and who better than Swarup Gupta, lead industry analyst for financial services at The Economist Intelligence Unit, the research arm of The Economist, to help us explore that topic. Gupta is an expert on digital finance, including central bank, digital currencies, and cryptocurrencies, as well as issues of privacy and data protection. It certainly sounds like we have a lot to talk about, so Swarup, I appreciate you joining us today.

Swarup Gupta: My pleasure, Joe. Thank you for having me.

Joe Kornik: So, let’s talk about the future of money, and specifically, the rise of digital currencies and cryptocurrencies, whether that’d be Bitcoin or other currencies from the private sector or the central banks. What’s your view of where digital currencies go over the next three to five or even 10 years, and what are the potential impacts of that evolution?

Swarup Gupta: Right. So, even now, across the greatest part of the planet, cash is definitely—it remains king, and it continues to be the major mode of payment, but there are various estimates that show that as a mode of payment, cash would decline to as low as 5% by 2030 to 2031. So, digitalization is something that is definitely picking up, and that is likely to continue over the rest of this decade and then even farther, and it’s quite likely that some form of digital payments will emerge in different parts of the world. It could take up different forms across the planet.

For example, real-time payments, very fast digital payments, are a reality across several countries in Southeast Asia, many of whom have also simultaneously all, prior to this, rolled digital identity services; whereas the private sector might actually take up a major role in the developed countries as we can see. First, for example, in the U.S. with Venmo, and now with the progress and the unceasing march of Apple Pay. Digital payments are definitely going to take center stage. The use of cash is going to fall, and that’s going to take several forms. That’s going to be the real-time payment systems; instant payment systems, both private and public; a small amount of cryptocurrencies; and ultimately, central bank digital currencies, which I’m sure, will come to innovate.

Joe Kornik: Right. That’s kind of where I was going next. As digital currencies become more mainstream, and as you pointed out, I think we’re all in agreement that it’s heading that way. What do you view as the role of governments or international bodies in regulating those currencies, and who takes the lead on such an effort, and what does that potentially mean for the U.S. dollar, and assuming it has a diminished role in the future, what could potentially replace the U.S. dollar?

Swarup Gupta: Well, let me start with the faith of the U.S. dollar. I’m afraid for the next years of the U.S. dollar, that isn’t happening any time soon. Lots of statistics show that almost 90% of cross-border transactions in Southeast Asia, definitely one of the fastest growing parts of the planet, is conducted using the U.S. dollar. Whether as an initial form of conversion or as a last-mile channel in which you convert different currencies across the region. So, yes, the U.S. dollar’s share of foreign trade is likely to decline over time, perhaps over the next decade, but that’s not happening any time soon.

At the same time, the U.S. government itself has shown, especially through the action of the SEC, that it wants to take back the use of money as a sovereign tool of governance and policy making. The way it’s gone after crypto exchanges in particular, those which have refused to register, shows that the U.S. government, and in fact, governments across the world, are keen to reassert their sovereignty over money as a form of exchange of value. So definitely governments will take an increasingly important role, whether it’s through government-backed real-time payment systems like the U.S.’ FedNow, or multi-CBDCs, or CBDCs themselves.

Coming to CBDCs, there are various benefits to the promotion and introduction of a CBDC. It encourages innovation in many spheres, enhances efficiency and reduces cost for internal as well as external economies in terms of foreign exchange transactions, and also promotes greater financial inclusion, not just in the developing world, but surprise, surprise, also in developed countries where large amounts of cash dominate population. So here, by financial inclusion, I’m not referring only to a poverty element, but also access to financial services of multiple kinds, for example, debit and credit services and insurance.

So, it’s going to be a very gated development of central bank digital countries across the world. Several initiatives have actually taken off. For example, China, Hongkong, Japan, Malaysia, Saudi Arabia and the UAE have experimented not just with retail CBDCs, but also with wholesale CBDCs. CBDC development is proceeding along two forks. One is retail, and the other is wholesale. While a lot of attention of both policy makers and analysts and the press is devoted to retail CBDCs, what is likely to take off initially is wholesale CBDCs, and that is related to another issue we’ll probably come to later in the conversation, which I would try and end with this particular section.

