The Promises and Risks of Digital Finance | Steven J. Davis, Kristalina Georgieva | Hoover Institution

Steven J. Davis (0:09)

With me now is Kristalina Georgieva.

She is the IMF Managing Director. You've been in that role since 2019, I think.

Kristalina Georgieva (0:19)

Indeed.

Steven J. Davis (0:20)

Welcome, and thanks so much for making the time.

Kristalina Georgieva (0:22)

My great pleasure. Thank you for inviting me.

Steven J. Davis (0:25)

Our pleasure as well. So you gave a talk earlier today, which I think of is about innovations in how we transfer funds and other assets between people, businesses and banks. And I want to ask you first about one of those big innovations, which is called tokenization.

So tokenization, as I understand it, is a technology for representing funds or other assets as digital tokens.

Kristalina Georgieva (0:54)

Yes.

Steven J. Davis (0:55)

And those tokens can then be exchanged, traded and so on more easily, and maybe more securely and cheaply than the underlying assets themselves.

Kristalina Georgieva (1:06)

That is correct. And also those tokens can be divided in a way that allows access to assets, even for relatively small capacity to invest.

Steven J. Davis (1:22)

I see.

Kristalina Georgieva (1:23)

And that makes them a huge contribution to bring more participation in the economy.

Steven J. Davis (1:31)

So they are, I'm just going to summarize what I understand to be the promise.

Greater liquidity, cheaper transactions, greater security, more trust. This is all the promise side. And more inclusion. This is your last point. By making the assets divisible. So all that sounds pretty good. But some people also worry that this tokenization process creates new risks in the financial system or amplifies existing risks.

Kristalina Georgieva (2:02)

Yes.

Steven J. Davis (2:02)

And I want to get your sense of that because that's a big issue, I think.

Kristalina Georgieva (2:06)

What they do is one, they accelerate the speed with which these digital assets can move from one pocket to another. And by accelerating a speed, the punishment for errors is instantaneous.

Two, they can be conceivably not properly backed, and therefore, you have something that when you look through it, is actually nothing. So that risk, that tokenization may lead to rapid, the movement of problems make it more rapid, and the nature of the problems can be quite different.

Steven J. Davis (3:09)

I see. So there is both a new source of risk potentially, in the backing, being inadequate, and then the amplification of risks is the acceleration, the speed.

Let me take those one at a time. And when I listen to you talk about the speed point, what comes to my mind is the failure of Lehman Brothers in 2008, which precipitated a tremendous financial crisis in the United States and around the world. But if I remember correctly, the BED and the US Treasury and other authorities around the world managed to keep things somewhat in check for a couple of days and then they got to the weekend.

Kristalina Georgieva (3:48)

You don't have that luxury of time anymore.

Steven J. Davis (3:51)

So you had the weekend to figure out what the heck are we going to do. And now you're saying 24-7, you don't get the weekend to figure out what to do.

That's the point, right?

Kristalina Georgieva (4:01)

And why this point matters? Because what then you have is the reliability of your macroeconomic and financial frameworks. If you have the strength of setting standards, knowing that you can trust activities, and if you have a legislative environment that enjoys the trust of the financial sector and especially of the businesses and people, then you're in a better place.

Where is the trick? The trick is that these are new technologies, right? It is very hard to put in place a legislative framework for them. We now have legislation in the United States advancing on one subset of tokenization stable coins.

Steven J. Davis (5:03)

Stable coins, okay.

Kristalina Georgieva (5:05)

That is a good development because then the trust can be built on the basis of clear legislative regulatory framework.

Steven J. Davis (5:17)

This brings us to your backing point because one of the concerns about stable coins, just because they're called stable coins doesn't mean they're really stable. So explain that for us. How can the stable coins really be a mirage and not be so stable?

Kristalina Georgieva (5:31)

It depends on is it backed one-to-one. So you have at the moment about 300 billion stable coins. This is still a technology that is picking up speed. Ninety-eight percent are US dollar based stable coins.

Steven J. Davis (5:53)

They're backed by dollar denominated assets.

Kristalina Georgieva (5:54)

They're backed by treasuries, try dollar denominated assets, one-to-one. You have to have full confidence that if you want to get your money back, you can do it. And that this process of getting it back is simple, it is transparent, it is reliable. Of course, when you have that, the stable coins become a very valuable part of the financial systems, because the digital, they are fast to deploy if you want to use it.