The Evolution of Money — with Eswar Prasad

We're revisiting a favorite interview featuring Eswar Prasad, the Tolani Senior Professor of Trade Policy at Cornell University and author of “The Future of Money: How the Digital Revolution is Transforming Currencies and Finance,” j Eswar discusses the state of play regarding the global financial ecosystem, the role of the US Dollar, and the opportunities and risks of cryptocurrencies and decentralized finance. Learn more about your ad choices. Visit podcastchoices.com/adchoices

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• 0:01Scott Galloway?

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• 1:18Scott Galloway?

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• 1:54Scott Galloway?

  Welcome to the 191st episode of the Prop G Pod. In today's episode, we're sharing a rerun of one of our favorite interviews. I don't like rerun. Previously owned, previously listened, recycled, whatever. Greatest hits of one of our favorite interviews featuring Professor Eswar Prasad. Eswar is the Tolani Senior Professor of Trade Policy at Cornell University and author of The Future of Money: How the Digital Revolution is Transforming Currencies and Finance. We spoke to Professor Prasad back in April where he shared his thoughts on the state of play regarding the global financial ecosystem, the role of the US dollar, and the opportunities and risks of decentralized finance. DeFi, here's our discussion.

• 2:44Scott Galloway?

  Eswar, where does this podcast find you?

• 2:46Speaker 02

  I'm in Washington DC, Scott.

• 2:48Scott Galloway?

  Nice. So let's bust right into it. We came across your research after we were introduced to your latest book, The Future of Money: How the Digital Revolution is Transforming Currencies and Finance. So let's start there. How would you describe the current state of play and the future of the financial system, specifically in the United States?

• 3:06Speaker 02

  So things are changing fast, Scott. In particular, the use of cash that is physical currency is fast disappearing and we're all moving into digital forms of payments. But the reality is that the US is pretty far behind much of the rest of the world when it comes to digital payments. In countries like China and Sweden, the future is already here. Hardly anybody uses cash anymore. In the US, we still use cash to a significant extent and we use some credit cards and other modes of payment that are not used that widely in the rest of the world. Low-cost, efficient digital payments are really becoming the norm much faster around the world. So the US is really playing catch up.

• 3:48Scott Galloway?

  And what's an out of fact, other than a lack of innovation? It feels like our fintech firms are as valuable as anyone's in the world. Or I would, I think the market cap of our fintech firms is... Is pretty formidable. What's the net effect of the fact that we are lagging the rest of the world?

• 4:06Speaker 02

  So it means that we have a significant part of the US population, not a huge amount, but it's a non-trivial part that is locked out of easy access to the financial system. So you and I can use Apple Pay or Google Pay, but we have to have that connected to a bank account or a credit card. And about 5% of households in the US are still unbanked or underbanked, so they don't have easy access to low-cost digital payments. And they also don't have easy access to banking services, even basic products for managing savings, risk, credit, and so forth. Now fintech platforms are beginning to fill in that hole.

• 4:47Speaker 02

  They're also providing more direct channels for savers and borrowers to be connected. But here too, I think the rest of the world, including even an economy like China, has quite a few steps ahead of where the US is right now in terms of this evolution.

• 5:02Scott Galloway?

  Why has the adoption not been faster? Is it regulation? Is it consumer misunderstanding? Why are we behind?

• 5:10Speaker 02

  So to some extent, it's because in the rest of the world, there was a real dearth of easy access to digital payment systems and also regulatory void that was filled by payment giants. If you think about China, WeChat Pay and Alipay filled in that void because China had a rising middle class that demanded better payments, and the government sort of stepped aside. Here in the US, we have big players who are very eager to protect their territory. So for instance, the interchange fees that merchants pay on credit card transactions are far higher in North America than anywhere else in the rest of the world. And the reason is because credit card companies have been very smart.

