Sunday, August 19, 2018

US House Financial Services Committee on "The Future of Money - Digital Currency"

It seems that the US House of Representatives has now started to look into issues we have been presenting here for some time. On July 18, 2018, the Financial Services Committtee of the House of Representatives held a hearing entitled:  The Future of Money - Digital Currency.

CoinTelegraph covered the hearing a bit in this recent article. Since we have covered this pretty extensively here and have been able to get direct input from one of the leading experts in the world on this topic, we will delve into this hearing to demonstrate why we do not think we will be seeing central bank digital currencies any time soon from major central banks such as the Federal Reserve. Below are excerpts from the testimony of the experts who appeared at this hearing and then some added comments and observations. I added some underlines for emphasis.


Dr. Rodney J. Garratt - (UC Santa Barbara)  - Conclusion Section of Testimony:

"In conclusion, I believe that the Federal Reserve will, at some point in the future, need to respond to the disappearance of cash and I have given some reasons why it might consider offering some form of retail-oriented central bank cryptocurrency. 

There are, however, many issues related to the viability and security of this technology that need to be fully resolved before adoption. Moreover, a much deeper understanding of the monetary policy and financial stability issues is needed. On the wholesale side, the DDR (Digital Depository Receipt) concept allows financial market infrastructures to build clearing and settlement features onto distributed ledger platforms by leveraging conventional central bank accounts without introducing a new category of central bank money."

Dr. Michel J. Norbert  - (Heritage Foundation)  - Conclusion Section of Testimony:


"Globally, there has been a steady shift away from paper-based payments during the past few decades, but cash remains a widely preferred option. This shift has occurred as technology changed, thus making it easier to facilitate consumer exchanges electronically. If the federal government would simply allow these changes to take place, there would be no particularly unique problem—the trends toward a less-cash society would likely continue, and consumers would likely use various forms of money, including cash and cryptocurrencies. Criminals may find it more expedient to transfer money anonymously via the Internet, but they have surely found it easier to commit crimes with the advent of better automobiles, computers, and communication devices. None of these items should be criminalized.

The U.S. government should treat all forms of currency, even cryptocurrencies, in a neutral manner. It should remove legal barriers to using alternative forms of money, and it should avoid providing any single form of money with a legal advantage, thus allowing competitive market forces to expose weaknesses and inefficiencies in existing alternatives. The competitive process is the optimal approach to discovering what people view as the best means of payment, and allowing people to access such alternative means of payment is the best way to provide a powerful check on the government’s ability to diminish the quality of money. The same concept—allowing competitive processes to work—applies equally to new applications of blockchain technologies: The federal government should not impose regulations that unduly hinder the development of these applications. Congress should work diligently to eliminate tax and other legal impediments to the development of alternative currencies as well as new applications for blockchain technologies.

The federal government currently has a partial monopoly on the production of money, and this monopoly necessarily limits the extent to which competitive processes can strengthen money. It also exposes the means of payment for all goods and services to the mistakes of a single government entity. Congress should ensure that this monopoly is not extended via the use of federally mandated digital money, especially via retail digital accounts at the Federal Reserve (including a central-bankbacked cryptocurrency). Implementing any such policy would effectively nationalize private credit markets because no private company (or individual) would be able to compete with the federal government. Because people are so vulnerable to the abuse of money (including modern monetary policy errors), Congress should not interfere with citizens’ ability to opt out of official currency."

Dr. Eswar S. Prasad  - (Cornell University)  -  from Conclusion Section of Testimony:

"The dominance of the dollar as a vehicle currency, followed by the euro, is related to the depth and liquidity of most currency pairs with the dollar (and the euro), which reduces the associated transaction costs. This dominance is unlikely to persist and could even result in an erosion of the dollar’s role as a unit of account. For instance, the denomination of all oil contracts in dollars could easily give away to denomination and settlement of contracts for oil and other commodities in other currencies, perhaps even emerging market currencies such as the renminbi.

Notwithstanding any such changes, the role of reserve currencies as stores of value are not likely to be affected. Safe financial assets—assets that are perceived as maintaining most of their principal value even in terms of extreme national or global financial stress—have many attributes that cannot be matched by nonofficial cryptocurrencies.

