Compliance by Design: Blueprint for Privacy, Power, and the Future of Money | Darrell Duffie

Can we have financial privacy AND stop financial crime? Stanford's Darrell Duffie thinks there's a third path and it might be the most important work happening in finance right now.

In this special UBRI Leadership Session, Ripple SVP Eric van Miltenburg sits down with Professor Darrell Duffie of Stanford's Graduate School of Business, U.S. Senate witness, and architect of the course The Future of Money and Payments for a conversation that moves from the theoretical to the genuinely urgent.

Duffie's "compliance by design" framework poses a radical question: what if privacy weren't a switch that governments could flip, but a cryptographic guarantee baked into the payment system itself? It's a question that cuts to the heart of every CBDC debate, every stablecoin regulation, and every fintech pitch deck claiming to serve the unbanked.

In this episode:

• Why the U.S. CBDC is dead and why that might be shortsighted
• How tokenized U.S. Treasuries went from zero to $10B and what clearing banks do next
• Why China's eCNY flopped even with government muscle behind it
• The surprising reason Europe may actually pull off a digital euro
• What Afghanistan's Hesab Pay reveals about stablecoins and financial inclusion
• Why agentic payments; AI making purchases on your behalf may be the real disruption no one's talking about
• And yes: why in 100 years, no one will carry "grubby bits of paper" in their pockets

Whether you're a regulator, a builder, a banker, or just someone who tapped your phone to buy coffee this morning this conversation will change how you think about who controls your money and why it matters.

Transcript

Lauren Weymouth (00:00)

I'm Lauren Weymouth and welcome to All About Blockchain, where we cut through the noise to find ideas that really matter. Today's episode is a special Uber leadership session, and I'm genuinely excited about this one. Handing the mic over to my colleague, Eric van Miltemberg, who leads strategic initiatives here at Ripple to host a conversation with someone whose work sits at the very center of what we do. Professor Daryl Duffy is the Adams Distinguished Professor of Management at the Stanford Graduate School of Business. And he may be the most consequential voice in the world right now on the future of how money moves.

He has testified before the US Senate, chaired the Financial Stability Board's Reform of Global Interest Rate Benchmarks, and has a Stanford course, The Future of Money and Payments, which has become a blueprint for how serious people think about what comes next.

At the heart of today's conversation is a tension that I think about constantly as we move from physical cash to programmable digital money. Can we build a system that protects individual privacy and keeps financial crime in check at the same time? Or do we have to choose? Professor Duffy thinks there's a third plan and his research may be the most important work happening in finance right now. All right, Eric, take it away.

EVM (1:17)
Thank you, Lauren. Daryl, also thank you so much for being here and joining me today. I've been very much looking forward to this conversation for a while. And one of the things I love about running our UBRI program is watching ideas move from the classroom or the faculty office into the actual plumbing of the financial system. And your work has definitely been at the forefront when it comes to things like the evolution of money. So let's dive in. ⁓ If you don't mind, we'll start big picture.

As Lauren mentioned in her intro, you're teaching the future of money and payments at Stanford. And the course covers everything from instant payments to zero-knowledge proofs. But when you step back from the technical detail, what do you see as the single biggest misconception that the audience, be it regulators, corporates, financial institutions, consumers, what do you think their biggest misconception is when it comes to the transition away from physical cash towards programmable digital money.

Darrell Duffie (02:11)

That's a terrific question, Eric, and it's great to be with you today. ⁓ Well, I think probably the biggest misconception is the multiplicity of use cases that demand many different solutions, and yet the need to treat the same activity as having the same regulation. So let me unpack that. ⁓ When we regulate stablecoins, for example, regulators are thinking of ⁓ The usual set of circumstances like there's privacy issues, there's illegal payment issues, there's the stability of the stable coins from depegging and so on. But they often don't think in terms of, well, what do we demand of banks when they need to meet their regulations for these things? So that's one issue. The other thing that I think is pretty common, pretty commonly ⁓ misunderstood, and I wouldn't accuse all regulators or policymakers of this, but many is that the range of use cases is huge. It goes from everything from potentially an agentic payment or buying a cup of coffee to conducting a $10 billion Treasury repo transaction to doing a cross-border payment and then to two issues of dollar dominance in foreign economies. So the range of potential use cases really flummoxes a lot of policymakers. How can I build a statutes and regulations to handle all of this in one, in one act of Congress or in one regulation. And that's, and it's really difficult. I sympathize.

