Sunday, December 17, 2017

Blog Reader Alerts Me to New Payments Technologies

One of the benefits of doing a blog like this is that I get emails from readers that are very helpful in pointing me to articles and information that I might otherwise miss. In this case a reader forwarded me links to articles about some interesting new payment systems that will be available in the US. Below are links to those articles along with a brief excerpt from each article.

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AJC.Com - Best Ways to Send Money Online

"With the rise of peer-to-peer payment services like Venmo, splitting the check with friends or reminding your sibling to pay you back isn’t as tiresome as it once was.

The services, which allow users to send money to others online or through apps, continue to gain popularity in the U.S. for their convenience (and the fact that fewer Americans carry cash these days)."

. . . .

"To help you narrow down the best P2P pick for you, we’ve rounded up a guide to the most popular, highly rated apps and services in the tech community."




"Thanks to our smartphones, there's no longer a need to put that drink purchase from a friend on an imaginary tab, or give them an IOU.

Mobile payment apps are making it a lot easier to give our friends or family cash, whether it's to split a restaurant bill, offer a gift, or settle a bet."

My blog reader had this to say about Zelle:

"I think Zelle is just an extension of the ACH transfer process for individuals to allow people to use it free instead of writing checks or using cash, as it appears it was developed by the banks to reduce transaction costs and allow speedy settlement for these P2P deals."

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My added comments: These articles were interesting to me in light of recent comments by Fed Vice Chair Randal Quarles. He seemed to downplay Fed interest in central bank digital currencies and put emphasis on improving existing payments systems in the US. Below is his quote on this from an article in Bankingexchange.com:

"Quarles suggested that any such efforts to develop central bank digital currency would be a distraction from—they “might even derail”—efforts to improve U.S. retail payments. He pointed out that the U.S. still lacks a wide scale system for banks and their customers to make instant and convenient transfers and settlements 24/7."

All of this is also in line from what I hear from a payments system expert who works in this space every day around the world. As banks and central banks delve into this whole topic, they are still trying to decide if a separate "central bank digital currency" is really needed and they all are coming to realize that whatever system they implement must be able to tie in to the existing system and handle the huge volumes of transactions necessary to serve as a legitimate mass scale payments system.

We should understand that some of the Fintech efforts being touted as "blockchain" technology may end up being dead ends when tested in the real world which is why companies like IBM are working with partners on new solutions that emphasize ease of connection into the existing banking and payment systems.

All of this is also in line with this article we recently published that suggests that the world is moving towards more payment options competing to please the end user rather than moving towards one centralized global system at this point in time. Just look at all the competing choices covered in just these two articles forwarded to me by a reader here.

Saturday, December 16, 2017

Reuters: Enter the 'Petro' - Venezuela to Launch Oil Backed Cryptocurrency

According to this article appearing in Reuters, it looks like Venezuela is going to attempt to launch "a cryptocurrency backed by oil, gas, gold and diamond reserves." The article notes that the leader of Venezuela (Maduro) "offered few specifics about the currency launch" or how Venezuela "would pull off such a feat". 


It is hard to tell at this point how significant this news may be. There are a number of questions that come to mind including if this cryptocurrency will be issued by a central bank (the first central bank digital currency?) and exactly how you back a currency with "reserves" still in the ground. Below are a couple of excerpts from the Reuters article.
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"Venezuelan President Nicolas Maduro looked to the world of digital currency to circumvent U.S.-led financial sanctions, announcing on Sunday the launch of the “petro” backed by oil reserves to shore up a collapsed economy."

. . . . .

“Venezuela will create a cryptocurrency,” backed by oil, gas, gold and diamond reserves, Maduro said in his regular Sunday televised broadcast, a five-hour showcase of Christmas songs and dancing.


Thursday, December 14, 2017

Bitcoin Followup - Bloomberg Article on Bitcoin "Whales"

In our earlier article on Bitcoin, we noted that trying to cover it is somewhat complicated and that there are a number of factors to consider in trying to analyze it objectively. 


In this Bloomberg article, they point out yet another one. According to the article it seems that 40% of the Bitcoins in existence may be owned by around 1,000 users. Is that good or bad? We'll leave it up to readers to decide for themselves. Below are a couple of excepts from the Bloomberg article.

