Listen on:

To kick off our first podcast we’ve got a great interview with Henri Arslanian, he’s a regular contributor to CNBC and Bloomberg as well as the PwC’s Global Crypto Leader.

Here are the show notes:

[01:00] The Future of Money is Happening Now
[03:58] Covid and crypto
[06:29] Central banks and the two types of CBDCs
[11:17] Stablecoins
[13:51] 2 reasons governments want CBDCs
[17:37] Educating future generations for financial literacy

Tom: Hi, and welcome to The Bit, the Bittrex Global Podcast, where you get the inside scoop on all things crypto. I’m Tom Albright, the CEO of Bittrex Global, the world’s most secure cryptocurrency platform. I’ll be your co-host along with Stephen Stonberg. 

Stephen: I’m Stephen Stonberg, the COO and CFO of Bittrex Global. You’re listening to The Bit.

Tom: On today’s show we’re super excited to be joined by one of the biggest crypto leaders in the world, Henri Arslanian. In fact, he is the PWC Global Leader and Asia FinTech leader. He’s also the Chairman of the FinTech Association of Hong Kong and an adjunct associate professor at the University of Hong Kong, where he teaches the first FinTech university course in Asia. Of course, I think everyone here will know him from his two social media series, FinTech Capsules and Crypto Capsules, or his recently launched Future of Money newsletter. Henri, thanks so much for joining us. 

Henri: Thanks for having me. I’m very excited to be here. 

[01:00] The Future of Money is Happening Now

Tom: Henri, what are the interesting things that you’re seeing in the crypto world right now? We’ve got Bitcoin going to almost 12,000, we’ve got Ethereum at 400, or a little bit above 400. We’re seeing institutional interest. We’re seeing tokens building amazing use cases and you’ve got such a great overview of all that. What do you think about what’s going on right now? What’s exciting you? 

Henri: Sure. I always say that all of us, including all of your listeners, are privileged to actually be witnessing the future of finance, the future of money, in front of our eyes. And I think we’re all privileged to actually be able to play a part in it. 

When I look at what’s happening globally, I’m seeing a couple of big trends right now. 

I would say the first one that has really accelerated over the last couple of weeks have been the developments around central bank digital currencies. Obviously a year ago, Libra was announced, Libra 1.0. 2 months ago Libra 2.0 came in and obviously central bank digital currencies have been a big topic of conversation. 80% of central banks, according to the Bank of International Settlements, are looking at CBDCs in one form or another. So there’s a lot of the debate around this topic. 

I’m also seeing a lot of conversation about stablecoins, partly catalyzed by Libra as well. And we’re seeing a surge in volume of stablecoins and day to day usage, not only from crypto traders as a way to protect themselves from volatility in the crypto markets. We’re also seeing broader day to day usage. Take cross border payments, for example. A lot of other topics are becoming quite relevant as well. 

I would say the big one we’re seeing at PWC is the entry of institutional players. We saw this about two years ago when our institutional clients were already familiar with future derivatives on existing platforms. Now we’re seeing a number of financial institutions entering the space. We’re seeing regulatory clarity that is also providing comfort to these players coming in. And the broader industry is becoming more institutionalized. For example, a lot of them are using the big four, they’re using big law firms. The industry is definitely more mature than all of us were when we started in this space. So I’m very, very excited. 

And the last area that I find exciting, probably because I’m based in Asia, as you mentioned at the beginning of the podcast, is what’s happening in Asia. There’s a lot of activity in crypto around the world, but when it comes to FinTech, China and Asia are way ahead of the game. And we’re beginning to see this from an Asian perspective, with central bank digital currencies out of China with a DCP and how they’re driving the conversation forward on the future of money. I think it’s very interesting what’s happening at the global level. So very exciting times, not only in crypto, but also in the future of money more holistically. And that’s super exciting.

[03:58] Covid and crypto

Stephen: Do you think COVID is the main reason for this acceleration or do you think this would have happened anyway? How do you bifurcate between what would have happened anyway versus the COVID impact on this space?

