Competition and Financial Inclusion: How Do Stablecoins Fit In? – Marcel Beer Kremnitzer [Season 2 | Episode #19]

Podcast Intro 00:00:01 Hello. Welcome to P.I.T. Exchange, a podcast by Currency Research. Join us as we discuss the latest in payments, innovation and technology with the industry’s most innovative thought leaders. Today’s payments are changing and moving around the world faster than ever before. An exchange gives you the knowledge and insights to keep up. Sit back and relax as we join Currency Research exchanging ideas with today’s special guest.

Jens Seidl 00:00:33 Welcome to another episode of the Exchange Payments, Innovation and Technology. My name is Jens Seidl and I’m your host for today’s episode. So we have a special guest today from Brazil who is currently residing in Paris in France. Marcel Beer Kremnitzer. Welcome, Marcel.

Marcel Beer 00:00:50 Thank you again. Hello, everyone. Nice to be here.

Jens Seidl 00:00:54 Lovely. Great to have you, as always on my episodes. I’d like to start with three semi personal questions just to get to know the person Marcel, a little bit better before we jump into the the business related topics. so first question on a plane, do you prefer aisle or window?

Marcel Beer 00:01:11 Aisle, definitely.

Jens Seidl 00:01:13 Why is that?

Marcel Beer 00:01:13 I like to be free to be able to move. I, I don’t like to be restrained by. And I don’t want to, like, bother other people to to get up.

Jens Seidl 00:01:23 Yes. Completely get that I’m the same. at least on long haul trips. Short haul? I don’t mind that much. I don’t have to get up that often. But on long haul, definitely. Then do you have a favorite band or artist or favorite music style?

Marcel Beer 00:01:36 Right now I am highly influenced by this last week when Ozzy passed away, and I’ve been listening a lot to to Black Sabbath. So right now, right now I would mention them as my for the week favorite music choice.

Jens Seidl 00:01:54 Okay, that’s pretty cool. And given that you’re from Brazil and I’ve been to Brazil many times and I love the country. If someone never been to Brazil, what are the top three places you’d send them to? To get a good impression of the country?

Marcel Beer 00:02:08 Not necessarily in order, but we have to visit the Amazon.

Marcel Beer 00:02:13 We have to visit Rio de Janeiro, and not necessarily for the the landscape, but for the people. We have to visit the northeast of Brazil, which is a very big region, but culturally they are really strong and really proud of themselves.

Jens Seidl 00:02:31 I love that you include that. My personal favorite is Salvador, Bahia. The the atmosphere there and the music culture as well is just outstanding. So yeah, I get it. Great recommendations. Thank you. So let’s talk a little bit about your work background then. As I said, you’re in Paris at the moment but originally from Brazil. Do you want to tell us a little bit about your career so far and what you’re working on right now?

Marcel Beer 00:02:55 I am a career civil servant from the Central Bank of Brazil. I’ve been there for the last ten years. I also consult on financial inclusion and policy analysis for other organisations. Right now, the World Bank and CGAP, which is under the world Bank as well. And, I’m going to spend the next two years at the OECD researching policy in, in finance, in financial markets.

Marcel Beer 00:03:29 What I’m a disclaimer I like to do when I, when I talk in public is that my views are my own, not necessarily my, my organization’s. And this is, valid as well for for our conversation.

Jens Seidl 00:03:42 Okay, sure. And I think we’re going to talk about CGAP a little bit more, later on so you can explain then what what that is and what that includes, but maybe where we should start. And we had a conversation of course, before we recorded this, this episode, BIS annual report had just come out and they included quite a few comments around stablecoins. So we thought it would be quite timely to have a bit of a chat around that and in a wider sense as well. What why stablecoins are so hotly debated at the moment. And maybe we can start with do we need stablecoins in mind? What purpose do they actually serve the report?

Marcel Beer 00:04:19 This is quite timely on on the topic. It’s been timely for for some time already. The stablecoins they are currently serving some purposes.

