Navigating an uncertain future with longtime financial innovation expert Peter Davey

Joe Kornik: Welcome to the VISION by Protiviti interview. I'm Joe Kornik, Editor-in-Chief of VISION by Protiviti, our 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 we're very fortunate to have Peter Davey join us. Peter is a payments, banking, and financial services executive, strategist, innovator, influencer, and former Head of Product Innovation and Labs at The Clearing House. Currently, he is a venture partner at Alloy Labs where he's focused on building out platforms that help community banks and credit unions succeed. I am happy to turn over the interviewing duties today to my Protiviti colleague, Ryan Gullum, Associate Director, Payments Technology consulting for Protiviti. Ryan, I'll turn it over to you to begin.

Ryan Gullum: Great. Thanks, Joe. Really appreciate it. And Peter, thanks for being part of this today. Really appreciate your time.

Peter Davey: Thanks, Ryan.

Gullum: Peter, you have more than three decades in the payments and banking space in all sorts of innovation and strategic roles. Currently, you are the venture partner at Alloy Labs, focusing on building out platforms that help community banks and credit unions succeed in payments and banking. So, first question, what are the big issues that the executives at those financial institutions are facing, and what do you see in that space over the next three to five years?

Davey: Yes, absolutely, Ryan. Yes, we're in a very transformative time. We talked about this a decade or so ago, everybody was going through some type of digital transformation. Now, with financial institutions in general, both community size financial institutions and credit unions, they're really going through an entire banking transformation. A lot of that is spurred on by new technologies, financial technology firms coming into this space, but even more so, by some of the new payment rails that are existing, both with FedNow and RTP. So, as I think about it, and I work with executives at these financial institutions, some of the biggest things that are top of mind is how can they compete in a technology world when they're highly dependent on vendors that are delivering them their functionality? There's not a lot of technology independence within the community banking and credit union space, and even less so in the community banking space, because credit unions have had CUSOs and other types of organizations that have helped them expand on some of the technologies in the past, but what we're really finding is that the flexibility to be able to pivot quickly, to be able to add new capabilities and to be able to service a customer in a holistic way really is lacking at a lot of these financial institutions. They're trying to figure out how they can compete and continue to be relevant for their customer base, which is a really important customer base as we think about the entire banking franchise of the U.S.

Gullum: I mentioned your vast experience in this space, and obviously, I think you're uniquely qualified to talk about some of the big future money topics on the table. So, let's start with cash. Everybody talks about that within the industry. I mean, you and I were just at a conference recently and that's a topic there, right? So, how much longer will we be using it, in your opinion, and do you have any prediction or set of triggers for when cash is going to go away?

Davey: Yes, I don't think cash will ever go away completely. It's been around since the dawn of time as we look at how people have traded value exchange. As you think about cash in general, there are certain reasons people use cash, similar to the way they use credit cards. Everybody talks about credit card interchange arbitrage as well, I'm sure we can talk about that a little bit more deeply. But cash is kind of the same thing, right? Cash is one of those things that's almost a religion for some people, and it's really hard to move people away from there. There are people who are underbanked or there are people who don't want to be banked who deal primarily in cash. Those are the ones you're never really going to convert.

I do think that there is a good opportunity and a good hope that we will reduce our reliance on cash, physical cash, as we start to implement the RTP and FedNow rails, because you actually have a cash equivalent that's moving in real time, that's actually doing final settlement with financial institutions, and then making all the parties whole at the same time. So, I do think that we'll have an opportunity to move away from cash.

We've definitely seen a lot of industries try to bend away from cash as well. It's funny enough, in the Richmond Airport, when you walk into the Richmond Airport, you can actually convert all of your cash into a debit card that you can leverage throughout the terminal. A lot of sporting event places have moved to a cashless society. And I think that's getting people more comfortable, even folks who really want to deal in cash, it's getting them more comfortable with the opportunity that the electronic payments are not a bad thing. So, I do think that we have a good opportunity to continue to reduce cash, but I don't know that we'll ever get rid of it because unless there's some type of legislative capability that Congress holds to get rid of cash, I just don't think that constituency will ever let it go.

Gullum: So, as we move from cash to digital dollars, digital currencies, what does that mean for this space, this industry? Ultimately, how do digital assets fit into the future?

Davey: Yes. So, digital assets can be broken down into a number of different forms, right? I think most everyone loves to talk about the cryptocurrency aspect of things, and honestly, we've seen crypto take huge nose dives. We've seen it not really flourish in the way that it wants, and I think part of that is due to the fact that there are alternatives out there to crypto and other digital currencies. It's hard to get away from fiat money. So, when we talk about fiat money, which is the basis of any country's financial stability, fiat money is tending to move toward digital anyway, with real-time payments systems around the world, including in India, out in Europe, but now in the U.S. We really have moved toward a digital dollar that is exchangeable within seconds with final settlement between people. So, some of the same things that cryptocurrency and other types of digital currency we're trying to solve for, we can now do in the fiat economy.

It doesn't mean that those capabilities are passe though. I still think as we start to look at various different stablecoins, PayPal obviously released a stablecoin within their basis. Stablecoins probably do hold some merit for transactions, but you have to think about why people are employing it. PayPal is not employing a stablecoin in order to actually make that the new U.S. dollar, they're doing it so that they can reduce their reliance on bank accounts in other countries. You have to really look at why, and why and how you would use that capability.

The biggest issue against, I think, things like CBDCs, digital dollars, and other types of digital assets in that space really comes down to the regulatory capabilities within the U.S. We're strangle-held by a quad party system where we actually have both a U.S. Congress, state-level Congress, and then state-level legislation, even down to the county-level legislation. A lot of these capabilities aren't able to be used in some of the biggest opportunities. If you think about real estate, if you think about the ability to do title transfers on cars where digital assets could be extremely helpful. But the age-old legislation that exists in place, there's going to have to be somebody to change that. And then you have to think about all the intermediaries right now that make money on those processes. It's a long row to hoe, and I just don't think that we're going to see people generally move in that direction. But I think as you start to see some of these new real-time and instant payment capabilities adopted, including some of the capabilities like request for payment or request for information, there's a better ability for us to automate processes, which is really what the core of digital assets and other digital properties have been meant to do.

Gullum: Yes, you mentioned the industry and the battles we have in order to get things moving and passed, and let alone about 10,000 financial institutions at play, plus governments, all those things. And I always get asked, “Well, why does this take so long?”

Davey: Yes. I think on top of that, Ryan, just thinking about the reason why it takes so long for these things to happen, especially in the U.S. You look at other countries, and they've had regulatory mandates to move things forward. UPI in India wouldn't be where it is today if they hadn't had some regulatory mandate from the government for businesses to start using it and for more open frameworks. But in the U.S., we've actually had, unfortunately, the benefit and detriment of actually having really robust payments systems over the past couple of decades, most of which I've been part of, some of which were there before I was. But as you look at it, ACH was such a strong capability within the U.S., there wasn't necessarily the need to reinvent it at the time. It takes a lot of people to get away from 40 years of history on a particular payment system to actually get them to engage in the new economy. I do think that there are compelling reasons, but part of the reason why I went to Alloy in the first place is that we need people to actually develop those solutions for the economy, and to be able to help these banks migrate onto the new economy as opposed to just keeping things status quo.

