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Discerning a regulatory approach: Crypto currencies and digital assets

Brian Brooks, CEO of BitFury, and Saule Omarova, a Cornell Law professor, in a lively debate explored questions of the right fit for digital assets within the regulatory banking perimeter during a Monday, June 13, 2022, panel at the Just Economy Conference. Broadly, they asked if consumers would benefit if digital assets fell under the same sphere of protections as traditional currency or would the more prudent alternative to view them as a Wild West technology that could destablize households and the broader banking system? The conversation touched upon questions that may not be raised as frequently – including if insured digital assets could have a Community Reinvestment Act (CRA) obligation, their prospects for closing the racial wealth gap, and if the question also influences the integration of Big Tech into banking. They also discussed whether the federal regulators should create a Central Bank Digital Currency (CBDC). Brooks expressed concerns about implications for privacy whereas Professor Omarova saw potential for CBDC to restore the balance of power between consumers and financial markets. Although they differed in their opinions, it was a great discussion on how new technologies impact our economy and people of color. 

 

 

Introduction:

Brad Blower, General Counsel, NCRC

Moderator:

Adam Rust, Senior Policy Advisor, NCRC

Speakers:

Saule T. Omarova, Beth and Marc Goldberg Professor of Law, Cornell University
Brian Brooks, Chief Exective Officer, Bitfury Group

Transcript:

NCRC video transcripts are produced by a third-party transcription service and may contain errors. They are lightly edited for style and clarity.

Blower 00:01

Welcome, everybody. Appreciate you coming to our kickoff session of the just economy conference. And it’s it’s quite a discussion we’re going to have I wanted to just introduce our speakers today, and our moderator, and then we’ll kick things off. First, I’m going to introduce Brian Brooks, who’s seated to the far left here. Brian and I are actually old friends. We met across the table from each other in litigation, actually, a HUD complaint we were facing off against each other. I totally forgot how the case ended. Brian probably does remember,

But…

Brooks 00:36

And I hope I won….

Blower 00:38

I think we resolved the matter amicably. We became fast friend even though…

Brooks 00:42

I consider that a win, Brad. 

Blower 00:44

Yes, that is a win. Brian’s a global leader in financial technology and cryptocurrency and he’s currently CEO of a Bitfury group, the Bitcoin mining and crypto tech unicorn. And I consider Brian personally a unicorn. He just because he’s such a renaissance man, aren’t hard to find this kind of guy. He’s formerly CEO of binance. Us, one of the world’s largest cryptocurrency exchanges. And he served as acting us Comptroller of the Currency. We chartered America’s first FinTech bank barrel bank, and its first crypto bank, Anchorage digital bank. He’s been involved in seminal financial issues for decades, although you would know it from looking at him. And he is also you should know, a board member and advisor to companies and investment groups, including wager digital protege, Trust Bank, Liberty strategies, capital, valor capital and others. As part of his unicorn characteristics, he’s also a very talented musician. And I wish we had a piano or a saxophone or something here where Brian could play. But that’s, that will be for another time. But we’re very happy to have Brian on our panel today. Professor Omarova I’ve gotten to know more recently, both through watching her public hearings where she displayed great intellect, integrity, and grace in her nomination by President Biden to be Comptroller of the Currency. She’s the Beth and Mark Gilbert professor of law at Cornell University, and director of Cornell’s Jack Clark program on law and regulation of financial institutions and markets. She’s also a senior fellow at the Roosevelt Institute. And her academic research focuses on systemic risk regulation, and structural trends and financial markets, banking, law, financial technology, and political economy of finance. Before joining Cornell, as a law professor, she worked in private practice at Davis, Polk and Wardwell. She was a at the US Department of Treasury as a Special Advisor for regulatory policy to the undersecretary of for domestic finance. And as I mentioned, more recently, she was nominated to be comfortable the currency so she and Brian share of legacy of connection to the OCC. But more importantly, they’re graceful people who have great intellect, and we thought it’d be just wonderful to get them together for a conversation. So with that, I’m going to turn it over to our moderator, Adam Rust, who’s Senior Policy Advisor at the NCRC. Thank you.

Rust 03:26

So yes, this is a, this is a pretty good audience. I’m pretty excited about today. I was excited back in January, when we first heard it was going to work out and have remained excited. And I’m glad you’re here, this is a pretty pressing set of issues we’re going to cover. But first, I just want to say, you know, we’re back. There’s so many familiar faces I see. And so it’s just good to be back. So saying that, I do want to mention that everyone’s gonna get a free bitcoin, courtesy, Brian…

Brooks 03:56

Those became a lot cheaper overnight, so we can now do that.

Rust 04:02

And so what the issue we’re going to talk about today concerns digital assets and where they, where they should be inside the banking system. And we’re going to talk about stable coin primarily, and also central bank digital currency. These are pressing issues. Partially, you could say, you know, with the case of stable coin, the amount of stable coin issuance increased fivefold, from q3 2020 to q3, 2021. People are really moving into this, but I think, I think we’re facing a situation. You know, if any of you saw the Super Bowl, did you see the Larry David Ad, where there was this notion of, oh, you should get into crypto if you don’t, you know, think about that. That’s like you avoided the wheel. Or, you know, you are a Luddite who doesn’t like light bulbs. That’s almost where we are now and yet, that’s not where we should be. We should be intentional about how we get into this. And there are just so many questions that people are facing right now. There’s a uncertainty, right. And so this is kind of the purpose of today’s panel is to review some of the questions. I think I think key questions are how stable do we want stable coin to be? Interoperability? Can you know your dollar is interoperable? But some IT systems aren’t interoperable? You know, Zell and Venmo. You can’t just pay anybody with Venmo. You’ve got to pay someone who’s got Venmo. And some people have cash app and they don’t work together. Do we want to have a system like that? But then find out finally, it’s just are we going to think, well, this is the Wild West, let’s keep it outside of our banking system. Or if we move it in, and all the consumer protections we have built in, maybe that’s a better choice. And people are really wrestling with that. And the President issued his paper, calling for stable coins to be held by insured depositories. Treasury is asking these questions, the SEC is involved the CFTC, there’s some new bills out to talk about who would regulate that who would have authority. This is what we’re going to cover today. So at the outset, I thought it was important in our panel thought it was important to maybe have some definitional. A little bit of explanation first. And so Brian is going to go into quick. Brian is pretty good at explaining this stuff. And then Saule, I’m going to ask her to kind of talk about these regulatory gaps. Sort of the key questions for us today.

Brooks 06:28

Well, oh, Fantastic. Thanks. Thanks to all of you for being here. Today. I actually love that we have an audience this big at a conference this important. Though, the worry always is and I’ve been to this conference before and have worked with with NCRC for a really long time. The idea you can get 50 people in a room here to talk about crypto, I think is a great sign of the future. So thank you for spending some time.

