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?

Bloomberg - Americans Stick with Credit Cards

Over the last decade all kinds of new efforts to get people to change the way they pay for things have arisen. We have covered many of them here. But this article appearing in Bloomberg notes that, at least in the US, the use of plain old credit cards still wins out. Below are some excerpts and then an added comment.

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"Will anything ever pry old-fashioned credit cards out of Americans’ hands?

Even as the rest of the world embraces the idea of paying for stuff with their smartphones, the U.S. is clinging to its cash and plastic -- so much so that even the nation’s biggest bank is struggling to persuade people to switch. Starting early next year, JPMorgan Chase & Co. customers will no longer be able to use the Chase Pay app to pay with their smartphones when shopping in stores, the bank said Wednesday (8-21-19)."

. . . . 

"In the U.S., digital-wallet transactions represent only 5% of the $2.6 trillion market for in-person purchases and 20% online, while cards accounted for 80% of spending at physical stores and 70% online."

. . . . 

"The U.S. market has been slower to develop partly because merchants have been slow to accept such payments and consumers haven’t found new options convenient enough to give up paying with cards that offer lucrative rewards."

Please click here to read the full article in Bloomberg

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My added comment: The last paragraph quoted above makes a significant point in my view. It's why I use credit cards for most payments and why most everyone I know does as well. Other payment options simply are not competitive in offering sufficient rewards to get people to change engrained behavior (both merchants and end users). I talked about this a bit in this previous blog article that compared using credit cards to using Bitcoin or other similar kinds of payment options.

Claudio Borio (BIS) - On Money, Debt, Trust, and Central Banking

One of our goals here is to try and provide links to information and resources that discuss the concept of money and monetary systems. On the one hand, most people probably don't think much about a discussion about "What is Money" or "What Monetary System Works Best". In the US for example, most people just think of the US dollar as their money and the monetary system is based on the US dollar and run by banks and the Federal Reserve. On the other hand, a growing number of people are interested in learning more about these kinds of issues.

In this recent article appearing in the Cato Journal by Claudio Borio, he takes a deeper dive into this topic. The article is a bit technical in spots, but also includes some time honored core principles that are critical to anything that wants to viewed as money; and monetary systems that attempt to administer the issuance and exchange of money to conduct business activity. Below are a few excerpts followed by the Conclusion Section of the article. I added the underlines below for additional emphasis.

(Claudio Borio - Head of the Monetary and Economic Department - BIS)

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"My focus will be on the monetary system, defined technically as money plus the transfer mechanisms to execute payments. Logically, it makes little sense to talk about one without the other."

. . . . 

"First, two properties underpin a well-functioning monetary system. One, rather technical, is the coincidence of the means of payment with the unit of account. The other, more intangible and fundamental, is trust. In fact, a precondition for the system to work at all is trust that the object functioning as money will be generally accepted and that payments will be executed. But a well-functioning system also requires trust that it will deliver price and financial stability."

. . . . 

"Society needs an institutional infrastructure to ensure that money is widely accepted, transactions take place, contracts are fulfilled and, above all, agents can count on that happening. Even the most primitive communities require generally agreed on, if informal, norms and forms of enforcement. Putting in place the corresponding supporting institutions — or institutional technology — in a way that ensures trust is a major challenge. And the challenge naturally becomes more complex as societies develop."

. . . .

"At the very least, a well-functioning monetary system has two properties. 

First, technically, it will exploit the benefits of unifying the means of payment with the unit of account. The main benefit of a means of payment is that it allows any economy to function at all. "

. . . .

"Second, and more fundamentally, a well-functioning monetary system will enjoy the solid trust of participants. To be sure, trust that people will accept the corresponding instrument as a means of payment and that the transfer will be effective are absolutely necessary for the system to function at all. But a well-functioning system requires more. It requires trust that the value of the instrument will be stable in terms of goods and services, as fluctuations generate uncertainty, and trust that its value will not change strongly in one direction or the other."

