Your Privacy May Be at Stake as Central Banks Develop Digital Currencies

seemed powerless to stop it. We're going to talk about that and the great baby battle underway in countries across Asia in a few minutes. Our reporter in Spain, Jeanette Newman, also has a story from Valencia on a radical experiment to help small businesses come through the next stage of the pandemic, which also features my favorite bicycle helmets. So we definitely have variety this week. But first, there are lots of things in our daily lives that are being

transformed by new technology. But what about money? Is bitcoin the future or perhaps one of the other cryptocurrencies that have been causing such a speculative frenzy in recent months. Ah, we wake up in a few years and fine, We're still fond of old fashioned dollars and cents, and that

talk of digital currencies was just a fad. Well, one person who's been thinking very hard about all of these issues is Professor prasad now Senior Professor of Trade Policy at Cornell University and a senior Fellow of Brookings, but previously a senior official at the International Monetary Fund, and most recently author of a book about to come out called The Future of Money, How the Digital Revolution is Transforming Currencies and Finance. Welcome Professor Prasadhwa, and thank you

for writing this extremely useful book. Given how much has been happening, how much news we've had over the last few months about digital currencies and crypto and the like, We've got a lot to cover, but I guess we should just start with the basic assertion running through your book that this time really is different. You know, we are looking at a major disruption in how we use money and and even what money is. That's why it's Deephanie.

First of all, thanks for having me on your show, and this is indeed a good time to take stock of what is happening in the worlds of money and finance. There has of course been a lot of interest in bitcoin and the cryptocurrency revolutions set off. But I think the real legacy of bitcoin is that it has come at a point in time and digital payments are becoming preponderant around the world, including in developing economies, and there is a move towards digitization, which I think is going

to leave its mark on both money and finance. Very few of us use actual cash any more physical cash, that is, we tend to make payments with this wipe of a credit card or a phone for that matter, and I think we're going to see a bit coin leave its legacy, even if Bitcoin does not endure in that form, that we're going to have digital forms of payment, either through central bank digital currencies with some countries are initiating, or private digital payment systems intermediated in the form of

these cryptical currencies. One thing you say in the book is that in a sense, it's not bitcoin that is the transformation in itself, it's the underlying technology. So just explain that a little bit. So the technology is a marvel,

and it's worth thinking about the origins of bitcoins. So the Bitcoin white Paper was released by a creator or creator as we don't know who that is to this day, right around the time of the global financial crisis is onset, So that was the time when trust in central banks and governments in traditional financial institutions was at its lowest end, and the notion of being able to undertake transactions in a somewhat anonymous way using only digital identities and without

a central bank or a traditional commercial bank in being involved was very alluring, and that is the remarkable aspect of the technology. When you make a payment, either using cash or using a credit or debit card, either a central bank or a commercial bank is involved. What bitcoin turned out to do was to provide a solution whereby you could have transactions being validated through what is called a public consensus mechanism, and Bitcoin, although it is supposed

to be anonymous, actually provides remarkable transparency. Every transaction is out there for the entire world to see on the bitcoin blockchain. The distributed aspect is also very important. The Bitcoin blockchain, which is a record, public ledger of all the transactions using bitcoin, is maintained on multiple puters around the world, so hacking a particular computer or even a set of computers, or having some computers go down is

not going to affect the system. So in that sense, the technology is going to really set off a revolution in itself. So, just to be clear, you could have the end of cash but still not have this kind of structural change in how money works that you're talking

about for bitcoin and other things. What is really crucial here is what role the government and central banks are going to have, and bitcoin provided the allere of getting away from all of that, essentially democratizing finance by making finance available to anybody with no restrictions, with no censorship, and without a trusted third party involved. That creates a

lot of risks, even while it does have certain benefits. Well, it's funny you say, the allure of getting rid of the role of the central bank or this kind of central authority. Of course there will be there will be a lot of people who would consider that to be deeply attractive, that you don't have government somehow involved in inherently at the center of finance, and of course many other people who would say, hang on a minute, isn't