I’m gonna assume unless I see body language to the contrary that like almost every audience I ever show up in front of there’s some level of skepticism about the overall enterprise of crypto, right, is that fair? So I want to just put that on the table. Let’s be open about that. And I’ll tell you what it is crypto is trying to do. And I’ll try and acknowledge that a significant amount of what’s going on in crypto is is very, like a significant amount of what went on on the internet in the 90s, which is scams and and things that are going to go to zero. And I’m going to argue that that doesn’t mean that crypto is not a super important project. Okay. So let me just begin. And I’ll do this in three minutes or less, I promise. But let me just cast your mind back to the mid 90s. Right when the world wide web as we know it first was invented. And you had a couple of things. In the world of the World Wide Web one is, most everyone who sat in a room like this thought it was a fad and a toy for kids. There were famous headlines in the mid 90s, about how people were dropping their internet connections by the millions showing that it was just all stupid and a flash in the pan. But with the benefit of 30 years hindsight, we know that wasn’t the case. And yet all of us in a room in 1995 would have firmly believed it was stupid. Okay, so let’s let’s just be honest about that. And what we also know is that the majority of internet traffic in the mid 90s, the majority of all traffic was devoted to two things, bank scams, and pornography. That’s basically all the internet was in 1995, outside of the government world. And there’s more bank scams and more pornography on the Internet today than there was then. But there’s also Amazon, right. And so a fundamental transformation in the way that information and commerce was exchanged took place. In that time, when we started realizing that networks were probably a better way of communicating than the post office, right, you didn’t have to spend 45 cents on a letter to send an email, and you didn’t have to wait five days for it to arrive. And it was a better way to conduct commerce than driving down to Montgomery Ward, which is why Montgomery Ward doesn’t exist anymore, is we all voted with our feet. And we started ordering on Amazon in our lives most mostly not without trade offs, but mostly got better. That was the story of the internet in the 90s. We left a brick and mortar world and a centralized world for a networked world. And mostly that had lots of efficiencies, mostly, again, with exceptions made made our lives better. The project of crypto is to address a couple of things. One is some shortcomings with the Internet. So it turns out that the internet is actually not a network, the internet is actually controlled almost entirely by five companies. And when I say that, what I mean is the Internet is a collection of servers that connect to each other. And it’s really expensive to maintain those servers. And so Google, Microsoft, Amazon, and a couple of other companies essentially control all the server power on the internet. And if one of those companies went down, or if one of those companies decided that they didn’t like your looks, okay, they could kick you off the internet that that is a thing that could actually happen. And we’ve seen a microcosm of that with internet apps like Twitter, where, you know, people on both the left and the right have been kicked off of Twitter for various, you know, speech violations. And that’s what happens in a world of a centralized internet. So one of the things that Crypto is trying to do is to build a decentralized internet. Okay, an internet that isn’t controlled by any company. Now, since what an internet is, is a network of computers talking to each other, the question is, if you don’t have one company with billions of dollars to buy and maintain a server farm, how could you build an internet like that? Right? If there’s no one rich person maintaining the network? The answer is, and you might have seen this in season eight of Silicon Valley, which was based on this very idea. The answer is, all of you have MacBooks and cell phones and computing power that you carry around in your pocket. And if I could just induce all of you to download the software and connect all of your computers and phones together, we’d have more computing power than the Internet has. So the question is, how can I convince you to do that? I mean, are any of you going to spend any time today downloading Bitcoin software and mining Bitcoin? No, you probably aren’t. Right? So the way that I can induce you to do that, is I can pay you. Now I can’t write you checks, because I don’t know who you are, right? It’s a decentralized internet. So the way I can pay you, is I can give you tokens when your computer validates, you know, information and value exchanges on the internet, that’s what most crypto assets are, they are the rewards that people get for connecting their computers to maintain this decentralized internet. That’s your inducement for building something away from Google and Microsoft. So that’s one of the things crypto is trying to do is to build networks that aren’t controlled by big companies. Okay. The second thing that crypto is trying to do, which is I think what Saule, and I will talk about today is to bring to financial services, what the original internet brought to information and the commerce, right? Whether you’re nostalgic for Sears Roebuck or not, you all decided that it’s easier to have stuff delivered to your house for free by Amazon, right? And so Sears went away, Ward’s went away, Kmart went away. Crypto, people believe that there are aspects of financial services that deserve the same fate, okay. And in my time with NCRC, the things that I’ve learned are minimum balance fees, and transaction fees, and all the things that eat away at the savings primarily of LMI individuals, right, those things suck. And what crypto is trying to do is to solve for that. So if a stable coin is a no fee savings account where there’s no minimum balance and no transaction costs, if it were that and Saule and I will debate whether it is that but if it were? The argument is, that’s a really good thing for Financial Inclusion, right? That’s the concept is can we do to financial services with the internet did to Montgomery Ward, which is make things cheaper and more accessible for more people? Now, we’ll talk today about all of the scams out there and all of the frauds and there are many, just as there were in the world of the original internet, but on the other side of this, there’s Amazon. And so my argument is we need to think carefully about regulation carefully about how we respond to these scams to make sure that we don’t throw babies out with bathwater. I’ll leave it there.

Rust 13:02

Hey, Brian, could you just explain what exactly stable coin is versus crypto? And maybe, you know, another 10 or 15 seconds on what cbdc is? Just yeah, just for definition.

Brooks 13:13

Absolutely. I don’t want to filibuster, but I’ll just do it very quickly. So what what a stable coin is supposed to be, okay, is an internet payment instrument. So it’s supposed to be kind of like a prepaid card, or like a traveler’s check, right. So those instruments of earlier eras, they weren’t cash. But they represented a claim on cash that existed somewhere, they were just easier to use, because you could carry them around in your pocket. prepaid card is much easier to carry than $100 and fives. So the concept is, you have an instrument that can be immediately sent from one person to another with no need for an intermediary to clear that there to settle that transaction. So like if I’m Venmo owing you money. Venmo actually is just a set of instructions from my bank to your bank to transfer money. And as somebody pointed out, if you’re on Zell, and I’m on Venmo, I can’t send it to you, right? But it doesn’t matter. If you’re on Gmail, and I’m on Hotmail, I can still send you an email, right, because the internet is interoperable. That’s what a stable coin is. It’s an ability to send an instantly settled payment to you backed as a claim on dollars in the bank. Now, the issue with stable coins is because we don’t have a clear regulatory framework. I mean, when I was running the OCC, I did put out guidance on this, but there’s no law yet. The issue is, what if it’s not really backed by dollars in the bank, though, so then you have problems. And again, one of the things we’ll talk about is how do you make stable coins stable? And the last thing I’ll just quickly say is on the stable coin point, some people may have heard about the implosion of something called Terra a few weeks ago, right? This was called a stable coin by crypto people but it didn’t meet any of the criteria I just described. There was no promise that there will be dollars available to redeem these stable coins. It was a token that was related to another token, you know. And if you exchange this token for that token at a given exchange rate, you could you could either get or not get a certain amount of value. And thus, it was highly susceptible to a bank run, which would happen. So, don’t believe when someone calls something a stable coin, that it necessarily is a stable coin, your mental model should be if there are dollars in the bank. CBDCs, just very quickly, the CBDC concept competes with the stable coin concept, the idea is that we should have an internet dollar, you know, a native non bank settled dollar, except only the government, only the Federal Reserve should be able to create it and destroy it, versus having, you know, American Express and Barclays both issued traveler’s checks and have different feature sets and things, you know, which we used to understand and like, the idea here is no, no, no, only only the central bank will do that.

Rust 15:50

Okay, Saule, take it away on gaps. 

Omarova 15:53

You know, this is this is just the story of my life, I’m always in, in the position of you, though, somebody sets the agenda, puts out a narrative, and I’m always responding, which is difficult, because there’s….

Brooks 16:05

so anyway, what I was gonna say about CBDCs was…. (laughter)

Omarova 16:10

Which is, you know, inherently a difficult position. So many thoughts kind of run through my head. And well, first of all, let me tell you that I actually agree with a lot of the description that Brian put out here about sort of what crypto is trying to do, at least what the crypto industry or proponents or users of crypto, telling us what the idea is, right? But the reality is not always exactly what the narrative may be. Right? So for example, it is true that there is a lot of excitement about the new technology and new technology really does offer us now opportunities to make payments and investment and financial transactions in general, faster, cheaper, more accessible, so that everybody can use it. And that’s a good thing. And we should seize upon it. And I completely share optimism and enthusiasm about that technology being used in the financial sector. The fundamental difference between just saying, well, internet, in general, the communications, or even e commerce, and money and finance are basically the same is that they’re not the same. Because money is a political instrument. It’s not just an economic resource, right? It is a political resource. Money is the lifeblood of the economy, who controls money, the flow of money, the allocation of money, the amount of money floating in the economy, really affects directly, everybody’s lives, just, you know, turn on the TV, you’ll hear all about inflation, right? So what happens here, if we actually believe that we can through technology decentralize decisions about what money is? how money flows, what it’s called, who issued it, who gets access to it on what conditions? Right? So the bad side of the story that the crypto industry or the crypto enthusiasts attack is the fact that in the system we have today, unfortunately, a lot of these decisions have become so divorced from the needs of the real people and real economy, that it feels like it’s now sort of overly centralized, corrupt, and it’s not used for the for the benefit of everybody. And I agree with that criticism. But I don’t see any evidence that by sort of allowing crypto money to replace or compete with the money that is currently managed by the Federal Reserve and flows through the traditional financial system, simply by doing that we will get to a better system, for example, with respect to inclusion, we’ve had Bitcoin the Satoshi Nakamoto paper came out in 2009, it’s been 13 years, right? 13 years the value of Bitcoin in the trading market. Okay. Until yesterday, at least right? Went how many 1000s of percentage more did that improve financial inclusion in practice, no. how many more years?

Brooks 19:15

I’m just gonna say that when I see people shaking their heads, I’m going to ask you why you’re shaking your heads once I give you the data on that. Okay, so while you’re shaking our heads, just ask is there data?