• 5:53Speaker 02

  First of all, they have used their revenues essentially to buy off the politicians and keep regulations in their favor. And then, of course, they bribe us by essentially making it worthwhile for us to use credit cards for transactions because we get money back, we get points back. And so, at least in North America, credit card companies have figured out how to maintain their market power, which has been very quickly eroding for them and the rest of the world.

• 6:21Scott Galloway?

  Who are the biggest losers when fintech and digital payments get the traction? The same level of traction that they've achieved overseas. Who are the big losers domestically? Is it the credit card companies? Is it the banks? Who is it? Is it the central bank? Who loses here?

• 6:36Speaker 02

  So it's the entire financial architecture, the traditional financial architecture that gets threatened. Now, we've certainly seen the biggest disruptions coming in both domestic and international payments, where there are huge inefficiencies, especially in the US. But then you can think about even the traditional functions of a banking system, you know, matching savers and borrowers of those funds, being essentially disintermediated, that is, having their lunch eaten by some of these fintech platforms that are able to provide services at much lower cost, at scale, and with perhaps greater efficiencies. Well, I think there are different pillars of the traditional financial institutions,

• 7:21Speaker 02

  starting with the payment providers, but especially the commercial banks that see serious threats to their business models.

• 7:28Scott Galloway?

  What do you think of Visa? It just strikes me that Visa and Mastercard feel vulnerable, and yet they continue to be, they appear to be bulletproof. What about the, what about the credit card companies?

• 7:40Speaker 02

  They face what I view as existential threats because it's really not a viable business model they have to provide payments with such large fees being charged. You know, in China again, which I keep bringing up as an example, you can literally use digital payments to buy a piece of fruit or a dumpling on the street because the costs of transacting are so low. The same is true in other countries like India and even advanced economies like Sweden. So it's hard to imagine that this sort of competition won't start eating away at the market share of Visa and Mastercard. But again, these are companies that have a lot at stake,

• 8:22Speaker 02

  and they've used the regulatory structure to their advantage. But that advantage is not going to last that much longer.

• 8:30Scott Galloway?

  And what about the USD? We talk about the idea of a digital currency or a digital coin, an eagle coin or something. Well, do you think that that's a viable? Do you think that's going to happen in the US? I know that the Fed or the US government's been talking about it. Where, where, where and how do you think that plays out?

• 8:49Speaker 02

  So this is the reality that central banks around the world are facing, that the use of cash is disappearing, so they have to figure out if there is a way to keep their physical, their currency viable, if not in physical form, in digital form. So countries like China and Sweden have already initiated central bank digital currency, or CBDC experiments. The Fed has been somewhat more cautious about it, partly because it doesn't want to move forward with any haste, because it doesn't need to, the US dollar still remains the dominant currency by far, and it's not going to be threatened by cryptocurrencies or other countries' digital currencies. But having said that, the Fed is also bowing to the reality that if it wants its money

• 9:32Speaker 02

  to remain relevant at the retail level, it's going to have to be digital. And there are also some advantages to having a central bank digital currency. Essentially, it would provide a very low-cost digital payment system that everybody has access to. It could also act as a portal for basic banking products and services that could be provided at very low cost. But there are some costs as well. You could end up in a world where if the government or a central bank is providing a payment system, it could be difficult to have private sector payment providers compete with a government agency, which of course is very deep pockets.

• 10:13Speaker 02

  It could also mean threatening the banking system, and of course, it is going to mean a significant threat to our privacy. You know, the one big advantage of cash is that you can conduct transactions, which may be, you know, illicit transactions or illicit transactions, but you have privacy. But the notion that we may move to a world where you cannot buy a cup of coffee without either private payments provider or the central bank knowing about it is certainly something that we need to think hard about.

• 10:48Scott Galloway?

  I've always thought that, similar to, I'm getting on a flight this afternoon, I always thought our invisible infrastructure is our airways, and that people don't appreciate the infrastructure that is our skies. And at the same time, I've always thought the US dollar was the most powerful aircraft carrier squadron that we don't talk about, that our ability to track the payment of capital, or track the flows of capital, give our sanctions real teeth. And that every day, if we're about 20 or 25% of the world's GDP, but we're 2/3 of the world's reserve currencies, we have a disproportionate amount of power vis a vis the USD. Does any of this threaten the USD and that soft power?