Gullum: Couldn't agree more. So, talking about the disruption to the global monetary system and the impacts that we'll see over the next decade or even beyond that, what or which ones most concern you, and which ones most excite you?

Davey: Yes. So, kind of tying it back to the instant payment space and the fact that this is a trend around the entire globe, the beautiful thing about this is we now have, for the first time in history, multiple countries speaking the same language, if you will, which is the ISO 20022 language and framework. And while there's natural derivations between those things, we know that from a technology perspective, we can actually start to look at cross-border transactions. I think that's one part of it. Moving to a global real-time economy is actually quite exciting. The fact that we can now do it because we actually have a fighting chance at interoperation of some of those capabilities is important.

But I think in terms of some of the more stringent global money supply issues that we have, we have to actually realize that we're now operating in a global economy. I think there's a lot of folks who don't quite grasp that, and part of operating in a global economy is giving people access to being able to do payments in a global economy, to be able to invoice people in whatever native currency they have, and to be able to get paid in the native currency that you have. And as we talked about earlier, there's a lot of intermediaries involved in a lot of things within state and local governments. If you think about the intermediaries that exist within moving money between countries, all of them have had roles to play, and if you start to move money natively between two government agencies across the globe, you start to reduce the reliance on needing some of those intermediaries in there.

That's a good thing, but it's also a bad thing because in many cases, you're paying to take a lot of the risk out of the system. There still isn't a global federated identity capability, so it's really hard to understand that you are paying the person that you expect to be paying. There's also local differences between the way that those payment systems work that then create some conflict in terms of how and what does really final settlement mean, especially when the government might be able to come and get their hooks into the money before the person that you're trying to send the money gets to it.

So, there is a lot of governance issues that I think need to be figured out over time, but the good news is the technology is there. The technology is the easy part. It's going to be more about setting global policy in terms of how money can efficiently move between countries and between individuals in those countries.

Gullum: Excellent. So, we talked a little bit about digital dollar, digital currencies, and you talked a little bit about cash and the U.S. dollar, if you will. So, what about the future of the U.S. dollar? And it's really more kind of in that digital sense, I think. But how will the race for digital dominance impact its status as the world's reserve currency, and will it be relevant still in 10, 20 years, and if it isn't, what replaces it?

Davey: It's a great question. If I had that crystal ball and could really answer that question, I'd be investing a lot of money in where I thought that whole ball would run.

Gullum: Show us the money, right? [Laughter]

Davey: Exactly. I do think that we have been quite fortunate as an economy to have an established basis of pretty much the currency that's universally accepted across multiple geographies. How long that continues to last really is going to come down to policy. It's also going to come down to strength of others. The funny thing about what we just talked about within doing global transfers, that starts to unwind a little bit of the dependency on one currency over another. As you start to make some of those negotiations, as you start to figure out how countries settle with each other as opposed to moving gold bars across the ocean to each other, or out of one vault into another as it is at the Vatican or at the various different forts within the U.S. that hold gold currency, it comes down to the fact that what is the common basis? What is going to be out there? Kind of related back to your cash comment earlier, there's more U.S. currency out of circulation in other countries than there is in circulation in the U.S. today. That should tell you that there are a lot of people doing trading on the U.S. dollar that never actually comes back into this economy. If you look at real estate, the Chinese and other countries, Sauds et cetera, are holding more real estate within the U.S. than almost anybody else, but all of that was paid for in the basis of US dollars.

So, I still think that the US has some predominance in this space, but I think we would be foolish to think that we should always hold that predominance in this space. I do think that we need to look for a way to make it easier for people to operate in a global economy. That might not mean getting rid of the U.S. dollar, but it might mean creating some equivalents across the globe that actually operate in a very similar fashion. That's one of the things that hasn't existed up until this point, and certainly, I think what crypto and other types of digital currencies were pointed at, I don't know that that's the answer either. I think it will actually ultimately be in trying to drive a hybridized, at least fiat exchange, not a hybridized fiat currency.

Gullum: So, finally, last question. Finally, if I asked you to look out 10, 20 years, what do you envision in terms of payments and money?

Davey: Yes. I would say one, and one of the reasons I got involved in this real-time payments journey in the first place, when I went over to The Clearing House, even before that on Project Compass, to actually look at what we should be doing from this country's perspective and the faster payments task force, it has to do with the fact that we have not had a monetary system or a payments system that actually supported a 21st century economy up until the advent of RTP, and then now subsequently, the release of FedNow.

I think that the future of the economy is digital and embedded and automated. In order to do that, we have to adopt the tools that exist within these new payment systems to be able to make that happen. I do believe that truthfully, we can contribute a couple of trillion dollars back to businesses by opening up the aperture of these new payment systems and figuring out how we can actually give the tools to businesses so that they can fully automate their supply chain, their accounts receivable and accounts payable management. And think about the amount of resources that you can then redeploy back into the economy to actually do meaningful work as opposed to post-work, which is what happens today in the majority of payment systems.

So, I still am very, very bullish over the next five years that we will be able to, as an economy, start to figure out how to create those inroads. And then, within the next 10 years, you're going to see people move away from payment types not because they want to, but because their business processes support the automation of those capabilities. It's not to say that any of the payment systems that exist today are bad, ACH or wire or anything else, they're going to continue to exist. Hopefully, we get rid of checks. But I do think that you're going to start to see a good bulk of payments move over into these real-time rails because of the nature and the efficiency that you can get from them.

Gullum: Really appreciate your time, Peter. Always fabulous to see you and chat with you and look forward to future fun with you as we hit the conference circuits and all those fun things. So, really appreciate your time today.

Davey: Thanks so much, Ryan. I appreciate it.

Gullum: You're welcome. And Joe, back to you.

Kornik: Thanks, Ryan. And Peter, we appreciate the time today. And thank you for watching the VISION by Protiviti interview. For Peter and Ryan, I'm Joe Kornik. We'll see you next time.

Joe Kornik: Welcome to the VISION by Protiviti podcast. I’m Joe Kornik, Editor-in-Chief of VISION by Protiviti, our 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 I’m excited to welcome Susan Yang to the program.

Susan is General Manager, High Value and International Payments at the Commonwealth Bank of Australia where she and her team are leading the ISO 20022 program and the digital IMT strategy execution for CBA. Susan spends much of her time exploring cross-border payments with the domestic ISO 20022 industry migration steering committee, the domestic Cross-Border Payments Advisory Council, and the Global Cross-Border Payments Interoperability and Extension Taskforce. Susan, thank you so much for joining us today.

Susan Yang: Happy to be here.

Kornik: I’m pleased to hand off interviewing duties today to my Protiviti colleagues, Director Ruby Chen and Senior Director Rupesh Mahto. Ruby, I’ll turn it over to you to begin.

Ruby Chen: Thank you, Joe. Hi, Susan. It’s so wonderful to have you with us today. We’re really excited to speak to you, so let’s jump into the interview questions. The first one we have is around your views on Australia’s payment ecosystem maturity. There have been significant changes to payment technology and capability across the globe recently, including real-time payments, mobile payment systems, near-field communication technology, QR code payments, open banking, cryptocurrencies, blockchain, and many of these terms were unknown practically 10 years ago, yet now they’re a fundamental part of the payments landscape. Where do you see Australia today on the maturity map?