Omarova 19:25

Well, perhaps Perhaps data, data can be produced, interpreted? In a variety of ways? The point is simple, right? If, if financial inclusion was achievable, simply by using cryptography to create value or purchasing power, right, then we probably would have been much farther along on a variety of fronts than whatever data you know, perhaps Brian has some super data. My point is that my point is that financial inclusion is a complex matter. And it’s a socio economic, it’s a political matter. A lot of people remain unbanked and underbanked. And a lot of people remain excluded from the financial services system, not because they somehow the US dollar is inherently, you know, less beneficial to them than a Bitcoin, for instance, but simply because they don’t have financial resources to begin with. They don’t have jobs, right? Which creates this question, what does crypto do in order to channel greater amounts of real money, real credit into the real economy, this is where I want to see the data. This is where I want to see progress. And I don’t see much of it because a lot of the crypto money is actually moving into what: trading in other crypto assets, trading and crypto assets, even stable coins are primarily used as a replication representation of US dollar stable as the US dollar is, but just like Brian said, much more easily movable on this new rails, that the internet or this sort of new blockchain technology offers, right. In other words, in some ways, the stable coin actually is very similar to this is a very widely used analogy, casino chips, right? You enter into a casino, and you want to participate in that particular economic activity in that particular exchange. And you exchange your US dollars for the chip and the chip moves across the table much easier and faster, right. And you can label those chips, they can be red, and green and blue, and what have you. Stablecoins crypto currency can be programmable in many ways, which is an incredible boost to its usability and movability. Right. But what it’s used for, is not a function of technology, per se. It’s a function of who runs the system,  what it is set up for, and what the purpose, you know, of the people participating in that system is, and this is where I think the most interesting questions are to be asked. And I hope that in the future, there is a common ground between Brian’s narrative and my narrative, right. So we can use the technology, but in a way that actually preserves the public’s say in how the public’s money, the sovereign, Full Faith and Credit is used in order to raise our economy, real economy and real people above, not simply those people who are already ahead of us, and are already active in the crypto space in trading and investing.

Brooks 22:45

So Adam, can I give 30 seconds on that? I mean, I so so shockingly, I agree with 90% of what Saule says. I mean, there’s there’s a lot going on there. I think that there are two points, I would just, I mean, they’re actually eight points, but I’m just going to try and focus on a couple, maybe four. So so so first of all, one thing that’s really important to understand, okay, and I said this a lot as Comptroller, the project of crypto isn’t to replace money I actually couldn’t, couldn’t agree more. Okay, that if the idea was to somehow create a stalking horse form of money that somehow wasn’t accountable to anybody that that would be problematic. The project of crypto is not to replace money, it’s to replace banks. Okay. As I said earlier, the purpose of crypto tokens not talking about stable coins, we’ll come to that again. But the purpose of crypto tokens is to reward you for creating a decentralized system that puts power in the hands of users versus the status quo where the power is in the hands of banks. Now, I sat on a credit committee of a bank, which at the time, one could argue is one of the most reviled banks in the United States, I remember this organization like picketing my house one day, so So I know the mistakes that can be made when human beings sit on a credit committee, and they decide who deserves the credit who doesn’t deserve the credit, right? I mean, we know the dark history of that. So the point is not to replace money. It’s place banking. And if you think that the banking system has problems today, then I would argue you should re examine your thoughts about crypto around that, that thinking like the Aetherium token is not here to replace dollars. It’s here to replace JP Morgan, okay, to create apps that are backed by dollars that are held in a bank. That’s the first point on the bit about financial inclusion and land bitcoin and how Bitcoin hasn’t helped people. I would just point out and many people don’t know this, okay. The rate of Bitcoin ownership among Black people is roughly 50% higher than the rate of Bitcoin ownership against a held by White people just in the United States alone. And since even after yesterday’s crash, I mean, you could argue that, you know, we’re 23,000 that I’m having heart palpitations here. Even after yesterday’s crash, the performance of Bitcoin versus the performance of the s&p 500 over the last 13 years, is different by a factor of a five. Okay, so if you’re a person who invested in Bitcoin in 2010, you’re about 5x better than if you’d invested in an s&p 500 mutual fund. And that is what minority investors who weren’t around to participate in the IPO boom of the 80s, because they didn’t have inherited wealth, the way that white people did at that time. But in 2009, when there was an asset available at zero, you know, and people at scale started buying that they’re way better off in that asset. Not that you should put all your wealth in it, I don’t. But in terms of an asset class, the racial distribution of investment, highly favors lower moderate income people relative to richer people.

Omarova 25:36

So, Brian, that is very interesting, because just because there is a high percentage of minority investors in Bitcoin, who, just like you said, are trying to catch up, right, with decades, if not centuries of being excluded from the ability to generate wealth, right. This is, this is it’s it in many ways, it is a sign of desperation. And it is it is actually a symbol of where our society has gone wrong for so many, so many, so many generations. Right. But just that fact alone does not show that the minorities in disadvantaged communities will benefit from such exposure to Bitcoin in the long run. Let’s just think about subprime mortgages. You know, 10-15 years ago, I bet there was statistics there that the vast majority of subprime mortgages were held by minority borrowers, right. And as a matter of fact, I remember reading the countrywide CEOs, testimony in Congress, back in 2005, the year when the worst vintage of subprime mortgages were being pushed onto a lot of minority and disadvantaged borrowers. And that rhetoric was precisely about inclusion. It was a heartwarming story about an African American single mother, who is now able to afford the house. Was that wrong? No, it was not wrong at the time. That’s exactly what they did. And yet we know that inclusion can also stand for predation. I’m not saying that those young investors and I’m sure they’re young, those investors for the most part, right, who hold those Bitcoin wallets and whatnot, but they were not on the ground floor of investment in Bitcoin. They are not the ones who would, who raped like, I don’t know, 100,000% profits on that investment. As a matter of fact, even last year, the statistics about crypto was that overwhelmingly crypto investors are affluent White males. That was that was that was that was it right? So to me, the data about inclusion shouldn’t show how many, I don’t know, racial minorities hold bitcoins in their wallets. It should show something deeper about the access of minorities and disadvantaged communities, to financial resources. And that’s not where we are. That is a political issue.

Brooks 28:05

I mean, the only thing I would say, before and I know Adam’s got a bunch of other topics, but the only thing I would say is in this, this is probably just an ideological difference. But you know, we have a lot of rules, investing rules that aren’t specific to crypto, the most prominent of these is the accredited investor rule, which we’ve adopted under the guise of protecting people, especially protecting unsophisticated and low income people. And what I’ve always found ironic about that, and you know, some of you will agree with me, and some of you will agree with Saule. On this, again, I think it’s just an ideological difference is, you know, a rule that says only rich people can invest in this type of asset. Rich people aren’t stupid, you know. So what we’re really saying when we say we’re rich people can invest in this but not poor people. What we’re really saying is this particular wealth creation opportunity is not available for people who don’t fit our mold of of that. And so a common trope you hear in crypto is if you believe that poor people should invest in Bitcoin, because it’s volatile. And you also believe that mostly billionaires hold crypto wealth. Why do we not want to allow poor people to behave like billionaires to invest in the things that the smartest investors think are worth putting a certain amount of wealth in? Now? There’s an answer, obviously, which is, you know, the marginal dollar is more valuable to the poor people to the rich people. But there’s also an argument that the exclusion of people from wealth creation, through through analyses that say, Well, this assets too risky for you all, strikes me as as unfair, but that’s an ideological issue.

Omarova 29:39

I ran. I don’t I don’t see that as an ideological issue. As a matter of fact, I don’t disagree with you. I don’t think we should exclude anyone from investing in Bitcoin. If Bitcoin is a form of investment, and that’s fine. The problem was Bitcoin or you know, a lot of crypto assets is they their not simply investments, you know, no crypto, you know, most crypto currencies or their promoters or issuers would say that No, no, it’s not a security because they don’t want those assets to be regulated by the SEC securities, right? The thing about those coins is that they can be an investment. They’re also used as money. That’s why they’re called often cryptocurrencies. Right. And they also come with an infrastructure payment system through which that assets slash Money, Money moves. It is, in that sense, a very flexible and complex financial instrument. We’ve never had that kind of instrument before. So the accredited investor rule, for example, was meant for regular stocks and bonds for actual securities. And there was a reason why people without people who can’t afford to lose their money without proper disclosure, we’re effectively excluded from investment in those types of securities that doesn’t necessarily have to translate into Bitcoin, I’m completely fine with crypto being available as investment, as long as it stays within the sphere of private investment. Right. But going back to your first point, or second point, for point number 55…. 

