The Future of Digital Money • Matt Swinehart

Managing Director at Rock Creek Global Advisors, Matt Swinehart, joins Niki in the studio to talk fintech and the future fate of the USD. Matt previews why alternatives to the US Dollar will be a hot topic globally in 2024, how the Libra project still impacts the way regulators are thinking about crypto, and shares his take on why the EU approaches tech regulation differently than the US. Niki shares her take on Bitcoin and what might have been and Matt forecasts the state of play for regulation with AI in fintech. 

“There is no world, I think, in which crypto will ever be dead. Even when it comes to things like unbacked crypto, there is such momentum in the market that the goal of regulators is not to reduce that activity to zero.”  - Matt Swinehart

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Transcript

[music plays] 

Niki: I'm Niki Christoff, and welcome to Teched Up. 

Today's guest is Matt Swinehart. He's a former litigator, a longtime public servant, and today we're going to talk about international financial markets. Matt's also a good friend, and I've been trying to get him on the podcast for almost two years. He's finally made his way into the studio.

Matt, thank you for coming in today. 

Matt: Thanks for having me! 

Niki: I think you were the first listener of this podcast, perhaps? 

Matt:  I might have been. Top ten! 

Niki: Top 10 for sure. [chuckles] We were on a trip and I had just started this and I'd fallen face-first into crypto. And you're a money expert. And I think, I think our conversation started with: I was trying to talk about the benefits of digital currency, which we'll talk about today, versus traditional currency, [Matt: Right] and I believe that your takeaway was something like, “Well, I think crypto's trash,” but you've been a huge fan of the podcast. 

Matt: Huge fan. 

Niki: Oh, sorry! Huge supporter. 

Matt: Huge supporter. Less so of crypto.

[both chuckle]

Niki: Right. But I want to explain why you didn't come on the podcast for a while. [Matt: Yeah] So, you have spent three administrations, or part of three administrations - President Obama, President Trump, and President Biden- in the Treasury Department. [Matt: Yes] And it's a little frowned upon to be speaking about the U.S. Dollar. 

Matt: Yes, the only person who's supposed to speak about the U.S. Dollar is the Treasury Secretary. 

Niki: Right, so Secretary Yellen.  [Matt: Yes] So, I kept saying, “Matt, come on the podcast and explain money to people, because nobody understands it.”

But now you can talk more freely! 

Matt: Yeah, I think so, and it's a very timely topic as well. The G7 is considering using Russian assets that are being held in G7 central banks to aid Ukraine. There's a lot of news continued about China's efforts to move away from the Dollar and toward its own currency, the RMB.

So we're gonna be seeing this, this question of money, the U.S. Dollar, alternative currencies coming up a lot in the next few months. 

Niki: Okay, great. So, I'm long on the US Dollar. I'm also long on Bitcoin though. 

Matt: Okay. [doubtfully]

Niki: You just made a lot of statements about how the Dollar is going to be more relevant in headlines. What does that mean exactly? 

Matt: There will always be incentives to want to move away from the U.S. Dollar. Part of the story here is that there are a number of factors that explain the current situation.

One of them is historical, that after World War II, there was a decision by the world's leaders to create an international monetary system that centered on the U.S. Dollar. That created a first-mover advantage, an incumbent advantage. There is substantial network effects associated with being that sort of dominant currency from the very beginning.

One of them is a set of economic factors, so the U.S. has a very substantial and growing economy. That's a very important piece of this. It has the deepest and most liquid capital markets in the world. And it also has [Niki: The envy of the world!] The envy of the world. Right. 

Niki: It also has one of our great natural resources, our capital markets. [chuckling]

Matt: Yes. And, and I think only securities lawyers would, would say that, but 

[both laugh] 

but the- 

Niki: [chuckling] Actually, Commissioner Peirce was on and said that she was on, a couple of years ago and said that. I think that's who I stole it from. 

Matt: Yes, it is a, it is a substantial natural resource for the U.S. We also have an open trade and investment environment, and all of these economic factors together mean that the U.S. Dollar is an attractive currency to use.

