Bloomberg: Billions of Barrels of Oil Vanish in a Puff of Accounting Smoke

So how do Billions of Barrels of oil vanish as this Bloomberg article states? This is a question I can answer having worked as an accountant in the oil industry for many years. It really doesn't matter how many actual physical barrels of oil may be below the surface in an oil resevoir. What does matter is whether or not they can be produced at a profit. If they can't, they will stay below the surface. Below are some quotes from the Bloomberg article and then a few added comments.

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"In an instant, Chesapeake Energy Corp. will erase the equivalent of 1.1 billion barrels of oil from its books. 

Across the American shale patch, companies are being forced to square their reported oil reserves with hard economic reality. After lobbying for rules that let them claim their vast underground potential at the start of the boom, they must now acknowledge what their investors already know: many prospective wells would lose money with oil hovering below $40 a barrel.

. . . . .

"Other examples include Denver-based Bill Barrett Corp., which will lose as much as 40 percent, and Oasis Petroleum Inc., based in Houston, which will erase 33 percent, according to filings. Larry Busnardo, a Bill Barrett spokesman, declined to comment. Richard Robuck of Oasis didn’t respond to questions."

. . . . .

“The question is, how are these reserves going to come back?” said Subash Chandra, an energy analyst with Guggenheim Securities in New York. “Because if you have to spend within cash flow, those reserves aren’t coming back. Not unless we get a spike in prices, or we return to levered growth.”

Click here to read the full article on Bloomberg

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My added comments: Years ago at my previous employer I actually worked on the calculation done at the end of each year to determine how many barrels of oil reserves could be reported. This is how that works. Engineers produce a reserve report each year that takes into account all the costs to produce the oil reserves and the current market price the oil can be sold for. If the price drops too much, many of the actual physical oil reserves underground cannot be produced without losing money so you must "write off" those barrels even though they still exist physically (accounting rules make this mandatory) . From an accounting point of view, they "vanish."

This causes the accounting for oil and gas companies to be somewhat different from other industries. While oil and gas companies produce a balance sheet like everyone else that lists the assets and liabilities of the company, it does not really give you any idea what the true "net worth" of the company is at any given time. The true "net worth" of the company is the net present value of all the reserves in the ground that can be produced at a profit. This net worth goes up and down constantly even though the assets listed on a balance sheet may stay fairly stable (reserves are not carried on a balance sheet directly as an asset, the costs to find or buy the reserves are the asset on the balance sheet). Oil companies take a double hit when prices fall, they lose cash flow from the oil produced in the present and they have to write off the value of future barrels that will no longer be produced.

Simplistic Example: A company owns oil reserves expected to last 10 years at an oil price of $75 per barrel. This is based on the discounted net present value of all those barrels using the best estimate for what it will cost to produce them. At $75, the engineers may estimate that the company has 1 million barrels of oil that can be produced and sold profitably. But some of those barrels will cost more than others to produce. So if the price falls to $50 per barrel, all the barrels that cost $50 or more are no longer are counted as reserves. In this example we will say that is 250,000 barrels. Suddenly those 250,000 barrels of oil "vanish" as Bloomberg says in this article. Now the company only has 750,000 barrels of reserves. The only way the oil can "reappear" is for the price to go back above $50 per barrel.

This is why a relatively stable price for oil really benefits everyone so long as the price is high enough to make money and not too high to hurt low income users. Eventually the world will gradually transition away from oil for energy, but it will take a long time to do that. In the meantime, we need a price that works for everyone if possible. The problem tends to self correct over time. Right now the price is too low so a lot of oil will "vanish". This will lower supply and cause the price to correct back up enough to generate more supply. 

Why Doesn't The Comex Run Out of Gold?

This is a question I see often asked on various alternative news sites, especially those devoted to covering precious metals. The argument goes like this. At the Comex where gold is traded using futures contracts, how can they hold such little physical gold in relation to the volumes of gold that are traded? What if those who hold long contracts were to ask for actual physical delivery of the gold and the Comex could not make the deliveries? The question is being raised again this month because the inventory of gold at the Comex available for delivery is below the amount of gold the could be demanded by those still holding December gold long positions.