Rust 31:21

But I have a point we want to make after we make this point, I want to I want to get back to stable.

Omarova 31:25

I know, I wanted to say that, you know, just like Brian, you said that, oh, crypto is not the is not intended to replace US dollar or money. It’s intended to replace banking. Yes, that is true. I understand that crypto doesn’t want to get rid of US dollar. What it wants to do is to sit on top of the US dollar and grow on top of the US dollar without being controlled by the issuers of the US dollar, the sovereign public. This is exactly what the banking system currently does. You know, what are banks? Banks are basically the agents of the federal government, federal government or state government charters, a bank allows the bank gives the bank that that exclusive right effectively to issue private money, which is bank deposits, electronic privately issued money, but puts a system around that money that makes that private money effectively identical to Sovereign Money in our eyes. Because when you ask me how much money I have, I’m going to look at my bank account and tell you this is how much US dollars I have. But those are not US dollars, those are private liabilities of my bank. So what crypto is trying to do is replace that. And the problem is that for us as the sovereign public members of the sovereign public, the question is the same can we control those private issues of private money, not to overreach to that money not to overuse that power, to come to issue this new money on behalf of the sovereign public in ways exactly the same ways as banks are currently overusing it right. In other words, the abuses of private power are not unique to the banking system. The abuses of private power are a result of the fact that private firms, private companies, quite legitimately pursue private profits. But money is not simply a private resource. It’s a public resource. And this is a political problem. We need to solve it with our banking system, we will need to solve it with our crypto system. And that’s where we are.

Rust 33:29

Okay, awesome. And I was hoping this would be

Brooks 33:34

It’s not a fun debate with that clash, right. You have to have clashed, and

Rust 33:37

I wanted to go back and forth. And I think we were getting there. Maybe there was even more back and forth to come. So I wanted to bring us back to stablecoin. That’s kind of where you get to Michael Hsu. You guys know him pretty well. The regulatory bang for the buck. And the question that I think I really want to get down to is the President’s working group said they should be at insured depositories. They were a little bit vague on what exactly that meant. So I’m looking for your take on that. If they weren’t insured depositories, maybe we talked about CRA. Maybe I’ll let Saule spoke last, so Brian your up.

Brooks 34:15

Sure. Well, so So look, I mean, I was the first regulator to say anything about bringing stable coins inside the banking system, people people have, you know, forgotten that. It’s like great ideas, keep getting rediscovered success has 1000 fathers as they say. My belief is that for a stable coin to be a stable coin, it has to have three features. I don’t think being issued by a bank is one of those features, but I do think that it has to have three features. One feature is it has to be fully reserved, right. So this is how it’s different from bank liabilities, which are of course fractionally reserved as you know, but it has to be fully reserved by liquid assets, which at least you know, when I was running the OCC we defined as insurer. bank deposits and short term Treasury securities and nothing else that has to be backed by that. It has to be redeemable on demand. So now accounts and stable coins right? It has to be redeemable upon demand. And there have to be public audits showing that the assets are actually there. That matters a lot because there are issuers of purported stable coins out there who they do have reserves, but nobody really knows what the reserves are. And when you dig too deeply, you discover that well, they’re not exactly insured bank deposits. They’re really more like long term corporate that junk bonds. I used to say that the tether token, which is the largest stable coin is backed by 68% bank deposits, 4% treasuries, and 23% partially hydrogenated vegetable oil that was kind of like what was what was behind tether was mostly dollars, but also other stuff. If you meet those conditions, then the OCCs view during my tenure was you’re basically the same as a traveler’s check. And I assume Sally would agree with me that there’s nothing about the American Express traveler’s check that threaten the integrity of the US dollar, even though American Express issue those checks not out of a bank, okay. And when you carry them around, they did not represent M one money supply, they were just call options on money that you paid in on on a given day. All right. But nothing, nobody thought that American Express traveler’s checks were anything other than a utility. And in its best use, stable coins are a utility, their utility that takes the settlement and time factor out that solves the interoperability problem that also solves for cross border issues, because I can send a stable coin to somebody in Nigeria just as easily as somebody in Omaha, Nebraska, and they now possess $1 equivalent payment instrument. The problem is that there are other kinds of things that people refer to as stable coins and really aren’t. Okay, one kind is a crypto backed stable coin. So you have a token that represents eath. Right? If Aetherium tokens held in an account someplace, it is redeemable in a sense, you can redeem it for Aetherium tokens, but Aetherium tokens have price volatility relative to dollars. And so what you’re holding is not really stable. The purchasing power doesn’t have the same stability that a you know, Fiat back stable coins. And then you have these algorithmic stable coins like Terra, which again, are not even remotely stable, but they’re operating under a misnomer. So on the banking system question, my belief is banks have to interact with stable coins. I don’t particularly see why the issuer of a stable coin has to be a bank, any more than the issuer of the Bed Bath and Beyond card that you bought this morning at the Safeway is not issued by a bank, there’s just a bank holding the dollars that get transferred when you present the card as an instruction to your bank. So I don’t see any difference between prepaid cards, traveler’s checks and these kinds of stable coins. But I will just make this point which is, for whatever reason, there is a viewpoint in the current administration that on the one hand says probably stable coin should only be issued by banks. But there are bank charter applications pending from the largest issuers of stable coins, which frankly, I would have granted if they had met the normal OCC standards, which are not going to be granted. And and that I don’t understand my basic belief is more of this activity that touches fiat currency needs to be inside the supervised bank system for all of the reasons Saule’s says, right, because these are public goods. And because bank runs are bad for everyone, not just the bank customers, there needs to be supervision and risk management, which is precisely why you don’t want to hive these off from the banking system, you want to include them in the banking system subject to all of the normal risk tools.

Omarova 38:34

So, you know, I’m an academic. And I have to confess that I have not yet made my mind absolutely 100% sure about, you know, how to approach stablecoins, how to regulate them? Because the ultimate question that I keep stumbling upon is what is the point of having stable coins? And it seems to me that a lot of the, you know, fancy people in fancy places have already accepted the fact that we don’t need to ask that question. It’s innovation. Well, there is innovation and innovation. What is the utility of stable coin and effect banks already issued stable coin? That’s bank deposits, right, the electronic and they’re stable, they’re stable, because banks are regulated and banks are federally insured, supervised and whatnot. So you know, what is the point of issuing stable coins on top of it? And, again, going back to that example of the casino chip, right. It’s sort of it does offer a certain degree of convenience within a particular ecosystem for a particular purpose. It’s just a See and faster, you don’t need to carry, you know wads of cash around around the casino is just, you know, it’s used for that. So perhaps stable coins are good for that right, within a particular ecosystem and that ecosystem, that’s, in fact, that’s how stable coins are currently used within particular ecosystem within the crypto trading market. And within those ecosystems, stable coins are used primarily as the store of safe value to back up trading effectively and investment, right. In other words, it’s it, it’s used as collateral in many ways, and you use it as collateral, then you can sort of reuse the collateral held by one particular actor to secure more borrowing and crypto from another actor and whatnot. So it’s used effectively to support tremendous growth in speculative trading and crypto. So when I think about that, this is where I kind of stopped doing need regulated and supervised banks to become issuers of the the asset that is used primarily as collateral to, you know, to increase and scale up speculative trading in crypto assets, digital assets, is that really worth the headache of a lot of smart people trying to figure out how exactly to put fancy word guardrails around that? I think that’s a lot of energy being spent on questions that perhaps mean whose solution perhaps is not going to bring in a lot of public benefit. But that’s just like I said, I’m still thinking about these issues.