There's also a set of legal and political and policy considerations on the legal front. There's a respect for private property in the U.S. that's enshrined in the Constitution and in our laws. There's a general respect for the rule of law through our legal system and court system.

And then, on the policy front and political front, it's really a governance question. And here, y’know, we have a, a democracy, we have a political system that is generally respected for its stability, although-  

Niki: [interrupts ruefullly] Less, less so lately, [crosstalk]  I know! We've be-clowned ourselves!

Matt: And I would say that that's the greatest risk at the moment to the medium and longer-term viability of the U.S. Dollar is this uncertainty about how decisions are made through our political bodies.

Niki: Right! Being on the brink every year of whether or not we're going to [Matt: Default on our debt] default on our debt!  And I say to people, which people love at cocktail parties, I'm like, “No, no, no! Say what you will about Senator McConnell, but he's the only reason we don't default on the debt!!”

Matt: Right. 

Niki: I think that that's true? I'm like, “His staff goes over and, y’know, bullies whoever's on the House side to just get it done.”  [Matt: Yeah, and I think] that may not be true, but that's what I think happens. 

Matt: The consequences would be relatively catastrophic in many ways. 

Niki: Totally catastrophic!  

Matt: Over time, it erodes this sense of stability that surrounds the Dollar at the moment, and the more we do to destabilize that sense the worse off the Dollar will be.

Niki: Right. Even if we always so far have voted to get that done, it just creates a brinksmanship that makes people uncomfortable. 

Matt: That's right. 

There's also a fifth dimension to this, and that is technology and the role that technology plays in payments and, and monetary systems. Whether changing the means by which payments are made, if you make them easier, cheaper, faster, does that mean that the role of the U.S. Dollar might change somehow?

And I think, y’know, the judgment that the U.S. government has made, I think, at the moment, is that it probably would have, only marginal effects.

There, there are pockets, particularly in cross-border payments, where the price of payments is, is too high, the, the speed of payments is too slow. And I've just experienced this in paying for a wedding in Italy. [Niki: chuckles] It takes seven, sometimes seven to ten days for a payment to reach all the way from the U.S. to Italy!  

So, there are frictions and - 

Niki: [interrupts] Who was  that? Sorry, this is just an aside, but that woman who was the scammer from Germany, Anna? [Matt: Oh yeah]  She took it- 

Matt: Becoming Anna!  

Niki: Becoming Anna, thank you!! She took advantage of that to scam people because she knew there was settlement, long-term settlementSo, people would loan her money and then she'd run. Anyway! 

Matt: It's called settlement risk.  [Niki: settlement risk!] During the time in which the payment is being transferred. 

Niki: [interrupts] And for regular people who are just sending money overseas, especially people who are sending it back to the countries that they came from, to their relatives, it means a delay, it means fees, it means costs. 

Matt: Right. 

In emerging markets where there's relatively low levels of adoption of other financial services like bank accounts, those frictions become really real because they're unable to access even the most basic services.

Niki: So, let's shift a little bit to crypto and look back. So, you were at the Treasury Department when, not when. I don't think you were there when the white paper was written about Bitcoin, but it was written right after the 2008 financial collapse. And the theory is that why it was interesting to people is it would be sovereign, or it would be separate from the United States policy.

No government would manage it. It would be immutable. It would maybe insulate you from things like inflation, that it could be hedging your bets with a different kind of currency. There was such distrust of our financial system that somebody came up with this concept of global internet money, Bitcoin, and it was going to be an alternative to the U.S. Dollar. 

Interestingly, two years ago, when I started this podcast and you and I were talking about crypto [chuckling] and you were like, “Yeah. Not, not bullish on it.” I sort of had bought into that idea that it could be a viable alternative currency.

Let's talk about what happened when this finally came to the forefront of the U.S. government, which was years later and you were at Treasury with the very first project, which was a Facebook project.

Matt: Right. And, and Libra is a really interesting example of, of the monetary sovereignty arguments that we were just talking about.

I, I will say my, my one big regret in, Bitcoin and digital assets was in 2013 when I was first writing about Bitcoin and digital assets, and I had put on my to-do list: “Buy Bitcoin” [Niki: laughs] because I thought, “Gosh, if I'm going to be writing about it, I need to at least go through the motions of, of, of getting one.”  

