Sunday, April 8, 2018

Mark Carney (BOE) - The Future of Money

Here we have some more input on money from the head of the Bank of England (BOE), Mark Carney. This is recent speech he gave on The Future of Money that goes into some basics on money, looks at cryptocurrencies, and then tries to look ahead into the future to see where things may be headed. Below are some excerpts from the speech. (see the slides for the speech here).


Comments on cryptocurrencies:

"Even though their prospects of replacing fiat money are tenuous at best, cryptocurrencies are of growing interest to policymakers, many of whom prefer to term them crypto-assets expressly because they are not true currencies—a convention I will adopt for the balance of my remarks.

On the upside, as I will come onto in a moment, some of the underlying technologies are exciting. Whatever the merits of cryptocurrencies as money, authorities should be careful not to stifle innovations which could in the future improve financial stability; support more innovative, efficient and reliable payment services as well as have wider applications.

On the downside, at present, crypto-assets raise a host of issues around consumer and investor protection, market integrity, money laundering, terrorism financing, tax evasion, and the circumvention of capital controls and international sanctions.

 The Bank of England’s FPC is currently considering the risks posed to UK financial stability. And internationally the Financial Stability Board (FSB) will report to the G20 in Argentina later this month on the financial stability implications of crypto-assets.

At present, in my view, crypto-assets do not appear to pose material risks to financial stability

This is in part because they are small relative to the financial system. Even at their recent peak, their combined global market capitalisation was less than 1% of global GDP. In comparison, at the height of the dotcom mania, the valuations of technology stocks were closer to about a third of global GDP. And just prior to the global financial crisis, the notional value of credit derivative swaps was 100%."

. . . . . .

Pointing to the Future I trust you have gathered by now that for many reasons the crypto-assets in your digital wallets are unlikely to be the future of money. 

But that is not meant to dismiss them. Their core technology is already having an impact. Bringing cryptoassets into the regulatory tent could potentially catalyse innovations to serve the public better. Indeed, crypto-assets help point the way to the future of money in three respects: 

- By suggesting how money and payments will need to adjust to meet societies’ changing preferences, particularly for decentralised peer-to-peer interactions; 

- Through the possibilities their underlying technologies offer to transform the efficiency, reliability and flexibility of payments; and 

- By the questions they raise about whether central banks should provide a central bank digital currency (CBDC) accessible to all.

. . . . . .

On the Potential for Central Bank Digital Currency for Everyone:

Third, crypto-assets raise the obvious question about whether their infrastructure could be combined with the trust inherent in existing fiat currencies to create a central bank digital currency (CBDC). 

Currently only banks can hold central bank money electronically in the form of a settlement account at the Bank of England. To be truly transformative a general purpose CBDC would open access to individuals and firms. 

The Bank has an open mind about the eventual development of a CBDC and an active research programme dedicated to it. That said, given current technological shortcomings in distributed ledger technologies and the risks with offering central bank accounts for all, a true, widely available reliable CBDC does not appear to be a near-term prospect. 

Moreover whether it is desirable depends on the answers to a series of big policy questions. While these are largely for another speech, I will note that a general purpose CBDC could mean a much greater role for central banks in the financial system. Central banks may find themselves disintermediating commercial banks in normal times and running the risk of destabilising flights to quality in times of stress.

There are also broader societal questions (that others would need to answer) such as how society balances privacy rights with the extent to which the information in a CBDC could be used to fight terrorism and economic crime.

A CBDC shouldn’t be a solution in search of a problem or an effort of central bankers to be down with the kids. 

My Added Comments: This speech provides a lot of good information on the current thinking inside major central banks such as the Bank of England. I feel like we have covered the issues discussed in this speech about as well as anyone. We have noted that despite a constant drumbeat we see in various media that blockchain based crytocurrencies will soon be arriving at major central banks, the reality is quite a bit different. Here is what Mr. Carney says about this directly from this very recent speech:

The Bank has an open mind about the eventual development of a CBDC and an active research programme dedicated to it. That said, given current technological shortcomings in distributed ledger technologies and the risks with offering central bank accounts for all, a true, widely available reliable CBDC does not appear to be a near-term prospect. 
I think he makes things pretty clear. The US Federal Reserve has made similar comments as well in the past year. Those who have been speculating that the IMF will have a blockchain based SDR any time soon are off base as well in our view here. 

If you simply read what Mark Carney says in this speech, you will see that there a number of concerns central banks have about issuing central bank digital currencies even as they continue to study the concept. The IMF would be even less likely to move forward with anything like this until they see some major central banks test it out in the real world for a lengthy period of time (something that may not happen for years). As Mark Carny plainly says, "a true, widely available CBDC does not appear to be a near term prospect."

He does offer encouragement for improved cross border payments systems for existing national currencies perhaps along the lines that IBM and others are working on with partners such as Stellar and KlickEx. We will continue to watch for anything along those lines that may unfold over time.
Added unrelated news note: Today (4-9-18) we get news that the personal lawyer of President Trump had his files raided by the FBI. Up to now I have viewed all this as mostly political theater leading to nowhere. This action today may indicate a much more serious ramping up of this situation. 

Anything that might lead to instability (or perceived instability) of the US government (and the President of course) is something we must watch carefully. A long, protracted and bloody legal battle could become a very serious situation. And we can be sure that the enormous political divide that exists in the US already will only get much worse as each side digs in and ramps up their attacks on the other side. Experts I follow also do believe this could be a serious situation as well.

That type of thing could certainly significantly impact markets on top of everything else. I encourage readers to pay close attention to this situation and market reactions to it going forward and consider what actions might be worth considering (to increase personal financial insurance against instability) if this situation gets much worse in weeks and months ahead.

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