Brooks 41:47

So let me let me just pick up on that. So So I think that there are two ways of thinking about Saule’s comments. So the first is in a market economy who decides if there’s a public benefit? Is it? Is it the government who decides? Or is it users who decide? So dollar back stable coin supported about $1.8 trillion of transactions last year, so all of those transactions were conducted by people who really believe stablecoin was super awesome. You may think it’s really stupid. But to me, what it sort of like is, I don’t smoke cigars, I don’t see the utility of them. They seem ridiculous to me. But there’s some number of people in the audience who do and in a market economy, that’s okay, we supply the wants and needs of a large diversity of desire. So the first thing is who who decides? But the second thing I would say is, and I’ll just, I’ll just I’ll tell this in the form of a quick story. So So you know, so I practiced law for many years, and I started practicing law in 1992, when the concept of email had just been invented, but mostly in those days, corporations did not use email, they mostly had these intranets, right. So when I came to my law firm, it’s funny, I’m old enough, we had just gotten computers six months before I joined. So everybody now for the first time had a computer on their desk. But we also had IBM Selectric, because it wasn’t clear if these computers were a fad or not. But we did have an intranet, and I was able to send you know, emails on the intranet to my partners in Los Angeles. But if I wanted to send a note to somebody at a different law firm, I had to send a letter or pick up the phone. And I remember that there was a mentor I had, who was about 40 years older than I was, and he just didn’t understand this. He said, Look, it’s exactly the same as the letter, I could sit at my Selectric and type a message. Or I could sit at my IBM computer keyboard and type a message, but it’s all the same. I’m typing messages, right? So who needs this stuff? Nobody thinks that anymore. Right? We understood that the ability to not only send a note to our partner in Los Angeles, but also to the person that the other law firm across the street was useful, right? So why does this matter for stablecoins? Well, everybody in this room, I’m gonna guess. I mean, you all have a bank account, right? Because you’re here at a bank advocacy group. You all either have Zell or Venmo. I’m a Citibank customers Thrive Zell. Some of you have Venmo. We think these things are fantastic. Because they’re like 50 million Zell users, and another 50 million Venmo users. And so they’re pretty many people I can send Zell cash to. But unfortunately, if you’re a Venmo user, I can’t send you the cash. Ah, that’s what stable coins are. Their internet money, I can send all of you stable coins. But I can’t send all of you dollars over the Venmo app. It’s just a traveler’s check that travels over the internet. And if the utility of a fully interoperable, instantly settled dollar, if that utility is not obvious to you, it will be I mean, just come back in two years. And we won’t be having this debate on that subject. I predict.

Omarova 44:36

Well, exactly. And I completely agree with that. Last point, fully interoperable, uniform, basically instantly settled, digital money is great. The best form of that money, logically speaking, would be digitized US dollar issued by the Central Bank of the United States because that’s the Sovereign Money. Well, stable coins, you know, unless you actually have one issuer or stable coin that provides that service to everybody, then, you know, you sort of who decides, right, then there could be a 10, issuers of large stable coins, they’ll be 100, issuers of stable coins. That’s fragmentation of the payment system. That’s monetary fragmentation. I actually have been in that in that situation, back before 1863, in this country, where every bank issued its own banknotes, and what the problem was like I live in Ithaca, upstate New York, right. And the bank notes, if the only money that they didn’t have traveler’s check, right, but sort of the equivalent was the bank notes of Tompkins Trust Company, my little local bank, and I had to travel to Washington DC, or, God forbid to San Francisco, then merchants in San Francisco wouldn’t wouldn’t, wouldn’t wouldn’t take my my bank note from my little Ithaca bank, because they don’t know, you know, what backs that bank and whatnot. That’s fragmentation, right? So the creation of national currency actually overcame that problem. That’s why we have the banking system, it’s not perfect. We need to, we need to really reform and you know, reform it and work on it. But that’s the reality of it. So stable coins are great, like I said, as long as they have certain utility within certain ecosystems. But the logic of money is money needs to dominate the entire exchange, otherwise, its utility is just not there.

Omarova 46:34

But But remember, stable coins aren’t money stable coins are a transmission device for money. If they were money, I totally agree with you. But it’s like we had 10 issuers of traveler’s checks. And everybody understood that was a great system. Sometimes American Express had a lower transaction fee than Barclays, but Barclays was better accepted in Europe or whatever. There were reasons why the government didn’t issue traveler’s checks private companies did because they were meeting a market demand. But nobody thought that American Express traveler’s checks were replacing dollars. And in the world of crypto, nobody thinks that USDC tokens are replacing dollars, as long as they meet the three conditions. It’s like as Isaac Asimov’s Three Laws of robots, right? If stablecoins meet these three rules, I think they meet your conditions, their money, only the government can create money, but the various ways of transmitting money, you know, that’s better left to the private sector that meets market demand, I would argue, 

Omarova 47:25

Well, first of all, not only the government can create money. airline miles is a form of money money is purchasing power, right? What is money actually is a very philosophical question, but that’s not the question for now.

Brooks 47:42

Give us five minutes.

Omarova 47:43

So so the point is like, like you said brand earlier, right? Crypto strength replace banking. Well, what do you think bank, do bank create money. So if money creation banks or monetary institutions, a lot of lenders can lend without being banks, and don’t have to be chartered as banks, your charter is bank, because you’re monitoring institution. That’s why you’re part you have access to the Federal Reserve’s master accounts and you know, subject to supervision, all of that, because they create money. The vast majority of Sovereign Money equivalent that we all use in this country is created by bank. So if crypto wants to replace that, then I’m sorry, you can call it giraffes, or zebras, but they are trying to become issuers of money. And that’s where we come to this point of, you know, the scale, the accessibility, the availability, and ultimately power. So it is a political question, Brian.

Rust 48:44

I want to jump in…So this is kind of getting awesome.

Brooks 48:51

I this started awesome, right from the beginning,

Omarova 48:53

We could take this act on the road.

Brooks 48:56

This is a crisis of low expectations over here.

Rust 49:01

If I can sell an NFT on it, then I’m okay with that. So, I want to ask this specific question that is about insured depository institutions that are holders of staple coin. That’s the President’s working groups kind of thought piece. And I want to point it steer it straight to Is it a round peg square hole? How would it work? Could it work for CRA because they’re insured? If it’s insured, it’s supposed to have a CRA obligation. It’s important that it has a CRA obligation. How does that work? Who wants to go first?

Brooks 49:38

Okay, well so so. Let’s let’s talk about what CRA is all about. Right? So CRA represents a sort of a bargain. This struggle. A lot of banking is about a set of political bargains where banks as Saule says, banks are special institutions that have a special government charter and special benefits that no other kind of company has and among those deposit insurance, access to low cost funding, in part because of deposit insurance, access to the discount window in the Federal Reserve’s payment system, there are a lot of things a bank gets that nobody else gets. And so it is thought to be just right, that if you get all of those benefits, and in particular, the ability to raise artificially low cost funding through deposit taking, that you should reinvest some of those deposits back into the community where you raised the deposits, right, that just seems fair. And that’s kind of the bargain that the CRA represents. And so if you are an institution that is taking deposits, and those funding your activities through an artificially low cost means you should plow that back into government. So I would argue that if one of the things that stablecoins do is increase the total amount of bank deposits versus other things that might be done with money. And, and if they increase the velocity of transactions, then on the margins, you’d think that it’s a good thing for people who care about community reinvestment for stable coins to do that to increase, right, the demand for and the utility of dollars versus other kinds of assets. So for example, you know, if I could put my money into an interest bearing bank account, or if I could put my money into the stock market, there’s no CRA at Merrill Lynch, right. But there is a CRA at Chase. And so at the margins, how can I make the dollar more useful if it sits in that account? I think that’s one way of thinking about it. It is another reason I would argue that if you believe that stable coin issuers should be banks, then you need to allow the stable coin issuers to get bank charters and bring them into the system that has CRA obligations around it. Right now circle, okay, which is a private company that has for 18 months now had a bank charter application pending Circle has an asset out there that has $54 billion of market cap, meaning $54 billion backed by bank deposits in various places, yet Circle itself has no CRA obligation, right? The underlying banks where the money is held, those banks have their own obligations, but Circle itself does not. What is the issue with granting the Circle bank charter application and bringing this into the supervisory system that in addition, has all of these community reinvestment benefits? I would argue, normalizing this activity will make it less scary. That’s what I would argue.