So, wholesale CBDCs are concerned more with interbank payments, and essentially, are trying to replace or reset the financial infrastructure of a country as it exists in pre-digitalization format. Basically, if countries can digitalize a large part of their financial transactions within a country, it improves transactions, it improves efficiencies, reduces transaction cost, and essentially shortens the chain which is required when a currency is converted into another currency. This itself has taken several forms. The most common form is using a single token, which is issued jointly by multiple commercial banks across countries. The UAE and Saudi Arabia have been working on a similar project where the same token is issued by multiple banks. The other form that it has taken is known as a multi-CBDC format, where CBDCs of different countries, different CBDCs are interoperable and operate with the similar financial infrastructure and rules governing them.

The retail CBDC, which has seen the most research, has only taken off in China, and even there, it hasn’t been as popular and it hasn’t gotten as much traction as was expected, and that’s not surprising because you already have the likes of Alipay and WeChat filling in for that role in that particular country. And in the developed world and even in developing countries, the introduction of retail CBDCs leads to important and difficult questions about privacy and anonymity.

Joe Kornik: Yes, absolutely. We’re going to get to privacy in just a minute. I know that’s a topic that’s near and dear to your heart, but before we do that, I just wanted to talk a little bit about some of the countries you mentioned. China, we’ve heard a lot about the yuan perhaps taking a leadership role. I’ve read a lot about the BRIC countries and a currency coming out of the BRIC countries. I’m just wondering if you had any thoughts on that, or what’s your take on those currencies potentially taking a leading role.

Swarup Gupta: Well, I have discussed this and commented on this publicly, and let me tell you that a BRIC currency at this point is a bit of a non-starter. Let me start with the status of the BRIC itself. More and more countries want to jump onto the BRIC bandwagon for reasons of their own. It might have to find a new name for itself. I’m not running it down, it’s an important agglomeration of countries. But at the same time, the BRIC itself is terribly lopsided. Any currency born out of a basket of currencies which make up the currencies of BRIC countries will be dominated overwhelmingly by the digital yuan, and definitely will satisfy China’s ambitions of internationalizing its currency, but at the same time, will other countries agree? India and China, for example, have fairly prickly relations, whereas China’s relation with other countries are perhaps better. So, that’s a bit of a non-starter even though the Brazilian president has gone on record discussing the need for a BRIC currency.

So, what is likely to happen is a diversification away from the U.S. dollar to a basket of currencies, and what is that basket going to look like? It’s going to be the euro, the yuan, and several other allied currencies. So essentially, the gap between the U.S. dollar and other currencies sort of declines to a certain extent, but the U.S. dollar overwhelmingly dominates as a share of foreign trade over the foreseeable future, which is the next five years, for instance.

Joe Kornik: Got you. Thank you for those views. It’s very interesting. I do want to dig a little deeper now into the potential impacts of digital currencies, specifically how privacy and anonymity will be affected. What’s the potential fallout from where you sit, and how does that vary by various parts of the planet, geopolitical realities, et cetera?

Swarup Gupta: Before we start this very important bit of this discussion, I’d like to try and define those terms, privacy and anonymity. Privacy is something that even the UN has guaranteed as a right. Essentially, it means that you keep your data safe and secure, and you ensure that only those whom you provide specific rights to, have the right to view that data. For example, iMessage, for long and still now has encrypted messaging, and when you send an iMessage to another person, say me, for instance, you would expect that only I would read that particular message and not any other person in your address book. So, that’s privacy.

Anonymity is a slightly more controversial concept. Anonymity means that you have a fake handle or you use an anonymous handle—let me be clear, not a fake handle but an anonymous handle—on a specific social media service. So, in this case, your identity remains secret, but your activities may or may not remain secret. So anonymity, in fact, is a more extreme form of privacy, and it’s absolutely impossible to guarantee in a digitalized world. The reason for that is any form of digital payment, whether it’s a real-time payment service run by an institution backed by the government, or it’s Venmo, or it's Apple Pay, inherently leaves a trail, an auditable trail of transactions. Not just a trail of transactions, but it also discloses interesting nuggets about your spending behavior and your life in general. That is something—complete anonymity in digital transactions is something that only cash can guarantee. But cash, as you know, is on its way out, and because of the capability of digital payments to generate this auditable trail, there are significant privacy concerns.