Marcel Beer 00:04:30 They are under demand for reasons that, in my view, almost escaped the grasp of of central bank. You have political reasons, you have some ideological reasons. The usage is financial right, as the report mentions, they use for transacting digital assets for cross-border remittances and for as a store of value for for consumers, which are in countries where money has lost value. These uses are financial, but a lot of the reasons for adoption of stablecoins escape the financial system, which is really interesting. We have to mention, of course, that that is a major concern, a topic which is raises lots of concerns for central banks is the fact that stablecoins are used in illegal activities, money laundering, etc.. So these are the gaps that stablecoins are feeling right now.

Jens Seidl 00:05:29 Yeah, and I think that was one of the three main issues that the report also identified, which was integrity, basically that there are no consistent KYC checks on stablecoins. So if you have your own wallet, rather than using one of the service providers, then there’s really no KYC.

Jens Seidl 00:05:49 You just set up your wallet, you start transacting in stablecoins and nobody knows who’s actually behind that wallet. Right.

Marcel Beer 00:05:56 Yeah. I would say maybe this is the the integrity integrity topic is the most debated point among the three that the report mentioned, because it’s related to to money laundering and to, to all the other types of illegal activity which stablecoins are employed. At the point the report mentioned, that is really crucial, is that right now, surveillance and oversight of anti-money laundering and KYC know your customer aspects. Right now, this responsibility falls on the shoulders of the regulators. But even if this was to be with regulation, a task for stablecoin issuers or wallet holders, online wallet holders, even if that happened, we would still have the UN hosted wallet. That is the the wallet that are completely offline, out or even online. But they are not in the system. We can we can put it like that. So as you said, there is poor to no traceability. You don’t have. Not that I know of redress mechanisms which you have in the regular financial system.

Marcel Beer 00:07:09 And this could lead to malicious actors sending receiving amounts under the radar. And that’s a major concern not only for regulators but for the whole society.

Jens Seidl 00:07:20 Absolutely. The other two areas where concerns have been raised in the report were singleness and elasticity, and maybe starting with with singleness. Do you want to talk a little bit to that and why that is an issue? Well, what it means and why it is an issue.

Marcel Beer 00:07:37 As a central banker that we, we we deal with that all the time. I mean, when there is a payment, a transfer going on, you need to have continuity from from the beginning of the operation until the end. And you you got to be sure that the the transaction is going to happen in a safe and in a trustable manner. Right. And this is in the report, this is very carefully mentioned in the, in the report, the image that is painted, that the way that we as a common citizen, the way we imagine payments and transfers being done digitally is, as before, money going from one hand to the other, from one pocket to the other.

Marcel Beer 00:08:21 And that’s not how it happens. It happens as claims over balance sheet and what makes the traditional system the best option right now is the fact that the central bank, it ensures the finality of the transaction, the the transaction is completed in the balance sheet of the central bank. And we don’t have that with stablecoins because when I for the moment, as we function right now with stablecoins. If I own one type of stablecoin, I can exchange it usually almost at par. But there is some risk involved in exchanging one stablecoin for another. Right. And this is what underlines the fragility of stablecoins. Functioning as a perfect means of exchange. And we have seen in the last 3 to 4 years several episodes where stablecoins lost. Lost peg to this, mostly to the dollar. Right. Most stablecoins are pegged to the dollar. And this is what underlines their fragility in that sense. Yeah.

Jens Seidl 00:09:24 And I guess the Terra Luna incident was probably one of the most prominent ones where stablecoin did not only lose its peg, but basically completely failed.

Jens Seidl 00:09:35 And I guess, again, we’re coming back to to a regulation. We’ll talk a bit more about that in a minute. But before we do that, let’s also talk about the third test that the BIS mentioned around elasticity. What what does that mean and what are the issues with at least the way stablecoins are operated at the moment?