Omarova 52:15

So first, you know, just quickly, the main reasons why people argue that stable coin issuing should be confined to regulated banking system. In my view, there are a couple right one is if you know, if you want this, this instruments to be stable, right, you bring them inside the regulated and supervised sector. Because that sector, the banking sector, also has the FDIC insurance. So in effect, this is how you stabilize the coin. However, great tether or any other stable coin, may be in terms of being backed by the government bonds and bank deposits and whatnot, there is always that fear and concern, right that maybe the collateralization is not enough, or something else might go on. Whereas if you tell people look, this particular stable coin, whatever solid coin is issued now by Saudi bank, that, even though it you know, all that Saudi bank does is simply issue, this particular coin doesn’t do anything else doesn’t do any lending or whatever. But it’s a bank. So this is a deposit and it’s backed by the FDIC, then people will start treating it as effectively identical to Sovereign Money to US dollar safe, and people will stop monitoring what’s going on there. Because you know, we know it’s all bad. So it’s good to protect regular people who might be drawn to invest to putting their money in stable coin, as opposed to traditional banks, for whatever reason, seeking maybe convenience or for cross border. I don’t know movability, and so on, so forth. So we want them to bring within that regulated perimeter, because we want that coin to be stable. The second reason typically, maybe it’s not articulated always but I think the second reason is that if if we make it or the law that only regulated charter banks can issue stable coins, then it will make it practically difficult, if not impossible for big tech companies like Amazon and Facebook and Apple to effectively become issuers of money. Because the current law is such that if if there is a regulated supervised Chartered Bank within a corporate structure, then no entity within that corporate structure in including the parent corporation can engage in commercial activities and running social media platform, for example, is a commercial activity or running an E commerce The platform is a commercial activity. So the idea is that we will keep Amazon from the ability to issue the Amazon coin. And the reason for that is that if Amazon starts issuing Amazon coin, then basically that Amazon coin very easily will replace the US Dollar as the primary purchasing power in the United States simply because Amazon has such incredible market power, we all buy things from Amazon effectively, right? So those are the two reasons typically that that are professed for that purpose. My problem is that you know, what the stable coin issue is, right? It’s not just the bank.

55:38

The stable coin issuer can be characterized as a bank, or as a money market fund, for example, right? That’s basically what a lot of currently stable coin issuers do when they invest, you know, the funds that there is from their stable coin purchasers into various securities, for example, right. But in some sense, if you look at the ecosystem within which that stable coin moves, right, the stable coin issue is also functionally a central bank within that ecosystem. Because whatever the tests are limited, or terror labs, TerraForm, labs or whatever it is, in fact, TerraForm Labs is a very clear example, because they actually adopted the entire narrative of being a central bank for their own ecosystem, algorithmic or not, whatever it is, but that’s the thing. And, you know, do we want to, to proliferate sort of a chain of this separate ecosystems, with each publicly backed bank also becoming effective, a little mini central bank within its own ecosystem? Do we have the regulatory approach for that? And I don’t think we do. So before we talk about CRA, for example, we need to just start to think about how the principle of the thing shifts, when we sort of start thinking about stable coins, these deposits that are denominated in US dollars, and also backed by the FDIC and whatnot, because I think the shift is much more fundamental. And we are not yet sure what the implications are. And until we’re sure I am hesitant about sort of condoning that notion that we need to put the FDIC insurance straightforwardly behind the stable coins by making it all chartered and regulated as banks. But perhaps, perhaps there will be answers to all these questions in the future. And I may change my mind… 

Brooks 57:49

Or maybe, right now, so so just two very, very quick responses to that. So so so first of all, I think on the point about, you know, if you limited stable coin issuance to banks, then you would solve the problem of bank commerce separation by making sure the Amazons of the world didn’t issue stable coins. All well and good insofar as it goes. But I keep coming back to what do we do about the fact that to purely financial companies, not commercial companies have applied for bank charters, to issue stable coins within the regulatory perimeter of the OCC, and it appears that those charter applications are just never going to be acted upon. I mean, those those aren’t commercial companies. And if we really believe what we’re both saying, which is that stablecoins would be safer inside the banking perimeter. We need to put our money where our mouth is, and we need to grant those bank charters, I mean, assuming that they meet the other things, I mean, I think that’s one key thing. The second thing that’s really important, though, I don’t know if you picked up on this. But, Salih, a moment ago, you made the point that there are other forms of money, like, for example, airline miles. But then five minutes later, you made the point that we can’t have Amazon coin. I would argue this is not about stable coins. It’s about crypto more generally. But it is definitely true that all of us this gets to the financial inclusion point. All of us have all kinds of stranded value that we have created, whether it’s by sitting in airline seats, buying things with our credit card, earning rewards points, going to Amazon and buying things that generate these things. The idea that we can’t monetize all those things in a fungible way, right and spend them the way we want to spend them. Versus I can only spend my United airline miles to fly united, God helped me that can’t be a good thing. And one of the projects of crypto one of the projects of tokenization is to take all of those assets that you’ve all generated and make them fungible and accessible to you. Right? That’s part of what crypto is all about. But but if you think those things are money, then you can’t say that those things can’t be inside the banking system. If they’re money. I would argue they’re not yet money but they should be because their value you created through your activity. You should be able to extract it, different point but an important part of the crypto enterprise

Omarova 59:58

Well Brian, not every ethical standard value, or asset that we create by just virtue of being live human beings within a society should be commodified, need to be commodified. And even when they are commodified and monetized, it doesn’t necessarily mean that we as the sources of this new value, actually get the lion’s share of that value. It could be somebody else. Speaking of Amazon data, we produce data in our everyday activities. And it is now being monetized thanks to technology, thanks to Internet by companies that actually have market power. Which brings me to that difference between airline miles and Amazon coin, it is about market power, money becomes a replacement and the challenge to Sovereign Money, private money becomes a challenge to the Sovereign Money, when there is market power behind that private money and the private money issue. And this is why I’m completely with you on all these wonderful things that crypto can offer people, as long as long as long as the market power of those crypto issuers and companies running in those ecosystems is not growing to an extent where it becomes a political economy issue. And, you know, keep it private. But in order to keep it private, I don’t think we should put FDIC insurance on the line there. Which brings me to this conundrum. Well, do we want to make the stable coins safe for the people to use? Because that the best way to do it is to bring the FDIC insurance? Why? And my question to that, why my answer to that, why is not there yet? I’m not sure what the answer to that why would be? Alright, Adam, you wanted to…. Otherwise, we can just argue about this for hours.

Brooks 1:01:52

Just wind us up, man. 

Rust 1:01:56

Yeah, so, so the next question is one that I think actually you guys have more on? Which is cbdc. Is that a good option for this? Is cbdc a good idea? And, you know, if so, how? So?

Brooks 1:02:16

Yeah. Well, you have you want you wanna go first? Okay, I’d rather preview my opponent’s argument and then lie and wait, I’m sure.

Omarova 1:02:25

I’m sure Brian would say no, it’s not a good idea. Because it’s controlled by the government. I think that if you take seriously all the arguments that Brian articulated so artfully, as to why crypto offers such great benefits, just like Internet back in the day offered benefits over snail mail. If we take those arguments seriously, then, you know, then cbdc actually can be a good compromise with respect to both producing those benefits technologically through using the technology, but also preserving the important sort of levers of public power over a public resource, which is Sovereign Money. And, and ensuring inclusion in a way that no private entity can fully insure. Because ultimately, private entities are entities that generate private profit. That’s just who they are, right? That’s the nature, it’s not good or bad. That’s what they do. And private profit is an incredibly strong motivation for doing certain things certain way and not doing certain things certain way. Whereas the public entities, however flawed, they may be, do not are not slaves, to private profit motivation, and are inherently better positioned to actually pursue collective interest. So from that perspective, you know, the key, the key benefit of cbdc would be basically taking Sovereign Money that we already know and trust, and the world knows and trust the US dollar, right, and make it programmable, make it movable, make it potentially interoperable with our digital Sovereign Money across across borders. I’m not saying it will be easy to do, but it is possible. And if we achieve those goals, then we will, we will remove the need to create this fragmented series of privately issued stable coins for example, right. Now, of course, the devil is always in the details. And we don’t know what the design of that particular cbdc system would be. And the design can differ tremendously on the one end of the designs that are currently discussed, is basically keeping the banking system as it is now, except now we will just have this sort of the US dollar is going to be some kind of token but the token is going to be sitting in the federal reserve accounts that only banks chartered banks can have. But then the banks will issue some kind of, you know, deposit accounts that are effectively backed by the newly digitized US dollar, right. Everything else stays the same. I’m sure Brian is not happy about that system. I’m not that happy about that system in many ways. On the other end, the opposite end of that could be that we can make all of the money effectively, directly public money in other In other words, instead of using bank accounts, private bank accounts deposit money electronically to pay people, for example, we would be using directly the liabilities of the Federal Reserve that would be like directly digital dollar, that somewhere sits in the wallet, right, then the question becomes, who would manage that wallet? Would it be the Federal Reserve Bank of New York or Chicago, whatever it is? Or would it be, for example, a private bank to whom the Fed actually outsources that function? And in between those two extremes, there is a whole range of various structural solutions as to how it can be managed. And everything depends on where the choice lands, right. But as a matter of principle, I think, CBDC offers the answer to the problems that crypto is claiming to offer solutions to, but I doubt will in a way that actually will achieve all the goals of the society. But you know, but we shall see.