Yang: Ruby, I’ll touch upon a few really important recent changes in the domestic payments’ world. Let’s maybe start and have a look at the real-time payments. There are more than 60 countries, I think, that have real-time payment systems globally now and then in Australia, we launched a real-time payment system, NPP or New Payments Platform, and it’s data-rich payment, so it allows for 280 characters inclusive of foreign characters and even emojis. It also has allowed for addressing service, so PayIDs enable payments to be made to net mobile, email address, and business registration numbers.

The NPP really provides a solid foundation for ongoing innovations with the most recent addition of PayTo, so a new efficient way to enable payer customers to preauthorize real-time payments from their bank accounts.

Now, let’s have a look at NFC. Australia is one of the biggest users globally for NFC contactless payments. Based on industry data, more than 30% Australians have been using mobile wallets when they make payments instore. As compared to US, that’s 1.7% and for Germany at 6.1%, and I see that trend continue to grow. Because of the presence of big technology companies in digital wallets, the regulators are now considering how to ensure ongoing competition and innovation in this space.

Because we have such a mature NFC infrastructure, QR codes have been taking off to the same extent as in some other countries such as India or China. However, there is still some interest in innovating in the QR code space, mainly when there are payments linked to royalty, identity, or reconciliation applications. This is because QR codes enable for rich data to be encoded in a process for payment transactions.

Lastly, let’s have a look at blockchain and CBDC. CBA has been experimenting with blockchain for a couple of years now with partners such as Wells Fargo, the Australia National Disability Insurance Scheme, and the World Bank. We are currently also part of RBA’s collaboration with the Digital Finance Cooperative Research Centre on a project to explore use cases and economic benefits of CBDC in Australia.

Rupesh Mahto: Hello, Susan. Very nice to meet you. It’s a pleasure to interview you today. From the payment’s perspective, I’m very passionate about payments and how Australia has been using payments in the region, but at the same time I have seen that there has been an increasing number of international payments being used, especially in the remittance field, I would say. Alongside, I see that the payments dimension has changed with the evolvement of virtual currency, metaverse being very particular in the market as well. How do you see banks like CommBank positioning themselves in the market to stay competitive for such use cases?

Yang: So nice to meet you as well, Rupesh. You’re right. New entrants and alternative rails, they are indeed driving innovation and competition in the cross-border payment space. For CommBank, our goal is to make cross-border payments, including remittances, faster, cheaper, more transparent, and inclusive while maintaining safety and security. We do this by constantly enhancing our international money transfer capabilities and also supporting the G20 Cross-Border Payment’s goals.

Some of the recent activities that CommBank has undertaken in order to stay competitive in the market include extending processing hours. We have extended the processing hours of incoming cross-border Aussie dollar payments to 24/5, and we are on the journey of further enhancing that to 24/7 before we add foreign currency payments. Implementing the ISO 20022 standards and also actively participating in the industry consultation and committees on [Unintelligible] these dangers across systems in different jurisdictions.

The other initiative will be to connect Swift with domestic real-time systems. For example, the ongoing initiative in Australia of distributing the next leg of cross-border payments by NPP.

Removing the fees for FS IMTs for any payments initiating from digital channels, and also absorbing correspondent banking fees to ensure the full amount can be received by overseas recipients.

Mahto: That’s a very insightful thought, Susan, and I think as we move towards much more bridging the gap of payments across the globe, I see there’s a good competition in the market in terms of how international payment providers have been involving.

Do you have some thoughts around how they will be evolving in the next few years? Will it be increasing more or the banks will be able to provide competitive services in that space?

Yang: Sure. G20 roadmap for enhancing cross-border payments is a significant trade guide in the industry on its priorities as well as development. The updated G20 roadmap was published, I think, February 2023. It assigns 10 actions across three priority things. That includes payment system interoperability and extension, the legal and regulatory provision frameworks, and data exchange and message standards. I’m excited by the possibility of leveraging ISO standards and the real-time cross-border capabilities to deliver enhanced value across a wide range of proper use cases such as supporting more efficient supply chains and trade, and multinational intercompany payments. I’m equally excited by the possibility of enabling faster and cheaper cross-border remittance flow for the payments between family members and C2B commerce.

I also expect over the next few years the real-time capability of all systems in the ecosystem of payments such as sanctions, transaction monitoring, fraud and scam prevention, they will all be more widely adopted and also linked to a more consistent legal and regulatory framework.

Chen: Thank you so much, Susan. Our next question is around your views on emerging risks. So not only do banks face increasing competition from non-bank disruptors, they also face growing operating costs from resourcing, systems, technologies, processes, and so on. What are some other emerging risks banks face in their payments ecosystem that could hinder growth in the future, and what can executives do to ensure banks are well positioned for the next decade?

Yang: Yes. We certainly have seen rapid and ongoing shifts in the way our customers pay and driven by technological innovation and also changing customer expectations. Banks have a large and trusting customer base and extensive in-person and digital distribution network, which provides a strong starting point for gaining scale with payments innovation. The growth of non-bank disruptors proves that customers are willing to switch for convenience, lower cost, and other personalized benefits that help them to achieve specific tasks, but the growth of non-bank disruptors proves that customers are willing to switch due to convenience, low cost, or other personalized benefits that help them complete specific tasks. Buy now, pay later or Apple Pay just are examples in that space.

In order to ensure that the banks are well positioned for the next decade, banks must make sure they deploy their investment capital wisely and also ensure their technology infrastructure can accommodate build, buy, and partner options across the payment cycle. Through models such as CommBank’s venture scaling on X15, we are harnessing the potential of innovation and agility of start-ups but building with scale and safety in mind, leveraging the assets of CommBank.

We also partner directly with fintechs to supplement the bank’s core offering with experienced enhancement and value-added services. In addition, banks have built a lot of payments infrastructure and we are the primary participants, but we also need to ensure the regulatory settings are also capturing the new entrants or new participants in order to maintain ongoing safety and security and trust in the payment’s ecosystem.

Mahto: Thank you, Susan. Going forward, I’m very optimistic about payments and how payments are evolving and will evolve. Do you have any near-term view about what the future of payments looks like? When I say real-term, the next two years or five years, how do you see payments to be evolving in this market especially in Australia, and which areas in Australia could benefit the most from a payments landscape?

Yang: Yes. I’m also very optimistic about the future of payments because payments continue to be a very dynamic and exciting area, and I don’t see the amount of changes and innovation will be slowing down. We have modern, fast payment systems. However, the benefits and efficiency of speed have to be balanced with an equal focus on safety and security. The opening of the payments ecosystem to new participants without proper regulatory oversight will further increased exposure to scams, fraud, and disputes. Banks have rigorous and sophisticated risk monitoring capabilities to protect the integrity of payments, to resolve disputes, and to identify scams and fraud. Policymakers and the private sector need to find a way to bring beneficial innovation to market while still maintaining a high standard of safety and security set by banks.

In order to address the above concerns, in Australia, we are undergoing significant reform to the payment regulations to provide the guardrails of safe innovation.

Chen: Thank you so much, Susan. Last question from us, if I asked you to look out to, say, 2035 and even beyond, what do you envision in terms of payments and customers? What may surprise us?

Yang: Over the next decade, payments will continue to connect people, devices, homes, and maybe even cars spanning physical, digital, and virtual worlds. The trend towards digital will continue. In Australia, the government has set a target to retire checks entirely by 2030, for example. With the global implementation of ISO 20022 standards for payment messaging, for the first time we will have a common language in which to transact with anyone, anywhere.