Henri: That’s a good question Stephen.  It’s something I’ve been thinking about a lot, especially as I’m working on my second book. I’m dedicating a whole chapter on COVID, which actually seems to be functioning as a catalyst. 

To start, a lot of people don’t want to touch paper money anymore because there are worries about transmitting the virus. But ironically, and at the same time, we’ve seen a rise in people hoarding cash in many countries. So on the one side they don’t want to touch cash, but on the other side they’re hoarding cash. 

As you know, this creates a lot of issues for central banks and, frankly, the system as a whole. And as if this was not enough already, we’re having an issue that you can see very clearly in the U.S., where the IRS has to send a hundred million checks by mail to people who are not able to get this money digitally. And ironically, it’s the people who need it the most who are getting it in a delayed fashion. So these changes are happening; COVID catalyzed the entire process. 

Last but not least is the whole conversation around what money is. We’re entering an era of record levels of quantitative easing. And this is happening while people have more time and they’re able to watch YouTube videos about Bitcoin, and to understand inflation and what QE, or quantitative easing, means. 

They’re realizing that there’s a pretty good use case for assets like Bitcoin, which may be a hedge in certain cases against potential inflation. All these elements came together and really upended the entire ecosystem. 

I really believe we will be the first generation to see a third form of central bank money. Today there are obviously cash bank notes issued by central banks. And there are the reserves that these central banks have. So we have two forms of central bank money that exist today. I think there’s a very high chance that in our lifetime, in our professional lifetime, we’ll see a third form of money issued by central banks, the CBDC. And I think we’re just very privileged to be able to witness this firsthand.

[06:29] Central banks and the two types of CBDCs

Stephen: Being a student of history, which you know I am Henri, they should watch the video on YouTube about the Weimar Republic to see that you’ll need a wheelbarrow if you’re going to be keeping a lot of those bank notes. So just because the central bank is making a digital version of that currency, maybe they should look at Bitcoin. Maybe that should be the form of central bank currency that they hold, which is not from a central bank at all. 

Henri: That’s a very good point Stephen and I think we need to separate Bitcoin, which as you mentioned is obviously a decentralized asset, but you’re absolutely right when it comes to CBDCs. Central bank digital currencies, often known as CBDCs, is digital currency that is issued by the central bank. If you’re a central banker and you love Bitcoin you’re crazy. 

Tom: You’d be hard pressed to find that person. 

Henri: Exactly. I like to compare it to  a taxi driver who’s excited to see Uber coming into their market. But central bankers aren’t stupid. They realize that digital currencies have a lot of potential benefits for central banks. If you’re looking for better visibility, better data on what’s happening in your economy, potentially targeting money laundering, then digital currencies have a lot of benefits. That’s why the idea of CBDCs has been discussed for a couple of years. 

Three to four years ago, this used to be discussed in a lot of academic conferences. If I put my professor hat on for a second, I would say that since Libra was announced about two years ago, it really came into the mainstream and vaulted to the top of every central bank agenda. 

But it’s important we differentiate between the different kinds of CBDCs. On the one side, you have what we call wholesale CBDCs. So what is a wholesale CBDC? It’s a central bank digital currency that is mainly used between the central banks and regulated member banks. So in every country you have a central bank and you have a number of banks that are actually members of that central bank. The wholesale CBDC functions at that level. It does not impact the listener, it does not impact everyday people on the street. It happens behind the scenes. 

On that front, we’ve had a lot of developments that have happened over the last two or three years. Canada had Project Jasper, Singapore Project Ubin, and more recently we had Hong Kong and Thailand with Project LionRock and Project Inthanon. And Japan and the ECB have come up with similar projects. A lot of work has gone into that front. 

However, what’s really exciting when you look at the future of money is not what’s happening at the wholesale CBDC level but in the second big category, retail CBDCs. So what are retail CBDCs? A retail CBDC is a central bank digital currency that is issued by a central bank, but one that everyday people, the mom and pop businesses, can actually hold. 

It comes back to the example I gave before that there are two kinds of central bank issued money. There are bank notes that people hold everyday in their wallets. And there are the reserves that banks hold at central banks. If you keep money at a regular bank, the bank uses that money to lend and do other activities. You have counterparty risk towards that bank, if something happens to that bank. So this is what would be taking place in retail CBDCs. And in that category, there are various different subdivisions. 