Brooks 1:06:36

Well, you’re you’re correct, Saule is correct. I think CBDCs are a frightening prospect. And I’ll just try and articulate why. So the way I usually talk about this is there are three possible frameworks for a financial system, I think, I mean, there might be infinitely many, but I think they’re really three. So the system we have today is a system where banks sit in between the government and the users of the financial system. And banks play this intermediary role chartered by a state or federal government to do various things. That includes holding government insured bank deposits, you know, it includes administering the retail side of the payment system, and it includes creating money through credit operations, and banks do that. The Federal Reserve sits over here doing what it does, but it processes monetary policy through the banking system, which is the middle, right, so you could move and I’m just gonna guess, by the way that this is the funny thing. I mean, I think one reason why it’s fun to be on a panel with Solly is I’m a little bit unusual for people with my political worldview, in that I’m pretty skeptical of the banking system, you think of people on my side of the aisle as being like pro bank, and you think of Democrats as being tough on banks? I’m actually pretty skeptical of the bank model. Okay, so we share that. The question is, what are the alternatives to the banking model? One model is a much more government controlled system over here. And you know, you could argue why you think that’s a good thing. And I could tell you why I think it’s a bad thing. The alternative is a user controlled model over here. So I look at what are the most obvious problems with moving to the government controlled model. And for this, I’m informed by the only country that’s actually launched a central bank digital currency, and that is China. Right? So China rolled out the EC NY token a year and a half ago, it is now not fully retail operational, but it’s in widespread use in its beta version. So when I was Comptroller, I sat on a group called the International hubs of supervision of which the vice chairman of the People’s Bank of China was an wasn’t member. And I was, you know, in a meeting when I heard him talk about the EC NY project and why the government of China thought it was a good idea. And you know, the People’s Bank of China have written papers on this as well. They had three basic reasons why they thought a central bank digital currency, in other words, a government controlled system was was a really great idea. The first reason was a belief that it would allow them to disintermediate the dollars dominance as a reserve currency, and the way they planned to use the EC and why it took them that way, was by requiring in the future this hasn’t happened yet. It’s just been articulated a policy goal was to require in the future, that inbound foreign investment into China not be made in dollars, but made in the form of EC NY tokens. So imagine that you’re Andreessen Horowitz, or Blackrock or some giant, you know, asset allocator. And you want to invest in the next WeChat, or the next Alibaba or whatever. Normally, the way venture markets work is everything clears in dollars. But in the future, if it’s a Chinese company, it would have to clear in tokens, which would increase the relevance of the remnant B currency relative to the dollar today, that was their first reason. The second reason, which he was quite candid about was the idea of let’s build a system away from the you know, sort of Basel Committee system, the system of sanctions that the US government basically controls right We have enormous influence over law enforcement globally, because if we cut someone off from the banking system in the West, you’re basically unable to transact. So think about the sanctions system on Russia right now. But the idea here was, we’ll create an entire parallel system that half the world will adopt. And then you won’t be able to cut North Korea off from from the system where there’ll be a different system that we can administer. But the third thing, the one that cuts me the most, and which I worry the most about, about a central bank having power over was the power to make determinations about settlement.

You might think that this is crazy talk out, you know, at one point, I thought maybe I was seeing shadows, and then the Canadian trucker protests happen. And, you know, you can think the truckers were good guys or bad guys, I’m pretty sure I mean, I’m gonna remove mask wearers. I’m gonna guess I know what your views are. But not everybody shares that view, right. And the Canadian truckers were guys who had driven trucks, earned money, paid taxes on the money and deposited the money in the bank. And then one day, the Canadian government said, we’re so annoyed at what you’re doing that we’re not going to allow you to withdraw dollars from your checking account to buy a sandwich today. Right, you thought it was your money, but we’re going to show you whose money it really is, we’re going to invoke emergency powers and cut you off from your own money. This was the third objective that the People’s Bank of China Vice Chairman articulated, which is there are things the government might not want you to buy. And on any given day, you might agree with the government’s decision on that or you might not agree. The example I give is, you know, I, when I was running, the OCC sat in my office with the CEO of just to preserve anonymity, I’ll say one of the two largest banks in the United States, I won’t say which one. But he came in and told me that the bank was deciding, you know, in the wake of Sandy Hook and some other things, whether the bank would no longer allow people to use their credit or debit cards to buy firearms. And again, you can be on one side or the other of the gun control debate. But I grew up in a rural area where you know, kids went out hunting with their dads on the weekend, it was just a thing that we did. And a lot of Americans live in those places. And I said to this bank CEO, I said, you know, at least we’re talking about debit cards, not credit cards, it’s their money. You can’t tell them what to buy, if it doesn’t violate the law way. What’s next that you don’t like me reading a right wing magazine or a left wing magazine? So that’s the other feature of the government controlled system is the power over the payment process versus what crypto is all about? Okay. Crypto is all about creating a user controlled system. Remember how I started that the point of tokens is to empower you to earn tokens by maintaining these networks? The question is, do you want a user controlled system or a government controlled system? Since all of us don’t like the bank controlled system? That’s the question,

Omarova 1:12:35

well, you know, user control. So…

Rust 1:12:37

Hey Saule, I want to give you the last word, but then we want to give some people a chance for questions. 

Omarova 1:12:43

OK. So you know, there is user control, and there is the control of the system. I have control over whether or not I want to, you know, buy services from spectrum, for example, right, or, theoretically, from some other telecom provider, but where I live in Ithaca, I really don’t have any choice. So I have to pay spectrum. And then they I’m stuck, right? Do I have control over my micro decision? Technically, yes, I do. As a practical matter, do I feel like I actually have control over the system? No, of course not. market power is not an inherently purely governmental attribute. And the concentration and abuse of power is not only what governments do, private corporations do that all the time. And that’s actually even worse, because that bank, to whose CEO you were talking about these issues, right about debit cards, that was not government that was a private corporation, right? And another thing is, yes, the government, the Federal Reserve, the central bank does process payments in the background of the system that we have today. And yet, it’s not like half the country or the entire Republican Party or the campaign finance in this country of political candidates that do not happen to be of the same party as the ruling. I don’t know, the White House incumbent might be somehow cut off from those settlement systems by the Federal Reserve. So we don’t worry about these things in the United States. The United States has a democratic system of government, that we are not China,

 right? So it hasn’t happened….

Brooks 1:14:31

But we might be Canada.

Omarova 1:14:33

It hasn’t happened so far. So to me saying that somehow this cbdc will be this incredibly oppressive government control system. I think it’s it’s, it’s not entirely true. And I think we should think about cbdc Not as a control, but as a provision of a service. And we have plenty of services provided by the public authorities precisely because private markets do not necessarily provide those services equally for everyone. But then again, I think we’re out of time. Right?

Rust 1:15:04

Well, do any does anyone have a question? Okay. Yeah. Is there a question manager? Or is that? A control? Yeah, exactly centralized

Brooks 1:15:16

servers loudest first?

Rust 1:15:18

Okay, you stood up first, I think.

Auidence question 1:15:21

The federal deficit, budget $30 trillion. And growing? How stable is the US dollar?

Brooks 1:15:32

I’ll just start. I mean, look, this picks up on what Saule just said, I think on a point that solid ended with which is, you know, how much do you try? Like, do you believe this is why I put it? Do you believe that there’s something about Americans, that actually makes us just better and different from everybody else, such that we would never engage in the kind of thing that the finance minister of Canada just engaged in with the trucker protests began, you’d have to agree with the truckers to know what it’s like when your viewpoint is the minority viewpoint, and somebody’s going to cut you off from from something. So it’s true. We’re America, we’ve never done that before. But I would argue the reason we’ve never done things like that before, is because we have a set of systems and checks and institutions that don’t allow that to happen. Now, once you start building things that would allow us to do that. My belief is we’re no different from any other human beings, we will use the powers that exist. And so my fear about creating a system in which the government could do what they did in Canada, and what China has that they want to do is, eventually not tomorrow, but soon and for the rest of your life, as Rick said, it will happen. I’m afraid of building systems that could be used that way, even if we don’t think that Janet Yellen will use the system that way, but somebody sometime will, if they can, because we’re no better than anybody else.

1:16:49

Yeah, like Elon Musk might?

