During the 2021 World Investment Forum, as part of our FTSE Russell Convenes series, we interviewed some of the most prominent speakers on key trends influencing the investment industry and beyond. This time round our host Jamie Macdonald met with MIT’s Media Lab Director of the Digital Currency Initiative, Neha Narula, who shared her thoughts on how the advancing technologies around cryptocurrencies like Bitcoin and Ethereum is placing pressure on central banks.
FTSE Russell Convenes brings to our audience independent and unvarnished insights and opinion from experts in their respective fields related to today’s most discussed topics.
Jamie: Neha, thank you so much for taking the time to chat with us this afternoon. Now I wanted to talk specifically to you about central bank digital currencies and private market currencies. But before we do that, would you mind just introduce yourself and saying a little bit about your background?
Neha: Sure. So, my name is Neha Narula. I'm the director of the Digital Currency Initiative, which is based out of the Media Lab at MIT. We are a group of technologists and researchers who are focusing on cryptocurrency and digital currency research and development. So, we do research, we write papers, we convene. I'm a computer scientist by background, went to graduate school at MIT as well.
Jamie: So, when you say do research, are you working with central banks to help them design a digital currency, is that right?
Neha: Yeah. So, we work in two areas. One area is in cryptocurrencies where we focus on decentralized networks. And then the other area is centralized digital currency and well, who has the biggest centralized currencies out there? It's central banks, and they are starting to investigate the idea of issuing their own digital currency. And so, we've had the pleasure of working with a few different central banks. And more recently, we've been doing a project in the past year with the Federal Reserve Bank of Boston.
Jamie: So, I have a question ah because in terms of rollout of a central bank digital currency, um ah I think you'll probably agree with me that it's inevitable that they will at least try at some point. However, my question to you is why do central banks just kind of wait and let the private market make the mistakes? I mean, with all your amazing research, I'm sure they'll get it right, but they could for free, just wait and let the private market work out where the mistakes lie and then wait a few years and then produce one. That's much better because I assume that when central banks release the digital currency, they want to make sure that it's right.
Neha: Yeah, there's a lot of pressure. There's a lot of pressure to get it right.
Jamie: Well, sorry, let me let me ask you a follow up quickly. Is that are they under pressure? Because basically the likes of Bitcoin, Etherium and just getting so big that had they stayed at lower numbers with market caps around 10 20 billion, they wouldn't have been in such a rush. But because of the attention these coins and this this technology is getting, they feel that they're they need to be there faster.
Neha: Yeah. So interestingly, it's not actually Bitcoin and Ethereum that are putting the pressure on central banks, despite the fact that I think today crypto has a market cap around $3 trillion, that's peanuts to a central bank. The real pressure is coming from tech companies. It was a wakeup call for the People's Bank of China, the Central Bank of China, and they actually started developing their own digital currency in 2014. So, you know, in kind of in response to what they were seeing in the world with Bitcoin and Ethereum. But then I'm sorry again. OK? They started developing their own currency in 2014, that got everyone sort of really excited and interested in moving faster in this space. And now, I think a lot of central banks feel like if they don't do it, they might be left behind.
Jamie: So when it comes to the central banks rolling out digital currencies, what power do they have, if any, to now think right, we're going to be less accommodating about other coins and the private markets, and to some extent we'll be able to slightly usher them out or do a central banks, in your opinion, going to be fine with, you know, people having the option of using whatever they want.
Neha: Well, I think you know, there's what central banks want and what the regulators and governments can enforce, and then there's what people want. So, technology is kind of inevitable. It's really hard to stop a snowball rolling down the mountain. And so we've seen this in plenty of areas in tech and where tech has run up against regulation and government. And if people are really using something and finding value in it, then the regulation has to change. You can't change people finding value in something. So, an example of this is Uber, you know, Uber pretty flagrantly flouted regulations to start their company and to start their business. And, you know, as people kind of tried to put a lid on that, they were really challenged. They were challenged politically. Yeah. You know, Uber took out advertisements saying, you know, your politicians are trying to take the service away from you and people didn't like it. And so, you know, you can think about that analogy extending to money, right? So, it's going to be really interesting to see what happens. I think it really depends on where we see useful systems being built, useful applications that really make people's lives better.
Jamie: So, could you help me understand the issue of privacy a bit better? Because I do feel there's a lot of misconception here, and maybe you can help explain it to me that in the future, we may use one digital currency to buy on Amazon or whatever, because we don't mind if we see our footprint out there for people to see, but we may donate to a political party. We may want to remain more anonymous using that, and that would be a different digital currency. Is that a is that a possibility that we may face?
Neha: Yeah. So, I'm a computer scientist, I'm a systems researcher and we try to build secure private systems and it is extremely challenging. It is really, really challenging to get strong privacy in these systems. However, I think it's of paramount importance.
Jamie: Can you go into a bit more detail about that? Like why is it so difficult to build them?