What may surprise us is a value of trust a customer has with banks and how that can translate into business. If banks can continue to enhance our digital experience and provide value to customers beyond what could be considered traditional banking, providing a world-class digital experience is essential to our strategy here at CBA, and I’m optimistic about what we all continue to deliver for our customers.

Chen: Thank you so much, Susan, for those excellent insights. We really enjoyed our conversation and we learned so much from you today. We hope you did as well, Susan.

Yang: Thank you. I enjoyed our conversation as well. Thank you, Ruby and Rupesh, for having me today.

Chen: Thank you. Thanks, Susan. All right. Back to you, Joe.

Kornik: Thanks, Ruby, Rupesh, and Susan, and thank you for listening to the VISION by Protiviti podcast. Please rate and subscribe wherever you listen to podcasts, and be sure to visit vision.protiviti.com to view all of our latest content. Until next time, I’m Joe Kornik.

The past, present and future of the U.S. dollar with David Cowen, President and CEO of MOAF

Joe Kornik: Welcome to the VISION by Protiviti interview. I’m Joe Kornik, Editor-in-Chief of VISION by Protiviti, our global content resource examining big themes that will impact the C-suite and executive boardrooms worldwide. Today, we’re exploring the future money and I’m thrilled to have David Cowen, the president and CEO of the Museum of American Finance, join me today. David is going to walk us through a brief history of money in the United States, or what would become the United States way before we even had the U.S. dollar. The museum has amazing historical collections from those days, and David will be sharing those in just a moment. The Museum of American Finance, by the way, was a big source of historical reference for Lin-Manuel Miranda when he was writing Hamilton. Following David’s presentation, I’m going to ask him a few questions about a very uncertain financial future. So, David, thank you so much for being here, and let me turn it over to you to begin.

David Cowen: Joe, what a pleasure to be back here with our friends at Protiviti. We’re going to be talking a little bit about money, as you know. As the museum, if you don’t know where you’ve been, how do you know where you’re going? So, we want to turn the clock back just a little bit to set the stage for a flavor of what money was at the beginning of our country, trace it very quickly to today, and then maybe we will do that little Q&A you mentioned about.

The first thing to talk about is the Revolutionary War. We’re not a country yet, but under the Articles of Confederation, the 13 states are banded together, and take a look at this note. By the way, all of these are from the museum’s collection. We have literally, thousands of documents. This is paper, this is money, and it’s dated the 10th of May 1775. This is the first day of the Second Continental Congress. The fighting started a few weeks earlier, April 19th, Lexington and Concord. But what does your Continental Congress do on the very first day? They turn on the printing presses.

This is very elaborate. Let’s take a quick look at this. It’s got some marbling, which is attributed to Ben Franklin, who was a printer, of course, and its anti-counterfeiting. And there’s always these Latin words of encouragement. This one means “energy,” and then this is in Spanish milled dollars. We don’t have U.S. dollar at this point, but you could potentially turn this in for some Spanish coins. By the way, foreign coins are going to be legal tender in the United States until 1857. It’s not until those gold rushes where we get enough of domestic source of gold, and then eventually, silver, that we have our own currency backed by our own gold and silver. On the back, it’s quite elaborate. I like this where it anticipates the fighting. That’s a Latin for “homes will cease to be quiet.”

But it’s not just the Continental Congress that’s issuing money. This is a note from Georgia. And in Georgia, you can take a look here, that it’s backed not by gold or silver or something like that, silver in the case of the Continental, but by money arising from the grabbing of the states that were loyal to the crown. You needed to have something backing your currency. Well, that’s all well and good, but unfortunately, we lose Savannah, and so what was backing this currency isn’t going to be there. So, it’s states as well as our nation, which is issuing currency. The problem with this is there’s hyperinflation at that time. It’s not just Germany. When I went to school, we learned about the textbooks and the wheelbarrow’s worth of money to buy a loaf of bread. It’s happening right here in the United States. That Continental currency I showed you, is going to depreciate and sell like a penny or two pennies on a dollar, giving Americans a terrible aversion to paper money. By the way, this inflation is so bad, George Washington writes a letter in the middle of the war saying, “A wagonful worth of money won’t buy a wagonful worth of provisions.” So, who is going to straighten all of this out? Well, we become a nation officially, April 30, 1789. George Washington takes the oath of office in New York City, and then he brings on Alexander Hamilton to be the secretary of the treasury. He’ll be in the office for six years. He’s going to write three monumental state papers. He’s going to write others, but let’s focus on three really quickly.

The first is the report on public credit. That is going to straighten out and untangle all the leftover debt from the Revolutionary War. It’s the first-grade bailout, because we’re going to assume not just the Continental Congress’s debt, but all the state debt, and reassure a new U.S. debt, U.S. securities, of which there was a direct line to today’s national debt. The second one is to create a quasi-central bank, a central regulating monitory authority, and that is accomplished for 20 years. The third is to establish the U.S. dollar, and at that time, set it against certain levels of gold and silver. All of these have to get through Congress. Some of them have big fights, the room where it happened, the rap from the musical Hamilton, is about that whole assumption of the debts, but they all do pass.

But because we have this aversion to government-issued paper at that time, who’s issuing it? Most people don’t realize that it’s banks initially, from the start of our country, all the way through the depression, and then the government will get back involved a little bit later during the Civil War, but initially, it’s the banks that are issuing the currency. We have several notes here, a $1.00, a $2.00, and a $3.00 from the Bank of New York, which by the way, today, is still in existence as BNY Mellon. You can see that it was individual banks throughout the country issuing. Now, that was fine if you were in New York with your note, but what if you were traveling outside of New York, the Philly or Charleston? These notes will depreciate, and there would be registers and books, and they can also be counterfeited. A very messy situation, because you wouldn’t get a full dollar on a dollar if you were in another town. The next one though shows you that that first Bank of the United States—by the way, in its day, called the Bank of the United States, but looking back, because there was a second Bank of the United States, the second quasi-central bank, issued notes as well. This was the main circulating medium, because they had branches, eight of them, eventually, throughout the country. So, you could bring notes of that bank and they wouldn’t necessarily be depreciated if you brought a Boston note, let’s say, to New York or to Philadelphia. But that was also a government-owned only 20%, 80% by the public, so again, a quasi-bank that acted as a central bank.

Moving forward quickly to currency in the Civil War, this is where the government gets back into the business of printing currency. If you see the back, it’s all green, and that’s where the phrase “greenbacks” come from. Now, this particular note was not backed by gold or silver, but you’re going to see quickly that we do get back on the gold standard, but for the issues and problems of the war we have to get off gold. Here is a bank from Kansas issuing a $2.00 note. This is called the lazy deuce because the $2.00 is on its side. All the banks could still issue after the Civil War, but they had to hold 90% reserves at the Treasury Department.