EVM (03:32)

Yeah, absolutely. I mean, you're right. It's such a broad scope of potential use cases. I mean, as you've observed this and observed their reaction, is it just overwhelming? Does it cause almost a little bit of paralysis as they look to navigate it? And do you see anybody or any regulators around the world just zeroing in on regulators who've tended to...navigate this maze a little more successfully or little more efficiently than others.

Darrell Duffie (03:57)

Well, if I look around the world, yeah, I think of domiciles like Hong Kong, Singapore, London, particularly, ⁓ we're very adept and ahead of the curve. When I think of US policymakers, I mean, they have a lot on their plate. If you think about what's going on in the world today, digital payment, digital assets and payments is something they get around to from time to time. And when they do, they focus, but they often focus on what they're hearing from the voters. And of course, they respond to voters and they also respond to lobbying. And so it's not like they, you know, there's this ⁓ room where it's filled with regulators and legislators that are saying, okay, let's build a blueprint for the new world of payments and money and let's try to do it from bottom up really well. It doesn't happen that way.

EVM (07:02)

There's a lot of noise in the system, for sure. ⁓

Darrell Duffie (07:04)

lot of noise

EVM (07:07)

No, that's spot on. And it's also a good setup for something I'd like to cover next. Dig in a little deeper. You and some of your co-authors have published a paper this year on what you call compliance by design. And as I understand it, the idea is that privacy can be preserved by default, but compliance is automatically enforced at the protocol level when specific risk indicators are triggered. ⁓ So if there's a skeptic, let's say that here's CBDC,

and immediately says, ⁓ that's government surveillance. How do you, how does one give them confidence that the off switch for privacy, so to speak, isn't a political lever that can be pulled by whomever's in power, but it's actually a cryptographic guarantee?

Darrell Duffie (07:55)

Yeah, it goes back to the title compliance by design. ⁓ And yes, Americans in particular are very worried about surveillance. That's why we have the Fourth Amendment. And that's why the CBDCs are literally either I think they were just outlawed, but they have been banned by executive order and they've been outlawed by the state. So Americans are very concerned that the government will surveil their payments.

And it's quite interesting because when we sign up for an app on our iPhone, I don't know about you, but there's like four pages of fine print about all the privacy that I'm giving away. And I just spin the screen as fast as I can to agree and click agree. Yeah. And I think most, check with my students, they all kind of look down and said, yes, we all do that. So, you know, when it comes to privacy, we're all pretty complacent.

EVM (08:40)

You and me both.

Yeah.

Darrell Duffie (08:53)

⁓ When we with what we do on a day to day basis, but when Congress is going to act ⁓ on something that affects privacy, people get very activated. Then they're concerned. ⁓ So going back to how do you manage this trade off? Well, I did I did this ⁓ thought piece with two colleagues, two Canadians. I'm a Canadian, so it makes three of us.

⁓ Odin ⁓ Oloakiri and Andreas Venaris at Osgoode Hall and the University of Toronto. And we actually did try to influence policymakers. We made submissions to the US Treasury Department in ⁓ its response to the Genius Act on these compliance by design issues and also to Canada's Parliament as it deals with a draft stablecoin act. ⁓ We feel

that the issue of privacy trade-offs with compliance is under-emphasized in existing legislation and needs to be emphasized as much as possible in upcoming legislation and in implementing regulations. ⁓ The idea here is ⁓ that you design a payment system so that first you don't have

total transparency like you often do on a typical cryptocurrency ⁓ blockchain setting where everyone can see what's happening. And secondly, ⁓ so privacy. And secondly, ⁓ you have compliance, meaning there is a way to detect a pattern of money laundering or payments to blacklisted actors around the world that doesn't

open the kimono for regulators to every single payment, again, protecting privacy. And so ⁓ there are technologies that allow both of these involving ⁓ zero-knowledge proofs and smart contracts. We're not going to get into that today. ⁓ But currently, they're not ready for accomplishing what we lay out in our paper. ⁓ So it's more, as I said, of a thought piece.

EVM (10:55)

Mm-hmm.

Darrell Duffie (11:20)

those technologies ⁓ have sufficient throughput capabilities, they could provide a system of compliance by design with privacy. I want to go back just for a second, I could, Eric, to why privacy is crucial, not only from a Fourth Amendment perspective and individual rights and our shyness about having others peer into our wallets.

EVM (11:34)

Mm-hmm.