And that just sat on that to-do list for months and months. And I think it was maybe priced at $200, $300 around that time. Never did it. [Niki: mm-hmm]I don't know if I would have held it to the point where I would have been [Niki: Yeah, last summer, $75,000] But it could have been a nice chunk of change. [Niki: Yes] So, that's a big regret.

Niki: Sorry! [corrects self] TWO summers ago, $75,000. Two summers ago. [Matt: Yes] 

Well, and I have a similar regret. I went to a blockchain conference. I didn't know the difference between Bitcoin and blockchain. So, Bitcoin, the currency that sits on blockchain technology. I went to a conference and someone said to me, it was 2015, “I'll just download a wallet and give you a Bitcoin.”

And I said, “Yknow, I just have too many apps on my phone.”  [Matt: chuckles] That's what I said! It was unbelievable. 

Matt: Yes, I think it was even in 2013 and 14 a little bit impenetrable to even savvy app users. 

Niki: It actually, it really was. And right now. I mean, I do some work with Block, but CashApp, it's so easy to buy Bitcoin and you can transfer it to US Dollars easily, which is why that's why I use it. [Matt: Yep] 

It's just super simple. [Matt: Yep] 

Okay. So, let's go back to Libra.

Matt: Yeah. So in 2019, I would say before the Libra white paper, attention paid to crypto in, among financial authorities globally was relatively muted. 

All that really changed in 2019. And I remember this very vividly. It was sort of all hands on deck, and you haven't seen international organizations work this fast, at least in my experience, where the G7 went from not knowing really what Libra and stablecoins were to the, in the course of maybe two months, publishing a set of principles that would then sort of form the basis and guidance for public policymaking for the years to come.

Why was that? It wasn't really about the crypto parts of Libra. That came later. The initial concern about Libra was this idea that it would disrupt monetary sovereignty. And- 

Niki: I just want to back up so people know what Libra is. [Matt: Yeah] It was a project launched by Facebook. 

Matt: Yeah, and a consortium of large companies.

Niki: And a consortium of large companies that would essentially make this cryptocurrency concept usable by their billions of users. And suddenly regulators woke up and said, like, “Oh my gosh! We now have to pay attention.”

Matt: Yeah. Up until then, you know, market cap of crypto was fairly low. It was very volatile. [Niki: mm-hmm] First-gen crypto, unbacked crypt. 

I think regulators generally viewed it as something that wouldn't ever have a useful application - adoption would remain relatively low and in sort of pockets of the economy.

But then, Libra represented this change and a pivot toward what we call stablecoins now, where they would design something that was intended to maintain stable value and governments recognize that this might have larger appeal.

Niki: Stablecoin is essentially a token, a crypto token, that is tied to a fiat currency like the Dollar. [Matt: Right. Or some other asset] Dogecoin, which is tied to like a sketch of a dog. 

Matt: Elon Musk's tweets. 

Niki: Elon Musk's tweets.

[both chuckle]

Niki: Right. So, it's for regular people. 

Matt: This was the moment of awakening for, for regulators, really, where crypto writ large went from something that sort of seemed like a novel nuisance to something that could take on greater and grander implications for regulators.

Niki: And the government shut it down!  

Matt: And the government shut it down.

Niki: Hard!

Matt: And why did that happen? Well, we just talked about, y’know, incentives for moving away from the U.S. Dollar. Governments have this incentive to sort of have monetary sovereignty and, sort of, fait control over their economic and political fates.

The way that the then Diem and now, and then laterm Libra proposal originally would have worked was not to rely on a single fiat currency as, as sort of the basis for the stablecoin, but to tie the value of the Libra to a basket of currencies. So, it was US Dollar, Euro, Yen, etc. 

What that would have done was create what we call a new unit of account, which is one of the three features of money. And what that does is it sort of disrupts the chain and the control that a government might have over that currency. 

Niki: And so, it shut it down. 

Matt: So, it shut it down.

Niki: And it was also shut down in Europe.

Matt: It was also shut down everywhere, yeah.