is a rather frightening world that you have no central figure. Um, you don't have the kind of relationship of trust that you have with a central bank. So you talked about how some central banks and if Sweden is thinking about having the e Krona, have talked about having central bank digital currencies. What's what's the thinking behind that and how would that be different from what we have now. Many central banks that on the world are initiating their own

digital currencies are central bank digital currencies CBDCs. That is, UM and CBDCs are being instituted in some economies because they provide easy access to households and businesses to a low cost digital payment system. In countries such as sweet even there is a concern that having the entire payment system in the hands of the private sector may be good for efficiency and bring down costs, but it could

leave concerns about financial stability. At a time of financial panic, you could have the entire payment system shutting down if the government has no role in it. In a country like China, there is a concern that the major digital payment providers like Ali pay and which I Paid are dominating the payment's market and making central bank money irrelevant.

So I think central banks ce UM CBDCs as a tool for promoting financial inclusion, providing a backstop to the private payment system, and creating a more level playing field for other payment innovators rather than just a major players who would also start providing efficient payment services. So what would if if you live in a country where the central bank is going down this route? What does that look like in practice? Would you you would know when

you were using a central bank digital currency? I mean, how would it be different. Technology now exists for each household in an economy or each business to have an account with the central bank and use central bank money through that account. That could drive banks sort of business, and you don't want to be in a position where the central bank is now allocating credit in the economy.

So countries such as China and Sweden that are experimenting with Serie dicis are going with a two tier system where the digital wallets in which the central bank digital uh dollars or you and reside are actually maintained by the commercial banks side by side with their own intersparing deposit accounts. So the CBDC is just like cash would not be interstparing instruments, but now with the central bank digital currency being in the form of token that can

be used across different payment platforms. So basically you could use your central bank money across a variety of payment platforms, again with the swipe of her phone. Um, so it would be observation equivalent to using any other payment system, except you would now be using central bank money. But this also creates one issue that we may need to

consider the societal level. Do we really want to live in a world where anytime I buy you a cup of coffee, Stephanie, either a payment private payment provider, or the government is going to know about it. Um, that's going to be a slightly dystopian world we live in.

Central banks are going to great lengths to make the case that they're going to have privacy protections in place, but in my view, ultimately anything digital is going to be traceable, and every central bank wants to make sure it's money is not used for illegal purposes, so there will be auditability and traceability. So whatever limited privacy we

have at this stage might very soon vanish well. And of course that's why any self respecting criminal has always used cash, because you don't have you don't have that kind of traceability. I just want to come back to you talked about the democratization of finance or than the potential for this to do that. I mean historically, of course, we have had periods where financial innovation have has brought

easier forms of financing to more and more people. We've had sort of waves of that running through societies at different times. And though it has made it possible for people, say to buy their own homes who might not otherwise have been und to do it, or have access to borrowing at all that they might not have had, it has tended to also leave a lot of those sort of newly financially enfranchised people with a lot of risk and have it blow up in a crisis of some sort.

I mean, if that's a risk here, how how can we guard against that? There is a significant list. Stephanie're right that the democratization of finance, while it is very part sative sounding concept, does carry certain risks, and those

risks arise for a couple of reasons. In particular, digital access is still quite unevenly distributed in many countries, and financial literacy is certainly not prevalent, especially among the economically disadvantaged, and we see that phenomenon even among people who ought

to be better informed. Um, the recent saga with Game Stop, where there was a speculative frenzy that was fueled by the robin Hood trading platform, which in principle made it much easier for retail investors to be able to trade both the stock and derivatives of this game stop company. Certainly led to a speculative frenzy. And the problem in that speculative frenzy, as in most others, is that retail investors who came late to the party are the ones who got burned. And of course we know we didn't

have to go far back. We only go back to two thousand and eight to find very sophisticated, often very senior members of the financial sector not understanding some of the risks they were taking. So this is something that, um, we've seen again and again. Finally, you've mentioned it a few times already in this interview and in the book. You keep coming back to trust as the basic glue of the financial system and something that has also traditionally