Darrell Duffie (11:46)

But also from the viewpoint of commerce, if you could imagine Ford or Boeing running its international supply chain on a stable coin blockchain, the current designs don't allow that. I mean, they, you can't have every payment by Boeing out there for everybody in the world to watch. Yeah. So they need systems ⁓ that they need. If they're going to use stable coins, which are a very competitive way to do cross border payments, they need to do it ⁓ on a system that has

EVM (12:02)

world to see.

Darrell Duffie (12:16)

a significant amount of privacy, basically to the extent that they want it.

EVM (12:20)

Yeah, no, that makes tons of sense and, you know, it kind of leads into...

the next question, you said we're not gonna get into zero-knowledge proofs, so this one touches on it, in that as people do talk about this touchy topic of privacy, it's often very binary. You either have privacy or you don't have privacy. And with something like zero-knowledge proofs, it seems like there's a possibility for a real middle ground in that you have the ability to prove a transaction is clean or trustworthy without necessarily revealing the underlying details of what that transaction

direction is. ⁓ mean, from your perspective, and maybe you kind of already touched on it, but why aren't we seeing greater deployment of zero-knowledge proofs or technologies like that that kind of allows this...

best of both worlds scenario if you will and that you get the efficiency and the benefits of leveraging blockchain technology but not necessarily have everything exposed in a way that just isn't gonna be palatable for corporates, ⁓ governments, et cetera, et cetera. Is it a regulatory problem? it a ⁓ political regulator problem? Is it purely technology? What's the holdup from your perspective?

Darrell Duffie (13:44)

⁓ Well, first of all, as I think I mentioned, a lot of consumers are quite complacent about this. So most users of stable coins today are quite okay with, you know, having all of their payments identified, at least pseudonymously, except maybe some illegal actors who use, you know, mixing and tumblers and so on to try to obscure that. So, but most of us, we're not paying close attention to that. It's not, it doesn't rise to the level

EVM (14:00)

Mm-hmm. Mm-hmm.

Right.

Darrell Duffie (14:13)

of concern until it becomes ⁓ an issue of ⁓ someone doing a drag net of everyone's payment transactions. And at that point, we'll all start to get quite concerned, and then Congress will get concerned. So level of concern. Secondly, technology. So we couldn't really do the kind of system that my co-authors Odin and Andreas and I conceived with current technology, because it's not fast enough to run a large payment system yet.

EVM (14:21)

Mm-hmm. Mm-hmm.

Darrell Duffie (14:44)

but we do point to the possibility that it may become fast enough. We were envisioning a system that could be totally decentralized, like Bitcoin. However, you already have technology that provides privacy and programmable ledgers for doing transactions where privacy is crucial. Like in the US Treasury market, you have ⁓ systems like Canton, where very large banks and

EVM (14:52)

Mm-hmm.

Darrell Duffie (15:14)

clearing corporations and custody banks and ⁓ large investment firms are already conducting very large transactions where privacy is crucial by using a special kind of programmable ledger, not a typical blockchain that's open for the world to see. And on Canton, for example, a platform provider can set up whatever privacy controls it wants. It can give.

to regulators. can allow ⁓ the two counterparties to a trade to be the only actors that see each other's position on that trade, but not anything else. Or it can allow a group of counterparties to see volume data or other aggregates at the design of the platform operator. And different platform operators can set up on Canton with different privacy terms.

EVM (16:06)

Right, so a true hybrid kind of pulling the best of both worlds together.

Darrell Duffie (16:10)

Yeah, it's interesting when I talk about this with DeFi advocates though, they don't like the solution because it involves a certain amount of ⁓ And yeah, control by, ⁓ you know, it's got a lot of control in it. Some actors just, you know, it's not to their taste. It's not in the original concept of Bitcoin.

EVM (16:18)

Third counterparty, right, yeah.

Mm-hmm.

Yes.

Right,

the purest point of view is sort of ⁓ sullied a little bit too much for them to be on board. Totally understand that. This kind of leads into something that I think is starting to move faster, at least over the last, I'd say, two years, 18 months, that's real world assets moving on on chain, tokenization, if you will. And certainly ⁓ one area that's seen a lot of

is around US treasuries being tokenized, going from almost nothing two years ago to I think the number somewhere around 10 billion worth of tokenized US treasuries right now, which is amazing. We're talking about firms like BlackRock, Franklin Templeton, Fidelity. These aren't small niche newcomers to the block trying to experiment. These are in production systems. in your work,

you had a chapter written calling Tokenizing Reserves and Treasuries and it anticipated this. ⁓ But as you step back, if you think that this sort of core safe haven asset of the global economy is gonna migrate maybe entirely over to a blockchain-based ledger, from your perspective, what happens to the role of traditional clearing banks? mean, they used to, I mean.

literally they were in the middle of everything. Are we looking at a future where they become operators of infrastructure instead of being fully in control? Or how do you see that evolve?