1:16:51

Absolutely, absolutely.  It’s not always gonna be your friend who’s gonna be in charge someday, it’ll be his friend and not the government. Right. But it’s all about centralized control, there is a question

Audience question 1:17:06

that comes to mind is if you talk about control or not, I think we can

Rust 1:17:09

do you want to use the mic? If you can.

Audience question 1:17:14

I just want to lift up that we control what poor people can ask me all the time, what food they can buy, what they have to have a job or not what childcare they get. So I think they’re just really important. And so if we’re concerned about government control, let’s make sure that it lifts people off. And you talk about why poor people can’t have like rich people. It’s not about acting like if they don’t have the autonomy or the resources to do so. So we want to mean that we do that, and we do it in our voice a lot of the time.

And then my other question. I’m kind of wrestling with the idea that you want crypto to replace things, but then wanting to be in there. And I’m not quite sure what I don’t know how to reconcile the replacing bank, a bank cutters. And I know that like even just in the world of CRA, the types of charters that were being proposed, don’t get at the type of conclusion that we’re talking about. So it’s not that just by putting them into the system as a charter doesn’t mean that we’ll get to the same requirements that city has, or chase hands. And we can talk about all the reasons why I need to be better today, but I think I think that they’re not being approved as a false narrative. 

Brooks 1:18:28

yeah, I’ll just speak to that. I don’t I don’t think that’s right. The, the, you know, what, like, what I spent my time as controller doing was sort of raising the question of what what constitutes a bank, what is banking and the point that I tried to make and chartering the first FinTech bank, and then later, the first crypto bank was the idea that banks are legacy money centers for the aggregation of capital, and then the dissemination of capital into the economy, which is, which is what we’ve always thought of banks as being and that banks have to offer all of the services that we historically associate with banking, to get a bank charter is itself the false narrative that that was my point. So you know, I did a lot of writing around the idea that there is an unbundling going on, in financial services made possible by technology, where you can now engage in payments without taking deposits. I would argue you couldn’t do that 100 years ago, that was not technologically possible. And so my point about bringing them into the banking system, the reason it’s not a contradiction, I don’t think is I don’t think banks, as we currently know them will exist in 50 years, there will still be banks. I mean, JP Morgan will be a company and they will do stuff. Yeah, replace the system replace the banking system. So the banking system is based on the concept of the money center. Sort of, I mean, banks are just like the post office. It used to be that the only efficient way to send money or to send a letter from New York to Omaha was you had to collect all the letters in New York at the Central Post Office. so that they could be sorted by zip code and sent out somewhere. And then people invented internet. And you don’t have to do that anymore. The need for the collector function, the central intermediary function vanished because of technology. My argument is that’s happening to banking, you can like it or not like it, but it inevitably is happening. And so my point is the system of supervision that we have the system of risk management and disclosure needs to be adapted to the new regime, just a Saule  says, the same way it applied to the old regime, the old regime won’t be here and 50 years. And so how do we anticipate that and provide protections and risk management to make sure the new system works? That was my point.

Rust 1:20:39

Saule, do you want to jump in on that?

Omarova 1:20:41

I want to give a chance for some other questions to be asked.

Audience question 1:20:48

I want to talk a little bit about regulation of crypto wine is a view that signaling from regulation that is able to stay around is a really important factor. There’s my first question. And then I’d love for you guys who have comments on the advice of the bill was introduced in the Senate by Senator Joe. What does it mean doesn’t change? 

Brooks 1:21:16

Good question. 

Omarova 1:21:21

So we could we could spend hours talking about this, right? Because there is regulation and regulation. I agree with you that part of the reason. For example, the crypto industry was apparently ecstatic when they saw the Loomis job brand, Bill. Because that precisely for that signaling reason, right? It’s sort of we know that at some point, because of the scale at which the crypto industry is growing, and the prominence of fraud and anti money laundering violations and whatnot, there will be some regulatory action coming. And so for the crypto industry, as I understand, they like this bill, because it creates a particular a system of oversight that is not too onerous. In other words, it doesn’t necessarily subject all the crypto players to the bank, like sort of intrusive regulatory oversight, right. And instead, it’s more like CFTC. My problem with that particular proposed bill is a fundamentally philosophical, it’s what it does is, it would be a totally fine bill. If we accepted one simple assumption, the crypto or digital assets, and the ecosystem within which those assets are created and move is basically the same as traditional financial assets, only maybe slightly bigger, or maybe slightly faster, or maybe slightly different. Because if it’s the same, then yeah, we can take the CFTC, the commodities regulation system, we can take disclosure, we can say, Well, if your security then you know, file certain disclosures, we can take various things. And you can say, well, the Fed should provide access to the master accounts to all of this, all of these new companies, and just impose impose those existing rules on this on this new industry. But I think that’s where the fundamental shift is happening, because his digital assets are not exactly like the good old, okay, here’s a loan, it’s a bank, it’s a bank like product, or this is a deposit, this is a clear way, because this screw is security. And in the traditional regulatory mindset, right, we should be able to look at the financial product or service, and clearly identify the function of it and the nature of it, and put it in a box, this would be the banking box, this would be the securities box, this would be the commodity box. And what a digital asset is, is just, it literally is just a container, it’s a bit of information, you can program it to carry any kind of economic relationship inside. And it is very difficult to look at a crypto asset and put it in a traditional box that we’ve inherited, if not from 1933, maybe even from 1863. Right. And so if this is where the problem is, then this particular bill isn’t really getting us to the to the crux of the issue, right? And this is where my hesitation is.

Rust 1:24:32

So Brian, you get the last word. And then we’re gonna we have to wrap up, which is too bad  because this is great.

Brooks 1:24:38

Oh, well, first of all, this was so much fun. I mean, we really should take this on the road. This was this was the best. I mean, I mean, you know, you sometimes feel like the country would be in a better place if people from opposing sides of the political spectrum could actually sit down and have an actual conversation right?

Omarova 1:24:55

Actually, I’m an independent and I consider myself being right in the middle of this.

Brooks 1:25:00

And nobody accepts me as a member of anything. So we’re the same place. Look that I’ll just end on, I think this is a great question to end on. So so, you know, markets abhor ambiguity, obviously, and, and so it’s one of those things I think of Justice Brandeis is famous line, that often it’s more important that the question be settled, and it’d be settled, right? So whatever the rule is, like, you know, I might like lower taxes than you might like, but just tell me the tax rate and don’t change it, you know, like, and then markets will adapt. So what I think is, I think any kind of framework is better than no framework at all. I’m proud to have kind of launched the public discussion about what frameworks could look like. And I think it’s enormously important that you now see some level of bipartisanship around the idea that we need some framework. I would disagree with Saule, about about some of the things she said about about, you know, needing a crypto specific framework because this is so different from other things. I mean, my basic view is, crypto is a word like internet that covers lots of unrelated activities. So if you think about what the internet is, its travel apps, banking apps, media apps, communication apps, we don’t have an internet regulator. We regulate media, one way we regulate banking a different way, et cetera. I think that the Lummis, Gillibrand bill is imperfect in all kinds of ways. But I do think that it launches a discussion about how to start thinking about this. And if the way you start thinking about it is some crypto tokens look a lot like Internet stocks. Other crypto tokens look a lot like traveler’s checks, other internet tokens look like you know, soybeans, and they really do you could bucket a lot of crypto into those three buckets, then it’s better than nothing. It’s I might want a different tax rate, but it’s at least a tax rate. Thanks for being here. This is really amazing.

Photo courtesy of Scott Henrichsen.

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Redlining and Neighborhood Health

Before the pandemic devastated minority communities, banks and government officials starved them of capital.

Lower-income and minority neighborhoods that were intentionally cut off from lending and investment decades ago today suffer not only from reduced wealth and greater poverty, but from lower life expectancy and higher prevalence of chronic diseases that are risk factors for poor outcomes from COVID-19, a new study shows.

The new study, from the National Community Reinvestment Coalition (NCRC) with researchers from the University of Wisconsin–Milwaukee Joseph J. Zilber School of Public Health and the University of Richmond’s Digital Scholarship Lab, compared 1930’s maps of government-sanctioned lending discrimination zones with current census and public health data.

Table of Content

  • Executive Summary
  • Introduction
  • Redlining, the HOLC Maps and Segregation
  • Segregation, Public Health and COVID-19
  • Methods
  • Results
  • Discussion
  • Conclusion and Policy Recommendations
  • Citations
  • Appendix

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