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"About 40 percent of bitcoin is held by perhaps 1,000 users; at current prices, each may want to sell about half of his or her holdings, says Aaron Brown, former managing director and head of financial markets research at AQR Capital Management. (Brown is a contributor to the Bloomberg Prophets online column.) What’s more, the whales can coordinate their moves or preview them to a select few. Many of the large owners have known one another for years and stuck by bitcoin through the early days when it was derided, and they can potentially band together to tank or prop up the market."

. . . . .

“I believe that it’s common sense that these whales that own so much bitcoin and bitcoin cash, they don’t want to destroy either one,” says Sebastian Kinsman, who lives in Prague and trades coins. But as prices go through the roof, that calculation might change. 

                       Please click here to read the full article on Bloomberg

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Added notes: If you want an easy place to track the price of Bitcoin alongside other things like gold, oil, and the Dow, I have a page setup on the blog to do that here. I added a quote for Stellar Lumens to the page because Stellar was part of the partnership between IBM and KlickEx that we covered here earlier this year. Stellar Lumens have also had a significant increase in price since that news was announced.

In our previous article on Bitcoin we noted that one obstacle to Bitcoin becoming more commonly used in regular commerce are the extra steps involved in acquiring it and trying to spend it easily. Most everyone who wishes to become involved with Bitcoin will do so by joining a coin exchange first (one of extra steps involved). Coinbase is one of the largest of these types of exchanges. Recently, they alerted their customers that due to increased volume, transactions to buy and sell may be delayed. Here is the information recently put out by Coinbase on this. Here is an article on Yahoo Finance that talks about this issue.

One last note. Readers may find this 25 minute audio interview with Keith Neumeyer of interest. He is the CEO of a major silver mining company and talks a bit about Bitcoin in relation to gold and silver. 


Friday, December 8, 2017

Is There a Path for Bitcoin to Go Mainstream?

Trying to cover Bitcoin is a bit like trying to cover gold in some respects. People that are really into the topic tend to get pretty emotional about it at times. Here, we just try to provide the most accurate information we can without any kind of agenda attached to the information.


In the case of Bitcoin, we have people who are enthusiastic supporters and others who are enthusiastic detractors. When they debate the future of Bitcoin, they can get quite passionate (see links below on the electricity consumption debate). In this article we will examine whether Bitcoin has realistic path for mainstream adoption as an alternative payment system to the existing legal tender currency based payment system.

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First, lets examine where things stand today. Currently, Bitcoin is still in the "early adoption" phase of its life cycle. It has seen strong growth in both its price per coin and also in the number of people who own it, especially in the last couple of years (this chart shows the upwward trend in blockchain wallet users which of course indicates a strong increase in Bitcoin and other cryptocurrencies). The price per Bitcoin has seen explosive growth higher as well with some normal market corrections along the way. 


While this growth trend is impressive, Bitcoin is still far from a payment system that is in use in the mainstream of daily commerce. I believe some reasons for that are:


- it's new and somewhat confusing to many people who are familiar with existing payment systems like debit cards, credit cards, checks, cash, etc. that already meet most people's needs adequately

- it has been somewhat awkward to obtain Bitcoin and also to spend it easily for most people. You have go through extra steps that most people don't see any need for

- the blockchain ledger system that Bitcoin runs on has scalability issues that have not yet been resolved to allow for the huge volumes of transactions per minute a real payment system must be able to support if hundreds of millions of people are going to use it daily

- most merchants don't accept Bitcoin for payment even though some do and there is some incremental growth in those that do over time.

- Bitcoin is not legal tender and there is no official institution that stands behind it. While many Bitcoin proponents like it just because it operates outside the official banking system, for now most people are not comforted by that fact and still trust the banking system they have always used and are familiar with.

I am sure there others, but these are a few of the main reasons why Bitcoin is not widely used for daily commerce. If Bitcoin someday managed to attract 150 million users, that would still only be 2% of the global population. In contrast 95%+ of the global population uses various legal tender currencies all over the world every day. For that matter, I could probably estimate that 20-25% of the global population (1.5 to 2 billion people) probably owns some gold. Gold is another form of money to some people historically and many more people globally are familiar with gold being used that way than Bitcoin.

Given the above information, is there a path for Bitcoin to Go Mainstream? I believe the answer to this question depends upon the answers to some other questions.

- Will we see the existing banking and monetary system fail at some point in the future? If not, why would most people search for alternatives to what they use now and like just fine?

- If the present system does fail, what alternatives will emerge to challenge the present system which is based on legal tender fiat currencies? History suggests gold (and silver) will be a contender. Bitcoin is in the process right now of trying to gain acceptance as another viable alternative.