Darrell Duffie (18:11)

Wow, Eric, you're going right into the core plumbing of the whole financial system. I love it. It's interesting. The Fed actually me to write a paper for this summer's Jackson Hole meeting on this topic. And what is the potential ⁓ for this on-chain finance vision to become reality? It's already becoming reality. The volume of transactions is growing very rapidly.

EVM (18:13)

Buckle up. we go.

Darrell Duffie (18:39)

You know, we have single digit billions of real world assets, but we have literally trillions of transactions already in tokenized treasuries or repos being done by a firm like Broadridge. And ⁓ I don't know how fast the majority of ⁓ clearing and settlement of treasuries trades is going to move over to programmable ledgers, not necessarily blockchains, but some kind of smart contract based settlement.

EVM (19:06)

Mm-hmm.

Darrell Duffie (19:07)

It's a superior technology and usually that wins in the end. ⁓ It's superior because it's 24-7. That's what a lot of market participants want. And it involves clearing and settlement. Your question, it involves clearing banks to the extent that you want to involve them. ⁓ So for example, if you want to delay your settlement in order to ⁓ get the necessary cash and assets, then a clearing bank

you know, would be needed in order to do those arrangements for you and you would have it settle on the blockchain. Could be in several hours or the next morning. It doesn't mean instant settlement. You still need clearing banks to ⁓ clear the trade and guarantee when that's appropriate or a central counterparty to do that. So it doesn't remove all of the existing infrastructure. At least ⁓ it's unlikely to do that. ⁓

The clearing banks will still be very important because in the best case, the cash settlement asset, the money for on-chain finance would be tokenized federal reserve deposits in the US or ⁓ Bank of England settlement ⁓ balances in the case of the UK. The UK, the ECB, the European Central Bank and the Bank of Japan are all working on providing their reserves or

know, central bank deposits in a tokenized form for those banks that want it. And that would be the role of the clearing banks. They would be the only actors, I mean, only banks would be able to hold deposits in the central bank. So if you and I wanted to do ⁓ a ⁓ treasury trade and we wanted to do smart settlement or we wanted to do it in the middle of the night, ⁓ we would need a bank ⁓ to...

you know, and give access to its tokenized reserves to do that. We couldn't do it on our own because we're not authorized to hold deposits in the central bank. And that's not going to happen for in the U.S. for decades. We're not going to have a CBDC in the U.S. for decades, in my view.

EVM (21:21)

Yeah, yeah, you are teaming me up, Daryl, because CBDC was the next topic I wanted to cover. ⁓ CBDCs, if I look back two, three years ago, seemed to be all the rage. Every central bank around the world was doing sandbox experiments and whatnot.

And I think from everybody's perspective, sometimes when you hear people talk about CBDCs, it's sort of as if they're monolithic. There's one, there's just one flavor, if you will.

But you've drawn a really important distinction between the retail CBDCs, which live in the hands of individuals, that's what you and I would go to the grocery store and pay for our groceries with, versus sort of the wholesale infrastructure where the plumbing upgrades have to happen between institutions. But the consumer facing application, if you will, ⁓ could stay private. One, I'd love to just hear your thoughts more broadly about the evolution of CBDCs and...

what the future looks like for them. But also, that plays out, assuming that it does, what is the role of the Fed in the CBDC? Is it getting down to the retail level, building a retail app, or can it just manage the infrastructure, if you will, and then private companies?

can really handle that more direct consumer interface. Anyway, there's a bunch of questions in there. I'll let you wander through them as you see fit.

Darrell Duffie (22:54)

Yeah, let me start.

I'll start with the US and then I'll step back a little bit and talk about what other countries are doing and the evolution and where it's going. So in the US, Congress has effectively directed the Fed, Congress and the White House together, have either directed or influenced the Fed to stop all development work on a retail CBDC. And in my view, it would have been premature to deploy a CBDC.

ready yet, we don't know enough yet to make sure the technology is good and that it adds enough to what we have or could have more easily by other means. But when I testified ⁓ in Congress about this, I suggested to a Senate committee, I recommended that the R &D work should continue because it takes years to solve these technology problems. It took China

10 years and they're still in a kind of beta test phase. And the ECB has been going at it for a number of years and they're still three years away. The Bank of England is just in the early stages of development. It will take them many years. So if you want to have a design that's ready to go when the time comes, you need to get to work on that design. But in the US, it's completely stopped. And it foundered on this issue that you started with, which is privacy.