Niki: It was shut down everywhere. It didn't stop crypto's momentum, which again I realize that - well we're going to talk about whether or not crypto is dead. [Matt: mm-hmm] 

I will tell you that on this podcast when I started it, our most listened to episodes were about crypto, now they are about AI. [Matt: mm-hmm] So, I don't want to overly dwell on crypto because people have sort of moved to a new hype cycle. But, it didn't stop it in its tracks. [Matt: Yep]

However, it made it very, very clear to the industry, the crypto industry, that regulators had the ability, they could say whatever they want about being borderless and internet-based, but in real life they can still get shut down. [Matt: Yep]

So, can you talk a little bit about how Europe versus the US thinks about this digital money?

Matt: Yeah, and I think it's an interesting question because one of the lessons learned that came out from Libra for perhaps some in the crypto industry was: “Don't ask for permission,” right? Like, Libra did everything you should do.

Niki: And they're still mad about it! Our friend Dante Desparte, who's been on this, I love him! I think he's fantastic, [chuckling] but he's still a little wounded because he did do all the right things. 

Matt: Yeah, and Dante is going to make a guest appearance in my international finance course at Georgetown this semester. [Niki: Oh, fantastic!] So, we'll get to revisit this together. I think that, is not necessarily the right lesson to draw from that experience.

I think the, the right lesson is when you have a potentially disruptive technological development, it's very important to put yourself in the shoes of the, the financial or other authorities who might have an interest in regulating you. 

What I mean by that is that I think I think Libra and the consortium had anticipated a number of consumer protection issues. They had a very good narrative about the potential benefits. They, they even addressed some of maybe investor protection or other considerations, but they, what they had initially failed to do, I think, is address these monetary sovereignty concerns and failed to realize that the prospect of a new currency was really this existential threat to central banks, financial authorities, and the government's control over currency.

And I think if they had to do it all over again, and I won't speak for Dante and others, but I think what they would do would have been to jettison that whole basket of currencies idea and make it much more like the stablecoins that we see today.

Niki: Right! And Dante, not to make this about Dante, [Matt: Yep] but, but Dante is now at Circle, which is tied to [Matt: Yep. Exactly] the U.S. Dollar. So, they sort of did evolve. The part of the crypto industry that wants to work with regulators and wants to get mass adoption - well, everybody wants mass adoption - but who actually want to work in tandem have figured out that stablecoins tied to just one currency is a very viable option [Matt: Yep] moving forward.

Matt: I think quite quickly, maybe within the first eight months of that project, they began to pivot. But by then, it was too late and trust in the enterprise had sort of fallen. 

Niki: And there is a big part of the crypto industry, which has been my cross to bear, which is: it's hard to communicate the positives of an industry when you then have people say, “Well, it didn't work to talk to regulators, so, catch me if you can,” which was, has not gone well for them and is a bad look.

Matt: Yeah. I think that's right, and that gets to your question about the differing views in Europe and the U.S. and, and there I think there's some sense in industry that Europe where they have, have moved very quickly with, with regulation reflects a judgment that crypto is, in fact, valuable and there are economic use cases. 

I don't think that's quite right. I, I, I think Europe is regulating in a way that is agnostic as to whether there is economic utility in any of this. They say that quite clearly. It's not necessarily with an aim to engendering some large crypto ecosystem within Europe.

What their perspective is, I think, is they're from a civil law jurisdiction which is different than a common law jurisdiction. It's, I think, incumbent upon those types of regulators and civil law jurisdictions to update the rules as new technologies come online. 

We have in the U.S. a bit of a luxury in common law systems because It's more principles-based, we have a little bit more flexibility in, in, in changes in technology but I think that's really why Europe is moving in this way. It's not necessarily reflective of differing attitudes about the economic value of crypto.

Niki: I think that's a really good and interesting point to make because when you, when people who are in the crypto industry think about the US versus Europe - 

So, just to break it down for people who are not really close to this world, right now there is a framework for operating legally in the EU and also the UK has been very constructive with the industry and creating rules of the road.

So, these companies and these entrepreneurs and their employees know what they need to do to not get crosswise with regulators [Matt: Yep] and with even criminal charges. In the US they really don't know. [Matt: Yep] They find out when they get sued. 