• 11:28Speaker 02

  It's going to be something under threat, but not a huge amount. And here is where there are going to be some changes coming. And these changes are already underway, but certainly what we've seen happen in the aftermath of the Russian invasion of Ukraine is going to accelerate these changes. The reality is that the US dollar's role as a payment currency is going to decline, because we now have countries like China that are setting up their payment systems that can more directly communicate with the payment systems of other countries. So you don't necessarily need to go through the dollar as an intermediary currency. But even if the dollar's role as a payment currency declines, a reserve currency has very different attributes.

• 12:12Speaker 02

  A reserve currency is essentially one that is held as a store of value, where foreign central banks hold their rainy day fund, so to speak, in assets denominated in that currency. And for that, you need financial markets that are very deep and very liquid, meaning where you can easily buy or sell huge amounts of those assets. You also need some important elements of an institutional framework, that is, foreign investors, including foreign central banks, need to be able to trust the issuer of those assets. And the US has a very powerful institutional framework, you know, an independent central bank, the rule of law, and institutionalized system of checks and balances.

• 12:56Speaker 02

  So if you add that up with the size of the US economy and the depth and liquidity of its financial markets, I don't see a serious threat to the US dollar's role as a reserve currency. But certainly, the decline in the dollar's role as a payment currency is going to mean that in the future, sanctions which the US has been able to very effectively enforce are going to become somewhat less potent.

• 13:24Scott Galloway?

  And so we have an entire generation of people who aren't as worried about privacy, as far as I can tell, aren't as worried about hacks and feel very comfortable paying for stuff. I've always thought that privacy, there's some consumer dissonance, that people talk a big game about privacy and then they take selfies of themselves and announce where they are via GPS or via Uber. It seems to me that privacy is something that for people over the age of 50 in Brussels or DC, are the benefits, are the upside of the government being able to track illicit activity, do those outweigh the violation of privacy? I know this is more of an existential conversation here, but will we end up with the, just as some people have burner phones, do you think we'll end up with burner digital currency

• 14:08Scott Galloway?

  that can't be leaked back to an individual? What do you think wins out here? Utility and government protocols, which are important for the emergence and health of any market, or privacy? Because so far it strikes me that privacy is losing in almost every, in terms of consumer behavior.

• 14:24Speaker 02

  Yeah, this seems to be a generational thing, Scott. I cared about my privacy. My adolescent kids don't seem to have any expectation of privacy. They're perfectly comfortable, as you pointed out, being tracked all the time and in fact seem to relish that prospect to some extent. Now, I think even for those who value privacy and confidentiality in their financial lives, the convenience of digital payments is going to win over. Because from the point of view of consumers, you know, it's very easy to use digital payments with the swipe of a phone for businesses not having to deal with the hassle of handling cash and having it be vulnerable to loss and theft is a benefit. And for governments,

• 15:09Speaker 02

  it's a boon because it means that central bank money cannot easily be used for illicit activities such as drug trafficking and terrorism financing. It also brings a lot of economic activity out of the shadows and into the tax net. So I think for consumers, businesses and governments, the advantages are significant enough that we are all going to bow to the reality of digital payments. But having said that, the interesting thing is that technology, while it might lead us to some dark places, is also giving us potentially a way of resolving some of these contradictions. So for instance, China is moving forward with the central bank digital currency, but

• 15:50Speaker 02

  the Chinese central bank is introducing what are called low-grade digital wallets, where essentially users can still maintain some degree of transactional privacy, but you can use those digital wallets only for low-value transactions or to hold small balances. So the idea is if you want to use government-issued money for larger transactions or to maintain large balances, you have to identify yourself, you have to know your customer requirements and so on. But perhaps there is a way, if you just want to buy a cup of coffee using a digital payment system provided by the government, you can still maintain some degree of privacy.

