Digital Currency and the New Cold War

This followup article at the OMFIF delves into the implications of China working hard to implement its version of a central bank digital currency at the PBOC. The article suggests one key objective would be to disrupt the current US dollar based monetary system and reduce the ability of the US to use "soft power" at SWIFT. Below are a couple of excerpts.

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"Just as the US Treasury was mailing out physical stimulus cheques, the People’s Bank of China began its beta testing of a national digital currency in four cities. Future economists will look back on these counterpoints as the start of the digital currency era.

Discussions about alternatives to fiat currency were speculative, until last August. At the 2019 Jackson Hole Symposium, Bank of England Governor Mark Carney stated that a new form of global digital currency could be ‘the answer to the destabilising dominance of the dollar in today’s global monetary system’."

. . . . . 

"As Robert Kaplan, president and chief executive officer of the Federal Reserve Bank of Dallas said last year, "The dollar may not be the world’s reserve currency forever, and if that changes, and you tack on 100 basis points to $20tn, [that is] $200bn a year and all of a sudden we’ve got a tremendous problem."

. . . . 

. . . . . "The dollar’s ‘destabilising dominance’ gives the US the ability to use the international payments system as an arm of its foreign policy. The real and serious implication of replacing the existing payments systems with the new infrastructure based on digital currency is that no clearing and settlement means no transactions going through the international banking system. . . . "

Please read the full article at OMFIF here

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Added comment: In an earlier blog article we noted that relations between the US and China are clearly strained heading into the US elections. One of the bullet points we listed talked about the desire of China to set up an alternative payments system to bypass SWIFT and reduce dependence on the US dollar around the world.

Reader note: In October I will post one article that takes a deeper look into what happens in the US if no one is able to claim enough electoral votes to be declared a winner on November 3rd. There is an actual Constitutional set of rules that could come into play. Also, I plan to offer an article titled - The Three Most Important Things I Have Learned Doing This Blog some time in October. Unless there is some kind of relevant news that needs to be covered, that may be all the articles to post here until after the November elections.

OMFIF Updates on Central Bank Digital Currency Initiatives

Below are some featured pieces from the monthly OMFIF update on central bank activities related to studying the implementation of central bank digital currencies. I have pasted in video discussion that focuses on efforts underway in Asia for those interested in this topic.

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Video: Central bank digital currencies and blockchain Following technology breakthroughs by private cryptocurrencies, central banks are considering the use of distributed ledger technology and blockchain to develop their own digital currency. However, there remains much debate over the ideal technological infrastructure to operate CBDCs. This discussion addresses how blockchain could benefit CBDC. In cashless Sweden, for example, concerns about the marginalisation of cash are the main driver for exploring the potential of an e-krona. Watch the full discussion on our YouTube channel.

News: Algorand joins OMFIF's DMI OMFIF is pleased to welcome Algorand, a technology company dedicated to removing the friction from financial exchange, as the latest member of the Digital Monetary Institute. Algorand joins other leading financial institutions and technology companies to help inform a range of discussions and research on the adoption of digital currencies by central banks You can learn more here.

Central Bank Digital Currency Activity in Asia Discussion

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Added note: If you want to explore this topic in depth, you may want to visit the Digital Monetary Institute section of the OMFIF web site here. So far most central banks still are just in the evaluation process rather than any implementation process with the possible exception of China which is discussed in the video just above. Coming up in a couple of days will be an article that looks deeper into the effort by China to reduce dependence on the US dollar and bypass the SWIFT network.

Latest News Bites on Central Bank Currencies

The idea of central banks moving towards issuing their own "central bank digital currencies" seemed to be gaining a lot of momentum for awhile, but lately the idea seems to have taken a back seat. Below are links to a few news articles on this that provide some insight on various central banks activities related to central bank digital currencies.

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Bundesbank - Digital bank run a risk if central banks issue their own virtual currency

"The head of the Deutsche Bundesbank has warned of the risks to financial stability should central banks issue their own virtual currencies, including from a potential "digital bank run".

Click here to read the full article on Out-Law.com


Reuters - Chinese Think Tank - Central Banks Should Consider Using Digital Currencies

"Central banks should consider using digital currencies in cross-border payments that could cut transaction time and costs, researchers at the Chinese Academy of Social Sciences (CASS), a top government think tank, said in a report."

Click here to read the full article on Reuters

Reuters - Swiss Bank Has No Plan for Digital Currency

Meanwhile, it is obvious that central banks and governments are still struggling with what to do about private virtual currencies (if anything). For now, they seem to mostly be interested in just issuing warnings and statements of concern:

Independent UK - ECB Wakes up to Digital Currency Concern

Centralbanking.com - Polish Central Bank funds Youtube video to warn about digital currencies

And then we have some central banks trying to partner with digital currency:

Reuters - Saudia Arabia's central bank signs deal with Ripple

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My added comments: I think readers can see from these articles that the idea that we are on the verge of some new global reserve currency that everyone will be using in place of the US dollar is simply not reality. We have been reporting here for some time that things seemed to be going in the opposite direction as these articles continue to show.

This is why we have put a mid 2018 deadline here on this blog for something significant to happen that would justify ongoing regular articles regarding the replacement of our current monetary system with some new version based on something that replaces the US dollar. 

Until there is actual evidence that something like that is really happening, it is simply misleading to report otherwise. We'll continue to monitor events and watch for any hint of change. But for now, there is simply no evidence to report that we are on the verge of some kind a major change in the global monetary system unless some kind of new major global financial crisis emerges to force the issue. We'll continue to watch for that as well, but at some point there is no sense in continuing to write regular articles about such an event with no evidence to suggest it is on the near term horizon (even though it could arise at any time).

