The majority of the world's leading economies have launched central bank digital currency ("CBDC") initiatives. In particular, China has launched a sophisticated digital currency called the eCNY that promises to reshape money for billions of people, including many outside of China. Meanwhile, the EU has announced immediate plans for a digital euro. According to Giancarlo, these CBDC launches threaten the preeminence and power of the U.S. dollar as the world's default global currency. The former chairman argues that unless a digital dollar is released, foreign CBDC's could signal an end to the "exorbitant privilege" that the U.S. economy enjoys from its status as the world's dominant reserve currency.
Not all CBDC's are created equally, and they can confer incredible new powers to the governments that control them. Giancarlo delves into important legal questions about financial privacy and contrasts the potential for First Amendment and Fourth Amendment protections that would be unique to a Digital Dollar that are absent from private cryptos or currencies like the digital yuan in China.
Christopher Giancarlo served as the 13th Chairman of the United States Commodity Futures Trading Commission. He is senior counsel to the international law firm, Willkie Farr & Gallagher.
The Digital Dollar and Central Bank Digital Currencies
Former CFTC Chairman Christopher Giancarlo: Here's what's going on in the world right now. Over a hundred countries are actively exploring developing sovereign digital money. That includes 50 of them that are in advanced stages of exploration, 19 of the G20. It also includes China that has developed something called their eCNY which is their digital currency which they've already placed into over 240 million wallets of Chinese citizens and that figure is 18 months old. It may be a lot more than that by now. Europe has said that by 2025 they will deploy a digital Euro.
The "Exorbitant Privilege" of Issuing a Global Reserve Currency
Joel Cohen ("Host"): Maybe you could quickly explain to our viewers who aren't remembering their econ classes. Why do we get so much benefit from so much of the world using and storing wealth in the dollar?
Giancarlo: Yeah, we are a debtor Nation. We fund ourselves by selling debt to the rest of the world and this goes actually go back to my Commodities work the CFTC where I became very aware of the fact that most of the world's major commodities, energy commodities, building commodities, food commodities – like oil, like iron ore, like wheat and corn and soybeans are priced in dollars and they're priced in dollars for historical reasons as well as liquidity reasons. And the reason is that America's got the biggest and most liquid price setting markets in the world, regulated by that relatively unknown agency the CFTC and it's the quality of that regulation, the quality of those markets that makes the world hedge its need for wheat or soybeans or iron ore or oil in American markets. And because they buy those goods in dollars, because those goods are priced in dollars, every country in the world's got to hold dollars. If you're going to buy oil in virtually every country in the world, you're going to pay for it in dollars. So, you've got to have some dollars. The other reason is that in uncertain economic times. which come and they go, but they always seem to return, the world reaches for something that they deem to be safe. Because the US is the world's largest economy, because the taxing power of the federal government is relatively unlimited to pay its debts, holding U.S debt, which are called treasury securities, is a place to go for safety when all the world is getting rough or wars are breaking out or threatening to break out. And so, for this reason, it allows the United States to basically deficit fund all of its operations, all of our social benefits whether that be Social Security or welfare or Bridges and tunnels being built. They are built on the fact that the U.S issues debt instruments, borrows from foreign countries to build those bridges or make those welfare payments or to pay the Social Security payments.
Host: It's a multi-trillion dollar investment in our economy.
Giancarlo: Exactly, and Christine Lagarde, the head of the European Central Bank refers to it as the “exorbitant privilege enjoyed only by the United States.” And we can debate whether it's a good thing or a bad thing.
Host: And you want to keep that privilege rolling along.
Giancarlo: If that privilege ends tomorrow, we're all in deep tapioca. It's not a good thing. We've got to keep that privilege going. And so it's my own personal estimation, based upon thorough work. I've served on a Hoover Institute one-year study of the digital Yuan that within 10 years, a third of the globe could be either directly using China's digital currency or using what looks like a domestic currency but it's actually powered by Chinese technology.
The Digital Dollar and Privacy Protections
Giancarlo: Now, the digital yuan is a very sophisticated instrument, but it also has complete surveillance and censorship capability. If you're a Chinese citizen and you criticize the Chinese regime, tomorrow your your digital money will be turned off and you may be prevented from being able to get the train out of your village or to pay the rent that you used to pay on your apartment.
Host: Incredible power, incredible leverage.
Giancarlo: Great surveillance. I wish to say that the digital euro would not be used for surveillance, but there are some prominent European promoters of it who are on YouTube going around saying we'll be able to track every transaction. So, the design choices we make in digital money are critically important.