• 16:29Scott Galloway?

  So let's talk specifically, when we talk about fintech, it encompasses so many things. Let's talk about Web 3, tokens, NFTs and DAOs. I'd love to just get your top line on what you think the prospect is for each of those three sectors and more broadly, Web 3.

• 16:49Speaker 02

  So the aspect of Web 3 that I find particularly appealing links up with one element of cryptocurrency-related technology, which is the notion of decentralized finance, the notion that you might be able to build new products on decentralized blockchains. Now, Web 3 does not necessarily line up well with the notion of decentralized finance, because after all, at least some elements of the metaverse, you would have centralized control. But here again, the notion of undertaking, you know, a lot of activities in the virtual sphere certainly does have some appeal, but whether it is going to connect to...

• 17:34Speaker 02

  Real life in a way that is tangibly going to have, um, you know, either major benefits or deleterious consequences is still not entirely obvious to me. Um, so, you know, uh, between Web three and things like, um, um, NFTs and other uh, products being purveyed on, uh, blockchains, there is certainly a bit of an intersection. Um, but I think these two will proceed, um, on parallel, um, tracks. Um, they may not diverge that much, but ultimately we might be moving to a world where certain elements of decentralized finance and so on can, um, can exist and actually have some tangible effects. Um, while Web three, I, you know, it's hard to imagine that it's going to remain

• 18:20Speaker 02

  viable in a way that it really connects with, uh, um, you know, the day to day realities of our lives.

• 18:28Scott Galloway?

  We'll be right back.

• 18:33Scott Galloway?

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• 20:57Scott Galloway?

  So you're a professor of trade policy. And when I look at a lot of these big trends, when I think about companies wanting to create a more diverse supply chain so they're not as reliant on China, when I look at sanctions, when I look at cryptocurrency, when I think about exogenous shocks that put into question your food supply or your energy supply, and I look at the US in terms of the innovation, the market capitalization, our access to different trading partners, the fact that we're effectively food-independent, energy-independent, and I'm a glass-half-empty kind of guy. I don't see, I see a further consolidation of power or a leakage back that the momentum that China has to the US.

• 21:40Scott Galloway?

  Or put another way, just geopolitically, I feel very bullish on America's position in the world. But I'd like to, I'd like you to respond to that thesis.

• 21:50Speaker 02

  I think the US has one element that is going to be crucially important, which is soft power and financial power that provides the soft power. And we spoke about the importance of the US dollar. Ultimately, what matters in the international sphere when it comes to economics, geopolitics or finance is really trust. And the question is whether foreign investors, foreign actors more generally, are going to trust a country like China. But having said that, I think the US too has certainly lost some of the trust that it had because, you know, there was a period not too far back

• 22:32Speaker 02

  when even traditional allies of the US found that they could not count on the US to watch their backs. So a lot of the world right now is trying to diversify itself in terms of economic and financial linkages, but also geopolitical linkages. That provides an opportunity for China certainly. But people are going to perhaps move into Chinese financial markets, perhaps develop closer relations with China out of a sense that they need to diversify their relationships rather than they're really going to fundamentally shift away from the US. And the reality, I think, is that even though economic power and perhaps even military power has shifted somewhat

• 23:17Speaker 02

  towards China and other emerging market economies, financial power still remains very firmly ensconced in the West, led by the US. And we've seen that play out in the context of the Russia war and Russian invasion of Ukraine and the fallout of that. So we might be seeing a bit of a fracture developing in the international economic and geopolitical system with the US and other Western economies on one side and emerging markets and developing economies on the other side, with many countries trying to straddle the two.

• 23:55Scott Galloway?

  And after spending as much time looking at or examining China, as it relates to America, are they our competitor or enemy?