Neha: Yeah. So, I think, you know, the way to think about this is once information is out there, it's out there and it's very hard to take it back. And so, you really have to think about privacy very early on in a system, and it is so much easier to build privacy in from the beginning than to try to tack it on later. You know, that's another thing. And what we've seen is that the momentum is often in the direction of, you know, revealing more and more and more data. It's always easier to kind of reveal a little bit more data. It's always harder to keep more data secret as time goes on. So, this is a really challenging area. And I think, you know, just given all of the prevalence of technology in our lives, we've gotten kind of used to companies collecting a lot of our data. What we're starting to run into is that that might not be a great idea that, you know, we are kind of giving up agency to our own data. So, thinking about how to get that back, but I think with money, we have the opportunity to design that right from the beginning because we're designing these new digital currencies. We can think about privacy at the very start. We can think about how to build that in, and we take a lot of inspiration from the cryptocurrency world where we see these privacy preserving cryptocurrencies, Zcash and Monero being two of the biggest ones. Yeah.
Jamie: So, I mean, I think a few years ago, there was some resistance about cryptocurrencies or digital assets being able to use for crime or, you know, for more black-market sales. But that seems to have dissipated as people understand more that it's more that you can be held accountable if someone wanted to find out about a transaction, they could. But what are some of the issues where you are seeing resistance from people keen to adopt these kinds of assets?
Neha: Yeah, there's a lot of resistance. Some of it was well founded. I want to make that clear, but some of it isn't. I think that there is this misconception that the only use for cryptocurrencies is in crime. And as far as I can tell, the data just doesn't bear that out. That's not true. It's actually a very, very small percentage that's used in criminal activity. And I think the thing that's really important to note is that if you build a payment system, it will be used for crime in some way. There's no way to get zero crime. That's impossible. But you try it, you try to build it in such a way that you can reduce that amount. And I think also, if you look at the existing regimes, we have today in the regulatory space for how we address this risk, it involves identifying people and it involves collecting a whole lot of data. And it really puts the risk in a place where it's the incentive of the bank or the payments. Service providers to collect a ton of data and to flag anything at all that might even look slightly risky. And so, you end up with things like, you know, I hear all these stories about people who pay, you know, might pay a relative in another country once a month and every single time that gets flagged as possibly fraudulent transaction or people who you know are buying something for the first time from a new merchant, that merchant doesn't have a lot of history. Their funds get frozen, you know, and they don't have access to their funds for 30 days. So, the systems we have right now just aren't efficient. They aren't doing as good a job as they could. And we have the opportunity to redesign them from the ground up using things like cryptography and verifiability.
Jamie: Now you mentioned just now that said, some of the reservations that you see today are warranted. Could you mention some of those?
Neha: I think something that maybe people don't think about enough is the technology risk behind some of these cryptocurrencies and digital payment platforms. So, I want to make it clear, I think the technology is incredible. I think it's going to change the world. It already is changing the world. However, that said, it is brand new technology. So, Bitcoin has been around the longest for about 12 years, and a lot of people like to say, well, it's never been hacked, it's never been hacked and it's out there. And, you know, obviously if someone you know, someone would hack it if they could. And I just don't think that's exactly true. I think that these systems actually, you know, there's a lot of different dynamics going on and, you know, we're still learning how to secure them effectively. That's a lot of the research that my group works on. And when you talk to the developers of these systems, you know, they use words like, well, this is still an experiment and we're still building. We're in the early stages where, you know, there's going to be problems, what we're going to find them and we're going to fix them, right? But then you talk to some of the investors and they're using words like, well, this is hardened. You know, this is government proof. This is hack proof. This is totally secure. And so, there's we've noticed this divide between the developers and the investors, which is fine. I mean, it's a new technology, but I just think, you know, people need to be able to understand that risk and price it appropriately.
Jamie: So, are you surprised that a currency like bitcoin hasn't been hacked yet?
Neha: Yeah, I am kind of surprised, actually.
Jamie: Sounds like if anyone could do it, you could.
Neha: I don't know about that. But I think I do know people in the world who could. And you know, a lot of them don't because they don't want to. They want bitcoin to succeed.
Jamie: Yeah. Well, that's the difference is there's a lot of people who see this as the future, and they want this to succeed because they can see all the benefits attributed to it.
Neha: Exactly. But I mean, I think, you know, we want this to work even in the most adversarial of cases. So, it's going to take a little bit more time and research effort to really, really get the foundation secure.
Jamie: So, if you don't mind me asking a kind of a crystal ball question, if you looked out five years to 2026, what do you think the world of currencies and digital asset looks like then? Roughly speaking? And what are the sort of issues we'll be talking about, do you think? Yeah.
Neha: Well, it's so hard to predict because the last five years have been so surprising, and everything is just accelerated so much faster than I ever thought it would. So 2026. I think that gives some central banks enough time, some major central banks enough time to launch their own currency. So, I think we see a top six.
Jamie: To the dollar?
Neha: I don't know if it'll be the dollar, but I think we'll see at least one top six.
Jamie: We aren't going to hold you to this Neha.
Neha: At least one of them has launched a digital currency. I think that the cryptocurrency space is going to be bigger than ever. And you know, just like with, you know, we've seen these use cases come up that we're a little bit surprising but really exciting and took the world by storm. DeFi and NFTs, we're going to see even more of those. So, you know, we're going to see new business models built on top of these cryptocurrency platforms. I also think we might see a much smaller number of cryptocurrencies. I think the space is going to is going to winnow a little bit, whether that's due to regulation or hacks or whatever might happen.
Jamie: Well, Neha I feel like kind of talk to you for hours and hours and thank you so much for spending the time chatting us today, and I hope we get to chat again in the future.
Neha: Yeah, that was great. Thank you. Jamie.
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