- If Bitcoin can emerge as a mainstream option, will there be an "easy to use" system in place for people to acquire it and spend it as they are used to doing now with legal tender currencies?

- Can Bitcoin resolve the problem the blockchain has in handling large volumes of transactions? 

I cannot answer all the above questions because I don't know what choices people will make under the different assumptions presented. However, in regards to the last question, we should watch to what happens with DragonCard Visa. It will launch in the UK and will offer people a much easier way to utilize Bitcoin (and other cryptocurrencies) more like regular money. Engadget.com has this to say about DragonCard Visa:

"With Bitcoin trading at all time high, investors are working out whether it's best to sit on their stockpile or make the most of it while they can. For those wishing to utilise their investment, opportunities can be limited, with only a small number of big companies currently supporting cryptocurrency transactions. London Block Exchange (LBX) wants to change that. It's launching a new Visa debit card that will let users spend their Bitcoin (and other digital currencies) anywhere across the UK."

This concept is very similar in the way it will work to Glint (which we covered here) which seeks to make gold easier to hold and spend like regular money. Making anything easier to use and understand is important to encouraging it use in everyday mainstream commerce.
Both Glint and DragonCard try to solve the problem by simply allowing the users of their MasterCard or Visa to pay for things anywhere those cards are accepted just like they use their debit card or credit card now. This is a very important step forward towards more mainstream adoption. 

Both of these new payment options do charge a fee (.5% of each transaction) to do the behind the scenes real time conversion into the local legal tender fiat currency at the point of sale (the merchant gets paid in his local currency). Goldmoney offers its users the ability to buy gold or bitcoin and also offers a prepaid card that can be funded by selling gold or bitcoin held in your account for a 1% fee.

So it will be interesting to see if the fees inhibit wide scale use for payments or not. Like anything, the bigger the volume of transactions, the more likely that the fees can go lower and thereby encourage even more use. The newly offered products (Glint and DragonCard) that automatically convert to fiat currency at the point of sale are only available in the UK for now (still in startup mode) so they will need to prove they can cross over the threshold of adoption for wide scale use in daily commerce. 

Under the present circumstances, legal tender currencies have a built in advantage over competitors of any kind (gold or Bitcoin) because they are universally accepted for payment and supported by official institutions that most people trust.

What we need to watch over time is to see if these alternative payment systems can overcome the advantages of legal tender currencies and especially if something happens to shake public trust in the existing system

My own guess is that absent a new major crisis that undermines the existing system, things will just rock along without a major sea change in the way people pay for things. Alternatives like gold and Bitcoin can gain some market share based on new technology that makes them easier to use for most people. But that process likely happens gradually over an extended period of time. 

In the crisis scenario that truly undermines public confidence in the present system, all bets are off. Both gold and Bitcoin are poised to benefit dramatically under that scenario. Now they both have ways to make it easier for the general public to own them and spend them in ways they are familiar with. That could lead to a realistic path for more mainstream adoption for either or both of these alternatives.
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Added notes:

For those interested in views on Bitcoin coming from alternative media sources, you may wish to listen to this discussion about the potential for Bitcoin vs. Gold in the future:







In the Youtube discussion just above, included is a debate on how much electricity is required to keep Bitcoin operating and if that will become a major obstacle for Bitcoin in the future. Both sides can throw out a lot of data in an effort to try and support their view. Below are links to just 3 articles that will give you an example of this debate:

Bitcoin on track to consume the entire electricity supply by 2020

(Bitcoin electricity consumption data cited in the article linked just above)

Opposing view article suggesting the Bitcoin electricity usage claims are "sensationalized"

When I see all this my head tends to explode and I have to ask:

How is the average person supposed to have any idea what the correct information is on all this? It boggles my mind to think that we have come to a point where in order to try and stay on top of all the changing technology that MIGHT impact our monetary system (or might not), now you must somehow become an expert in the dynamics of energy consumption. 

The only thoughts I can offer on Bitcoin (not blockchain, but Bitcoin) at this time are:

- we cannot dismiss it completely as a factor for major impact in the future no matter how many obstacles it has to overcome. People did that with Donald Trump and look how that turned out. People have proclaimed Bitcoin would die several times now and have been proven wrong so far. Bitcoin wallet holders increased substantially in 2017.

- in my view, the thing to watch carefully with Bitcoin is whether or not it can achieve a critical point of mass adoption by enough people to be viewed as a true alternative to the existing currency system. Will something like DragonCard Visa be what makes that possible?