Marcel Beer 00:09:52 We we take so much as consumers. We we take so much for granted. How many works that when we stop to analyze the system and as removing the consumer head and putting on the regulator head, we see how it’s built and the and how hard it is to to build a system that ensures so many social functions in a safe manner. Elasticity ensures that if there is a an uptick in demand for money or in supply for of money the system can withstand, stablecoins can do it. The Basel three regulations. They allow banks to commercial banks to create money through deposits. The way consumers. When you have credit in the bank, You don’t have money. You have a claim against the commercial bank.

Marcel Beer 00:10:42 And you can you can take that money. You don’t have that with stablecoins because if you want to, if you for the moment, if you want to have a an increase in the supply of stablecoins, the stablecoin issuer, they have to come with the funds immediately. So again, another major flaw, which as of now there’s I don’t see in the in the short term anything that could solve this puzzle of of stablecoins.

Jens Seidl 00:11:09 Okay. So that sounds like at least two of the main issues with good and consistent and ultimately global regulation should be able to at least improve significantly. But the elasticity as it needs a real paradigm shift if you wanted to address that as well. Basically creating fiat money in inside the stablecoin system if you wanted to overcome that. Is that a fair summary?

Marcel Beer 00:11:34 I think so. The integrity I mean, we’ve seen that happening with integrity issues with we we’ve had that with cash for a long, long time. We’ve had issues on integrity with all types of payments and they are eventually solved.

Marcel Beer 00:11:53 Yes, elasticity is a major issue if you want to. And here I’m extrapolating a bit. If you want to have stablecoin issuers having elasticity to issue money, they would have to be connected to to the central bank and it could break that. One of the main reasons why people adopt stablecoins, which is the fact that they are decentralized, they don’t depend on the central bank. So this is a paradox from a first look and think on it. I think it’s also partially connected to that. Right? The most of the allure of, of stablecoins is the fact that they are centralized, and they are used also for the purchase of digital assets, whose also their allure is that the fact that they are rich to decentralized finance. There is no dependence on the central bank. So that’s a paradox we have to face.

Jens Seidl 00:12:47 Yeah, absolutely. And I think we really didn’t go into a lot of detail around why stablecoins have become so popular. I think stablecoins have been used for on ramping and off ramping for digital assets.

Jens Seidl 00:12:58 For a long time. That was, I guess, almost like the the original use case, but it has been used a lot now in cross-border scenarios and and not just for, for illicit purposes. Right. These are big corporates that are using stablecoins to move money immediately around the world within seconds, not being impacted by week end closures and things like that. So I think there are legitimate use cases as well for this kind of technology. But at the same time, central banks are developing CBDCs, right? Do you think that CBDCs could potentially do all of these things as well that stablecoins do? And is that maybe where we’re heading to in in the long run that both will co-exist?

Marcel Beer 00:13:45 Stablecoins, they fill gaps and and imperfections that we see in the current financial system. And there is kind of a race between stablecoins and CBDCs for so to to solving these problems. But as I’ve I’ve mentioned before on singleness and on elasticity by principle, stablecoins don’t seem to to get there at the same level as CBDCs will.

Marcel Beer 00:14:11 So for the moment, stablecoins are being used to replace central bank money digitally and, basic economics. There is no supply without demand, right? Just seeing that stablecoin adoption in countries suffering from high inflation is explosive. Iran Bangladesh. This the uptake in in stablecoins is several hundred percent. Citizens of of these countries they want to keep the value of of their money. They will be able to do so if they could either have access to the dollar or if their national currency was stable, and we don’t see either of those happening. So to answer your question, or the moment, stablecoins are filling a gap, but in the medium to long term, we’re going to have to find a better solution, because I don’t see stablecoins that are as they are functioning right now. I don’t see them as a replacement, well designed, safe, private, central bank, digital currency. Even worse is the fact that this is they are being designed to keep the safety and keep the the trust that we have in the current system while adding composability and programmability.

Marcel Beer 00:15:28 Yes. So consumers will be able to program transactions based on on to have use cases that are unimagined for the moment. And all that, while keeping the safety of of the current financial system.