Moving along. So, when the government also starts issuing, you can get Goldback or Silverback notes. Here’s an example where you could go back to the treasury, gold and silver are set at certain amounts, and you could turn your note in for specific amounts of gold or silver. But that’s all going to change once the depression hits. Now, remember, Franklin Delano Roosevelt comes into office, the Great Depression’s in full swing, there’s the initial bank holiday. Most people don’t realize that banks, all of them, closed for 100 days. There was a lack of money around, very difficult time, but there were so many bank failures that was in extreme measure that was taken. The second extreme measure most people don’t realize is all your gold was confiscated. This is for individuals who would have to line up then and turn your gold into the treasury, because if you didn’t, there were very severe fines for that. By the way, this is going to be rescinded in the mid ’70s under the Ford administration, and that’s why we all now can own gold. The other thing to know about those that the banks now are stopped out, they can’t issue their own currency, it’s all going to be by the government. One of the things to note was there were high-denomination bills back then. These are $500.00 and $1.000.00 bills. These were all stopped in particular because of the black market, the drug trade, to make it much harder to move cash around.

So, that’s your rolling tour, Joe, of how we get to today and our current currency. I’m happy to field your questions now about any of these topics.

Kornik: Thanks, David, for that walkthrough of historical America and the origins of money and the origins of the U.S. dollar, the treasury. Fascinating stuff. I know the museum does a great work. It has all kinds of great information, a lot more than even what you shared here with us in that presentation.

Cowen: Yes. Joe, that was one of the quickest, if not, the quickest tour of all currency I’ve ever done.

Kornik: Yes. I’ve seen you do it and it’s much longer, but I appreciate you scaling it back for us here. David, I just wanted to ask you. I mean, you talked about the past, I wanted to push this forward a little bit and talk about the future. But first, I’d like to just know, what do you think Alexander Hamilton would think of the state of our national debt right now?

Cowen: Hamilton, as we’ve mentioned, created this national debt, and he actually said the phrase, “A national debt, if it is not excessive, will be a national blessing.” By the way, his detractors often take out that middle line, “if it’s not excessive,” just to blame him for the debt. But in my opinion, he’d be spinning in his grave at this massive $33-odd trillion worth of debt.

Kornik: Right. What about the deficits that we’ve grown and accustomed to? I mean, it’s the highest ever outside of war time that we’re running right now. What do you think the Founding Fathers would think about that?

Cowen: Let’s contextualize a little about how much this really is. If we could bring up our debt clock, you can see that we’re currently at some $33-odd trillion dollars’ worth of debt, closing in on a $100,000.00 per citizen, and $258,000 per taxpayer. This is an incredible load of debt. So, the question is really, though, okay, can we service this debt? What are the ways to lower this debt? We’re at really extreme levels, 120%, roughly. It’s 123% of the federal debt. There’s several ways—the least appealing, of course, and that we don’t want to talk about is you could default on the debt, right? That’s a disaster and just a horrible scenario. You can raise taxes. That’s one way to get it down, but that’s a political hot potato. You can lower spending, equally a political hot potato, or the ideal one is to potentially grow your way out of it. That is the preferred scenario that maybe we get the economy cooking or chugging along at such a great pace that we’re able to help do that. The problem now is we’re in a rising interest rate environment. The highest level since roughly 2007. So, when the nation’s debt becomes due, we’re refunding it, refinancing it at a much higher level. We’re at 1%-1.5%, and now we’re closing in on 4.75%-5%. That spells trouble down the road.

Kornik: Right. And I should mention, we’re recording this in early October 2023. By the time some folks watch this, that debt unfortunately will be higher. [Laughter] Most likely, it will not be going down. It’ll only be getting larger.

Cowen: Joe, right. What we’ve witnessed in Washington lately is not a forum for getting together on ideas and moving forward.

Kornik: Right. So, David, how concerned shall we be, I mean, that could potentially, you mentioned, default. How concerned shall we be about the downgrading of the U.S. credit rating? Because we’ve seen that a few times.

Cowen: We have, most recently by Fitch, but they were just catching up to a dozen years ago when S&P made the original downgrade, and Fitch cited the two concerns you and I just talked about. They said governance and then they also said the rising interest rate environment. At the level it is, it’s still AA+, roughly, but it is scary if we start to go through more downgrades, but everything is relative, and therefore, what are your other options? By the way, the states are also awash in debt. They are equally profligate in what they have issued. Some states are a little better than others. As far as just saying though, default, just because we are mentioning it. Most people don’t realize that states had defaulted in the nation’s history in the 1840s. Several states with a bad economy defaulted. We certainly know municipalities and cities have. The United States, though, never has, never missed an interest payment, hasn’t done that, and we certainly pray that that never happens.

Kornik: David, what impact do you think the things that you’ve been discussing, that deficits and credit ratings could have on the future of the U.S. dollar status as the world’s reserve currency, and where do things stand, and what could theoretically happen if the dollar does lose some of its dominance?

Cowen: Let’s take a look a bit of a last part first, in a sense that some people will say, “Well, the U.S. dollar has lost some of its preeminence. It’s been devalued.” Why? Well, if you take a look from Alexander Hamilton’s day, $1.00 is worth $20.00 of gold. Now, $1.00, it’s $1800.00 worth of gold. So, you had a 90 times devaluation. People like Jim Grant of Jim Grant’s Interest Rate Observer say, “Hey, back in 1933 when we went off the gold standard, that’s actually a default.” But to really dig into this, you’ve got to say, are there other relative options? And certainly, nations that aren’t friendly to us would certainly like to replace the dollar. But remember, it’s so intertwined also with the international banking system, free capital flows, and if you look at what potentially could replace it, the Chinese renminbi? They don’t have free capital flows. Are you going to get involved with a country like that? Crypto has all sorts of its own problems. Gold, as we know, is just not elastic enough for this type of modern economy. So, while there all sorts of pressures on the U.S. dollar, I don’t see a viable alternative in the near future here.

Kornik: Yes, interesting. And I’m sure that there are business leaders who are watching this will be happy to know that, because certainly, they are rooting for stability and not chaos in global monetary systems.

So, David, you’ve taken us back a few hundred years today and we appreciate that, but I’d like to look forward. I won’t ask you to go out 200 years, [Laughter] but how about a decade or even a little further? Any thoughts on where we’ll be as a country, as a financial system in the year 2035 or maybe even 2040? Any thoughts?

Cowen: Well, I don’t have a crystal ball other than a look at history. The British, the pound, was supreme for about 150 years, with an inflection point roughly around World War I or so. If we use that as our guide, add a 150 years-ish on to the U.S. dollar, what does that give us? Roughly, another 30, 40 years or so of U.S. dollar. So, my best guess, and that’s all it is, is that old Mark Twain quote, “The reports of my death are greatly exaggerated.” So, let’s all hope that’s the case for several decades to come.

Kornik: David, thank you so much for that look back and that look forward. I really enjoyed our conversation today. Fascinating stuff.

Cowen: Thanks a lot.

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

Innovation versus regulation and the future of digital banking with Blockchain Coinvestors CEO

Joe Kornik: Welcome to the VISION by Protiviti podcast. I'm Joe Kornik, Editor-in-Chief of VISION by Protiviti, our 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 I'm excited to welcome in Matthew Le Merle, managing partner and CEO of Blockchain Coinvestors, which he launched in 2014 with the goal of providing broad coverage of the fastest growth blockchain companies and crypto projects. I'm pleased to turn over today's podcast to my colleague, Protiviti Managing Director, Digital Assets and Blockchain Solutions, Lata Varghese. Lata, I'll turn it over to you to begin.

Lata Varghese: Thank you, Joe. And Matthew, thank you so much for joining the podcast today.

Matthew Le Merle: Great. It's great to be here, Lata. And I'm looking forward to speaking to your audience and to your questions.