- if Bitcoin cannot become a viable alternative payments system, can it still become a viable alternative for storing wealth long term (more like people have viewed gold)? Does a younger generation see Bitcoin as their new version of gold?

- will Bitcoin end up like a Ponzi scheme as many detractors predict? Will the "early adopters have a chance to profit, but the "late arrivers" be left holding the bag? 

One thing I know. Bitcoin is like gold in this regard. There are people for and against it that are very passionate and vocal in their views on it one way or the other. More and more people are paying attention to it and there is no end to the number of people trying to predict its future. Central banks prefer to ignore it, but are finding that harder to do as more people are attracted to look into it due to its huge price rise.

What all these people are really trying to do is predict how people will behave and what choices they will make in the future. Here, I just simply don't try to do that. I believe Jim Rickards complexity theory is valid and that trying to make these kinds of predictions involves too many complexities including how the "herd" may react to a crisis. I do think that anyone trying to make their own personal decisions is best served by having the most accurate information possible as input and that what actually happens is what matters. That is what I try to focus on here as best I can. I will admit I never imagined it would get this complicated when I started this blog.

Thursday, December 7, 2017

Lots of Studying by Central Banks on Digital Currencies

We have noted here that at some point next year we could see the first central bank digital currency show up. This won't be surprising since this topic is being studied all around the world by central banks and the IMF and BIS are also watching the space.



Below are links that will give you some examples of how pervasive this topic is in the world of central banking even as central banks have not yet made any actual significant change that might impact the global monetary system. In just one article, Bloomberg takes us on a tour around the globe to see how the major central banks view both Bitcoin and distributed ledger technolgy (see link below).

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Bank for International Settlements (BIS) - Central Bank Cryptocurrencies

"New cryptocurrencies are emerging almost daily, and many interested parties are wondering whether central banks should issue their own versions. But what might central bank cryptocurrencies (CBCCs) look like and would they be useful? This feature provides a taxonomy of money that identifies two types of CBCC - retail and wholesale - and differentiates them from other forms of central bank money such as cash and reserves. It discusses the different characteristics of CBCCs and compares them with existing payment options."

IMF - Central Banking and Fintech - Brave New World?

"Instead, citizens may one day prefer virtual currencies, since they potentially offer the same cost and convenience as cash—no settlement risks, no clearing delays, no central registration, no intermediary to check accounts and identities. If privately issued virtual currencies remain risky and unstable, citizens may even call on central banks to provide digital forms of legal tender."

Bloomberg - Here is What the World's Central Banks Think about Bitcoin

"The guardians of the global economy have two sets of issues to address. First is what to do, if anything, about emergence and growth of the private cryptocurrencies that are grabbing more and more attention -- with bitcoin now surging toward $10,000. The second question is whether to issue official versions."



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Conclusion: It is hard to tell how quickly we might see central bank digital currencies show up. My guess is that Singapore, China, and Russia are the most likely places to see it first. There are still questions to be resolved for any central bank studying the idea:

- Will individual citizens be able to open central bank accounts to hold digital currencies?

- If so, how would that impact the private commercial banks?

- Would a central bank use a distributed ledger to support a digital currency or not?

- Will a new standard ledger technology emerge that all or most banks and central banks adopt to use with digital currencies?

These are just some of the questions being considered. Some even say that central banks should stay away from digital currencies and blockchain technology completely. 

Until we see some actual central banks adopt a new version of their currency (the so called central bank digital currency), we just won't know how quickly this might spread around the world. Someone has to stick their toes in the water and test things out first. Who will it be?
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Added note: US Fed Vice Chair Randal Quarles addressed the issue of both cryptocurrencies (private and official) and distributed ledger technology in this recent article carried on Banking Exchange.com. The points he makes in this article align almost perfectly with what we have reported here. Central banks are studying, testing, etc. But the process does not move quickly and they are very cautious about making changes.

Below are a couple of excerpts from the article:

. . . . .
"The challenge, as explained by Quarles, is for new payments mechanisms to achieve necessary scale while controlling financial and technical risks.

“Not surprisingly,” said Quarles, “because striking the right balance takes time, genuine innovation in payment systems over history has often been measured in decades, not years.” Quarles referred to banking and payments industry efforts, notably those aimed towards building a faster payments system that have been moving forward with Federal Reserve System cooperation."
. . . . .
"Quarles acknowledged that some have suggested that the stability issue could be addressed by having central banks issue their own digital currencies. Several years ago an informal and unofficial concept of a “Fedcoin” was floated in a Fed bank blog as a subject for discussion. More recently, some experimentation has occurred overseas, such as a pilot effort by the Monetary Authority of Singapore, that nation’s central bank.