. . . .

"A new and controversial payment scheme — cryptocurrencies — illustrates some of the difficulties in generating trust through a fully decentralized system that does not piggy-back on existing institutional arrangements. This is so quite apart from the issues concerning scalability, finality, and incentives to verify, discussed in detail in this year’s BIS Annual Economic Report (BIS 2018).28 The above analysis points to another problem that can undermine trust, as also mentioned in the report: the lack of elastic supply. Hence the cryptocurrencies’ extreme price volatility: changes in demand are fully reflected in the price. The volatility undermines the cryptocurrency’s role as a unit of account and as a means of payment. Not surprisingly, prices are still quoted and sticky in terms of national currencies."

"The problem cannot easily be solved. A fully unbacked currency in elastic supply will not succeed in gaining the necessary trust. Alternatively, seeking to tie it to the domestic currency would require some agent to arbitrage in possibly unlimited quantities between the two, just as when central banks seek to keep exchange rates stable. And simply backing it with a sovereign asset or means of payment on a demand-determined basis would not do either. Not only would it defeat the purpose of having a cryptocurrency in the first place, as it would explicitly piggy-back on sovereign money. As in the case of any mutual fund unbacked by a supply of liquidity and a lender of last resort, it would also be vulnerable to runs (breaking the buck) — the equivalent of having to break the promise of convertibility. Moreover, in all probability it would not to be profitable without taking on significant risk to pick up yield, which would increase the probability of such a run."

. . . .

"The previous analysis suggests that the concepts of price and financial stability are joined at the hip. They are simply two ways of ensuring trust in the monetary system. Inflation, deflation, and price volatility induce instability in the value of money — and its close cousin, debt — in terms of goods and services, undermining its means-of-payment (and store-of-value). Financial instability effectively undermines it through the threat and materialization of default, which can bring the payments system to a halt when bank deposits are involved. Price and financial instability amount to broken promises."

. . . .

"Finally, studies indicate that financial booms tend to misallocate resources, not least because too many resources go into sectors such as construction, which depresses productivity growth persistently once the boom turns to bust (Borio, Disyatat, and Zabai 2016 and references therein). Furthermore, a large amount of empirical work indicates that the financial busts that follow booms may depress output for a long period, if not permanently. It is hard to imagine that interest rates are simply innocent bystanders. At least for any policy- relevant horizon, if not beyond, these observations suggest that monetary policy neutrality is questionable."

. . . .

"Strong monetary system anchors are crucial. As argued in more detail elsewhere, putting them in place requires action on two fronts. It calls for effective regulation and supervision. This must be so both in relation to banks (and other financial institutions) assessed on a stand-alone basis (the so-called microprudential perspective) and with respect to the system as a whole (the so-called macroprudential perspective). And it calls for monetary policy regimes that secure long-term price stability while taking advantage of any room for maneuvering to respond to financial stability threats."

. . . .

Conclusion

"The monetary system is the cornerstone of an economy. Not an outer facade, but its very foundation. The system hinges on trust. It cannot survive without it, just as we cannot survive without the oxygen we breathe. Building trust to ensure the system functions well is a daunting challenge. It requires sound and robust institutions. Lasting price and financial stability are the ultimate prize. The two concepts are inextricably linked, but because the underlying processes differ, in practice price and financial stability have often been more like uncomfortable bedfellows than perfect partners. The history of our monetary system is the history of the quest for that elusive prize. It is a journey with an uncertain destination. It takes time to gain trust, but a mere instant to lose it. The present system has central banks and a regulatory/supervisory apparatus at its core. It is by no means perfect. It can and must be improved. But cryptocurrencies, with their promise of fully decentralized trust, are not the answer.

Paraphrasing Churchill’s famous line about democracy, “the current monetary system is the worst, except for all those others that have been tried from time to time.”

