Wednesday, July 5, 2017

Cryptocurrency Followup - IMF Paper Backs Issuance of Central Bank Digital Currencies

A thank to a reader who pointed me to this new article in In our previous article on cryptocurrencies, we raised some questions about the future. This new IMF paper may give us some hints as to how the existing monetary authorities view cryptocurrencies. Below are a few excerpts and then a few added comments.


"Central bank digital currency (CBDC) could increase the efficiency of current payment infrastructure while reducing costs to central banks, a paper published by the International Monetary Fund has said.

In the paper, published in June, the fund examines how digital technology has thus far transformed the financial services landscape in an attempt to understand what challenges consumers and regulators could face in the future.

The paper focuses on distributed ledger technology (DLT) and the role it can play in cross-border payments. In a separate appendix, the fund seems to come out in favour of central banks creating and issuing their own digital currencies.

“Introducing a CBDC may allow the central bank to perform its role in insuring an effective payments infrastructure, including the issuance of currency and the provision of a lender of last resort function, more efficiently,” the authors argue.

While acknowledging there are several examples where payment systems have become more efficient without the assistance of digital currency, the IMF suggests CBDCs could “narrow the shortcomings” of the payment space.

The economists argue CBDCs could overcome co-ordination failures or the inability to agree on a single new technology standard while also helping to topple private virtual currencies, which the fund believes hold a “monopoly of power” in the payment system landscape.

“The introduction and potential proliferation of private virtual currencies might, in one view, threaten to erode the demand for central bank money and the transmission mechanism of monetary policy,” the authors explain. “A CBDC may forestall such private virtual currencies or relegate them to a secondary role in the payments system.”

The authors acknowledge a CBDC would also result in the eventual phasing out of hard cash, but with the benefit of savings on the costs of maintaining and replacing notes and coins.

Such a move to central bank electronic currency would ultimately help “significantly reduce” transaction costs for individuals and small enterprises which have little or no access to banking services.   . . . . . . "

My added comments: This article is filled with information related to topics we have covered here. Lets take a quick look at some of them.

In our previous article we asked these questions:

"If we do get another major global financial crisis that will be another factor to consider. Does that drive millions (or tens of millions if its really bad) more people to look outside the banking system due to lost confidence? If so, do they move into things like Bitcoin or more traditional safe havens like gold and silver? How would the central banks respond to all that? Try to crush alternatives to their currencies? Try to compete with their own versions?"

Does this IMF paper suggest the central banks view the cryptocurrencies as problematic and something they need to push into a "secondary role in the payments system?" The article linked above that quotes the IMF paper clearly appears to say that. It also seems to suggest the idea of central bank digital currencies as a state backed competitor to existing private cryptocurrencies with one goal being to "forestall such private currencies". 

If this scenario unfolded, it would be interesting to see if state backed digital currencies simply competed with private currencies or if the nations involved would take additional steps to make sure their own currencies had a strong competitive advantage (critics would say monopoly advantage). For example, do they issue tough regulations on the issuance and use of the private currencies and use tax agencies to add on additional burdens for trying to use private currencies? It seems likely that nations would take actions to make it harder on private currencies as money just as they did on gold and silver by implementing regulations and making them subject to steep capital gains taxes in the US if bought and sold. Of course they already use legal tender laws to insure competitive advantage.


Those who are sure that the existing monetary authorities intend to wage a "war on cash" will also find this part of the IMF paper interesting. Here is a key quote on that from the paper:

"The authors acknowledge a CBDC would also result in the eventual phasing out of hard cash, but with the benefit of savings on the costs of maintaining and replacing notes and coins."

The paper puts a positive spin on this by emphasizing that . . .

"Such a move to central bank electronic currency would ultimately help “significantly reduce” transaction costs for individuals and small enterprises which have little or no access to banking services."

Making it easier for financial inclusion for those who do not have access to banking services is certainly a noble goal and we have covered the efforts of payments systems like KlickEx and M-Pesa to accomplish this. 

IMF and central bank cynics and critics are not going to buy this as the primary objective though. They will view this as a pure power play by the existing monetary institutions to wipe out any competing currencies to their official currencies while also removing the ability to use cash from the system. I cannot imagine that this kind of policy making (removing all cash) would not generate substantial blow back from millions of people who already do not trust these institutions. This would simply confirm their suspicions that these kinds of policies are why they cannot trust them. They will also feel that they are waging war on their ability to do business outside the banking system if they prefer to do so. This could also raise all kinds of deeper issues as to state (and central bank) power versus individual freedom (privacy). This will certainly be an issue to monitor going forward.