Quarles struck a very cautious note here—he used the word “caution” or forms of it frequently in the speech.
For a nation like the U.S. with an extensive banking system and much demand still for physical cash to venture into virtual money would require intensive review of legal and risk issues, Quarles said.
“I am particularly concerned that a central-bank-issued digital currency that’s held widely around the globe could be the subject of serious cyberattacks,” said Quarles, “and could be widely used in money laundering and terrorist financing.”
Quarles suggested that any such efforts to develop central bank digital currency would be a distraction from—they “might even derail”—efforts to improve U.S. retail payments. He pointed out that the U.S. still lacks a widescale system for banks and their customers to make instant and convenient transfers and settlements 24/7."

Friday, December 1, 2017

Recapping as We Head into Year End - What Does the Future Hold?

Most of the action this year in terms of change to the existing monetary system has revolved around various payment technologies and alternative currencies. We have seen virtually no public movement of any kind by central banks and/or the IMF towards any major changes in the global monetary system. 



They seem to be in the midst of researching and studying the various new technologies arising in an effort to decide when and if to go forward with their own new versions of digital currencies. Based on the best information available at this time, here is a bullet point list of where things seem to stand.

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- we may see the first central bank digital currency arise in 2018. I am keeping an eye on Singapore for that, but Russia or China could always pop up with something because we know they are looking at it and that they are somewhat opaque in terms of releasing news (see latest on Singapore here)

-the IMF seems interested in the new technologies emerging and open to the idea of eventually looking at a digital version of the SDR (the so called IMF Coin). This article in Street.com says don't look for this any time soon (as we have also suggested here).

-while central banks and the IMF continue to study things and monitor events, private initiatives to move forward with new virtual currencies and payment systems continue. We reported on the IBM-KlickEx-Stellar launch of a cross border payments system that could be used by central banks as well in the future. We anticipate hearing more from IBM and KlickEx in the future.

- we also reported on another new technology payments venture that hopes to re-introduce the concept of using gold like money again. Glint CEO Jason Cozens gave us this interview to publish here on the launch date for Glint . Glint allows people to pay for things using gold anywhere MasterCard is accepted.

-in a bit of a similar vein, we also now have DragonCard Visa. This allows people to own Bitcoin and also be able to spend it with a debit card. It works a bit differently in that a cryptocurrency exchange handles the conversion from Bitcoin to fiat currency themselves rather than to immediately liquidate the Bitcoin instantly at the point of sale. It will be interesting to see how a large volume of retail transactions might impact the blockchain as at some point someone has to do the conversion between Bitcoin and legal tender currency.

-from time to time we get a chance to "listen in" on some email discussions by some monetary system experts who are always looking at ways to reform the current monetary system in the hopes of improving it. These discussions are quite interesting and there are a lot of creative ideas out there on how best to improve the system and what the best "anchor" for a currency might be. We have covered some of those ideas and archived them here.

Looking Forward

The combination of all of the above sources of information leads me to conclude that major changes in the existing monetary system are more likely to unfold gradually over time unless some kind of new major crisis were to disrupt the existing system and force some kind of major change to be implemented more rapidly. This is always possible and should not be ruled out given the world debt situation and the unknown potential impact of derivatives contracts around the world.

However, absent such a crisis, I now see a future that may be far less dramatic than many people have expected or even assumed will take place that may unfold gradually. I can envision a world where people actually obtain additional viable choices for where to store their money and how to spend it. Instead of some kind of "top down" edict that tries to force people to accept a new global monetary system based on one new global reserve currency, it may be that the change comes more from the "bottom up" and a more dominant global currency emerges from competition.

I think it is reasonable to expect that at some point we will see central bank digital currencies emerge and eventually some kind of digital version of the SDR as well. But I now think these may enter the picture simply as additional new alternatives for people to choose from alongside existing available choices. Gold has always been an alternative option and now Bitcoin seems to have joined that category. Technology like Glint recently introduced allows gold to function more like the other currency choices available so that people can easily access it and spend it if desired.