Please click here to read the full article in the Cato Journal

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My added comments: As you can see from the underlined portions of the text above, it is critical that anything that wants to be viewed as money has the widespread trust of the population in general. Without that, it is doomed to failure eventually. This seems obvious, but examples of projects and monetary systems that failed to obtain this vital trust abound both in history and around us today. 

I encourage readers to read the full article by Claudio Borio. It is an analysis of how the present system values the public trust in the monetary system and the ways it attempts to maintain that trust. It is clear when you read this article that monetary officials understand that if they lose general public trust in money and the monetary system, it is very difficult to get it back as history has shown many times.

Also, another thing I have learned is that if you want to offer up anything as money with hope of achieving wide scale adoption by the general public, you must be able to convince the public it is trustworthy above all else. You can have the greatest theoretical concept for money or a monetary system ever devised by man, but if you cannot convince the public at large to trust it, it won't matter and it will fail eventually.

Added notes: The comments in this article about cryptocurrencies are interesting in light of the announcement by Facebook to launch the Libra. The second paragraph above related to cryptocurrencies seems to me to be directly pointed at something like the Facebook Libra even though the Libra plans to have full fiat currency backing for each coin. As I read it, that paragraph suggests Libra will just be "piggybacking" on existing national currencies and that it could be vulnerable to a bank run under some conditions.

Also, the BIS has just issued a new report that looks at the pros and cons of "Big Tech" like Facebook entering into the financial services industry. 

More Facebook Reaction - Open Letter from Steve Forbes to Mark Zuckerberg

It did not take long for long time gold advocate Steve Forbes to offer up his reaction to the Facebook Project Libra news. He pens this open letter to Mark Zuckerberg appearing in Forbes magazine. Below I have pasted in the introduction to his open letter. Mr. Forbes says the Libra should be backed by gold and also suggests a potential name change for the currency.

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Dear Mr. Zuckerberg:

"Your company made big headlines when it announced it would be launching a cryptocurrency called the Libra in 2020. Not surprisingly, given the nature of the times, the project has been greeted with intense criticism and skepticism. Don’t lose heart. In one sense, the idea of a company creating its own kind of money is an old one. The airlines’ frequent-flier miles are really a form of money that customers can earn and use to buy trips and various other things. Credit card companies, hotels and numerous retailers have all sorts of loyalty programs in which people earn points that will let them buy all manner of goodies.

But if you play your cards right with the Libra, you could be to money and finance what Henry Ford was to automobiles. Your new currency could take its place alongside the inventions of coins and paper money many centuries ago. It could replace the U.S. dollar as the global currency.

. . . .

Here are crucial tips to turn the Libra into one of history’s truly seminal creations:

Make it as good as gold. Backing your new money—as you plan to do—with a basket of currencies won’t cut it. In today’s monetary system the values of currencies jump up and down, so you won’t get the stability you need.

Countries that became global powerhouses–Holland, followed by Britain (Isaac Newton, as director of the Royal Mint, fixed the pound to gold at a ratio that held for more than two centuries) and then the U.S. (thanks to Alexander Hamilton)—all had their currencies linked to gold."    . . . . click here to read the full open letter

from Steve

to Mark

see the open letter here

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My added comments: In some ways this whole topic of potential monetary system change has been difficult to cover because I mostly have had to report that not much that could initiate major change has been happening lately. 

But suddenly, with the global release of Facebook's Project Libra proposal, there is a huge uptick in interest if for no other reason than the enormous footprint Facebook has globally with its user base.

Now we have a leading gold advocate joining in the reaction parade writing the open letter linked above. Ironically, later this year Kinesis is expected to launch its own fully physically backed gold and silver currencies that will operate on a blockchain. They just put out this interesting news release. Kinesis is already attempting to do what Steve Forbes is calling on Mark Zuckerberg to do with the Libra. Kinesis says in this news release that they will partner with the Post Office in Indonesia to offer their gold and silver backed currencies across the region.

