Innovations in the Payments System | Steven J. Davis, Stefano Scarpetta | Hoover Institution

Steven J. Davis (0:09)

Stefano Scarpetta is Chief Economist at the Organization for Economic and Development, or OECD.

Stefano, welcome. Thanks for making the time.

Stefano Scarpetta (0:20)

Thank you for having me.

Steven J. Davis (0:21)

It's great to have you. This is the best weather we've had all day.

Stefano Scarpetta (0:24)

Yes, indeed.

Steven J. Davis (0:24)

The best lighting.

Stefano Scarpetta (0:25)

Yes. We're waiting for that.

Steven J. Davis (0:27)

Exactly. Just for you. Earlier today at the Jackson Hole Economic Policy Symposium, you gave some remarks on innovation in payments systems, including the way that banks and businesses, but households too, make payments between each other.

There's been a lot of innovation in this space recently, including in something you talked about called distributed ledger technologies or DLTs for short. So what are these DLTs?

Stefano Scarpetta (1:01)

Well, I think the distributed ledger technology has the great potential to reduce frictions in payment, but actually improve the functioning of financial systems altogether. These are basically share digital ledger that record a transaction among multiple participants without necessarily a central authority.

Steven J. Davis (1:23)

Okay. And when you say reduce frictions, what do you mean by that in everyday terms?

Stefano Scarpetta (1:27)

Well, in our financial system, we have a lot of frictions, different intermediaries, these raise costs, reduce access, make things actually take more time. And I think the distributed ledger technology has the potential to actually help us on all these fronts. You can think about the atomic settlement, whereby an asset and the payment can actually be synchronized, can be executed at the same time.

Steven J. Davis (1:52)

So, yeah, so tell us a little bit more about what atomic settlement means.

Stefano Scarpetta (1:57)

Not about nuclear weapons or anything like that. So tell me what it means. The distributed ledger technology, basically, you have an asset and the payment for this asset that are executed simultaneously, without intermediaries, without actually transaction times.

Steven J. Davis (2:11)

I don't have to worry that if I'm transferring something to you, and you're supposed to pay me back whether you're trustworthy or not, we both go to this DLT ledger and we know how it operates, and it solves that problem for us. Is that right?

Stefano Scarpetta (2:25)

Potentially, yes. But I mean, I think what we discussed at the symposium is a lot of potential, a lot of conditionality here. We are not yet there. I think this distributed ledger technology has really the potential to make a fundamental change in the financial system. Payment, stable coin, but I think beyond that, so the tokenization of assets more generally, I would say.

Steven J. Davis (2:45)

If this is just in the incipient stage, why all the attention to it now?

Stefano Scarpetta (2:50)

Because we have to be ready. I mean, the technology is evolving very rapidly.

Steven J. Davis (2:54)

So the technology is advanced.

Stefano Scarpetta (2:56)

Yeah, the technology is allowing for these things to happen. Think about stable coin, right? These are basically, again, using the stable ledger technology. They are basically supposed to be a sort of design in a way to hold a stable relationship with the reference asset. In general, it is a fiat money currency.

They started as a niche in the market, and now become a significant financial market phenomenon. So things are moving, and I think the potential there are significant, but we have to be prepared. Think about cross-border payment. A stable coin can actually make a significant difference. We have been discussing at this symposium, if you think about cross-border payment, there's been very little progress. Think about remittances, for example, right?

Steven J. Davis (3:42)

Okay.

Stefano Scarpetta (3:43)

Remittances still cost 6.4 percent of the amount which is sent.

Steven J. Davis (3:47)

So an immigrant worker wants to make a payment back to their family.

Stefano Scarpetta (3:50)

The target for the sustainable development goal was 3 percent. There's been very little progress, a lot of intermediaries. Stable coin potentially can solve all of that, because basically the transaction can make a cross-border in a very simple and actually pretty efficient way, potentially.

Steven J. Davis (4:05)

So, okay, the way you're describing it now makes it sound fairly simple. We need this trusted distributed ledger that everybody can see, everybody can access, everybody believe it works correctly, and then we can have these low cost immediate transactions. So what's holding up the show?

Stefano Scarpetta (4:25)

Well, maybe one other thing I want to mention is because we've been talking about stable coin, but actually tokenization of asset is maybe even more important. We are talking about more standard asset. I mean, we're talking about bonds, securities, fund, and again, this can be issue and represented in a digital token basically.