 Hello, and a very good afternoon to you all. My name is Dara Lawler and I am Senior Economics Researcher here at the Institute of International and European Affairs, and we're delighted to welcome you today to this IIA webinar. We're delighted to be joined today by Christopher Calabia, who is the Head of Central Bank Digital Currency Programs at the Massachusetts IT Digital Currency Initiative, and he's been very generous to take time out of his busy south schedule to speak to us today. This is the second in the IIA series of webinars that we're running on the subject of central bank digital currencies, and in his remarks today Chris will share recent research on the opportunities and challenges presented by the potential introduction of the CVDC such as a digital dollar, and he will also address practical and policy questions that this digital asset or other digital assets like it could raise for our economies and societies, including whether CVDCs could promote greater financial inclusion and how to safeguard other risks such as privacy and mitigating other risks like fraud and anti-money laundering, so promises to be a very interesting discussion today. Chris is going to speak to us for about 20 to 25 minutes, and then we're going to go to Q&A with you, our audience. So as you, I'm sure you know at this stage that you'll be able to join the discussion using Zoom, the Q&A function on Zoom at the bottom of your screen. Please be free to send in your questions throughout the session as they occur to you, and we'll come to them once Chris has finished his presentation, and you can also participate in the discussion on Twitter, or ex as it's now known, using the handle at IIA. And just a reminder that today's presentation and the question and answer session are both on the record. So Christopher Calabia or Christopher Calabia rather is head of central bank digital currency programs at the Massachusetts Institute of Technology, or MIT as we know it, Digital Currency Initiative, which he joined in October 2022. His 30-year career in central banking and regulation included senior leadership roles at the Federal Reserve Bank of New York, and the Dubai Financial Services Authority, so comments to the Bank for International Settlements in Switzerland and the IMF, and a senior advisor role at the Bill and Melinda Gates Foundation's Financial Services for the poor initiative, which I know does very important work. Chris is a certified anti-money laundering specialist and graduated from the Fletcher School of Law and Diplomacy and the University of Virginia. So Chris, we're delighted to be joined by you today. I'm looking at my window here and it's extremely rainy, so I hope it's a bit sunnier in Massachusetts than it is over here. So over to you for your remarks and your presentation. It's raining over here too, Dara, so we're in sympathy. So thank you so much for inviting me to participate in this discussion today, which is quite timely given that the European Central Bank made a decision today to move to the preparation phase for the Digital Euro project. So I'm happy to share today some of the research that we're doing on the other side of the Atlantic here at the Massachusetts Institute of Technology and the Digital Currency Initiative on central bank digital currency. And so you can see a picture of our lab here. We're part of what's called the Media Lab in Cambridge, Massachusetts, and the Media Lab is an interdisciplinary research hub that blends art and science and design and engineering. And the goal for the lab is to create new technologies that will transform lives and have a positive impact on society. Now DCI's work fits really well into that mission as we're focused on building a digital future for money that upholds democratic values and promotes freedom, autonomy, privacy, and inclusion. And we see a tremendous opportunity to make money and finance work better for everyone using innovations like faster computing power, network systems like the internet, and more powerful cryptography. And we believe that digital assets like digital currencies can do for value what the internet has done for information. So Lorcan, if we go to the next slide please. So DCI focuses on improving the security and the scalability and the privacy of digital assets, both centralized assets like Central Bank Digital Currency or CBDC as well as decentralized assets like Bitcoin and Ethereum. And we leverage the talent and knowledge of research scientists, engineers, students in computer sciences, engineering, finance, economics, and regulation to help advance public dialogue on the development use of digital assets and payments. Now we are neutral in that we don't really endorse any particular technology platform or solution and we don't sell or monetize any of the work we do. Instead, all of our work results in papers like public scientific papers, policy notes, and open source code. And we were created in 2015 to focus on some of the first digital assets like Bitcoin. But starting as early as 2016, we began looking at Central Bank Digital Currency. So in the next slide please. Now given the quality of our team's research, we were honored to be invited to collaborate on research topics with several central banks related to CBDC, including the Federal Reserve Bank of Boston, the Bank of England, and the Bank of Canada as well as some large private sector companies that were researching CBDC such as Google and PayPal. And I'd like to share some of our research today on CBDC. I'll be focusing on projects that explore design choices and options that central bankers and policymakers will have when seeking to create a new form of public money. And I was able to see the excellent event that Dr. Karen Asemacher presented last week through your form on the digital euro