"In accordance with the new regulation, Kinesis, OZL and the Indonesian Government Postal Service (PT POS) are planning to develop, build and operate an international standard vaulting facility in Jakarta.

Additional stakeholders in the project include, Jakarta Futures Exchange (JFX), government clearinghouse Kliring Berjangka Indonesia (KBI) and religious organisation – Nahdlatul Ulama (NU) who have 100+ million members."

. . . .

"POS Indonesia have indicated they will facilitate and contribute significant resources and support for the project, including the contribution of land; licenses for Free Zone/Bonded Warehouse designation, and duty-free imports; permits for expedited building, construction and utilities; as well as significant post-launch marketing and logistical support."  excerpted from news release


So maybe we are starting to see some fireworks (no 4th of July pun intended) flare up related to this whole topic of monetary system reform. It's way too early to know if any of this will significantly impact the present monetary system. On the other hand, we can't just ignore a tech giant company with over 1 billion users jumping into the arena, Steve Forbes writing open letters about it, and people like Kinesis partnering up with state organizations like the Indonesian Post Office. It's news we do need to cover and follow over time.

As always, we will monitor events and report what actually happens with these various proposals as they attempt to launch and gain broad public adoption. 
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Added notes: IMF warns that giant tech firms could "present a unique systemic challenge to financial stability"

Kinesis issues this new press release about their CEO speaking at the UN (speech starts around the 31 minute mark)

News notes 7-2-19: IMF's Lagarde nominated to head the ECB

Dr. Judy Shelton nominated for a position at the Fed

VP Pence cancels a planned appearance and is said to have met at the White House on something not as yet disclosed to the public. His spokesman says "there will be more later" and then defines later as in "a few weeks"

News reports of a fire on a Russian sub also surfaced with additional reports that Putin also cancelled a planned appearance to participate in some kind of emergency meeting at the Kremlin. One completely unconfirmed source said an incident took place near Alaska involving a Russian submarine. 

Meanwhile, other news reports said tension is ramping up between Israel and Iran and that the US has moved more fighter jets into the Persian Gulf area.

So much odd news today it is hard to sort it all out and discern what is valid and what may not be valid. But it does seem like something unusual happened today behind the scenes that the public has not yet been told about. Gold spiked sharply higher as well. We'll see what happens in the next few days.

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.

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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:

Conclusion 

"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

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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.

BIS Agustín Carstens - "My Message to Young People - Stop Trying to Create Money"

In this recent interview, the head of the Bank for International Settlements (Agustin Carstens) repeats that he sees no future for cryptocurrencies to be used as money. Below are some selected questions and answers from the interview.

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Q: In the wrong hands, monetary policy can be something destructive?

A:  "That's also my view. Monetary policy determines the level of purchasing power, wealth and pensions. There's no disputing the fact that monetary policy can also have far-reaching social repercussions. In my experience, it is always the poorest who suffer the most from inflation. It is therefore the duty of central bankers to ensure that purchasing power is maintained. Moreover, there has to be a guarantee that money is able to fulfill its important role in the economic system and that monetary policy can help growth and income distribution."

Q: Don't you think it's a positive side effect that Bitcoin has got many young people thinking about money, money creation and the financial system?

A:  "Glance back into the past and you will see that creating gold or money from nothing has been a regular obsession. It never worked. Even the great physicist Isaac Newton was at one point in his life obsessed by alchemy and the idea of making gold. He was very successful in a number of fields, but in this one he failed. Newton ended up as head of the British Mint. Why? Because he could detect at once if a coin was counterfeit. After he failed in his attempt to make gold, he switched sides and sent counterfeiters to prison. So my message to young people would be: Stop trying to create money!"

Q: What's the main thrust of your argument?

A:  "Central banks are trusted, and that trust is something they have built up over decades and for which there is no substitute right now. Trust is a valuable commodity. It is easily destroyed, but winning it takes time. Money has become established. Young people should use their many talents and skills for innovation, not reinventing money. It's a fallacy to think money can be created from nothing."

