"Digital Currencies" Innovation - Is Anything Significant Really Happening?

This blog has covered this topic extensively over the years and has monitored events related the potential for so called "digital currencies" (either privately issued or issued by central banks) to make some kind of significant impact on the current monetary system. 

Now Bloomberg has published this article "Fed Drags Feet as Digital Money Challenges Central Banks" that implies that the IMF is concerned that central banks are falling behind the innovation curve and that "it is just a matter of time before we see massive disruption" according to Tobias Adrian of the IMF. 

Readers here know that we have been reporting for some time that the reality is that there is no indication that any kind of significant new "digital money" innovation that could shake up the existing monetary system is on the near term horizon. Instead, we have steadfastly reported that any changes we do see are more likely to be very gradual and incremental over long periods of time unless some kind of new major financial crisis disrupts the present monetary system.

The first thing to note here is that the money we have now issued by the Fed and other central banks is already "digital money" for the most part. So the term "digital currency" being used to imply something new and innovative is arriving can be misleading. Usually, it is actually the ledger system used to record and track the transactions of the money that is really being talked about which is where things like "blockchain" enter the picture. But even there, there is no indication at this time that central banks are ready to suddenly plunge into using a blockchain ledger system on any kind of major scale. Honestly, what we see is a lot of use of buzz words and some hype, but not very much actual innovation or major changes so far to our present system. 

However, I encourage readers not to just take my word for this analysis. I have often mentioned that I do get input from leading experts on these kinds of issues and that my analysis is mostly based on the credible information I get from these sources. 

Robert Bell (CEO of KlickEx), is one example of these kinds of high credibility sources. Robert does not have to speculate on these kinds of issues because he lives it every day and is one of the leading experts in the world on payment systems and the related technologies used to operate them. Robert has worked with many central banks and met with institutions like the IMF and BIS to discuss these kinds of issues over the years. He was kind to do an interview for this blog and has provided very valuable input here over the years based on his real world experiences. When Robert tells me what is really going on around the world, I simply know that I can trust his analysis to be accurate and up to date.

I showed the Bloomberg article linked above to Robert and he was kind to reply with his thoughts on it as a kind of update on things for readers here. Robert was in Washington DC at the time attending the IMF and World Bank fall meetings.

Here is what he said in his email reply in regards to anything significant happening any time soon related to "digital money"

"As far as real systemic change... There's nothing on the cards for the monetary system. The digital services spoken of (in the Bloomberg article) will not change anything fundamental, and the IMF and BIS are even further behind where most central banks are. 

The central banks will implement real time slowly, and banks will reduce cross border prices slowly. 

Swift and their GPI project is already doing this work, but banks are taking a long time to reduce prices, that's all. 

Open Banking, is speeding things up a bit, but not much."    ---- Robert Bell (KlickEx)

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My added comments: Readers sometimes wonder how I am able to offer analysis on these issues with my having no personal background in banking or macro economics. The answer is simple. I get input from highly credible sources who are experts in their field like Robert Bell. Usually, their input and insights are right on target. I see that borne out over time over and over again. 

Many times they prefer I do not directly attribute quotes in their names which I honor. In that case, I try my best to summarize the information for readers without attributing it to any specific expert. But I do want to clearly credit them for helping to greatly improve the analysis offered here and the reason why we have been able to correctly predict that despite constant articles that some kind of major change is about to happen to disrupt the current US dollar based monetary system; the reality has been slow and gradual change as we have been reporting here for some time.

If I do hear anything to change that analysis, I will certainly let readers know. However, it is more likely that if something does quickly arise to disrupt the present system, none of us will really know much ahead of time as Jim Rickards has said for many years. There are always potential risks to the current system and we have documented many of them here, but those running the system are not looking to make sudden major changes. They prefer stability and for any changes to be gradual over time. The US Fed in particular, moves very slowly and cautiously.

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.