Jens Seidl 00:15:44 Indeed. And I think it’s that safety and stability as well, where if you look at, well, I live in Germany, take the digital euro, there’s so much discussion around disintermediation and the risk if you don’t put a limit on each wallet, that there could be disintermediation quite quickly. With stablecoins, that door is wide open, right. And as you just mentioned, if now even a foreign currency comes in to replace the use of local currency, that that’s even worse. And I think, well, I would expect that there’s going to be quite strict regulation being implemented in the next few months and years to to manage that risk.

Marcel Beer 00:16:22 One, I’m actually even though I’m a I’m a central banker and I have a master’s in Economics. my original university studies are in international relations, and I always bring geopolitics and larger issues into the discussion.

Marcel Beer 00:16:39 And stablecoins, they are, in a way, being analyzed either favorably or unfavorably. With political wise. You have some jurisdiction, some jurisdictions intensely pro stablecoins, others against it. And once we let the political blur vanish, we’re going to be able to to analyze them, I wouldn’t say neutrally, but with the well-being of consumers and institutions, institutions as the as the final goal. Right. We want to have a better financial system as most as possible. Clear from political biases.

Jens Seidl 00:17:18 Yes. Better financial system is a great segue now to the second segment of of our episode, because as much as we could easily do so. We don’t want to spend all of the time talking about stablecoins. So you mentioned cap earlier, and I think in the second half now we want to talk a little bit about competition and innovation in financial services. Do you want to explain to us maybe first what Cap is and what it does?

Marcel Beer 00:17:44 Cap is an organization that works toward more and better financial inclusion. They are administratively under the world Bank.

Marcel Beer 00:17:53 They are composed of several other organizations, including the world Bank, but also development agencies. And even my work is as consultant in in competition and financial inclusion. I also did that at the central Bank of Brazil, and I also did that as well for the world Bank itself. So I think this topic of competition in financial services, which we can make a clear bridge into the stablecoins discussion. But this topic of competition as a promoter of financial inclusion is something that is starting to pervade regulators in a very positive way to improve the experience of of the financial consumer.

Jens Seidl 00:18:36 Okay. And we mentioned both competition but also innovation as drivers of financial inclusion. And and I think what we should also be clear on is financial inclusion is not only for the unbanked. It’s also very much for the underbanked. Right. And I think that’s what we’ve seen, for instance, with pix in in Brazil, where a lot of people that were underbanked before, as in taking cash out of an ATM and making all of their payments in cash, are now more financially included by using a digital payment instrument.

Jens Seidl 00:19:06 Is that where your thinking is as well? That we’re looking at how we can move people not only onto a bank account, but really then using all of the abilities that come with it more consistently.

Marcel Beer 00:19:19 The concept of financial inclusion has has evolved greatly in the in the last years. Initially was having a bank account but then you we had consumers had a bank account which was basically inactive. They just withdrew their cash, whatever the source of the cash was, and used it. Then from account ownership, we moved to usage. Then from using an account, we need to have consumers using other products, insurance, payment transfers, credit. So there is not only the breadth of financial inclusion. It’s not only having more people owning an account, it’s also and and that’s where it applies also to developed economies to reach countries. As you said, I, I, I live in France right now, and I see that several financial services here are are left aside, which could be useful for for consumers. So of course, that’s not that big of an issue in a, in a rich economy.

Marcel Beer 00:20:14 But you could improve financial consumers lives by by having them not only using the financial system, but using it more and in a more varied manner. That’s how the concept goes, and the Pix was a great example of that. We when it was implemented in 2020, Brazil already had you had my my colleague Aristide is here talking about about Pix. And it’s not from my perspective, it the merit of pigs was not only bringing people to the financial system, but making financial consumers who were already banked have access to so many other products. You had, small merchants being able to get a card machine and receive payments also through Pix, but with cards, etc. QR codes. That was incredible. That was really incredible. And that’s the benefit that financial inclusion can, can have in a country.

Jens Seidl 00:21:14 Absolutely. And and I guess this is a great example for innovation and how that can drive financial inclusion. But how does competition help driving financial inclusion? Why is that also important?