The IMF paper goes on to explain that there are two possible models central banks might use to implement a central bank digital currency. Basically, one involves the central bank being more in control of the operation that the other option. You can read the article to get the details. We covered the study by the Bank of England (BOE)  a year ago where they discussed some of these kinds of implementation issues.

Summary: Please keep in mind that this (the IMF paper) is just another research paper that has been issued. As we have noted here, all of this is still being studied and no decisions to move forward with a central bank digital currency have been made yet that I am aware of. China might be the first large nation to do so. Only time will tell us where all this is headed. However, the IMF paper may be telling us that the current public infatuation with private cryptocurrencies like Bitcoin is becoming a concern to monetary authorities and they clearly are looking for ways to "relegate them to a secondary role in the payments system." 

Added news note: London metals trader Andrew Maguire has come out with news on his Twitter feed about yet another new gold backed cryptocurrency. In a series of tweets, he says to expect billions of dollars of buy orders when this product launches which he says is coming soon. While other gold backed cryptocurrencies have also launched recently (see here and here), Maguire says this product will have institutional and sovereign support, will encourage gold buying in the tons of physical gold, and will even have some kind of yield.

What we may be seeing here are back door ways (outside the system) for physical gold to be more easily available for those who want to hedge against the dollar (and or systemic risk) including large institutions and sovereign wealth funds. It would take these kinds of buyers to generate billions of dollars in purchases at the launch (I calculated $10 billion at least in the update below based on 250 tons of gold).

If his claims prove out, this is something to keep an eye on. If large buyers do jump in, the gold market will very likely be impacted not only due to the initial buying, but because it will signal to other large institutional investors they now have a way to hedge with a product backed with actual physical gold and also get a yield. The Texas Teacher Retirement Pension Fund already does this with physical gold. Getting a yield might appeal to other similar types of funds who don't allocate anything to gold in their investment portfolios currently.

If just 1% of the investment capital in the world moved into something like that as a hedge, the price of gold could explode much higher. If we saw very large moves of capital into something like this, it might suggest there is institutional concern about systemic stability which is something we watch for here of course.

Update 7-7-17: King World News issues this brief update in which Maguire says 250 tons of sovereign buy orders for physical gold are coming. He says he expected them on July 5th. They did not come on that date and now he says he is "100% sure" they are coming soon. By my calculation, this would be about $10 billion in gold purchases at the current price. Maguire says it would be impossible to source 250 tons at anywhere near the current prices. Earlier in this blog post, we noted the updates Andrew Maguire provided on his Twitter feed that a new gold backed cryptocurrency will launch soon. So. we will just continue to monitor this and report what actually happens.

Additional update 7-7-17 (8pm): King World News has now added the audio interview. Here are the key points I noted from the interview: 

- 250 tons of gold buy orders to hit the market "soon"
- options expirations led to efforts to get gold below $1260 in June-July (Jim Rickards recent article suggests he agrees with this possibility)
- July 5th time period should be a low 
- expect attempts to cap gold at $1300 on the next move up
- Andrew expects that gold will break above $1300 this time
- he believes gold will move soon thereafter to $1400
- says he has direct evidence that sovereign entities will be backing a new gold backed cryptocurrency before August which he thinks will thwart the effort to keep gold below $1300 this time
- he believes the entities that have shorted gold will be forced to deliver actual gold for these large orders which they will be unable to do
- he claims the bullion banks have been quietly switching to long positions during the recent price pullback
-he also thinks silver will participate in this sharp move up
-he says gold is $140 below proper fair value at the current price
-he believes now that the commercial interests have switched long and that the short positions will be forced into a massive covering soon
- he does not think the so called "paper futures" markets in gold and silver will survive another year after this upcoming event in the gold market

So, we have a pretty clear prediction here to track. Mr. Maguire expects gold to clear $1300 by mid August. We will monitor it and see what happens. It also looks like his comments have touched off a new round of speculation as we can see in this King World News interview.


  1. Your coverage of cryptocurrencies and their threat to or possible use by central banks is first rate. Thanks.

  2. Thank you. There is a lot of news in this area lately. My feeling is that all kinds of people are vying to attract capital and support for various forms of money (or proposed money) because the feeling that the present monetary system is running out of steam is expanding. At some point if we reach a tipping point (too many people lose trust in the current system), we will see much more rapid moves away from the present US dollar based system which remains entrenched for now. That is what I try to monitor here. If and when that day comes, people will need information and I have tried to make sure it will be available here free for anyone who can use it.