BIS Issues Reports on Blockchain Regulation and Stablecoins

This blog has followed the emergence of Bitcoin/Blockchain/Cryptocurrencies/Stablecoins for some time to watch for any indications that any of that may have significant impact on the current monetary system. While a lot of activity has taken place in the arena, so far there has been no significant impact on the present monetary system in our view here. As the old saying goes, "don't mistake activity for achievement".

However, it is pretty clear that the announcement of Project Libra by Facebook has gotten the attention of monetary officials around the world (as we noted in this recent article) This is probably because Facebook has the resources and potential user base to actually make some kind of more significant impact if Project Libra comes to fruition as they have vaguely described it. We have covered that here as well.

The Bank for International Settlements seems to be keeping sort of a wary eye on all this activity and has been busy trying to put together some kind of plan to deal with the issues related to non state sponsored forms of would be money. Below are links to two recently released reports that may be of interest with some excerpts from each one. (underlines were added for emphasis) Further below are a few added comments.

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Embedded supervision: how to build regulation into blockchain finance   (full text)

Abstract

"The spread of distributed ledger technology (DLT) in finance could help to improve the efficiency and quality of supervision. This paper makes the case for embedded supervision, ie a regulatory framework that provides for compliance in tokenised markets to be automatically monitored by reading the market's ledger, thus reducing the need for firms to actively collect, verify and deliver data. After sketching out a design for such schemes, the paper explores the conditions under which distributed ledger data might be used to monitor compliance. To this end, a decentralised market is modelled that replaces today's intermediary-based verification of legal data with blockchain-enabled data credibility based on economic consensus. The key results set out the conditions under which the market's economic consensus would be strong enough to guarantee that transactions are economically final, so that supervisors can trust the distributed ledger's data. The paper concludes with a discussion of the legislative and operational requirements that would promote low-cost supervision and a level playing field for small and large firms."

Global Conference on Stablecoins

(conference agenda)

"Senior officials from public authorities worldwide met in Basel on Monday (9-16-2019) to discuss policy and regulatory issues posed by the emergence of "stablecoin" initiatives backed by financial institutions and large technology companies.

The conference was hosted by the Bank for International Settlements (BIS), and included presentations by Fnality International, the Libra Association and JP Morgan.

"A key part of assessing new initiatives is to understand the details," said Agustín Carstens, General Manager of the BIS. "When such initiatives cross national borders, it's important for regulators to coordinate and come to a common understanding."

The event was convened by the Group of Seven working group on stablecoins chaired by Benoît Cœuré, Chair of the BIS-hosted Committee on Payments and Market Infrastructures. The group will produce a final report on its work by mid-October.

"As a new technology, stablecoins are largely untested, especially on the scale required to run a global payment system," said Mr Cœuré. "They give rise to a number of serious risks related to public policy priorities. The bar for regulatory approval will be high."

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My added comments: As this whole industry has emerged and progressed, central banks and organizations like the IMF and the BIS have clearly been struggling to keep up with rapid changes in technology that are taking place. It is clear that there is deep concern that various attempts to disrupt the existing state sponsored currency system operated by central banks and the private banking system may allow for something to eventually rise up and challenge the existing system before it is well understood by monetary authorities. The response we usually see from these authorities is usually along the lines that change and progress can be good, but not any kind of change that bypasses the regulatory control of those running the present system. 

So far there has not been any need for them to be too concerned because the entire combined universe of Bitcoin/blockchain/cryptocurrency/stablecoins has such a tiny market share that it has posed no serious threat to the status quo. It seems like Project Libra from Facebook is the first one of these to be taken as some kind of actual potential threat that must be dealt with one way or another. 

At this time, my expectation is that whatever has to be done to prevent anything like Project Libra from posing any kind of serious challenge to the present monetary system will likely be done. While the central banks, IMF, BIS, etc. seem to be starting off kind of behind the curve and have been trying to catch up just to understand the various technologies, they retain the regulatory power to cripple anything that might try to become a serious threat to the status quo. These reports are reminders that regulators won't sit by idly while something arises to threaten the present system.

Once again, as we have written here many times. changing the status quo is extremely difficult. It is unlikely in our view here that any sudden major radical change to the status quo system will take unless a new financial crisis so disrupts the present system that it cannot function. That is what we advise readers to monitor over time. All the rest is probably just a lot of activity, but not much achievement that would significantly change things.
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Added note: The BIS also publishes this speech by a member of the Executive Board of the ECB which summarizes where things stand with digital currencies, etc. Again, in this speech, we see not much change on the immediate horizon as monetary officials continue to try and figure out which way to proceed. Do they just heavily regulate private efforts to create new payments systems and forms of money or do they push forward with their own state sponsored versions?