Varghese: Sure. As we dive in now, Blockchain Coinvestors might be unfamiliar to some of our listeners. And, in fact, the whole space of blockchain investing might need a little more explanation. So, can you tell us a little bit more about it and your role at Blockchain Coinvestors?

Le Merle: Yes, I'm happy to. So, along with Alison Davis, I'm the founder of Blockchain Coinvestors. We had been investing in internet and fintech here in Silicon Valley for about 20 or 20-plus years. And about 10 years ago, we saw those two innovations converging on something new. And so, the internet and fintech came together to create something called Bitcoin, which was put on top of an innovation called blockchain. And we were very taken by the arrival of the world's first digital money that worked at scale. And there are some very important reasons why we thought that that was a transformative moment.

So, we pivoted to be 100% focused on investing in blockchain. And we've done that ever since. We're the leading and most diversified funder funds in the world in early stage blockchain investing. And so, that's what we focus on. We've backed more than 800 blockchain companies and projects at this point in Europe, North America and Asia. And we do not trade. So, just to make that clear, we're early-stage venture investors, but we are not public liquid crypto traders.

Varghese: Great. And I know Blockchain Coinvestors’ position is that the move to digital money’s, commodities and assets is pretty inevitable. And in order for all that to happen, really, all of the world's financial infrastructure must be upgraded. Now, in your view, Matthew, how does that happen? Like, who leads this effort? Is it public, private sector? If I look back at how the internet adoption was driven by a large part by government investment and mandates, and enterprises had the pull factor in past computing cycles, right? So, who does the heavy lifting for all of this to occur, right?

Le Merle: So, you just said something there, which isn't quite my memory. I believe that the rollout of digital communications and content on a global basis wasn't driven by governments at all. It was driven by innovators, and the world's most innovative companies, including, of course, the world's most valuable companies of today—the Apples, Microsofts, Amazons, Googles, Facebook, Alibabas, Ten Cents, Baidu's—those were the companies that brought digital communications and content to us. It actually took a while for the incumbents, the large telcos, the large media companies to embrace the internet. And in fact, if you go back to the 90s, most of them were resisting it, they didn't want it. Blockbuster famously told us all that we didn't need downloadable content at all, we could just go to a local Blockbuster store and pick up a CD or a DVD and they had a store on every corner.

So, my remembrance is that innovation is always driven primarily by disruptive innovative companies. And the large incumbents take a while to come on board. And in fact, they resist innovation because innovation disrupts their current ways of doing business and making money.

And so, now talking about blockchain or the digitalization, as you said, of money's assets and commodities, I think it will be exactly the same. I think the most important breakthroughs of this moment are being driven by the innovators. And that could be Coinbase, that could be Anchorage, that could be Tether and Circle. And then the incumbents, some of them are working very hard to catch up. And that's why PayPal has announced its stablecoin and why Citibank has just announced it will be using tokenization to drive payment transfers for its customers. But the majority of the world's banks and payment companies will be trying to slow all of this down in this timeframe because they're not ready for it.

And then governments, the role of government is always to create pro innovation regulation, in my opinion, since innovation is the driver of jobs, GDP, and economic growth in every economy of the world. And any economy and any government that purposefully tries to slow down innovation, always regrets it later. They discover that they lose ground on a global basis and they end up not capturing the jobs and the GDP growth, if they proactively try and slow down innovation, and that's just the way it always is. And I could be talking about life sciences, I could be talking about clean energy, I could be talking about enterprise software. It's true across all areas of innovation.

Varghese: Yes, thank you for that clarifying comment. Really, I think my question was about government setting the conditions for innovation to occur with active investments also in infrastructure and other related things, right? Of course, the companies are the ones who innovate, but you do need the innovation set up to be—set up in a way where companies can actually act with conviction that their products and services can get deployed in the market.

Le Merle: Yes. Well, so I—no, I don't agree. Governments do not create the backbone or the innovation infrastructure upon which innovators build. Time after time, what we actually see is governments waste enormous amounts of money, billions and billions of dollars on infrastructure that we end up not using. And if all they would do would be to get out of the way and set pro innovation regulation, the private sector makes it happen. And so, Tesla put in the fast-charging infrastructure of America at this point, and the government didn't do it. They could have done it, by the way, the government could have simply said that every transportation node in America should have fast electronic electrical supercharging in it, because of course, at the federal, state and local level, we do have a lot of transportation agencies in America; cars, trains, planes, and auto, etc., but they didn't do it. And so, Tesla's had to build it and others are now trying to catch up. And I'm just using that as an example. I don't think government is good at innovating. I don't think large established companies are that good at innovating—a few of them are. I think that innovative companies are very good at innovating, and then the rest of us figure out later how to take those inventions. And when I say the rest of us, I mean, established companies, figure out later how to take those innovations and embed them in their own businesses. And I think that's okay. I think the process of innovation has to be driven by people and companies that are unencumbered by other distractions. And government agencies are just not that good at innovation.

Varghese: Right. And their job is to provide the regulatory clarity so that innovators can do what they're doing.

Le Merle: Yes, preferably we prefer that, but it's difficult and I appreciate that. It's very difficult for a regulator to both maintain regulation of today's industries, businesses and activities, whilst at the same time, trying to figure out what a new body of innovative regulation would be for a future that hasn't yet occurred. And so, we always have that tension. Our preference is, as you say, Lata. I mean, as investors in innovation, we prefer to have regulatory clarity, but we also appreciate that that's very hard. The thing we don't want ever is anti-innovation regulation, right? So, if I had a choice between anti-innovation regulation, pro-innovation regulation, or regulatory confusion and lack of clarity, I would pick two out of three. The one I wouldn't pick would be anti-innovation regulation. And unfortunately—well, fortunately, in the internet years—America was a leader in creating pro-innovation regulation.

Right now, every other jurisdiction in the world is leading in establishing pro-innovation regulation for digital moneys, commodities and assets. And unfortunately, in America, we have a small number of people who believe that we should be killing this innovation. And they are a small minority of people, but they're working very hard to create anti-innovation regulation. And it's holding America back. And it's actually putting America on the wrong side of this innovation, which is very unfortunate. America has always been an innovation leader. America has also been the world's financial leader. And the danger here is that we end up being neither innovative nor a financial leader. And financial services is probably America's most important industry.

Varghese: You make some fair points there, it's just that the space is inherently complex, you're trying to upgrade infrastructure. And without clarity, it just kind of slows down the innovation a fair bit and incumbents who have their regulatory moats, protecting their existing businesses, find a little more time to sort of adapt, adopt, because this is we're talking about financial services and highly regulated industries.

Le Merle: So, in terms of corporate strategy, for many companies that are not very innovative, a good strategy is to try and slow down the external environment, because they don't have the ability to compete. So, I do understand that there are incumbents that would like to slow down innovation, but at the level of national economic strategy, i.e., at the level of the country, the United States, the EU v. China, for example, it's never a good strategy to be slow on innovation. And we know that, so if we can go back decades or even hundreds of years, and we can show the most innovative countries captured the lion's share of the global economic trade and value.