Picture the idea of future world where you can open an account in your own country with your own national currency (say US dollars for example). Once you fund this account, you can then move the funds between major fiat currencies in real time for a reasonable fee. Or you can buy gold that you can spend just like these currencies for the same fee. But now add on the option of a digital version of the major currencies issued directly from central banks (lets call those e-dollars in the US backed by the Fed, e-pounds in the UK, etc). 

On top of all that lets add on some "Real SDR's" issued and backed by the IMF using new underlying digital technology (blockchain or otherwise). What if all those options were available to you from one app in one account on a mobile phone? You could diversify and hedge your money right on your mobile phone or even opt out of the system into gold very quickly if you wanted to do that.

And if you must have Bitcoin, DragonCard Visa (mentioned above) plans to offer that option as well.

Instead of a world where someone is trying to force you to use one currency like many people have expected or feared, what if the world moves in the opposite direction? 

What if people are offered all the above choices and then they choose which ones emerge as the cream of the crop based on such things as their ability to easily meet their payment needs, ability to hold their purchasing power, and ability to help keep global imbalances in check between nations? 

Such a system might work very well and also provide incentive for everyone issuing legal tender currencies to be more disciplined to make sure their currency stays competitive with the other alternatives people can choose. If people can "vote with their money" on a mobile phone in real time, everyone has to stay on their toes to garner their market share. With financial inclusion around the world, the pie could also grow and provide plenty of market share for the various currency alternatives to thrive. The best ones should rise to the top in a natural process as people "vote" on what works best for them by choosing from the options available.I see that world as being at least as likely as the one where some official authority tries to impose a new currency and monetary system in "top down" fashion. But how would another major global financial crisis change the picture? 

As always, time will tell us what will actually happen and that is what really matters for the average person trying to make personal financial decisions. The goal here is to try and cover what actually happens and inform readers of the various ideas out there for monetary system change in the future.

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Added note for news events 4:15pm:

Whenever there is news that might impact market stability like the news today that a former Trump official pled guilty to lying to the FBI, it is natural to ask if something like this could lead to any kind of major market disruption or impact systemic stability. 

My reaction based on the information known at this time is not likely. The news today is not real surprising given what was already known about Flynn and at this time not likely to impact the Administration significantly. Even if the worst case scenario were to unfold and President Trump left office for some reason, I doubt markets would be all that impacted long term. The VP would take over and not much change in policy would be likely. The passage of the tax reform bill is actually more likely to boost markets and perhaps GDP if it works as intended. So none of the events of today seem likely to be any kind of trigger for a major market disruption or systemic crisis at this time. Also, it is doubtful that the upcoming deadline to keep the government running will be a problem. They won't let that happen despite some drama leading up to the deadline. Other than North Korea, I do not see anything on the horizon with the likely potential to create a systemic stability problem.

Tuesday, November 28, 2017

2014 - Robert Pringle Interview with Paul Volcker

Now and then while doing research I run across some older information that is really interesting. This 2014 interview by Robert Pringle with former Fed Chief Paul Volcker falls in that category. 


This interview provides a great window into the past (both long term history and recent history) from an icon in the world of central banking. I present it here for readers who have interest in these issues. Below is some text that describes the interview from Centralbanking.com

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Former chairman of the Federal Reserve Paul Volcker believes the Federal Reserve has come in for unfair criticism related to its decision to ‘taper' its asset purchases late last year (see video above).
Volcker told an audience at the Central Banking Awards dinner on March 13 that he was perplexed by criticism of the Fed when it made a very small, even "tiny", move towards ending its purchases of US Treasuries and mortgage-backed securities. The Fed started to reduce its $85 billion of monthly US bond purchases in December last year. It now buys $55 billion of such securities per month.
In a ‘conversation' with Central Banking founder Robert Pringle, Volcker said there were complaints that other central banks should have "consulted" regarding tapering. But he said it was unworkable for the Fed to consult with every nation around the world when making its policy decisions. Volcker said volatile capital flows and currencies are a product of the structure of the current monetary system, rather than any actions undertaken by the Fed on tapering.
Volcker added that one of the issues in the lead-up to the financial crisis of 2007–08 was that huge imbalances built up in China and the US but "nobody wanted to do anything" about it, he said. "There was nothing in the system that made anybody do anything [to address the imbalances]," Volcker added. Asked if that was a system the world should operate with today, Volcker replied: "I don't think so", adding that "nobody is prepared to look at it".
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My added comments: I hope readers who see this interview will appreciate even more the contributions that Robert Pringle has made to this blog. Mr. Pringle has been very kind to help out with explaining complex issues presented here and also to contribute to articles published here with direct comments. Please note that when Mr. Pringle offers us information, he is coming from a background of decades of experience working with central bankers like Paul Volcker. This kind of insight is very hard to find and much appreciated here.