supported any effective currency. Um, what's the future of of of trust in this world and in this in this new world that you paint m Are we going to put the same kind of trust into these digital platforms that we used to put into central banks, or are we going to potentially end up with government actually more involved in our lives, as you said, and more aware

of what we're doing. The great promise of bitcoin was that it would replace trust in government institutions and traditional financial institutions by essentially creating a public and census mechanism. I think what we have seen in the last few years is that ultimately the government is still going to

have a crucial role. Cryptocurrencies and even stable coins, which have their values linked to existing fear currencies, all actually seemed to do a lot better when they get the im perimeter of the government in some implicit form or the other. Bitcoin actually did a lot better once um the US Internal Revenue Service actually recognized it as a

financial asset that could be taxed. Bitcoin earners, we're not happy about the taxes, but certainly were very happy that this implicit government recognition actually helped the bitcoin community flower. And ultimately you're going to need regulations for investor protection, but also for these markets to move forward in a

stable way. Moreover, if you think about the promise of decent allized finance and the ability to conduct transactions just electronically, still, where the digital world meets the real world, you still need the government to enforce property and contractual rights. Now, the risk, of course, is that bitcoin may have set up a set off a revolution which ends up, as you suggested, Stephanie, with the government playing even more intrusive

roles in our lives. If central bank digital currencies do take hold, we could lose any last vestige of privacy to the government, and that would be a certainly a dystopian future um and one that we should be very concerned about. It's not obvious that private payment systems and providers will be displaced by the government, but certainly one can see this happening in a society, and we should

guard against that. This is such a I mean, it is such a complicated and fast moving area, and you have been such a calm and lucid guide to it. Thank you very much, issue a product. It's been my pleasure, Stephanie. Thank you so much for having me on. Well, that was all very interesting, but many businesses in the US and Europe haven't had the luxury of thinking about the

future over the past year and a half. They've been mainly focused on surviving the week, and the threat of bankruptcy still hangs over hundreds of thousands of small businesses in Europe, though some bold experiments underwear in Spain and France might make all the difference. Our Spain economy reporter Jeanette Newman went to Valencia to eat payola and find out more. M that's the sound of a chef turning some brath rice and sat front into a Spanish culinary

treat pa. I'm in La Pepica, a restaurant that has been serving pa in the city of Valencia for more than a century. The recipes are traditional rice with vegetables, rabbit and chicken. Peppe Ballagher is the third generation to run this family restaurant. When he was a boy in the nineteen fifties, he remembers Ernest Hemingway coming to dine

after bullfights. Hemingway would walk into the kitchen to taste the paia or make himself as angria, and I've always had the memory of this person who talked to everyone and was really engaging. Lapapka has thrived as a temple to tradition in Valencia, but some of those old ways are threatening the survival of small European companies as they emerge from the pandemic. I went to Valencia to learn more about one of those problematic old habits companies over

reliance on banks for financing. That compares to the much wider range of options open to businesses that are recovering from the pandemic in the US, and financing is so much more common, especially in continental of UM than than cabin markets and markets financing, so that's a huge difference. That's Katia langen Booker. She's a law professor at Frankfort University. There's no reason to say bank financing is bad in any way. It's just as always the combination of the

two is where we would like to go. Selling stock, issuing debt to investors, and other financing options known broadly as capital markets. These tools aren't as widespread on the continent as they are in the US. That's a problem is Europe's small firms emerged from the pandemic and need to invest and restructure their debts. European Union leaders have talked for years about the need for deeper capital markets,

particularly in the South and in smaller countries. They've also talked for years about the need to join up those disparate markets into a capital markets union, but they've never got very far. Why one hurdle is that small businesses themselves are sometimes reluctant to let go of tradition. They don't like the idea outside investors. They feel all letting an outsider in and I don't really want that, and it's better, you know, I know my banker, I've been