and the implication for the European economy. And I'll conclude with some personal thoughts on the status of discussions on a digital US dollar. So the next slide please. I think a key question that many people ask is why so many countries are considering the development of a digital fiat currency. And I think especially in regions like the European Union or the United States, it's easy to assume that we have a well-functioning financial system. In fact, most of us already make extensive use of digital payments through things like credit and debit cards or automated bank transfers and payments. And I can see three reasons for studying CBDC. One is that the use of cash on the screen there is declining in many societies. Since the introduction of various electronic means of payments, many but certainly not all of us carry and use much less cash than before. In the introduction of phone and app-based payments have only accelerated that trend in many countries. And the pandemic seems to have driven even more away from the use of cash towards digital payments. Now in the US, for example, only about 18% of all payments are in cash today, which is down from about a third of all payments in 2016. Now in some countries like Sweden, the decline in the use of cash has actually been over a much longer period of time and happened much sooner. And today somewhere between two and 13% of payments in Sweden are made in cash. And if you're in Ireland, you might check your own wallet today to think a little about this. I read a recent report that suggested that about 20% of survey respondents in Ireland never carry cash and about half carry less than 20 euros. Now these statistics are not borne out in all countries and people in rural or low-income regions may carry and rely on cash to a greater degree. But what's substituting for cash in these societies? That's the second reason that I think it makes sense to study central bank digital currency. In nearly all cases, what's replacing cash is private money. And by that, what I mean are tools that make it possible for us to access our funds that are held at commercial banks or tools that allow us to access funds provided by companies that offer credit. And this means that private sector intermediaries are facilitating our access to money. And while that works well for some of us, not everyone is able to benefit from a credit card. And some people shy away from bank accounts because of the fees that they may face when using certain services. And in some low and middle-income countries, vulnerable people may lack the necessary identity documentation to open financial accounts, which is a problem especially challenging for low-income women in those countries. Now as more innovative payment services become available, a question sometimes arises about the efficiency and effectiveness of these various services. Now just as an example, as a parent, I have to find ways to pay for my children's trombone lessons, dance classes, and participation in sports teams. I've discovered that not all sports coaches will accept cash or checks. One accepts payments only via one particular app, while our trombone tutor accepts funds only on a different app. And I've learned that it's hard to transfer funds from one app to another because they're not interoperable. Now some central bankers and policymakers see these trends and are becoming concerned about central banks' roles in providing access for all citizens to public money that is accessible and to all and doesn't present credit, liquidity, or operational risks to the degree that privately intermediated funds may. In extreme cases, we could even imagine a country's monetary sovereignty that is its ability to issue its own money and execute monetary policy could be constrained should private digital assets crowd out fiat money to a great degree. So I think a third reason for studying central bank digital currency is that so many so much economic activity is moving to take place online today, and you generally can't use cash to buy things or pay for things online. And our research scientists have sought to estimate what kind of transaction processing power a centralized issuer of money would need to support an economy as large and as diverse as the United States. And they think that it's about at least being able to manage 100,000 transactions per second. Now, if we look at the private solutions that have emerged, none are quite there yet. So if we go to the next slide, please. So you can see that a large credit card provider like Visa handles about 24,000 transactions per second. Now in reality, in peak times, they can handle more, but generally it's about 24,000 per second PayPal, which was one of the first online payments platforms that really skilled in the United States achieves about 193 transactions per second. And Bitcoin famously only processes about seven transactions per second because of the complex cryptography that's involved in handling those transactions. So the existing systems that we have wouldn't necessarily be able to support a move to a completely digital currency today. And we think that 100,000 transactions per second is probably the low end of what would be required. Much more throughput will be necessary and it was likely to increase as more micro payments are required for things like accessing individual news articles online or as more merchants and service providers accept novel payments platforms. My children, for example, now accept payment for their babysitting and dog sitting jobs via a phone-based payment app. Now they're not old enough actually to have those apps on their phones in most cases. So they rely on a financial intermediary to receive their payments. And that's me. And they're justifiably concerned that their dad might start charging them