Friday, November 24, 2017

Fintech Innovation - Where is it Headed?

We have clearly entered into a new world in terms of financial technology that is slowly but surely altering the landscape of banking, payments systems, and even perhaps legal tender currencies. All this technological innovation is filled with buzzwords and companies trying to become "the next big thing" that changes the world in a truly meaningful way.


We have "Bitcoin", "Blockchain", "Distributed Ledger", "CBDC" (Central Bank Digital Currencies) as new buzzwords that have popped up in recent years. Lately we see even newer efforts to try and innovate to improve "blockchain" (see Hashgraph here). I believe there are now over 1,000 private "cryptocurrencies" vying for capital in the marketplace. 


Right now there is so much happening so quickly in terms of competing ideas and technologies, it can quickly become overwhelmingly confusing to most people who are not technological experts and just want a simple, inexpensive, and secure way to transact their business with a currency that holds it value over time. 


We have covered this topic pretty well here, but as it can be quite confusing and things keep changing constantly (funny how innovation works that way), I thought perhaps an analogy that most people can relate to might be helpful to see where things stand right now. With that in mind, let's use the old Sony Betamax vs. VHS technology battle as our guide. 

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Readers from my generation will quickly recall this technology battle. Younger readers might find it an interesting footnote in history that illustrates how there is a constant technological struggle to gain universal adoption that really never ends. Even in this case, after the VHS technology for video players won out in the marketplace, it was eventually replaced by DVD's, then Blue Ray etc. But perhaps this process can help us understand the ongoing technology battles in the fintech arena?

First, here is how the Betamax vs. VHS battle played out as described in this wikipedia article on the topic:
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Videotape format war

"The first video cassette recorder (VCR) to become available was the U-matic system, released in September 1971. U-matic was designed for commercial or professional television production use, and was not affordable or user-friendly for home videos or home movies. The first consumer-grade VCR to be released was the Philips N1500 VCR format in 1972, followed in 1975 by Sony's Betamax. This was quickly followed by the competing VHS format from JVC, and later by Video 2000from Philips. Subsequently, the Betamax–VHS format war began in earnest. Other competitors, such as the Avco Cartrivision, Sanyo's V-Cord and Matsushita's "Great Time Machine" quickly disappeared.
Sony had demonstrated a prototype videotape recording system it called "Beta" to the other electronics manufacturers in 1974, and expected that they would back a single format for the good of all. But JVC in particular decided to go with its own format, despite Sony's appeal to the Japanese Ministry of Trade and Industry, thus beginning the format war."
. . . .
"Sony had met with Matsushita executives in late 1974 or early 1975 to discuss the forthcoming home video market.[6] Both had previously cooperated in the development and marketing of the U-Matic video cassette format. Sony brought along a Betamax prototype for Matsushita's engineers to evaluate. Sony at the time was unaware of JVC's work. At a later meeting, Matsushita, with JVC management in attendance, showed Sony a VHS prototype, and advised them it was not too late to embrace VHS "for the good of the industry" but Sony management felt it was too close to Betamax production to compromise."

Outcome


"The main determining factor between Betamax and VHS was the cost of the recorders and recording time. Betamax is, in theory, a superior recording format over VHS due to resolution (250 lines vs. 240 lines), slightly superior sound, and a more stable image; Betamax recorders were also of higher quality construction. But these differences were negligible to consumers, and thus did not justify either the extra cost of a Betamax VCR (which was often significantly more expensive than a VHS equivalent) or Betamax's shorter recording time.

JVC, which designed the VHS technology, licensed it to any manufacturer that was interested. The manufacturers then competed against each other for sales, resulting in lower prices to the consumer. Sony was the only manufacturer of Betamax initially and so was not pressured to reduce prices. Only in the early 1980s did Sony decide to license Betamax to other manufacturers, such as Toshiba and Sanyo.

Sony's decision in 1975 to limit Betamax's maximum recording time to one hour (for NTSC systems) handicapped its chances of winning this marketing war. VHS's recording time at first release (1976) was two hours—meaning that most feature films could be recorded without a tape change. It was not until the early 1980s that Betamax offered recording times comparable to VHS. In UK, the L-750 Betamax tape lasted 3 hours and 15 mins, while VHS was limited to a 3-hour maximum (The E-180), though later on an E-240 tape lasting four hours became available, though picture quality wasn't as good.

