Class Takeaways — The Future of Money and Payments

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Darrell Duffie: Hi, my name is Darrell Duffie. I’m on the finance faculty at Stanford’s Graduate School of Business. I’d like to give you five takeaway concepts from my new Pathfinder course here called The Future of Money and Payments. A Central Bank digital currency or a CBDC is simply a way for Americans to have a bank deposit account right at the Central Bank, the Federal Reserve of the United States. This is very controversial in the United States, because Americans feel, or at least many Americans feel that this would be an invasion of their privacy for the Fed to have their deposit account information. Nevertheless, it’s going ahead in places like China and Europe. I do think it’s going to be a while before the United States does this. In the meantime, it should simply be investigated by the U.S. government.

I’m sure everyone has heard about Bitcoin. Now, we’re going to see a new kind of cryptocurrency called stablecoins entering the everyday lives of Americans. These can be used to make payments much more efficiently, especially in a setting in which you need to pay somebody in another country. For example, if a small company needs to pay a supplier in an emerging market economy, it can save up to 5% of the cost and save a lot of time by simply sending a stablecoin. Stablecoins have the potential to revolutionize payments in America.

The same blockchain methods that are used to create Bitcoin, or at least an update of those, could also be used to tokenize financial securities like stocks and bonds, even Treasury securities. Once Treasury securities are tokenized, it will be much easier to trade them 24/7 365 around the world. In fact, in my congressional testimony about Treasury market liquidity, I suggested that the Treasury Department should consider tokenizing Treasury securities, which would increase their demand and the liquidity in the Treasury market. There are already experiments in which big banks are testing the ability to trade Treasury securities with each other. This could revolutionize the core of the U.S. financial system.

One of the toughest trade-offs in the world of payments is privacy versus legal compliance. Americans want their payments to be private, but regulators need to see those payments in order to know whether they are doing money laundering or financing terrorists, or conducting sanctions avoidance. In the future, it won’t be necessary for the government to see everything that Americans are doing with their bank accounts or with cryptocurrencies. New technologies involving cryptography can achieve a good balance between privacy and legal compliance. I expect these new technologies involving cryptography to come first to the world of cryptocurrencies, and particularly stablecoins where they’re most easily adapted and much later they’ll come to the world of banking and bank deposits.

Making a payment from one bank account to another can be slow and costly and frustrating. However, in Brazil and in India, new payment systems are leapfrogging the payment systems that we have in the United States. In Brazil, it’s called PIX. In India, it’s called UPI Unified Payment Interface. Using PIX or UPI, anyone can pay anyone anytime with a simple tap of a smartphone. Financial inclusion is important in America too. I expect this to take some time to come to the United States. The infrastructure already exists here in a system called FedNow, but it’s not been adapted yet to make the lives of Americans simplified when making their payments like they already are in India and in Brazil. At this point, it’s very difficult to say whether people around the world are going to be making their everyday payments with Central Bank digital currencies, with cryptocurrencies like stablecoins, or simply buy new and improved methods of paying out of their bank accounts. All we know for sure is that it’s going to depend on technology and policy developments, and it’s very exciting to watch.

If you would’ve asked me when I graduated from high school, would I be here at Stanford Business School teaching a course on the future of money and payments, I would’ve said. “No way.” But I do have to say I was always a committed nerd and I was always going to be doing something about math and science, and it’s just not so far from that. It involves technology and economics, which it’s all nerdism one way or the other.