EVM (23:59)

Mm-hmm.

Darrell Duffie (24:23)

⁓ In the last two elections, it became a political football with one party saying, ⁓ you should vote for us because we're not in favor of a CBDC because we want to protect your privacy. ⁓ And, you know, to some extent that was unfortunate in terms of the R &D, but Americans responded. And, you know, as I said, I'm a Canadian, but even when a poll conducted by the Bank of Canada, even Canadians who are not

suspicious people, majority of them said, we're worried about the privacy issue. So that's why it's not going ahead in the United States and Canada, despite some long-term potential value that should be explored. Coming back to the summary point, it's not ready for deployment, even if we wanted to. Let me step back, as I said, and go a little bit broader. The first country that really developed a CBDC at scale

was China, the ECNY. And the take up on that is surprisingly low. ⁓ Very, very small fraction of payments are made with that CBDC because China already has very good private sector payment systems like WeChat Pay and Alipay. And nobody really felt that, you know, they had the network effects. Everybody was already using those apps. Why would they move over?

EVM (25:40)

Hmm.

Darrell Duffie (25:49)

Maybe a CBDC would be a bit cheaper. ⁓ It had some government encouragement, but still that wasn't enough. And just recently there was, to some extent, a retreat from a pure CBDC design by China when it made a statement just in the last few months that henceforth these will be viewed as liabilities of commercial banks.

And to the extent that commercial banks want to pay interest on these, that would be fine. It's up to them. The statement wasn't that plain and simple, but de facto, that's what they said. So it was a bit of a retreat and maybe a chance to revive the ECNY as a payment system that people in China will use. ⁓ again, I'm not seeing much action there. Let's move across to Europe, where in the Eurozone, the European Central Bank,

has very ambitious plans to bring out a CBDC for everyone that could hold paper euros, they'll now be able to digital euros issued by the European Central Bank. And the ECB is quite excited about this. It's invested in a lot of resources. It's lobbying the European Parliament and the European Commission to approve this. And one of the recent ⁓

lobbying points by the ECB is the fact that Europe doesn't really have technology leaders in payments. It relies on American technology firms like Visa, MasterCard, ⁓ US stablecoin issuers like Circle to the extent that stablecoin might come forth. ⁓ All the big tech in Europe that could process payments.

are basically American technology today. And the ECB doesn't feel comfortable. And a number of European central bank leaders have spoken about the fact that ⁓ economic security in Europe depends on being ⁓ in charge of their own payment systems. And they view the ⁓ digital euro as the answer to that. Well, let's see if the European Parliament and the European Commission are swayed by those arguments. And let's see if

EVM (27:46)

Mm-hmm.

Darrell Duffie (28:14)

I do think that it actually will go ahead. It's quite popular, at least among policymakers and ⁓ academics for sure, who have written a letter in favor. But let's see if European citizens actually start making their payments that way.

EVM (28:26)

Yeah, I mean, it's funny, you reference China, which again, everybody thought, I don't know, three years ago was the odds on favorite to get huge penetration. And ⁓ I think it's safe to say that the Chinese government has more of a ability to persuade and direct consumer sentiment maybe than another. You can maybe have evidence would disagree, but what would lead one to believe that the user

reaction or embrace of CBDCs in markets beyond China would be different than what China saw. mean, again, it's a matter of, to your point, switching costs. Like, I have something that works. I trust it. You're not showing me something that is gonna provide a demonstrably better benefit. I'm, again, nobody's looking for my opinion, but I'm a CBDC skeptic in that I'm just not sure what.

My sense is you may have a little more optimism and you kind of almost hinted at the things that at some point it's inevitable, it's coming and you gotta do the work now to be ready for that. Help me get there. One, correct me if you think that I'm overstating and putting words in your mouth, of course, but then what makes, if you do feel that way, what makes you feel that it will be more of the norm in the future?

Darrell Duffie (29:54)

Well, I'm not sure it will be. think actually for our generation and maybe the next generation after that, fast payment systems like PICS in Brazil or UPI in India are the lower hanging fruit and provide basically all of the functionality that we would want from a CBDC. But ⁓ I do think that the Europeans are on to something in the sense that they don't have one country. It's not like China. And in fact,

EVM (30:04)

Mm-hmm. Yeah.