By the time Sony made these changes to their strategy, VHS dominated the market, with Betamax relegated to a niche position."

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So, how can we relate this old technology battle to what we see going on in Fintech today? I think in a number of ways. 

 As with most technology battles, what is being sought is a universal standard that everyone can easily use and will want to use. Before a universal standard is adopted for anything, there are usually competing versions of new technology vying to become the universal standard. Once most manufacturers pick what they want, one technology tends to "win out" and become what everyone adopts. Sometimes it matters less which technology is actually "superior" than it does which one gets adopted by the most manufacturers. Once a critical mass of adoption takes place, the standard become accepted across the board.
Applying this idea to the new banking and currency technologies we see just about everywhere now, I think we are in the process of seeing which innovative technology will gain the broadest adoption by the key "manufacturers" in this arena. In this analogy, I think the major banks and central banks are the "manufacturers" because whatever most of them adopt is more likely to become the global "standard".  The general public (as always) will have the final say because whatever end "financial product" is adopted will have to meet the needs of the end users (we, the people). 

It is important to distinguish between the underlying ledger technology that is used to support a currency system and payments system (blockchain and hashgraph for example) and the actual currency unit itself. As an example, one new Fintech innovation just introduced (Glint) does not use blockchain at all, but does hope to re-introduce the idea of gold as a currency people can use in daily transactions. Ben Davies of Glint has this to say about the ledger system they are using:

"One way we did it was to create our own ledger systems using micro-services architecture. It was about taking cutting edge technology and integrating into financial services. The innovation is in the application of that technology.”



Right now what we are seeing is that the major banks and central banks around the world are looking at which underlying supporting technology (like blockchain, hashgraph, various hybrids, etc) works the best in real world testing. 
Until we can get to a universal standard for this kind of underlying ledger technology, it is not really possible for central banks to move forward with the concept of central bank digital currencies. The currencies themselves are not really the innovation. They are just another electronic version of the legal tender currencies they already produce now. 
What is needed is an underlying ledger system that makes it possible to implement a digital version of their currency that is inexpensive, fast, and secureIt also needs to be "interoperable" (connect to) other banks and central banks existing systems (Bitcoin running on very slow blockchain ledger technology cannot do this and will remain a private virtual currency).
The first technology that central banks can adopt that meets these goals will likely "win out" and gain widespread global adoption in the existing banking system. At that point in time, it becomes more realistic to think in terms of a new "global digital currency" that can utilize whatever new underlying ledger technology eventually gains adoption as the universal standard. Just as VHS became the standard for video players, some new underlying ledger technology will likely do the same in the banking system.

Conclusion
I see the process above as playing out over time in stages. I believe right now we are in the middle of the technology battle for universal adoption of an underlying ledger system that all banks and central banks can plug into. Until that stage is completed, I would expect most central banks (and the IMF) to hold off on moving towards so called central bank digital currencies. I would expect a few central banks to step into the central bank digital currency waters first on test basis using what they believe will become the universal underlying ledger technology that all banks can plug into relatively easily (I am watching Singapore in 2018 for now). 
If and when these initial tests prove successful and the general public finds it attractive, I would then expect to see more and more central banks join in around the world further cementing the technology chosen as the "universal standard" that everyone can plug into. After all that, it would not surprise me to see the IMF look more seriously into the concept of an "IMF Coin" as they mentioned recently
This seems to me like the logical way for things to progress over time and why I have said I expect this process to take some time to unfold. What is sometimes overlooked is that it always takes more time than many expect to test out various concepts in the real world and make sure they will actually work and truly meet the end objectives of the final end users. In this case, the final end users would be the general public which will have the final say on what they prefer to use. I
I view that as a good thing. The final product (for a new official global reserve currency) will have to be easy to use, safe, and inexpensive. Any such currency will need to be able to demonstrate it can hold its value over time and retain the public confidence. If legal tender currencies fail in that regard, people will look elsewhere (perhaps to new gold payment systems or virtual currencies like Bitcoin). These days, there are more of choices available for people to consider. That also helps keep the system more honest. If people have real choices, then you must offer them a genuine product that meets their needs and has their confidence or they will opt out to another choice one way or another.

Meanwhile, innovation moves forward as it always does and we wait to see what emerges as the universal standard (or if one actually does emerge).