Q: A well respected book about the BIS made reference to the "secret bank that rules  the world". How secret is your bank in actual fact?

A:  "Well, here you are sitting inside it, so - so much for secrecy! But seriously- We have made it our goal to present a more diverse and more human picture of the BIS - among other things, in our Annual Report and through our internet presence. We want to become more approachable. Much of what we do here is public. The bulk of our research, for instance, is public. Obviously, there are some activities, also discussions, which by their nature are subject to confidentiality. But I can assure you that such business is less exciting than some people imagine - and as for ruling the world: hardly! In two years' time, we'll be celebrating the 90th anniversary of the Bank's founding. We want to use the occasion to better explain what we do here and how important our activities are."

Please click here to read the full interview

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My added comments: During the time I have published this blog I have had some input from time to time from some well known BIS economists (off the record). The email exchanges have always been courteous and have answered the questions that I have asked. I get the monthly BIS newsletter and alerts which is available to anyone who asks for it.

BIS recently alerted me to this press release which asks if prolonged low interest rates may impact global financial stability. We have also documented numerous systemic risk warnings from the BIS (go here) over the years.

BIS and central bank critics will likely find this statement in the above interview ironic:

"It's a fallacy to think money can be created from nothing."

They of course believe that this is exactly what central banks do and that very belief is one of the reasons for various efforts to try and create alternative currencies and alternative monetary systems.

BIS General Manager - Bitcoin is "a bubble, a ponzi scheme, and an environmental disaster"

The new General Manager of the Bank for International Settlements decided to take on the topic of Bitcoin and cryptocurrencies in general in this recent speech. He made it pretty clear where he stands. He describes Bitcoin as "a bubble, a ponzi scheme, and an environmental disaster". Below are some excerpts.

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Authorities should be prepared to act on cryptocurrencies: Carstens

"Authorities must be prepared to act against the invasive spread of cryptocurrencies to protect consumers and investors, Bank for International Settlements (BIS) General Manager Agustín Carstens said.

In a lecture "Money in the digital age: what role for central banks?", Mr Carstens said that for money to keep its value, it must be backed by accountable institutions which enjoy public trust. Here, central banks are key.

"The meteoric rise of cryptocurrencies should not make us forget the important role central banks play as stewards of public trust," Mr Carstens said in the lecture in Frankfurt, organised by Sustainable Architecture for Finance in Europe (SAFE), the Center for Financial Studies and the Deutsche Bundesbank. "Private digital tokens masquerading as currencies must not subvert this trust."

New technologies hold great promise, for example in making payment systems more efficient. But new currencies are not required for that promise to be realised. Authorities have a duty to make sure technological advances are not used to legitimise the profits from illegal activities, and to educate and protect investors and consumers, Mr Carstens said. They must also ensure cryptocurrencies do not become entrenched and pose a risk to financial stability.

"Novel technology is not the same as better technology or better economics," Mr Carstens said.

"That is clearly the case with Bitcoin: while perhaps intended as an alternative payment system with no government involvement, it has become a combination of a bubble, a Ponzi scheme and an environmental disaster."

Large price swings, high transaction costs and a lack of consumer and investor protection make cryptocurrencies unsafe and unsuited to fill money's role as a shared means of payment, store of value and unit of account, he said.

Central banks and financial authorities should pay particular attention to the ties linking cryptocurrencies to real currencies, and ensure they do not become parasites on the institutional infrastructure of the wider financial system. To ensure a level playing field for all participants in financial markets, access to legitimate banking and payment services should be limited to those exchanges and products that meet accepted high standards, Mr Carstens said.

"This means 'same risk, same regulation'. And no exceptions allowed," he said."

Please click here to read the full text of the speech

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Added note: The US tries to move forward with cryptocurrency regulation