Thursday, November 16, 2017

IMF: Fintech and Cross Border Payments

We have covered quite a bit of fintech news lately because that topic has emerged as the most likely to impact the overall monetary system whether because of private virtual currencies challenging the various legal tender currencies around the world or because a number of central banks are looking at implementing some kind of central bank digitial currency (CBDC).

The IMF has made it clear that they are also following all this closely to see where things may be headed. Here we have a recent speech by IMF Deputy Director Dong He on the topic of Fintech and Cross Border Payments. Below are a few excerpts.


"It’s a pleasure to join you here today, at Ripple’s “Central Bank Summit,” as we explore some of the key issues facing central banks raised by the current acceleration of progress in “fintech.”
The IMF has been carefully studying the trends in fintech, and my colleagues and I have gathered some initial thoughts about the way that the financial realm is likely to change. We’ve also been weighing how financial regulation and central banking will need to respond."
. . . . 
"In my remarks here today—focusing on implications of fintech for cross-border payments, I'll explore three broad areas:
  • First, a sketch of the economic framework on how fintech applications will affect financial services and the market structure.
  • Second, the current landscape of cross-border payments, and the possible evolution of cross-border payment systems; and
  • Third, the role of central banks, themselves, and the possible reasons for them to issue their own digital currencies."
Central Bank Digital Currencies
"Let me now turn to a second possible avenue for DLT application to be used as a means of payment: Central banks could offer their own digital currencies.
A “Central Bank Digital Currency—let’s call it, in shorthand, a “CBDC”—would not be a parallel currency. It would merely be a digital form of central bank money that can be exchanged in a decentralized manner. In other words, it can be transferred or exchanged peer-to-peer, directly from payer to payee without the need for an intermediary.
Such a CBDC would be exchanged at par with the central bank’s other liabilities (its cash and reserves)—either through banks or directly at the central bank."
Why Issue a Central Bank Digital Currency?
. . . . . . 
My added comments: I publish this kind of information not only to give readers a look at what the IMF and others are saying on these issues, but also to try and illustrate how these changes are unfolding very gradually and the outcome is by no means certain or predetermined. I see a lot of speculation that "China is about to replace the US dollar with a gold backed yuan" or "China will endorse a gold backed SDR to replace the US dollar" all the time. Many articles suggest that these kinds of major changes to the existing monetary system are about to happen any time now. 
Of course, I can't possibly know for sure what is going to happen in the future or when something major might change in the global monetary system. We have listed many potential triggers for that kind of change that really do exist and are pretty much present all the time despite the fact that no such changes have taken place so far. 
Also, there is no doubt that both Russia and China (and probably a number of other nations) are working towards the day when the US dollar does not hold its place at the primary global reserve currency. We see obvious proof of this all the time in both statements of officials and actions taken by those officials in those nations.
However, if you take the time to read what the various central banks, the IMF, and the BIS have released publicly on all this, you do not see any indication at all that they are moving rapidly to towards any major changes in the current monetary system dominated by the US dollar as global reserve currency. 
There is a lot of talk, a lot of studies, and a lot of various new technologies being introduced and tested that could lead to some big changes, but none of them appear to be leading towards a major global change in the near future as best I can tell. It feels like a universal technology standard formed by consensus (of the banks and central banks) needs to emerge first and we seem to be in the process of working through that now with a variety of concepts being tested. I view it as somewhat like the old BetaMax vs. VHS battle for standard universal adoption for video players back in the day (more on that in an article next week).
It appears that a slow and steady gradual movement towards change is underway driven by innovative new technologies. But the process will probably take some time to unfold at the current pace without some kind of major trigger (like a global crisis that took out the current monetary system). The best evidence I have from what I consider to be excellent and very high credibility sources is that we might expect to see a few central banks test out a central bank digital currency by next year. If that goes well, then others may follow and some of the bigger central banks might be tempted to test that out as well. If it does not go well, expect major central banks to be very cautious about making any big changes. My guess is that the IMF will sit back and watch all this to see how things turn out and which technology gains consensus widescale adoption in the banking system (or if any of the new technologies are able to obtain that status).
While I can't be sure what China and/or Russia might do of course, I don't expect them to try and force some kind major change to the existing global monetary system before all parties who would have to be involved in that are ready to agree on that. I don't find any public evidence that anything like that is anywhere on the near horizon despite articles I see constantly that speculate along those lines. The US seems to view efforts to undermine the US dollar globally somewhat along the same lines as a declaration of war (here is an alternative media view on that idea). I always remain open to evidence to the contrary should it arise.
As always, an unexpected crisis event can change things quickly. The most probable known event that could be in that category would be if the US is unable to resolve its problems with North Korea without a major shooting war taking place (Jim Rickards latest analysis is still 70% chance for war). The could certainly be a trigger for a major disruption of the current monetary system so we will continue to monitor that situation until it is resolved one way or another. (added note - see Jim Rickards Twitter comment on North Korea here)
By mid 2018, I feel like it will be pretty clear if any of this will lead to the kind of major monetary system change we watch for here and if further regular articles are really needed. It may be that I can just go into "monitor" mode and only produce an article if something that is significant in terms of monetary change surfaces. 

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