For example, one of them is what we call the two tier system, in which a central bank could issue the central bank CBDC through the existing banks. And that’s what China is doing, and in the U.S. the idea of a digital dollar has been floated as well. You’ve seen places like Sweden, in their latest proposal this year. There are other different categories as well. 

For example, one of them that is gaining a lot of traction is what we call the platform model, where a central bank actually builds a tech platform that allows not only financial institutions, but non-bank fintechs, to come and try to develop a new CBDC. That’s what’s happening in England. And more recently, other countries have come up with this same model as well. 

So there are some very interesting developments happening in this space. And these are very, very exciting times when it comes to the broader world of the future of money, especially with central bank digital currencies. 

[11:17] Stablecoins

Stephen: How do stablecoins fit into this? Because I thought that’s what stablecoins are, backed by central bank money. How does that work? Maybe you could define what stablecoin is and explain the differences to our listeners. 

Henri: A stablecoin is a digital asset that is backed one-to-one by fiat currencies like the US dollar, for example. The majority of stablecoins today are still using the US dollar. 

What is the benefit of this? Let’s say I send a Bitcoin to one of your listeners. They’d be very happy, but as we all know, there’s a lot of volatility when it comes to Bitcoin. However, if I send them a stablecoin, the price is $1 and will remain $1. It’s always constant. That’s the benefit of this. 

There are two big use cases we’re seeing right now for stablecoins. One of them is within the crypto ecosystem. For crypto funds and crypto traders, stablecoins are a great asset to park whenever the markets get choppy or volatile, where you’re holding assets while still remaining in the crypto space. And Stephen, you were mentioning the old school world before, but in the traditional financial world we have treasuries, we have T-bills. There are a lot of traders that actually park their assets until they want to come back in. So that’s one of the use cases. 

The second use case, which I love, concerns cross border payments. A great example is that I live in Hong Kong and every time I want to send money back to Canada, my lovely bank in Hong Kong does not process FX reduction on a Sunday, in 2020. And if I send a payment, not only do I see the upfront fees, I see all of the hidden fees, the FX fees, the transaction fees that are embedded in the system. That’s a big problem.

Tom: I’m going to go out on a limb and say, that probably takes five, six, seven days to actually get from Hong Kong to Canada.

Henri: Honestly, it’s embarrassing that in 2020 I can send you a WhatsApp message, immediately, for free. I can send an email, immediately, for free. But sending money around the world is so complicated, it’s so costly. 

Stephen: The private sector way of solving the problem, before governments decided to issue it themselves, is that the banks can still make money, but it will be in custody, not in FX, during the interim period. 

Henri: Correct. 

Stephen: And I can see why the banks don’t like this because it’s going to take away a lot of their unfair profit margins. 

[13:51] 2 reasons governments want CBDCs

Henri: From a bank perspective, it’s very interesting.  I deal with a number of bank CEOs and executives around the world. And what ‘s been very interesting when it comes to CBDCs is that they have a very practical impact. 

First of all, as a policy maker, from a government perspective, one of the reasons they want to issue CBDCs is really twofold. First, they want to combat financial exclusion. In many countries today, whether it’s the US or Sweden or Denmark or the Netherlands, cash usage is declining. And the people that still use cash are either unbanked or the elderly. So you want to be able to afford them access to central bank money in a way that will not discriminate against them. 

The second thing is actually a very good policy reason. I really believe that if you’re a criminal today, you want to launder money or sell drugs and do bad things, cash is still the best way. And as a government, you have no visibility or no traceability on it. And for the first time, I believe CBDCs and, frankly, cryptocurrencies as a whole, give us a fighting chance against money laundering, because we have some traceability tools. And there’s a whole debate we can have on the privacy issue here, but from a policy perspective, that’s one of the things that we have to put in mind. 