Host: Chris this was on my outline with a bullet that I wanted to talk to you about, which is we like the concept of our own privacy. We like personal freedom without government surveillance or monitoring. And the idea of a a crypto dollar where the government could go back and and trace where it was spent, where it was exchanged, what that means in terms of relationships, is pretty startling. I guess, why don't we start with the reality that we're not exactly in a fully private world right now considering, as you mentioned earlier, most of our money and most of our transactions do leave a digital footprint. How would current digital wealth differ from the type of privacy issues in a crypto digital dollar?
Stablecoins and a Lack of Privacy
Giancarlo: Well let's put Bitcoin aside for a second. which actually is a spectacular instrument of of digital privacy, but look at stable coins, which are increasingly growing in utilization by some of the very forward-thinking people that are very excited about digital money. There's no privacy protection whatsoever in stable coins. I can't tell you how many times people come to me and say, Giancarlo, what are you doing? Why would you support a digital dollar when the government's going to surveil you? Leave it to the private sector. And my response to that is, how well has that worked out for you in the internet of information with social media that tracks everything you say and do, and not only surveils it but censors it? The difference is they're not subject, private enterprise is not subject to the First Amendment freedom of speech or the Fourth Amendment freedom of privacy, but the federal government is. So, designed correctly, a digital dollar could actually be a greater provider of privacy than a privately operated stable coin which has no privacy protection by law. And so the notion that private sector conducted money give more privacy protection and surveillance than government-run money, it's just false. Right. We can't make that assumption. Now, that doesn't mean that governments won't abuse it and and that's why if we get privacy wrong in a digital dollar, people will flee it to other instruments like maybe Bitcoin. And I'm not saying that's a good or a bad thing, but but the fact of the matter is, it would undermine the dollar. But the flip side is also true, if we get privacy right in a digital dollar, compared to say the Yuan or a digital Euro, people might flock to a digital dollar we could get three more generations of the world flocking to the dollar because it becomes the world's most private instrument. If we get the design choices right, and in a free society I think it's right that people for lawful transactions enjoy privacy. If I choose to give to Planned Parenthood or if I give to “right to life,” that's not my government's business. And you can imagine a left-wing a right-wing government may want to know exactly that and may want to censor it. As long as Congress hasn't banned it, that's my private business and nobody else's and getting privacy right is not about doing illegal things, it's about a free people should enjoy freedom of their economic activity simply because that's a matter of our personal autonomy, and it's nobody else's business.
Digital Central Bank Currency and Law Enforcement
Host: I think about this as such a fascinating experiment that you're playing a role in such an interesting innovation, and there's two sides to everything. So you think, well with the digital dollar, imagine if we put a country on a sanctions list, then we could turn off their dollars. Or if someone stole 20 million dollars from a hospital or 50 million dollars from a bank, well we could reverse that or we could seize it. But at the same time, those are the types of concerns that might make people skeptical or have fear of using a currency where the government has so much power.
Giancarlo: Absolutely, the great thing though about going from an analog financial system where the limitations are set by the physical or the engineering limitations of the instrument to a digital system where all the tolerances are design choices is that we can come to some social consensus as to where the balance points are and write that into the code itself. And so again, we need to be in the game of experimenting with these policy choices now so we come to some consensus as to what are those choices say for example in the Chinese digital yuan, the Chinese people aren't making those choices.
Host: No certainly not.
Giancarlo: The party is making those choices and telling them, this is your money and everything else is banned. And this is what you get. That can't be the road we follow in a free Society. We need to be out there experimenting, and we go to the government and say this is what we will tolerate in terms of your knowledge of who we are, and this is what we won't tolerate. These are the choices a free society would make and what its money should look like in the future. And once you go to a digital format, the range of choices is so much greater and the precision is so much greater. Look, digital money is coming – sovereign, non-sovereign, or some combination of the two. The future of banking, finance, and money itself is going to be digital. It is going to be token-based, it's going to be blockchain-based. The question is “how?” Just as I did at the CFTC, let's not sit back and let this innovation pass us by. Let's engage with it. Let's get the balance right between privacy and national stability and law enforcement.
Host: Chris Giancarlo is the former chairman of the Commodity Futures Trading Commission and the co-founder and executive chairman of the Digital Dollar Project. Chris what a pleasure. I really appreciate your time and in such a hectic crypto environment, I understand it's a scarce resource in and of itself.
Giancarlo: Joel the pleasure is mine. Really good talking with you and I look forward to doing it again soon.