you know, doing business with them forever. Another hurdle is the supply of funds. One issues that banks in Europe have a lot of power to turn on and off the financing tab I spoke to all funds, so are hard from investment from Okendo Capital I Madrid. The banks in the US. Everything is really specialized. Here are banks big of credit cards. They do uh capital h leases, they do working capital financing, they will finance your exports,

they will manage your payments. To ensure those powerful banks didn't cut off funding during this crisis, European government's launched loan guarantee programs. The power and reach of banks has been an asset, channeling cheap loans backed by the state to companies in need. The programs ensured that many companies got the funds they needed to cover basic expenses, but in the end it's still dead. People are starting a

worry that some bankruptcies have just been delayed. What if banks are willing to restructure some loans or don't lend some firms that need to invest to bounce back. Banks, after all, have their own balance sheets to focus on. I spoke to Carlos Ferrando and Valencia to learn what the lack of financing options means for companies emerging from the pandemic. He runs close to the startup that makes

water bottles and patented a collapsible helmet. You can reduce the volume of the helmet like more than in less than one second. No, he's collapsed. No, it's about hamlet. When Carlos started his company several years ago, you've got a taste for how hard it can be to get financing. He says. It's tough for banks to understand the startup business model. The risk team from the balance is the same if the sp we the startup none with a restaurant. It this is my This is a reality that is

happening here in his pain today. So turtles end up stopping many startups from growing. You cannot go to other countries. You cannot increase your your your your sales team, or your marketing or your digital marketing. No, and then you start to get smaller and this is a black hole. Carlos was lucky and eventually got funding from Spanish venture capital firms and a bank. He sells his helmets at the Museum of Modern Arts design store. He sold close

to bottles to major companies, including Google. Then the pandemic hit and funding dried up. Closker tried to pivot and sell face masks. It didn't go well. He tapped some stay back loans. It wasn't enough. In mind, with such a good broad with such a good producde, we were a thread to lose the company. Valencia's regional financing agency came to the rescue. It gave close to a type of equity loan that isn't considered debt and bolsters the

firm's balance sheet that's encouraged banks to keep lending. Carlos says he considered leaving Valencia until the agency helped him restructure his balance sheet. I know because the support of government. I would love to to to pay in the present of the Texas Here in the future. The man behind these clever solutions for thousands of small companies like Kloska and La Pepica is Manuel Uwica. He's the head of Valencia's finance agency. Before Manuel joined the agency, he was

a finance professor. Now he's putting years of academic expertise to work to ensure that viable firms survived the pandemic. I mean we need to do it otherwise I mean the this, this company is gonna be bankrupt. Manuell's agency has also contributed millions of euros to restructuring fund that will be run by Okendo, the investment firm. We heard all phones of talk about banks earlier. They're all putting money on the on the big companies, on the best

performing company. So the good businesses which are struggling uh nobody, Nobody looks after them. And and Manuela has been quick to support that. There are people like us UH that invest in in those types of instruments and those type of situation. There's an important of happening in France too, on a greater scale. Frances in the process of rolling out a twenty billion euro fund to provide financing too small and medium sized companies. Banks will issue equity loans

to around twelve thousand French companies. The banks will keep some of those loans on their balance sheet and spin off the rest into a fund. That fund is partially guaranteed by the French state, that makes it less risky for investors. Alberto nvo Potro founded in Boni's a credit rating firm for smaller businesses. His company will analyze the

default risk of some of those French companies. This program alone twice the size of the private marketing fronts and and twelve thousand companies is four time more than the companies that have today in France access to some sort of private debt private equity. The fund is expected to draw new types of investors, such as insurance companies and investment firms based outside France. In the past, they haven't been able to easily beat on the prospects of so

many small French companies. These are players that didn't used to play in this market, so they're bringing insurance companies directly into this market and this is new. In the short term, this fund should help provide financing the companies so that they recovered from the pandemic and invest. The longer term play is to shape a copy side market for these compex Many hurdles remain to develop a deep capital market in Europe. The pandemic, though, has triggered a

shift in places like Valencia and France. New tools are important so that European startups like Closca can get off the ground and so traditional firms like Lapepka can last another one years. Jeanette Newman, Bloomberg News m H and those conhapsible bicycle hermits really are very good. My sister gave me one for my birthday. Best present ever. Now.