And so, in terms of the competitiveness of nations, you have to be pro-innovation, there is no alternative. And so, at the level of America, we have to be pro-innovation. And along the way, we have 5,000 banks in America, not all of those 5,000 banks will survive because they won't be able to keep up. And we've seen that in other countries that have many fewer banks. We have very large nations that have 20 and 30 banks, not 5,000 banks. So, I'm using that as an example. The fallout of innovation, especially global digital innovation, is that industries become larger, economies of scale and scope get larger, but we also have concentration. And concentration means some people fail. Within blockchain, specifically, we have a lot of disruptive companies moving fast in countries around the world. We have a few very large, innovative companies, and I'll use PayPal as an example, that are moving very fast. And then we have an awful lot of incumbents that are nervous and are trying to slow everything down. And I guess my bottom line is what I've already said, which is, if I was running the UK, the U.S., the EU, Switzerland, Abu Dhabi, Dubai, Singapore, Hong Kong, I would be passing pro-innovation regulation right now for digital moneys, commodities and assets.

Varghese: Absolutely. So, clearly, the underlying innovation for the blockchain, underlying Bitcoin, that led to all of this transformation of money and that will bring about a sea change in how we transact digitally as businesses, governments, people—granted, right?—but because it is so complex as money says a lot of options, the race for that digital currency dominance is on. So, there's Bitcoin, there's central bank digital currencies, there's tokenized commercial bank deposits, which almost is a reaction from the banks to the innovation. And as you quoted, the IUSD stablecoin launched now. All this, Matthew, to me seems to suggest that it is a transformative change in payment options, but then if you have one option, why can't you have multiple options? So, do we go back to the world of private tokenized money or probably sort of trading differently deflecting the credit quality of the banks issuing them? How do you see all of this evolve? Because it's something as complex as money and value.

Le Merle: Yes, it's a great question. And there's multiple components within that. So, for your audience, let's just unbundle it a bit. The first question—and I'm a bit of a fundamentalist around consumers and consumer benefits—so, let's just start there first. If we went back to the year 2000, and all of your listeners thought about how they did communications, how they got and shared and stored their information and how they did their financial transactions and investments. And now, if they thought about this year, 2023, and how they do all of those same things, and then if they rated them by speed, cost, accessibility, and ease, what you'd discover—everyone on this listening to this would discover—is that their communications and their information sharing have become dramatically better. The consumer benefit is demonstrable. It's almost real-time. It's almost no cost. It's ubiquitous. When Google told us they would make the world's information available to all of us in real-time at no cost, we didn't believe them, but they did. And not just them, obviously, a host of others. So, the consumer benefit has been demonstrable. And we all have benefited from it. And every industry and business has changed.

Now look at commerce, finance and investing, it hasn't changed much at all. We basically use the same approach to taking a loan, paying with a credit card, transferring money internationally, it's slow, it's expensive, it's painful. We have to answer telephone calls to confirm wire transfers. It takes a week. Our investments don't settle in t-zero, they settle in three days and four days. And if we want to buy a house, it can take 90 days just to complete the mortgage and the title transfer.

So, the financial industry has not provided consumer benefit in the last 20 years in a substantial way. And so, you have to begin there. And then you have to say, “Well, okay, how did we create that consumer benefit in digital communications and content?” And it wasn't centralized. It was diverse and decentralized. One day, you had Hotmail or you had Yahoo Mail, or you had Google Mail, and there were many of them and they were competing. But they were all better than you writing a letter, putting a stamp on it and giving it to the post office. And you started exploring with, “Oh, my gosh, I can communicate to people I want in almost real-time. And this is strange. They're not charging me anything. They're showing me an advertisement which I'm not sure if I like it or don't like it, but it's free. I'm getting free global communications. What's that about?”

When we digitalize moneys, do we think we'll have more or less? And will they be central bank only or will the private sector play? And how will that play out? And I guess my expectation will be, it will be a process of disruptive innovation. It will start out with more, and then some things will win, and we'll end up with fewer. The process of innovation is chaotic, confused, decentralized and disruptive. And then over time, we begin to figure out who the winners are, and we have less. So, I'm expecting the same thing. And I'd like to think that the digital dollar is a winner, and that we'll have both central bank digital dollar perhaps, but I'm expecting we'll have private sector digital dollars. And my bet is that they'll be issued by big banks and other financial players, but maybe there'll be a role for Circle and Tether as well. And the regulators will have to set the rules of the game. But if the regulators say there will be no digital dollars, they're throwing the baby out with the bathwater because the digital dollar is, from a consumer benefit perspective, it's real-time, low-cost and easy to use. That's why so many people are using Circle and Tether. They are superior ways of transferring money. Bank of America says the invention of the stablecoin is the greatest invention in the history of money. And it's because it is real-time, low-cost, easy to use money that can operate on a global scale. And that's the holy grail of payments.

Varghese: Right. And because payments and transactions are moving across, so don't you then think that having some standardization on how these digital dollars, or types of it, is created is important because it's almost like if every bank has its own sort of ways in which this is ledgered or on crypto rail, so to say, a digital dollar, if there are different points of view on how that should get created, then what does it fundamentally sort of solve in terms of an efficiency play?

Le Merle: Yes, but you see, you can't standardize innovation. That's the equivalent—if in the Betamax-VHS moment, the government had said, “Okay, we're going to pick a standard,” which one would they have chosen? The answer was Betamax. Betamax was the superior technology. So, from an objective perspective, if you had chosen to stop innovation in that moment, we would all be on Betamax and we wouldn't never have had CDs, DVDs, or downloadable content because we would have made rigid a set of standards that said the chosen way of storing and sharing data is on Betamax tape. And governments make that mistake all the time—you can't set a standard in a moment of time when you have rapid innovation occurring because the next innovation may be superior to anything you understand today.

I think that standards are very dangerous in a world of innovation. I think that what a regulator has to do is to create a dynamic, flexible regulatory structure that provides some clarity, but still permits additional waves of innovation, and it's very difficult. So, what does that look like? Right now, what that means is what MiCA is, it's what the UK and the Swiss have done as well, other geographies are doing, which is you need a market structure bill, which basically sort of says, “We believe the shape of the industry is the following. We think the shape of the innovations is likely to be the following. And we think the likely participants of it is supposed to be the following. And we'll set some guidelines around that.” And then you need some specific clarity around definitions of what we're going to be building, which I believe digital moneys, you can call those stablecoins, if you wish. The stablecoin is a little bit of a bad name because they don't have to be stable to be digital moneys, so, that's a bit odd, but call it stablecoins. And then you need some frame of reference for digital assets. What are digital assets? And what is the process of tokenization and where do you draw the line? And Gensler was asked in Congress, he was asked, “Is a Pokémon card a security?” And he said, “No, it's not.” And then he was asked, “If I tokenize a Pokémon card, is that a security?” And he said, “I need more information.” Well, he's the regulator. So, he needs to set out the digital asset, a regulatory framework that draws the parameters. A Pokémon card is not a security, a digitalized tokenized ownership record for a Pokémon card doesn't make it a security. But if it's bundled up into an investment contract, and you're selling a large batch of Pokémon cards, and you're guaranteeing a financial return, you cross some lines, right? I mean, I can turn a Pokémon card into a security if I say certain things about it. That clarity—market structure, what's a digital money, what's a digital asset—most financial centers in the world are putting that in place. And so, that's what the UK has done, Switzerland's done, Europe's done, or at least they're close to finishing. Abu Dhabi, Dubai, Singapore, now Hong Kong, are moving very quickly to clarify those parameters.