Darrell Duffie (30:23)

If you wanted to make a payment in Germany and you come from France, it's not trivial to do it except with a credit card, which is an American technology and it's expensive, not as much in Europe as in the US, but it's still expensive for merchants. And so it's a bit more fertile ground for the development of a CBDC when, and when you are, as the ECB is charged with European integration of its economy.

and its financial system, this ⁓ is an attractive proposition to lower the barriers, to lower the frictions between European countries from making their payments. But you raised the most important question. Will consumers, when you open your phone to buy groceries and you see two apps on your phone, one is the one you've always used and it gives you 2 % reward ⁓ and the other app ⁓ is just paying you no interest and

EVM (31:11)

Mm-hmm.

Darrell Duffie (31:20)

and doesn't give you any rewards, but you can take one for Europe if you tap the other one. ⁓ I don't know. Will Europeans actually tap it? I think it's too early to say. The Chinese definitely, even though actually WeChat Pay and Alipay are fairly expensive to use, ⁓ they love it. The network effects are fantastic. You can do social, you can do texting, you can do social media, various kinds. You can bundle it with, you can do e-commerce, you can buy your groceries, you can shop for a new coat.

EVM (31:25)

Ha ha. Mm-hmm. ride hailing, yeah.

Darrell Duffie (31:50)

and then just tap. And they're gonna be ⁓ one of the first out, if not the first out, with broad-scale agentic payments off of those same apps. It was reported just last week that Tencent is developing ⁓ for its app WeChat Pay an agentic payment function. That's under wraps apparently, but I tend to credit that because that's exactly what I would do and what I would imagine Tencent would do. And I bet you anything,

EVM (32:14)

Makes sense.

Darrell Duffie (32:19)

that Ant Group is developing the same thing. ⁓ so we know once you get those network effects and you get those very agile private actors that are bundling and aggregating and bringing in the latest technology, it's going to be hard to dislodge people from those existing apps and get them onto a CBDC, which probably won't be bundled with anything.

EVM (32:41)

Right, right, I would tend to agree. You touched a second ago on some of these, I guess I'd call them domestic payment systems that have been successful in getting traction, be it the E1 or the Fed has done some exploratory work around payment systems, Brazil has Drex and the E-Rupi in India.

certainly there's been a lot of progress. It does feel like the US maybe is lagging a little bit in that area. ⁓ And it also is very fragmented, right? You have these different silos almost of payment systems and to your point, using the Europe example, going from France to Germany, it's two different systems. Maybe the European CBDC can address that, but.

When you think about the potential fragmentation, if you will, of payment systems,

One, mean, do you agree that that's an issue? And two, what risks might that pose? it just because there's, or why does it need to exist? Is there technical ⁓ incompatibility between systems? Or is it more politically motivated? There's geopolitical forces that are forcing people or causing people to be a little bit more closed with how they think about

and implementing their payment systems.

Darrell Duffie (34:15)

The biggest sources of friction or fragmentation are cross-border. Within each country, making bankroll payments is pretty ⁓ unified, fungible, homogeneous. And if you're willing to use a credit card, you can make a payment almost anywhere in the world very, very easily and get a reward for it. Of course, it's not the best solution because on the back end, there's delays and heavy costs for merchants.

EVM (34:19)

Mm-hmm.

Darrell Duffie (34:45)

And so a better system ⁓ could work, like as I mentioned, PICS or UPI. But I don't think the consumer is really today in developed market economies thinking very much concerned about fragmentation. ⁓ In emerging market economies, that's a big deal because you're getting remittances by stablecoin, your banks are maybe not everything they should be, your currency is not that trustworthy, you have to do.

EVM (34:45)

Mm-hmm.

Darrell Duffie (35:14)

It's very expensive and time consuming to manage ⁓ your money and your payments. ⁓ So I think fragmentation is much more important there. I think your question is really important for policymakers in emerging market economies. By the way, I just spoke to ⁓ our Stanford MBA study group that's going to Kenya and Tanzania. ⁓ Right now, they're over there.

and their whole trip is oriented around fintech and with a significant emphasis on fintech payments. And I prepared a talk for them. And when I did the research for that talk, I discovered, wow, there really is a serious problem in terms of payment fragmentation and low penetration of digital payments in those countries, especially Tanzania. And a lot of it revolves around identity. ⁓ India cured that problem.

by a national identity system called ADAR. But a lot of emerging market economies have not. And that is a real source of fragmentation that prevents financial inclusion. But I'd say we have it pretty good in the United States in terms of fragmentation. ⁓ We don't really have a big concern. If tokenized deposits and stablecoins start to become more common, then that'll be an issue. We'll have to have clearing houses and new technology to solve that fragmentation problem.