The biggest events we know of to keep an eye on at this time are what happens with North Korea and if there were to be some kind of major and sharp decline in the US stock market alongside a sharp further drop in the US dollar. In his latest article, Jim Rickards says we should also keep an eye on Turkey. Those are the kinds of events to watch for and what we monitor here. 

The horrific US debt situation should be causing more concern than it does, but so far no one anywhere seems to care about it. Who knows when or if that will change any time soon. Our lawmakers in both political parties just doubled down on policies likely to explode the debt even higher, so they obviously are not concerned. And US debt keeps selling just fine, so why would anyone care?

Beyond that, the US Fed just proved over the last several years that it stands ready to create the money to buy trillions of US bonds should everyone else decide to opt out. Perhaps this is why our political leaders are no longer all that concerned how much debt they run up? The markets seem fine with trillions in new central bank money to keep things running over at Treasury if need be.

Express UK - BOE Could Introduce Bitcoin Style Digital Currency? Apparently Not

The Express (UK) runs this article which at first glance sounds like the Bank of England might be on the verge of issuing a central bank digital currency. This something we have covered here extensively so the article is of interest. 

However, when you look into the details in this article, it becomes clear that the BOE is not going to do anything like this any time soon. Below are a couple of quotes from the article and then a few added comments. (see added note below for latest update on this - BOE will not move forward with a central bank digital currency)

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"The Bank of England is investigating the possibility of introducing a bitcoin-style digital currency linked to sterling, according to reports. 

A new crypto-currency could be set up as early as 2018 and would transform the banking industry in Britain – possibly ending the need for high street banks.

A research unit at the Bank of England was set up in February 2015 to look into the possibility of a sterling-linked crypto-currency and a spokesman told the Telegraph it could report back within the next 12 months."

. . . .

"Despite looking into the possibility of launching a central-bank issued cryptocurrency, Dr Carney (BOE Governor) warned there could be financial stability risks if such an approach were rolled out across the whole economy through a cryptocurrency intended for the general public."

. . . .

“You (could) create a situation where you can have an instantaneous (bank) run. So as soon as there were any concern, people can switch in their account at the Bank of England,” Carney said.

Please click here to read the full article in Express (UK)

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My added comments: I will just list a few key points to consider on this topic below:

- please note that the article says it will 12 months before a research unit of the BOE "reports back" on this issue. That is not something about to actually be implemented. They say it will take another 12 months just to report back.

- BOE Governor Mark Carney repeats the concerns he and other central banks have about even doing this at all. Fed Governor Quarles recently said somewhat the same thing and indicated the Fed is in no hurry to do anything with a central bank digital currency. He talked about changes like this taking decades to unfold.

- please note the comment by Governor Carney that if central banks setup digital currencies that the public can own directly with an account at the central bank, it could setup the potential for "an instantaneous bank run" in a crisis where everyone tries to move their money to that account that would be directly backed by the central bank.

My own view on this is that all we seeing is a lot of articles trying to capitalize on the Bitcoin craze and trying to imply that major central banks are ready to counter this rise in Bitcoin interest by suddenly offering up their own versions of a digital currency. The direct input I get from people who work on this every day in the real world suggests otherwise. For one thing, this not something you can "suddenly" do in the real world.

I want to repeat what I have stated here many times. I have zero evidence that anything like this is about to happen any time soon based on direct input from experts I view as extremely credible. While this idea continues to be studied at central banks and the IMF, none of these entities have any kind of actual real world tested system they could actually implement at this time as far as I know. The only payments system in the world that has been able to implement a blockchain based ledger that could actually function inside the existing banking and central banking system (connect into it) that I am aware of is the one IBM announced earlier this year in partneship with KlickEx and Stellar. 

A central bank would have to have access to a functioning system like that one to actually implement this. I am not aware of any major central bank (or the IMF) announcing they have such a real world tested functioning system at this time. The best information I have at this time is that we might see a central bank such as Singapore test a central bank digital currency sometime in 2018 perhaps followed by some other smaller central banks. I don't believe any major central bank would move forward with this idea until they have a chance to observe it tested in the real world somewhere first. I will say that IBM and KlickEx can point to real world testing by KlickEx in the South Pacific for their system.

So, I doubt the BOE will implement a central bank digital currency in 2018. 2019 is the earliest I can imagine that really happening if they even to decide to implement one at all. There are many concerns such as the one Governor Carney mentions above that have to be resolved. If Bitcoin takes a huge dive in price in 2018 it would not surprise me to see this whole topic disappear as quickly as it has arisen in the media. Central banks could easily just put it all on the back shelf as well.

I would not hold my breath on the BOE issuing a central bank digital currency any time soon. China may be more likely to show up with one in 2018 than the BOE.
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Added note: After I wrote the above post, this article appeared stating that the BOE has decided not to go forward with implementation of a central bank "cryptocurrency" as the article puts it:

"The Bank of England has decided it will not launch its own cryptocurrency due to its possible impact on the financial system, according to FT Advisor. The bank began researching cryptocurrencies in 2015 and was considering launching its own cryptocurrency."

I decided not to delete this post as originally written but to leave it up as it very well illustrates what we have been trying to report here recently. That being that we should take all these articles about central bank digital currencies and blockchains with a grain of salt (Bank of Canada lukewarm on a CBDC). I do have information that suggests that we could see a central bank digital currency show up soon in Singapore. However, these major central banks like the BOE and the US Fed seem to have cooled off on the idea at this time as this new article reports. Original article on this is here on FT Adviser.