For banks, you make a very interesting point, Stephen, because banks make a lot of revenue from cross border payments. But there’s also the basic funding issue as well. So let’s say I leave a thousand dollars in my bank. The bank, because of what we call fractional banking, lends out that money and is able to make money by charging interest rates,to people to whom the bank lends. As a customer, if I’m lucky, I’m able to get a little interest rate, if my bank gives me that, but that’s pretty much it. 

The problem that any bank executive needs to have in the back of their mind is if central bank digital currencies are issued, and people take some of the money they have in banks and put it into central bank digital currencies, then there are two very practical implications for the banks. 

First, it may affect their profitability, because there’s less money in the bank. There’s less money they can lend out. And to actually touch it themselves the banks have to go borrow that money on what we call wholesale markets in order to fund whatever they’re going to lend, and that decreases their profits and their profitability. 

But the second thing, which is something that is even more important, is it can accelerate a run on the banks. If I think the banking system is going to collapse like we saw in 2008, for example, I can go to an ATM to try to withdraw all my money, but practically speaking, there are limitations on how much money I could withdraw from my ATM. There are also practical considerations on how I can store it and store it safely.

Stephen: I think it’s a very interesting space and it’s still early days.

Tom: I absolutely agree. And with all of that, it’s a fascinating lesson here, Henri, and I love the university professor angle. Now with everything you’ve said here today and the things that I’ve learned, I know very few people in the world who actually understand our money system, understand where money comes from, understand the role of central banks and those sorts of things. And I would say even fewer understand blockchain, cryptocurrencies and financial technology. Do you think that we as a society are doing enough to educate people on those topics, to make sure that people have the knowledge that they need to function in the digital world?

[17:37] Educating future generations for financial literacy

Henri: It’s a good question. And the short answer is no. As you know, I wear many hats, and one of them is as an adjunct associate professor at the University of Hong Kong, where I teach the first FinTech university class in Asia. And the reason I started the class is because I find it unacceptable that in the day and era we live in, we let students graduate from universities with no courses on FinTech or blockchain or cryptocurrencies, especially considering that they’ll be the generation most impacted from this. 

You mentioned COVID earlier, Stephen. I would say that one of the good things that I think will happen after COVID is that universities will begin to seriously reevaluate how they teach, what they teach, and what the students want to be taught, which is going to be very, very important. And Tom, you and Stephen have each spent many years in the traditional world, whether in law firms or in traditional banks. I get messages from people on LinkedIn saying, “Hey, Henri, can we go for a coffee?” Because they’ve just been let go from the bank. And I can see that financial institutions have not trained their people accordingly on these topics, either. 

Because the bank doesn’t care; they’re not making any money in this space so that’s not where their focus is.  But these people suddenly realize in their 30s, 40s, 50s that “Hey, the world has changed.”  And they’re not ready for it. So I think that there’s a lot of work to be done in this space. But the work both of you are doing with this podcast is a great example. You guys are contributing to the ecosystem, where anybody can log in, listen to this podcast, and hopefully learn something. That’s very awesome. 

Tom: Well Henri, thank you so much for joining us today. We really appreciate it. And I know our listeners will as well. I’ve certainly learned a lot and the knowledge you have on central bank digital currencies, on how the financial system works, is just fantastic. So thank you so much for joining us and for sharing that with us.  

Stephen: Henri, even though I was an economics student a very long time ago at university, I still learned so much from you on this topic and I think it’s great how much you’re doing, not just through education, but with your Crypto Capsule and the things you’re doing on social media. I agree that there’s a lot of work to do in terms of education in this space. So thank you for tending to our podcast today and for all that you do. 

Henri: Thanks for having me guys. It’s always a pleasure. We’re all continuous students. I always tell my clients that the day I tell you that I’m a crypto expert is the day you need to fire me. Even though I spend 24/7 of my time in this space, I have absolutely no idea what’s going to happen even one month from now, which is scary, but also very exciting, because it shows us quickly things are moving in this space. So thank you very much for having me and thank you to the listeners for taking the time to let us share our passion for the future of money. Thank you very much.

Tom: Thank you Henri.

Tom: I’m Tom Albright, CEO of Bittrex Global. You’re listening to The Bit. To learn more about Bittrex Global, visit us online at global.bittrex.com.