But so far it's mostly a bank rail payment system that I wouldn't give it a high grade like A plus, but I'd give it a pretty good grade in terms of fragmentation.

EVM (36:55)

That's fair. That's totally fair. You just touched on...

on financial inclusion and you've been pretty direct about the fact that a lot of the current payment systems function as kind of kind of tax on lower income people, high fees, slow settlement, limited access, ⁓ things aren't very evenly distributed. If we are able to get the privacy and compliance balance right in the way we've been discussing and that you've described.

Do you see that there's an opportunity for financial inclusion to really improve, to sort of level the playing field a little bit more? Or do you feel that the cost of building and maintaining compliant infrastructure creates kind of a new set of challenges that create different types of barriers, but barriers nonetheless?

Darrell Duffie (37:50)

⁓ The United States is a below average for developed market economies. Financial inclusion, well, the fraction of US households without a bank account, which is a traditional measure, world bank measure of financial inclusion or lack of financial inclusion, it's ⁓ come, it's improved over the last few years. It was around six or 7%. Now it's a bit under 5%. So we're making progress in the US, but a lot more could be done.

And you are right, the payment systems that we have today are not available to, or are much more expensive for very low income groups in the United States who can't get a credit card, for example, or can't get even a bank account, or for undocumented ⁓ people living in the United States who don't want to get onto the payment rails because they don't want to need to become documented to do that. And so a lot of people are left out.

And that's very unfortunate. And being plugged into the payment system is like, it's like access to the economy. It's crucial. If you go to emerging market economies, I think your question is, you know, should be front and center among policymakers because the economic life of your citizens depends so heavily in those countries on increased access to payment systems. ⁓

EVM (38:56)

100%. Yeah.

Darrell Duffie (39:17)

And that's, you know, just recently, for example, let's take a stable coin example, Afghanistan. ⁓ You can imagine the disarray of its banking system and the difficulty if you're in rural Afghanistan of getting currency, security of your currency, finding someone that can make change for your currency and getting to going to the market, making payments. ⁓ And the difficulty and ⁓

Frictions in the economy someone came along and developed was in New York Times story a few a few weeks ago developed a payment system called Hesap pay and Hesap pay runs on stable coins not in dollars, but in local currency and has Significantly mitigated this problem of financial inclusion where you can now store ⁓ On your wallet on your phone. You need a phone and make your payments on your phone

EVM (39:49)

Mm-hmm.

Darrell Duffie (40:17)

throughout the country. You can also receive international aid directly onto your phone and avoid the middlemen who sometimes scrape a little off the top. So it's been a big success story. And I think in emerging market economies, your question is so, so important ⁓ to solve that ⁓ financial inclusion problem. Countries like India and Brazil have dramatically increased their financial inclusion by adding a fast payment system.

And I think that's a solution for most countries, actually, because it runs on existing rails. It's low cost. ⁓ You don't need to reinvent ⁓ a lot. And you have the network effects that bring people into the payment system. I think PICS and UPI should get really high score.

EVM (40:53)

Mm-hmm.

Yeah,

poster children in a positive way. I think those are great insights. I hadn't heard of the Afghanistan example that you shared. But yeah, mean, it's something at Ripple we think a lot about in terms of, in theory, this technology should be helping to address some of the unbanked, if you will.

like it or not, oftentimes these markets aren't served because the business models just don't pan out for the financial institutions who would traditionally serve them and being able to think about different solutions and seeing examples that maybe others can emulate. It's encouraging. Hopefully we can see more of that going forward. you've been generous with your time. I have one more question and maybe taking it up a notch in terms of making it little lighter and

and referencing something that I think you've said, which I think I'd love you said that in 100 years nobody's gonna be carrying quote unquote grubby bits of paper in their pockets. ⁓

you know, we'll look back and think about whether it's quaint or weird that this is how we used to operate. Even today, I don't know the last time I pulled out paper money, but still, if you look forward, I don't know how far into the future where we get the privacy, the regulation balance right, we build the systems that we've been talking about, what does daily life look like for somebody who maybe doesn't even know what blockchain is? don't...

care about it, don't follow fintech, they're not a fintech nerd, if you will. They're just looking to pay for their coffee and send money to their family abroad. What changes for them, sort of for the man on the street, if you will, and what does that look like from your perspective?