handling fees and don't think the thought hasn't crossed my mind today. I mean, have you seen the cost of college in the United States these days? Now on a more serious note, if you lack the ability to receive a digital payment or if it costs too much to receive such a digital payment, lower income people may be left out of the digital economy. So this is another reason to study central bank digital currencies. So if we move on to the next slide, please. So the trend towards the greater use of private money such as digital commercial bank money, as well as more actively requiring payments electronically, raises critical public policy questions about how inclusive and democratic our economy will be and whether the transition to digital money will leave anyone behind. The traditional system, which are banks, credit card companies, et cetera, are well established. By that, I mean that they're widely adopted, as you can see on the left-hand side of the screen there. Widely adopted, they're highly regulated in Ireland and the EU and in the United States. And they're generally, and very broadly speaking, stable and secure. Innovative payments mechanisms are emerging, including new kinds of private money like Bitcoin or other cryptocurrencies, as well as things called stablecoins. Now, many of these innovations are open and accessible to many people, but they aren't widely adopted, meaning you can't really buy much with Bitcoin. In many countries, they're subject to less regulation than traditional finance or in some cases, no regulation at all. And these platforms have not yet proven to be stable or secure. Now, at DCI, we believe that a well-established central bank digital currency could achieve all of these objectives, including scaling to be adopted widely. It could be fully subject to regulation. And it could be as stable and secure as a fiat currency, yet still remain open and accessible and highly innovative. So let's go to the next slide, please. For all of these reasons and more, central banks virtually everywhere are exploring and researching CBDC. The Bank for International Settlements recently estimated about 93% of the world's central banks are conducting research or even developing and piloting various experiments. And according to the Atlanta Council, about 11 countries have launched a CBDC of some kind, mostly in smaller jurisdictions. Now, in addition to the benefits I've mentioned, two or three use cases that people are considering include potentially reducing dramatically the high costs of remittances. That is the money that people send home when they're working abroad. These costs have remained stubbornly high for a long period of time at about 10%, whereas the UN Sustainable Development Goals have been set to reduce these costs so that more money can reach people's families to about 3%. And a digital currency payment could theoretically be made for pennies. A second use for a central bank digital currency could be to reduce the cost of other cross-border payments, including things like providing foreign aid. Now, this particular topic might be very important in the context of a country like Ireland that contributes so much in foreign aid to low and middle income countries. But some of those funds don't always make it to those countries because they're captured by high fees or inefficiencies in the global payments infrastructure. Now, a third use case could be greater financial inclusion that is expanding access to financial services to those who are unbanked or underbanked. But I'm going to come back to that in a few moments. At DCI, we believe that central bank digital currency could fundamentally change the structure of the U.S. financial system and consequently the global system as well. And that's an exciting but also really daunting challenge to contemplate. Another big challenge that we see is that we believe that any digital assets and payment systems must be built to uphold democratic values. But that, I mean, it should improve autonomy for individuals. It should promote transparency and accountability. And digital payments and assets should safeguard privacy. They still must provide sufficient transparency, though, to deter criminal activity and to mitigate things like money laundering or the financing of terrorism. Digital payments rather create data trails that can be tracked while cash does not. So privacy is at the heart of some of the political debates about central digital currency. So let's turn now to some of the research that we have been doing at MIT on central bank digital currency. So in the next slide, I'd like to introduce you to Project Hamilton. Project Hamilton was one of the first major CBDC research project that we collaborated on with a central bank and our team joined with engineers and researchers from the Federal Reserve Bank of Boston in 2020 to launch this project. Now, I should stress that U.S. authorities have not made any decision to issue us a central bank digital currency and only the U.S. Congress can authorize legislation to prove the release of such an asset. So the project that we undertook with the Boston Fed was purely scientific research to explore whether we could build a transaction processor for CBDC that could service an economy on the scale and sophistication of the United States. Now, remember that our best guess is that a CBDC would need to support at least 100,000 transactions per second. And we set as well a goal for this project that transactions should settle in less than five seconds. And finally, the system also needs to be resilient so that it could handle disruption such as the loss of data centers due to hurricanes or storms and other matters. Now, the first architecture that engineers from DCI and the Boston Fed built was able to handle about 170,000 transactions