It's often said that demography is destiny. How quickly your population is growing and how old it is can have an enormous impact on what kind of country you live in and how fast you grow. The US and much of Europe has been grappling with the consequences of people living longer for some time, but probably no country has seen such a dramatic shift in its demographic fortunes in

the last few years as China. The latest Chinese censors brought this out very clearly, and I thought it was a good opportunity to get more from our chief Asia economist Chang Shu in Hong Kong and Bloomberg's senior Asia Economy reporter, Michelle jam Risco in Singapore. So Chang, Michelle,

thanks for staying up to talk to me. And there's long been discussion about China's one child policy and how that had had put it on course for a pretty challenging time demographically, we've had this this latest census changing were there any surprises there? Indeed, the demographic issues in China have been discussed for some time, but the latest census still brought some surprises. It really shows how acute

the demographic challenges have become. The latest censors put the Chinese population at one point four billions later, up from a decade ago, but the growth rate was very slow, point five percent on average each year in the past decades, down from the previous decades. And the biggest surprise in the way is the fertility rate. It was estimated at one point three in twenty That would place China close to the low fertility case in the United Nations projections.

In such scenario, China's population started to decline around twenty five that's much earlier than the government anticipated. In a twenty seventeen and again twenty nineteen reports, government reports, the population peak was put at around twenty thirty so this situation is really much more serious than previously anticipated. That's amazing. So that's it's basically it's taken five years off the forecast for when the population was gonna was going to peak,

from from twenty thirty to twenty five means extraordinary. Looking at this as an economist, what does that mean for China's growth rate? Because obviously we know that China is going to be going from this very dramatic fast growth period for several decades. We know that it's going to slow. But does it mean it's going to slow that much more dramatically. Yes, that does mean the demographic trained well turned into a negative contribution to China's growth. The working

population has to already started to decline. The share of the working age population failed to six or three percent in twenty from seven percent a decade ago. If we look at international comparison, China's employment growth was already slower than what other major economies experienced as similar income levels. This suggests the slowdown in labor growth is an increasing challenge for China to break through the middle income TRAPP and UM and UH. If not dealt with, that really

would stop China rise into a developed economy status. Now we know that that the government's pretty concerned about this, and it has changed its one child policy. In fact, I saw that it's gone from not only being able to have too but maybe have three children. Is that going to come faster to reduce the challenges you've just been talking about. Yeah, I mean that might not come

fast enough. And certainly there's three child policy itself is not sufficient to tend the tight The relaxation you talked about in twenty sixteen to allow two children only resulted in a very short term post to childbirth, and birth jumped to just for two years in twenty sixteen seventeen, but then quickly dropped again. So the latest relaxation to three children may not really move the needle much or

for any sustained period. The the officials at the National Statistics Bureau of Statistics said the average number of desired children is about at one point eight certainly below too, so China will have to do more, much more, all sort of france employment attacks and housing policies to reduce financial and time burden for raising children, Increasing mobility and raising the retirement age is really critical for the country's

long term growth. Out book. I mean, it's interesting because it's the same challenge that lots of countries, certainly across Europe. You have. Italy has got a shrinking population now and has made great efforts to try and effectively bribe families to have more children, has not had so much success. In France, they seem to have been a bit more successful at maintaining the fertility rate. And I don't. They often say that's because of the fine wine and fine food.