And so, what's happening, I have a lot of even former clients in this industry who are just moving overseas. They're moving to Europe, to the UK, to Singapore, to Japan, to Dubai because these are American entrepreneurs, but they just feel like it's just too uncertain and too risky here, and they're paying too high a price for just no system being in place. 

And what you're saying, which I think is interesting, isn't that the U.S. regulators have more of a skeptical view of crypto than, than Europeans might. But that here, we just have the luxury of not having to really do anything because we have these principles. We can apply them after the fact. And they are required, as you just said, to think ahead of time about the tech.

Matt: Yeah. I think that's right. 

And I think the jury is out about whether regulating does create better opportunities for markets generally. Europe certainly has, at least some in Europe, have some remorse over the General Data Protection Regulation, GDPR, which, y’know, some studies suggest has reduced economic outcomes and innovation in Europe.

Niki: It seems like historically, heavy-handed regulation does not create more economic growth. 

Matt: I think that's right. 

Niki: So, if we look back at our conversation so far. So, we started about talking about the U.S. Dollar and how our political uncertainties in the United States have created a system now where people are looking at other fiat currencies and, and boosting their own currencies in a way that they don't want to be totally reliant on us.

Then, we talked about crypto and the idea that It was created potentially as an alternative to these currencies, sort of, shut down, and now there is maybe more hope for it being used in Europe, y’ know, really in the U.S. it's very, very difficult, although the industry is still trying to work in Washington to make it viable here.

And the question I have for you is, is crypto dead? 

Matt: Absolutely not. There is, there is no world, I think, in which crypto will ever be dead. Even when it comes to things like unbacked crypto, there is such momentum in the market that I think, y’know, the goal of regulators is not to reduce that activity to zero.

It's absolutely not dead.

And the, the, the one thing that I will say is that when it comes to things like stablecoins and tokenization, that's really where the game is going to be played and that's where regulators are most focused in terms of their next steps and what they need to do both to regulate risks and make sure there are appropriate safeguards, but also to enable innovation in those areas where they do think there is useful economic activity.

Niki: Yeah. Okay! 

So, not to make this all about me, but two years ago when we started talking about this conversation and this podcast launched and one of the first episodes was “What is blockchain?” And I actually had Commissioner Peirce come on from the SEC and I, I used the term, “ethers.”  And she said, “That'd be like saying golds.” 

[both laugh]

That's how little I knew about it!  

And now, I know a lot more about it, but I did, y’know, bought some ETH, turned it into WETH, bought a couple NFTs. And then, now I've got some Bitcoin, but interestingly, just got a note from Fidelity, “Hey, by the way, if you've got, if you're holding crypto this year, let's talk about what we're doing.”

So, I do think we're shifting, and this is what I think is interesting: Traditional banks - watch what they do, not what they say, right? So, they are jumping into some affiliations with these kinds of currencies. 

Matt: Yeah,  I, I agree. I think there is some sense, there's some fear of missing out. And that is driving some activity among traditional financial institutions. There are a number of applications right now before the SEC, to provide an exchange-traded fund that would be based off the value of Bitcoin.

So you could, instead of buying Bitcoin, you could buy this fund using existing mechanisms and essentially track the value of Bitcoin without actually owning the Bitcoin itself. 

Y’know, I won't weigh in on the prospects for those applications, but just to say that if they were approved, it's sort of a very perverse outcome for the crypto community because we basically have gone full circle where there's this creation of this new asset class, but then, in the end, it's largely captured all the activities by the traditional financial intermediaries.

Niki: Right. It's an ideological bummer for them. But probably really good for them financially, the people who were early adopters. [Matt: Yeah, absolutely] 

So, yeah, it'll be interesting to see that. And that's not sort of an esoteric topic. Suddenly crypto is dead. Nobody was talking about it. They're all talking about AI, which actually I want to end on [Matt: Yep] but just recently, because of the Bitcoin ETF, which you just described, it's suddenly back in the normal, traditional business news. So, we're seeing a lot more headlines about it. 