per second. So well in excess of the minimum we set for ourselves. But in the second architecture, the team decided to allow multiple computers to process transactions in parallel. And that resulted in a throughput of 1.7 million transactions per second with 99% of those transactions settling in less than one second. So Project Hamilton far exceeded the minimum requirements that we believed are necessary to support an economy the size of the US and that might then be true for the EU as well. And it may also be the fastest processor that we know of that's been built. But Project Hamilton also created a code base that we and others could use to experiment with different design choices. So the Boston Fed and DCI decided to make the code base freely available to anyone in GitHub for experimentation and further research and is now known as OpenCBDC. And we know that a number of central banks have been using and testing the software as of other research groups and they've been able to replicate some of our results. And we're happy to see that this this free code base is helping to advance the science and research across the globe. Now while we have another a number of other research projects related to CBDC underway, I'd like to share just one more related to the question of financial inclusion. So let's go to the next slide please. In public discussions about issuing a central bank digital currency, a claim that many proponents have made and even quite a few central bankers have said is that issuing a digital currency will expand access to financial services among those who are currently unbanked or underbanked. And this claim is made especially in the context of low and middle income countries where today nearly 1.4 billion adults continue to lack access to a formal financial account of some kind. And the Bill and Melinda Gates Foundation reached out to DCI a few years ago to explore the question of whether CBDC might actually help to improve access to financial services among people living in extreme poverty. So MIT worked with 13 research teams across the United States and in four countries, India, Indonesia, Mexico and Nigeria, to understand better how current money technologies are either serving low income people well or not so well and whether central bank digital currency could be designed to serve them better. We also needed to explore the important question of as to why cash is so important in many societies and whether CBDC could be designed to draw on the best elements of cash but also newer payments tools like digital payments and cryptocurrencies. So back to the question, will CBDC drive greater financial inclusion? And I think as some of my colleagues at the DCI would say who are economists, the answer is it depends. The DCI research paper emphasized the importance of design choices when building CBDC but also the importance of reimagining the financial ecosystem to help address inequities and better serve everyone. So if we go to the next slide, please. So DCI's research noted that it's not just the design of the digital assets that matters, it's the design of the whole ecosystem that will help to determine whether we can build public digital money that will work well for everyone. And more importantly, how money is intermediated may be decisive in whether digital currency, digital fiat currency, succeeds or fails. Now, digital currency doesn't need to be intermediated by a bank or a service provider. And one of the characteristics that some enthusiasts about things like Bitcoin really like is that they can hold their own digital assets on their own or casue them as it's sometimes called on their phones without needing a bank account or a commercial service provider to do so. However, as far as is publicly known, every one of the more than 100 central banks that is studying central bank digital currency today assumes that a CBDC will be intermediated by a third party other than a central bank. Now what that means is that commercial banks or fintechs or other service providers will likely pay a player role if a central bank digital currency is implemented. Now what do we mean when we talk about intermediation? Payments are usually made on behalf of a user through a financial institution like a commercial bank. As you can see in the diagram, the person on the left hand side who sends an order to their bank and then it goes up to the central bank to be settled and the cash is transferred to another person's bank account and so on. Now there are often many intermediaries today beyond banks. So for example, if you're using your phone or a mobile device or a web browser, you're relying on the communications infrastructure and your internet provider or your mobile network operator to help transmit that information. So those are intermediaries as well today. And then there are a whole slew of payments applications which really abstract banks away from the user and serve as a service provider for digital payments for these people. Now every layer of infrastructure creates new opportunities for something to go wrong, whether that means an intermediary actually deciding to deny somebody access to an account or to a transaction or a failure in the infrastructure because of an operational problem. And we saw in our field work that infrastructure fails quite often. So in the report that was issued sponsored by the Gates Foundation, the DCI noted that with any digital currency, whether it's centralized or decentralized, there's always a system run by some actors and maintained by others that ensures the validity and the continued operation of currency and preventing things like double spending of the same money, verifying and ordering transactions, maintaining and upgrading the software and so on. And so there's no such thing as a totally