But Michelle, I'm risk let me, let me bring you in here. I'm interested in whether there are other countries around the region that are concerned about the fertility rates and whether actually COVID has done anything to change the conversation. Yes, certainly, certainly. I mean, I think several have endured this struggle for many years, even before COVID. And outside of China, so South Korea, Thailand, Singapore, Taiwan, and of course Japan. I'll

i'll really stand out. South Korea appears to be clinging to the world it's lowest fertility rate, and several of the others are in that territory as well, and Japan's population could plunge another fifteen percent by according to UN estimates, so COVID, as it has on many other issues, has made a bad situation so much worse. We saw a lot more record lows in fertility rates last year, and there is hope that some of the demographic damage of

the past year will be temporary. But the question still remains on how to tackle this long term trend that was cemented even before the pandemic. I think governments are finding that it's quite difficult to work against cultural and behavioral norms, and they've often joked about how difficult it is just to convince people to have more babies. And Singapore Prime Minister Lesia and Loon mentioned this in an interview with our own editor and a chief a couple

of years ago. Our Type Hay Bureau chief recalls all the press briefings with the former Central Bank governor there, who would exhort his young reporters in briefings to to go home and get married and have children. But none of this seems to work. It is because we've had most of the time when we talk about Asia, or when we think indeed about the twenty one century and what it's going to look like, we've tended to think it will be the Asian century, that the march of

Asia is unstoppable. But if Asian economies continue to face this demographic challenge, if populations continue to shrink, I mean, does that really put some of that at risk? Does it really stop Asia's development at some level? Well, I

think that's the big question. But that's what we're starting to see cracks and a lot of these measurements, and and not just the tapline growth figures though those are certainly focused on and a lot of these discussions, but there's a lot of long term repercussions of these aging

societies and low fertility rates UM. One other measure that we look at a lot is the dependency ratio, the lack of younger residents available to care for the elderly, which certainly is a strain on government pension and healthcare systems, but also of course the cultural and a personal strain UM. Labor markets are getting a rude awakening fewer working age residents and automation and not moving fast enough to fill

the void. Some institutions, like universities that banked on certain enrollment numbers will now see strains when those applicants don't materialize, and there's an interesting one. In South Korea, the shrinking population there is a concern, especially for the military, which is still an arms standoff with its northern neighbor. Military officials are turning to robots for help, reasoning that, you know,

losses of robot soldiers are less tragic anyway. But you know, any of these solutions, Um, you know, as we said, it's it's very difficult, and these institutions and aspects of society are certainly understrain. But less we think it's all downhill for Asia's population. And of course we should always also be reminded that you can't you shouldn't generalize about such an incredibly varied continent. UM. I think you found a couple of economies in Asia that are actually have

got too many babies. Well, that's right, and there's two notable exceptions in this category, and then they're very different from each other, I would say too, But that's Indonesia and the Philippine. UM. Indonesia has been a bit more vocal recently about needing to resolve this. We we had a story just a few months ago about the government doubling down and efforts to push later marriages. Family planning

enhance birth control UH officials. They're arguing that such a rapid pace of population growth threatens the living standard in the Philippines. There are some other real cultural debates on

how to address the situation. Religion also comes into play there, where the majority Catholic country hasn't been quick to embrace the thought of having fewer children per family, and birth control isn't very well available or supported, so, especially among lower income individuals, lack of access to birth control, healthcare, and education has resulted in more unwanted or unexpected pregnancies,

which also have spiked during the pandemic. So there's been less traction than the Philippines and how to get to a more desirable pace of population growth. But both countries are are in that different camp as as opposed to the majority of of these other countries we discussed, and as you said, COVID sort of throwing a lot of these issues up into the air in an interesting way in many places. Well, Michelle dan Risco Chang Shoo. Thank you very much. So that's it for this episode of Stephanomics.

Will be back next week. In the meantime, please rate the show and follow our economics on Twitter for more news and analysis during the week from Bloomberg Economics. This episode was produced by Magnus Hendrickson, with special thanks to Professor Hua Prasad, Jeanette Newman, Chang Shoe, and Michelle jam Risco. Mike Sasso is executive producer of Stephonomics and the head of Bloomberg Podcast is Francesca Levy.