Matt: Yeah, absolutely. I mean, it's amazing the waves in which the crypto winter comes and goes. One of my very last official meetings at Treasury was with SBF, Sam Bankman-Fried.

Niki: Oh, I didn't know that! 

Matt: Yeah, yeah. I don't talk a lot about it, but, [Niki: chuckles]  y’know, good, good podcast fodder!  Met with him, I guess, eight months before his, his very public fall. But, y’know, we're now a year or so after that, and, and things seem to have at least on the, the public perception have, have been righted a little bit.

Niki: A little bit. 

Matt: I don't think that regulators forget things like that, though. 

Niki: Noooo! , It was not great. Not a great poster child. 

We've talked about digital currencies. We've talked about how that's going to probably be baked in. What about AI? 

Matt: Yeah, I mean, as with most sectors, AI is going to be perhaps the number one tech focus for financial authorities in 2024.

I think that It will be a relatively muted response in the beginning. Certainly, everyone has pivoted toward this big focus on AI among financial authorities, but what they will be doing is mostly monitoring with some exceptions. They are going to largely wait for these horizontal economy-wide rules to come out, like the EU AI Act before thinking about whether to tailor them specifically to financial services.

And I think this is a really interesting contrast with crypto and maybe we can draw some parallels and contrasts there, but, y’know, there are some key differences. 

One, authorities, financial authorities generally accept that AI has economic utility. That's a game changer because no longer is there the sense that it's only about downside risks.  It's about risks and opportunities. And that, sort of, unlocks a different mindset, I think, among authorities. 

It's also not an issue like digital assets that financial authorities have to address first because the use cases aren't solely, y’ know, the first initial use cases aren't within financial services. 

And then, financial services has always been a business about data and data analytics. It's less obvious in this sector that, y’know, so-called AI is radically different than the complex algorithms and models that we had a year ago or ten years ago.

Niki: A lot of tech experts who I talk to say exactly that. It's in some ways iterative. [Matt: Yes] It's just captured people's minds and it's captured a lot of the zeitgeist, but it's it's an iterative technology. 

Matt: Yeah, and I think because financial markets have relied for so long on these really complex models, the rules of the road already address many of the bias, explainability, etc., type concerns that might arise with AI. 

Niki: Like an example would be, you already, it's already illegal to make credit determinations based on race. 

Matt: Right, exactly. And, and you have to be able to explain the credit decisions that you make. And if you're using AI or a complex algorithm, that becomes more difficult. [Niki: Mm-hmm] Of course, you can't just simply point the consumer to this black box explanation [Niki: Right] 

I think the rubber will really hit the road in the future on a number of issues that might be specific to financial services. One of them, there's this big concern in financial services about concentration risk generally, the idea that you'd have a few big entities controlling all activity.

When it comes to AI, it may be that there's just a handful of foundational models underlying the, the types of AI that, that, that financial services providers are using. It might be that they're sharing data sets, and it might be that there's organic concentration in the sense that AIs are communicating with each other and learning from each other and even without the human, any sort of human intervention.

All of a sudden, firms might be relying on [Niki: The Borg] The Borg. [Niki: chuckles] Yeah. So I think that's a, that's a medium and longer term concern, but that's something that when financial regulators do pivot to policymaking in AI will be sort of top of the list. 

Niki: I think that was a really good place to end because when the crypto industry came to regulators, it was seen as only downside risk. 

And as you just said, AI is seen as having challenges and opportunities, including efficiencies, which absolutely has economic value. And people get that. They just intuitively get it. So, I think it's probably, as you said, more likely to be given runway to operate and then we can address any harms as they emerge.

Matt: Yeah, I think that's right. And AI generally has a lot to thank for ChatGPT because regulators are sitting in their home and continue to sit in their own home and are using it.

Niki: Right! They're using it in a way that, as we started out talking about, you and I had trouble buying Bitcoin originally because it was so complicated. 

[both chuckle]

Matt: Yeah. Anyone can use a chatbot. Yeah. 

Niki: Anybody can use it. All right. Well, Matt, thank you so much for coming on. I really appreciate it. 

Matt: Thanks for having me.

[music plays]