Marcel Beer 00:21:24 In several ways. We can talk, first of having greater access to the financial products.

Marcel Beer 00:21:30 You have several countries where you had a big concentration in very few banks. Of course, this entails high financial stability. The system is highly stable, but you have several people who can’t afford to get credit, sometimes can’t afford to get to get an account. If you increase competition in a sustainable, responsible manner. You have what happened, for instance, in Brazil, with payment institutions, digital banks, they manage to bring the excluded to have an account, to have a debit card, to make transfers, payments and from there from increasing their access. One positive outcome that is based in the literature is that with more people having deposits in the bank instead of cash at home, monetary policy is more effective, right? So this is how you have competition and, Innovation, of course, because it’s a it’s an instant payment system, but beyond greed. You have, of course, lower prices once you increase competition. Again, the literature based is that you have smaller margins. You reduce the the loan rate for both individual consumers and small merchants.

Marcel Beer 00:22:41 And this makes financial products more accessible to them. And with the credit they can enterprise, they can open their business, they can consume again increasing their well-being, let’s say. And these are just two of the possible benefits that increase competition brings. But there are several.

Jens Seidl 00:22:57 Okay. And I guess what we’ve seen in many countries is that widening competition is not just a matter of adding more banks or adding digital banks, but then branching out into the fintech community and and the communications industry in Africa, for instance, with M-Pesa so that there’s more and more non banks providing financial services. So with all of that, does that also potentially introduce more risk. And if so what can the the regulator actually do to make sure that risk is being well managed without really holding that innovation back.

Marcel Beer 00:23:33 We regulators have to be to be careful. And this is not even, being proposed here. Unhinged, increasing in in competition, of course is the base of it all is financial stability. Right. So and this hasn’t changed.

Marcel Beer 00:23:52 It hasn’t changed in the last 2000. The global financial crisis only reinforced that. So keeping financial stability at heart, even when central banks don’t have an explicit mandate to pursue competition topics, they can do so with their current tools. One good example that you mentioned. Other institutions test and learn initiatives, innovation labs and regulatory drop boxes. These are being used by developed and developed economies, but also the low and middle income countries. Let’s put let’s put it like this. Basically to allow smaller challenges, but highly with products that are highly technological, to test their products in a protected environment and make it fit into the financial system. So you are the regulators are bringing innovative competitors, mostly small, but not only to enter the banking system and offer products that, as of now, either are not, are not offered or don’t reach the public that they should reach. So you have their only. I’m only talking about these innovative initiatives. You have innovation. You have increased competition. There is no damage to to financial stability.

Marcel Beer 00:25:19 And, as the examples with, Brazil, with United Kingdom, so many, so many places, you have the consumer having a larger gamut of, of products, financial products available.

Jens Seidl 00:25:33 Absolutely. And I completely agree with you that the regulatory sandboxes make such a big difference to allow experimentation. Right? I’ve been in financial services for most of my career, and 20, 30 years ago, it was so hard to launch a new service because everything had to be thought of and everything had to be fully developed already before you were even allowed to start operating. Now, with those sandboxes, it’s it’s a lot more easy, and there’s a lower barrier to actually start experimenting with new experiences.

Marcel Beer 00:26:04 I agree with you. It’s great that the mindset is changing, but still there is considerable resistance. Not in a whole central bank, but in specific market insights that are regulated by central bank. There is still resistance to allow for innovation to increase competition. Because of the whole our very big path of mostly assuring financial stability through reduced competition, which was what the literature pointed until the 90s, for instance.

Marcel Beer 00:26:41 But that has begun to change. And by seeing increased competition, mostly through through technical to technological innovation, but not only. Right. An example I can give is credit registry by leveling information among providers. You can benefit the the consumers that have a better credit registry. And you can reduce spread and you you increase the incentives or for better financial conduct on the part of of consumers. You have less delinquency. And this is not technological. This is classic credit registry.