So, that is one aspect of it. You might argue that “Look, this is exactly why the proponents of cryptocurrency came up with Bitcoin,” right? Because in this case, not only are you, as a user, anonymous, your transactions are also perhaps anonymous. Yes, you can track that in the case of malfeasance, some protocols have now evolved, but the sender and receiver of those transactions remain inherently anonymous. Well, I would argue actually that that’s not anonymity but pseudo-anonymity because the entire distributed ledger can be viewed, especially by the concerned authorities. They reveal several identifiers which are about us. For example, our age, our gender, our race, and our location even can be tracked, and you can tie that together and then get a fair idea whether Joe or Swarup was using a particular distributed ledger chain to engage in transactions.

So, to round up what I’m trying to say here, the demise of cash has finally ended a completely anonymous form of transacting value, so money or hard cash was the only completely anonymous way of storing value over time in exchange. Digital payments have ended that, which has led to multiple concerns around privacy, who owns the data, who shares the data, who has rights to the data, and which authorities can gain access to which part of the data.

Joe Kornik: Yes, interesting. You touched on a lot there, and I think one of the things that worries people a lot about a new world or digital currency is the potential for fraud, crime, money laundering, and probably some other things that I’m not even aware of in this new, potentially unregulated future. So, how concerned should we be about that, and what can companies or countries do to protect people and data?

Swarup Gupta: I think those concerns that you raised, Joe, are extremely pertinent, and as monetary payment schemes become increasingly digitalized, digital financial crimes, the occurrence of those activities just go up, which leads also to strict anti-money laundering regulations, many of whom are now internationally prescribed to for various agencies. They need to follow them. This is exactly why the proponents of CBDCs or authorities who wish to issue CBDCs argue that if you back the issuance of CBDCs, you would enable us to crack down on money laundering activities, on financial crime of various kinds, and illegal transactions.

However, again, we circle back to those privacy concerns, especially in countries where there is greater awareness of one’s digital rights. So, it’s a bit of a chicken and egg situation. How do you guarantee at least a minimum or a maximum modicum of privacy rights? I would argue that the U.S., for example, or any other developed country could actually take the lead on this by saying, “Look, my CBDC is more private than yours.” Because it offers a greater level of privacy, to the extent of offering a level of pseudo-anonymity, you could just continue to flock into the U.S. dollar.

Joe Kornik: Swarup, thank you so much for your time today. You’ve been very generous of your time. I have just one more question. If I ask you to look out to 2030 or even 2035, how do you see all this playing out? I mean, ultimately, what do you see is the financial future, and will it be a good place, will we like it, or would we long for the good old days of the 2020s?

Swarup Gupta: Well, you definitely will long for the good old days of the 2010s and ’20s because as I’ve said, cash will probably decline to 5% of all transactions globally. But let me just bring in something which has become a bit of a watchword recently, which is AI. You will definitely see AI figure more on both the supply and demand side of money, you will have more and more people using AI as a marketing tool, including the market financial services. At the same time, you will have AI-enabled tools, both generative and predictive, managing a lot of your monetary activities. So, some of the things that we are now trying to achieve or striving to achieve in various parts of the globe, people will just take as given: automation, instant, seamless, crossborder payments, very efficient, very low transaction cost, and of course, assisted by AI, which means that it takes out a lot of the drudgery related to both financial planning and transations.

Joe Kornik: Swarup, thank you so much for your time today. I really appreciate the conversation. Fascinating.

Swarup Gupta: Thanks, Joe.

Joe Kornik: And thank you for watching the VISION by Protiviti interview. For Swarup Gupta, I’m Joe Kornik. We’ll see you next time.