The key technical attributes include liquidity and depth of the relevant financial instruments denominated in these currencies, such as U.S. Treasuries. More importantly, both domestic and foreign investors tend to place their trust in such currencies during times of financial crisis since they are backed by a powerful institutional framework. The elements of such a framework include an institutionalized system of checks and balances, the rule of law, and a trusted central bank. These elements provide a security blanket to investors that the value of those investments will be largely protected and that investors, both domestic and foreign, will be treated fairly.

While reserve currencies might not be challenged as stores of value, digital versions of extant reserve currencies and improved cross-border transaction channels could intensify competition among reserve currencies themselves. In short, the finance-related technological developments that are on the horizon portend important changes to domestic and international financial markets but a revolution in the international monetary system is not quite on the cards for the foreseeable future."

Alex J. Pollock - (R Street Institute)  -  from Conclusion Section of Testimony:

The Future of Money

"There is no doubt that the digitalization of financial transactions, records, access to information, and communication will continue to increase, and that the electronic networks underlying the activity continue to grow more intense and omnipresent. But the fundamental nature of money, it seems to me, will not change. It will either be:

 -- The monopoly issuance of a fiat currency by the central bank as part of the government, backed by the power of the government. That the whole world operates on such currencies is a remarkable—and dangerous—invention of the 20th century.

--  Or if private currencies do again develop, they will, as in the past, have to be based on a credible claim to reliable assets. With Hayek, we could hope (without much hope) that this might bring competition for government fiat money.

It is clear that having a fiat currency is far too precious and profitable for governments for them ever to go back to a government currency backed and convertible into actual assets, whether gold coins or otherwise.

Government fiat currencies will operate in increasingly digitalized forms. Still, paper money will retain its advantages of secure privacy, immediate settlement without intermediaries, and the ability to function when the electricity is shut down. Recently I was amazed to find that my younger son, an up and-coming banking officer, was walking around with the total of one dollar in his wallet, but of course with a well-used debit card. As this generational difference indicates, doubtless our ideas of money will grow ever more dependent on having the electricity on at all times and everywhere.

Attempts at private fiat currencies, with no claim to any underlying assets, in my view have a very low probability of ever achieving widespread acceptance and functioning as money.

An increase of the monopoly power of central banks, which already have too much, should be avoided."

Watch the full hearing just above
Observation and Comments:

The testimony at this hearing as presented selectively above conforms very well to what we have been reporting here for some time and what experts tell have told us. The advent of cryptocurrencies (such as Bitcoin) and the much touted blockchain technology has created a global discussion about what can be money. Also, will central banks respond to private initiatives to create competing currencies by creating their own versions?

What we have discovered here is that while this topic is very popular in terms of academic studies, panel discussions, and even congressional hearings such as this one, the mainstream banking and central banking industry moves very slowly towards any kind of major change. It is clearly easier to talk about than to implement in the real world.

Please notice the portions of the testimony of the experts underlined above. There is no indication from these experts that we are close to any major central bank creating a central bank digital currency (CBDC) running on a blockchain platform (and certainly not the Federal Reserve). We see some smaller central banks playing around with the idea, but no major movement or trend in that direction so far.

A couple of the experts quoted above even argue in their testimony that a central bank digital currency is a bad idea and oppose anything that might tend to give central banks even more monopoly control over money than they have now.

The point here is that it is obvious there is no consensus right now that major central banks should or will move forward with central bank digital currencies at this time. 

The words of KlickEx CEO Robert Bell offered in his recent interview here come to mind:

"The technology for real time payments has existed for a long time. The technology, like military technology, often takes a decade or more to test and prove and deploy - and can be 30 years old before it goes live, unless in wartime."

If major banks and central banks move this slowly towards adopting simple real time payments systems to move money across borders more quickly and less expensively, just imagine how long they will probably be studying and discussing the concept of a central bank digital currency. Even if they can figure out the technology to implement it, the political process of obtaining consensus remains a formidable obstacle to change. 

Without a crisis to speed things up, this industry tends to move towards change in terms of decades. This is exactly what we have reported here for some time now.

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