unmediated digital bearer asset. But think about this in contrast with cash. Cash is also mediated in that it is carefully designed, manufactured, minted, and distributed to make counterfeiting very difficult. But cash is quite different from digital transaction systems in that there's really no device that you need, no network or no system operator that makes it possible for you to make a payment. Instead, I simply open my wallet, take out a dollar or a euro and hand it to you, and the payment has been taken care of. Now cash has many issues. It's expensive to maintain and handle. It can be easily lost or stolen. And of course, it doesn't work digitally. But cash is a critical backstop against exclusion. Anyone can use it. It doesn't require an account or an identification card or an external infrastructure because it's not intermediated in that way. So at DCI, we think that central banks do need to think seriously about an option for allowing people to hold CBDC on their own without the use of a bank account or payments account on their phone. Many of us at DCI imagine that CBDC could be as simple or as easy to use as digital cash. And so if we go to the next slide, the reality, though, is that most likely third-party intermediaries will be involved in and sit between people and their central bank digital currency. And that means that people will need to open account with those intermediaries. And intermediaries often have a lot of sway over who gets permission to have an account and who doesn't. And if the same intermediaries that exist today are the entities that will intermediate CBDC tomorrow, that means that the same impediments, the same preferences, and the same biases that some intermediaries sometimes demonstrate could be baked into the new world of digital fiat money, replicating whatever exclusions we have today. So any intermediate digital currency is only as good for financial inclusion as the intermediary ecosystem is that people use to access it. So I want to wrap up and just share a few thoughts about the state and the United States with digital currencies and central bank digital currency. So if we go to the next slides, President Biden issued an executive order in March of 2022 called focusing on the responsible development of digital assets. And in this executive order, the president called on the US government to think about ways for digital assets like central bank digital currency to protect consumers and investors and businesses, to protect financial stability and to mitigate systemic risks. Importantly, to mitigate the misuse of digital assets, things like money laundering or cybercrimes or terrorist financing or human trafficking. The order also called upon the US government to support US leadership in the development of these technologies, but to make sure that they're developed in a responsible way that would promote democratic values, including privacy and security by design. The order does ask the government to consider how to improve financial inclusion through the use of central bank digital currencies and to maintain the financial stability and mitigate the misuse of digital assets. The president did call on the government to consider whether a central bank digital currency could achieve all of these goals, but it did not represent a decision necessarily to issue one. And so that's when the research for the federal government side began in earnest. Earlier this year, an interagency working group was set up consisting of the US Treasury, the Federal Reserve System, the National Security Council, and other government agencies to look into the various digital assets and to try to explore the different objectives that the president had set out for the government. And research is continuing. As I mentioned, the research that started in 2020 with the Federal Reserve Bank of Boston, President Hamilton, while that has concluded, research is taking place in other Federal Reserve banks, including the Federal Reserve Bank of New York, with something called Project CEDR, which is a project with the Monetary Authority of Singapore to look at wholesale CBC and cross-border payments. And other central banks, other Reserve Banks in the United States and the Board of Governors in Washington are conducting additional research and studies as well. However, one thing that surprised me a little bit more recently, and perhaps it shouldn't have surprised me, is that central bank digital currency has become quite a political issue in the United States. And partly that's because of concerns about the potential for central bank digital currency to become a surveillance tool and to monitor how people and companies are spending their funds. Now, the US government has said that it has really no interest in doing this, and that it wants to ensure that the transactions we conduct privately. But there's still a lot of questions about how this would work and whether this will work the way it's said. And so at MIT, we were actually doing some research on this, and I'm happy to discuss a little bit more about privacy. But the issue has now become so big that it has become part of the presidential campaign with some candidates speaking out against the use of central bank digital currency. So my personal view, and again this is my personal view and not in MIT view or anyone else's view, is that most likely the US will not make much progress on the issuance of CBC until after the next presidential election. And we see after those results, we'll see where the government may wish to go with this. And ultimately, Congress has to make the final decision. So that's the status of central bank digital currency in the United States. And thank you so much for the opportunity to share some of these thoughts with you, and I'm happy to continue the dialogue now.