• 24:05Speaker 02

  I think they view, and I too to some extent view, the economic relationship as not necessarily a zero-sum game, although it has certainly become a zero-sum game in the last few years. They are going to compete with us on some areas that the US is very good at in terms of innovation, in terms of high technology and so on. And this is because they want to transform their economy to being a powerhouse in a very different way, not just a low-wage manufacturing powerhouse. But that's going to be a little difficult to achieve. Now, on the geopolitical front, it is a zero-sum game. And I think one problem is that the geopolitics and the economics

• 24:48Speaker 02

  are becoming, you know, inexorably linked so that we are competing in both areas. So I expect that in the next few years, we are going to see a ratchet of competition in practically every sphere between these two superpowers.

• 25:03Scott Galloway?

  So I can't resist. Bitcoin and Ethereum, are you bullish or bearish on these assets? Or stores of value or payment protocols, whatever you want to call them?

• 25:12Speaker 02

  Bitcoin as a store of value, no. Ethereum as a foundation for the really exciting new financial ecosystem, very much so.

• 25:24Scott Galloway?

  And that ecosystem is that NFTs? Why are you bullish on Ethereum? Say more.

• 25:30Speaker 02

  I think the notion of building new financial products and services on decentralized blockchains, including a variety of features like smart contracts that will allow for a broad range of financial transactions without needing trusted intermediaries, that sort of functionality is much more present on the Ethereum blockchain. So NFTs, you know, might be a passing fad in my view because it's not clear what exactly they represent in terms of intrinsic value. But the ability to create new products, like I said, at scale in a way that you can even provide bespoke financial products and services

• 26:12Speaker 02

  to low-income households, low-net-worth individuals and so on, that has really tremendous potential in terms of democratizing finance. And I think the Ethereum blockchain has the sort of functionality to make that happen.

• 26:26Scott Galloway?

  Last question, advice to your younger self or advice to a recent college grad who's interested in the fintech space? Should they go to business school? Should they go to work for the government, for the IMF? Should they go to work for one of these fintech startups? What would your advice be to somebody who says, "I buy into what Issuare is saying and I want to be at the center of it"? What advice would you give to an emerging professional around where to go in this sector? How to learn?

• 26:54Speaker 02

  A little bit of each. I think it's really important at the beginning to get a good handle about the technical elements and the basics of how these things work. But then ultimately, if you want to make a difference, I think being in the policy world and really get your nose to the grindstone in terms of making possibly small but important differences in the policy world is really crucial. But before you get there, I think understanding and getting a firm grasp of the technical elements of any of the new technologies or whatever financial markets you're interested in, that is really crucial.

• 27:35Speaker 02

  So study a lot, get some work experience, and then move to the policy world and try to make a difference.

• 27:42Scott Galloway?

  Issuare Prasad is the Tolani Senior Professor of Trade Policy at Cornell University, also a senior fellow at the Brookings Institution where he holds the New Century Chair in International Economics and a Research Associate at the National Bureau of Economic Research. He was previously chief of the Financial Studies Division in the International Monetary Funds or the IMF Research Department, and before that was the head of the IMF's China Division. Issuare is also the author of several books, including his latest, "The Future of Money: How the Digital Revolution is Transforming Currencies and Finance". He joins us from Washington, DC. Issuare, thanks so much, professor. I really enjoyed the conversation.

• 28:20Speaker 02

  Scott, that was really fun. Good luck with everything and best wishes.

• 28:30Scott Galloway?

  Our producers are Caroline Shager and Drew Burrows. Claire Miller is our associate producer. If you like what you heard, please follow, download, and subscribe. Thank you for listening to the Prop G Pod from the Vox Media Podcast Network. We will catch you next week. A quick reminder before we sign off. My new book, Adrift: America in 100 Charts, is now available for preorder on Amazon. Please preorder it. Preordering is super important in terms of building momentum. The team, we put a ton of work into this. I think you'll enjoy it. It's an attempt to sort of distill down the macro and microeconomic trends, societal trends, that make up the fabric that is America, including some suggestions on how we become

• 29:11Scott Galloway?

  more moored to each other, connected, and how this great American experiment continues to be the best experiment in the history of mankind. Anyways, in sum, Daddy Wants a Bestseller. Preorder now.

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