Darrell Duffie (43:00)

⁓ Okay, so it's so hard to forecast the future and especially, you know, what technology will come along and change the way that we do things. I do think paper money is a thing of the past in our economies. I went to Sweden recently and I couldn't even, I had old Swedish bank notes, couldn't use them, they wouldn't take them. ⁓ So yeah, think paper money is, in places like the United States, it's going to go down, down, down and it's been going down very rapidly.

EVM (43:03)

I know.

Darrell Duffie (43:29)

and it will be replaced with mobile money of one form or another. Will it be a new version of FedNow with a fast payment system that allows anyone to pay anyone anytime? I would love that. So far FedNow is not doing that. Will it be stable coins? I kind of think probably not for their ⁓ retail consumer payments, day-to-day payments, ⁓ unless that technology is sped up very, very significantly and the compliance privacy issues are conquered.

EVM (43:41)

Mm-hmm.

Darrell Duffie (43:58)

All of that's quite feasible. ⁓ I do think ⁓ we're probably going to be paying out of our bank accounts, by one means or another, using mobile payments most of the time. And I do think we're going to be asking agents to make a lot of our payments for us. And I think that agentic payments ⁓ is extremely powerful technology. has a ⁓ lot of risks, but it has a lot of

EVM (43:59)

Mm-hmm.

Mm-hmm.

Darrell Duffie (44:27)

commercial potential that will be irresistible ⁓ for many, many tech firms and merchandisers. So you're going to be seeing a lot of your payments being made on your behalf ⁓ with all the attendant risks until we learn how to control those risks of fraud and so on.

EVM (44:42)

being made. ⁓

Yeah.

What happens in that scenario, what happens to some of the traditional sort of prevalent predominant rails that exist today? I'm thinking the Visa, the MasterCard. Do they have a role to play in that future? Do they get displaced if I'm just tapping and it's going right for my bank account?

Darrell Duffie (45:14)

I think Visa and MasterCard have already ⁓ found the way that they can be the payment network for authentic payments. I don't think it's likely to be stable coins. It may be, but I think it's more likely to be done with your debit or credit card ⁓ accounts. Or if a fast payment system does eventually develop directly through fast payments. ⁓ I think Visa and MasterCard, they're thinking two or three steps ahead. They're very smart.

EVM (45:25)

Hmm.

Mm-hmm.

Darrell Duffie (45:45)

They've already figured out how to do stablecoin payments on their cards and they're definitely going to be front and center on agentic payments. mean already ⁓ it's up to the extent that agentic payments is already happening, it's mostly on credit cards.

EVM (34:01)

Yeah, fascinating. Well, again, Daryl, thank you so much for joining us today. Amazing insights, a peek into the future, I guess, a little bit, and we'll both see how it plays out. But again, thanks for your time, and I know the audience appreciates it as well. Have a great day.

Darrell Duffie (34:46)

Eric, it was such a pleasure and I love the questions. Thank you and a real pleasure to be with you.

Lauren Weymouth (34:50)

Well, what a note to end on, a future where technology disappears because it simply works. That's the entire mission. Daryl, thanks so much for joining us. Your ability to move between the deeply technical and genuinely human is exactly why this work matters. And your research, particularly the compliance by design framework, is exactly the kind of rigorous academic foundation that UBRI exists to connect people building the next generation of financial infrastructure.

Eric, thank you for stepping in the host chair today. The executive perspective you bring as someone who's actually watching these ideas move from paper into production made this conversation feel real in a way that it's hard to manufacture.

Darrell Duffie (35:28)

Lauren, thanks for inviting me today.

Lauren Weymouth (35:30)

What struck me most in this conversation is that the future of money is not waiting. Tokenized treasuries are live. Programmable stablecoins are live. Brazil and India have already leapfrogged settlement systems we take for granted. The question Darryl is helping to answer is not whether this happens, it's how we make sure it happens in a way that protects the individual, not just the institution.

That's precisely why the University Blockchain Research Initiative exists. To make sure people who build the next generation of financial infrastructure are sitting in rooms with people like Professor Duffie right now. For show notes and links to Darrell's research at Stanford GSB, please visit the episode page. And if you have thoughts, questions, or want to reach out to us directly, I'm always at ubri at ripple.com. Thanks for listening to All About Blockchain. I'm Lauren Weymouth and we'll see you next time.