Varghese: I don't disagree at all, Matthew, my only pushback would be if that standard is slow in emerging and if different forms of innovation come, then the efficiency that is touted by having money that moves across ledgers, both private public ledgers is able to transfer as a digital asset, where the asset is intelligent. It just takes a little more time and then there's a whole lot of other existing world processes slapped onto this, then I think it also adds cost on the infrastructure side, right?

Le Merle: Yes. Yes. So, I agree with that but that's why earlier on, I told you, I would take pro-innovation, dynamic regulation first. And then I would take no regulation and regulatory lack of clarity second because that still permits innovators to innovate. And the worst thing is anti-innovation regulation, which kills—throws the baby out with the bathwater. And the issue with that is that the world's a big place and there’s many jurisdictions. So, the danger of anti-innovation regulation is that all the innovators go somewhere else, and you lose your competitiveness of nations. And unfortunately, America is losing its competitiveness in this race to be the future of the financial system. I want America to be the global innovator and I know that we have to be the global financial hub. And if we lose the dominance of the U.S. dollar as the reserve currency, I think that we have very serious issues because we have an enormous deficit, we rely upon other people to buy our treasury securities. And if they don't want to hold dollars, we're in a very bad place.

Varghese: You actually answered the question I was going to ask you directly that do you see that rise of all these other currencies impact the U.S. dollar’s positioning as the world's reserve currency?

Le Merle: How could it make sense for China—to use China as an example—how could it make sense for China to do all of its global trade in dollars? Because China does about 30 to 35% of the world's exports, and I believe about 15 to 20% of the world's GDP. And when China trades with Brazil, Brazil's denominated in reals, and China uses renminbi or yuan, so wouldn't it make sense for, when China gives billions of dollars to Brazil, Brazil buys billions of dollars of Chinese equipment, China buys billions of dollars of commodities and Brazil buys billions of dollars of finished products from China, that they would not be denominated in dollars. They would be netted out at the level of the nation on a ledger that China and Brazil would have between the two of them. And they would maybe denominate it in real, but realistically, they would denominate it in Chinese currency. So, it would not pass through the dollar. I mean, that obviously makes sense, but the state of the world for the last 75 years, since we went off the gold standard at Bretton Woods, is that we have actually denominated Chinese global trade in US dollars, and it passes to a large extent on the Swift network. And if you're the head of the Chinese government, or the Chinese Ministry of Finance, you're going to say, “I can't have that. It's a question of national security because I just saw the U.S. turn off swift for the Russians, as an example. So, I need—as a matter of national security—I need an alternative way to transact with Brazil, all right?”

So, now you just roll that forward, and you sort of say, “Can we sit…”—“we” being Americans now— “Can we sit on our laurels and presume that the U.S. dollar and the US dollar international remittance system will always be used by everyone?” And the answer is no, we can't presume that. So, now it's about competitiveness. Now it's about—well, if the if the U.S.-based global remittance system was fast, cheap and easy to use, would it have the right to win in international trade? And the answer might be yes. But on the other hand, if it is slow, costly and hard to access, then of course people would abandon it in favor of digitalized, faster, better approaches.

And so, I come back to the earlier point, which is China, and Russia, and the euro and the EU, as examples, are preparing digitalized versions of monetary systems. And if the U.S. presumes that it can kill all that innovation, and just say, “You have to stick with dollar on Swift and you have to answer your telephone call when someone calls you up to confirm the transfer,” that we're going to lose.

Varghese: So, that potentially might be what worries you about this digitized future where the U.S. is not leading with pro-innovation regulation because then that digital channels and corridors of trade across the world are happening in other digital currencies, which the U.S. doesn't have to be in the middle, sort of, establishing trust.

Le Merle: Yes. Well, I do worry about it, but not as much as you might think because I do believe that American software engineers are the best in the world, and they consistently have demonstrated that. Now I do think there's a lot of great innovators in other places, in Europe, in Asia. There are many in India—there are many places in the world where there are great software engineers who know how to write great code. But America has been, and I believe still is, the world's greatest concentration of talent. And all we're really saying is “Government, please help us continue to maintain…”—we're early-stage venture investors. So, just to be clear, we back hundreds and hundreds of blockchain engineers that want to build software on top of distributed ledger technology and innovation. And they do great things with it. And those great things, on the one hand, some of them are well known like Coinbase and Kraken, and a lot of them you've never heard of, and they're coming fast.

Varghese: Absolutely. So, zooming up, taking out a decade or more to 2035. What can we expect? Any bold predictions?

Le Merle: Yes. Well, I don't feel that they're bold predictions, Lata but I think that this is the vision. Just go back to 2000. Remember how you did your communications and how you shared information and the devices you used and the formats you used. You were still probably using tapes, you may have transitioned to CDs and DVDs, you were using email, but it was not that great. Roll forward to today—I mean, don't forget the Apple iPhone wasn't even invented until the end of the zeros and we didn't have iTunes or apps until the end of the zeros. So, a lot of the innovation that we take for granted today is a relatively recent invention. That's called real-time free communications. It's easy to do, it's easy to use, and so is the same of every other content-based industry today.

Well, imagine that financial services was the same. What would that look like? And what it would look like was, you can transfer money to anyone in real-time, and you don't have to pay anything for payments. I think payments will become free. There won't be any friction. Retailers will not be complaining because they have a 3 or 4% margin and they have to pay one or 2% to MasterCard or Visa each time they enable the transaction. They won't be paying anything for payments, payments will be free, it'll be ubiquitous, it'll be real-time.

But then think about investments, right? Today we sort of have digitalized public equities, but it's not very good technology, it takes several days to settle and it's expensive and it's not very accessible for most people around the world. Very few people actually can buy and sell public equities easily. Well, imagine that 8 billion people have access to any investment in the world in a low-cost fractional way and they can transact in almost real-time at almost no cost. And so, investment markets become huge, liquidity becomes massive. And if we go back to what happened to public equities, we end up also with derivative products that are easy to create.

So, imagine everything, every asset in the world is digital. The state of today is most of the real estate, most of the funds, and most of the private investments are paper-based. Imagine, in this day and age, 2023, most of our investments are paper-based. So, by definition, they are slow, expensive and difficult. Well, now that's in 20.., whatever the year was, you said 2035. That is all digital. So, it is ubiquitous 24x7 trading, low-cost, easy to fractionalize, price discovery is hopefully efficient, and we can easily build derivatives and drive additional liquidity. That is the future world of investment.

Varghese: Great. Fantastic. On that note, Matthew, thanks again for doing this. I really enjoyed our conversation and that little bit of debate around sovereignty over currency and how infrastructure and all of that. I really enjoyed our conversation.

Le Merle: Thanks a lot, Lata. And for your listeners, what I do want to leave them with is what you said at the beginning. This is inevitable, we will have digital moneys, commodities and assets. And it will be beneficial for every consumer and user. It will be hard and it won't be easy. It will take time.

Varghese: On that note. Thank you again, Matthew, and back to you, Joe.

Kornik: Thanks, Lata and thanks again, Matthew. And thank you for listening to the VISION by Protiviti podcast. Please rate and subscribe wherever you listen to podcasts and be sure to visit vision.protiviti.com for all of our latest Future of Money content. And be sure to subscribe to sharpen your vision. Thanks for listening. I'm Joe Kornik.