Jens Seidl 00:27:19 Yes. And and maybe let’s come back to what is and I’m conscious of time. We need to wrap up pretty soon. But you mentioned before that financial inclusion of course, is not about making people use digital payments instead instead of cash. That’s not the objective, right? That’s just the first rung on that ladder to other financial products that will actually make a difference to the consumer’s life. Because digital payments, yes, might be a bit more a bit more convenient to do that. But it’s not that life changing. It could be life changing if people have access to microloans, have access to mortgages, etc., etc. that they’re currently excluded from.

Jens Seidl 00:27:57 So I don’t I know we both don’t have a crystal ball here, but where do you think this might be going next with regards to financial inclusion, where would you think are these these next low hanging fruits where people will take that next step on the ladder?

Marcel Beer 00:28:12 We can’t paint a single portrait for all financial systems globally, even though globally they are more and more interconnected. But I can give you two interesting examples. There are still some some countries pursuing an instant payment system after all those years. They don’t have free or at least low cost safe instant payments. So before we begin talking about using programmable payments or new forms of investment, we gotta allow these societies to to make instant payments. Whereas the example of of Brazil, I can give with the with the wholesale CBDC they’re testing. The purpose of it is to increase financial financial inclusion, let’s say, to increase the access to credit products and investment products. Why? Because account ownership and payments and transfers that solved with the regulation that they passed with path that sold.

Marcel Beer 00:29:12 So we can aim at other other goals. So the low hanging fruit depends on on the country. Some are struggling to solve the the remittances issue. Some are struggling with instant payment. Some are struggling is still with controlling inflation. So and with in the middle of all that you have technology still progressing. And I think technological advancement effect from one side gives new tools to to the regulators from the other side they bring there is that regulatory gap. The regulator is always a bit behind the market. And with as technological progress gets more intense, there is this risk that the regulator gets too much behind the market. So it’s a very turbulent moment. But at the same time it’s exciting to watch it all unfold.

Jens Seidl 00:30:01 Excellent. Well, I was I was going to ask you, actually for a summarizing statement, and I think you just made it because that’s that’s my view as well. We are in a time where it feels like progress is really accelerating, and where the many new technologies that are being developed are accelerating financial inclusion.

Jens Seidl 00:30:22 But that’s that’s what I think I heard from you just now. But I’ll, I’ll hand over to you for some some closing remarks, whether that’s also where you think we are, that we are at the brink of some really exciting new developments,

Marcel Beer 00:30:35 The bridge we can make between. But to me, it’s pretty clear the bridge between the first topic, which is stablecoins, and the second one, which is competition and innovation, is that stablecoins are a mostly unregulated, unregulated financial product or financial service, however you put it, that came to compete with central bank money, because central bank money in some instances was not serving the population, the financial consumer, well enough. So in a sense, we look at the scenario from the first part of, of our talk, and we see the effect of not serving the consumer in the not only the consumer. It’s beyond the consumer citizen, but not all the time consuming, whether it’s a public good money, the public good, and it has to be faced as a public good.

Marcel Beer 00:31:30 The bridge is now regulators have to make something out of stablecoins with these issues happening. And this is happening as well in several other topics financial topics, payments. We can talk about that in investments as well. So like I said before, it’s very, very turbulent with also political discussions, but they’ve always been there. And regulators know how to navigate the political turbulence. So the mix of all that makes I would keep my my statement very turbulent but very exciting moment.

Jens Seidl 00:32:11 Excellent. Great. Marcel, thank you so much for joining us today. This was a really interesting conversation. I enjoyed it very much.

Marcel Beer 00:32:18 I enjoyed it too. I hope it was useful.

Jens Seidl 00:32:21 Thank you. Well, our listeners will be the judges of that. And thank you to all of our listeners as well. Please do follow, like whatever you need to do on your podcast platform to make sure you don’t miss any of our future episodes. Thank you and have a good one.

Podcast Intro 00:32:38 Thank you for listening to The Pit Exchange, a podcast by Currency Research.

Podcast Intro 00:32:43 Check out our upcoming events and publications at Currency Research. And join us for our next episode to hear what’s trending in payments, innovation and technology.