This article by Louis Cammarosano is one of the best I have seen that addresses this ongoing question. In this recent article he gives four reasons why he believes the Comex will not default. It's always possible that some kind of unexpected event could trigger the long awaited default, but absent that event Mr. Cammarosano provides the best explanation I have seen as to why the Comex has not already defaulted and is unlikely to in the future As with all things we cover here, time will tell if he is right or wrong on this going forward. Below are some quotes from his recent article.

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"Despite the predictions of many smart analysts of an imminent collapse or default of Comex, it hasn’t happened yet and probably won’t. Comex analysts have noted the seeming unsustainable gold and silver trading on Comex and have long predicted “imminent” collapses or defaults of that exchange."

. . . . .

"Currently, Comex analysts cite blatant anomalies like:

The mere 160,000 ounces of registered gold in the Comex vaults available to deliver and the 260 claims that long contracts have on each ounce of gold should they choose to settle those contracts by taking physical delivery."

. . . . . .

"The amounts of registered gold in the Comex vaults are less than Russia might acquire in a few days of buying for its foreign reserves and there is less registered silver in the Comex vaults than India imports in a month.

None of those “stunning” facts seem to matter as the registered Comex inventories of gold and silver continue to be depleted and trading of gold and silver in huge volumes carries on.

There has been no Comex collapse or default. It hasn’t happened and probably won’t."

Click here to read the full article

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My added comments: The bottom line on this question is that so long as there is enough physical gold (or silver) available to meet the demand for those who buy real physical gold or silver, the amount of paper trading that goes on for gold and silver (the leverage of paper gold or silver to actual physical inventory) won't matter in terms of causing the price to go higher. When a true physical shortage of gold or silver happens such that those who really want physical product cannot get it, that price will move up. That can happen at any time due to anything that causes a rapid surge in demand, but so far supply has been sufficient to meet actual physical demand. As we have noted here many times, another major financial crisis would certainly provoke a rapid surge in demand, but absent such a crisis most people will not be thinking in terms of buying physical gold or silver, especially in Western nations. Physical demand in China and India remains strong for both metals.

CNBC - Art Cashin - We Could Be in Trouble

As everyone waits to see what the Federal Reserve will do on interest rates, markets are clearly jittery. In this CNBC article, anlayst Art Cashin says "we could be in trouble." China announces it will allow the yuan to float against a basket of currencies. Concern is being expressed that emerging market currencies may drop sharply. We'll see what happens on the Fed decision soon. Below are some quotes from the CNBC article.

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"The U.S. equity market could experience another leg lower now that the S&P 500 has broken a key technical level, Art Cashin said Friday.

"So far, the S&P stopped at about 2,020, which is where it held back on Nov. 16, before it started a pretty significant rally. If we weaken again, and it violates that area, we could be in trouble," the director of floor operations for UBS at the NYSE told CNBC's "Squawk Alley."

The benchmark index hit a low of about 2,015 on Friday as investors digested oil futures hitting fresh multiyear lows as well as a fall in the high-yield bond market."

. . . . .

"The market has seen increasing volatility this week, with the CBOE Volatility Index gaining more than 60 percent, as investors also prepare for the Federal Reserve policy announcement due Wednesday. According to the CME Group's FedWatch tool, the likelihood of a rate hike next week is 81 percent."

Click here to read the full CNBC article

Added note: On Monday December 28th we will publish a year end review for 2015 that asks the question: Where Do We Stand? That article will stay at the top of the blog until January 2016.

IMF Changes Debt Rule - Ukraine Can Now Default on its Debt to Russia

This is a story we have followed here for some time. The Ukraine has a $3 Billion debt due Russia soon. IMF rules were such that if the Ukraine defaulted on that debt, it would put IMF loans to the Ukraine in jeopardy. So the IMF changed the rules making it OK for the Ukraine to default. Problem solved. Per this Reuters article, Russia is unhappy but will not leave the IMF over it. Below are some quotes.

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Russia has no plan to cancel its membership in the International Monetary Fund after the organization changed its operating rules in a way that may support Ukraine in a debt dispute with Russia, Finance Minister Anton Siluanov said on Thursday.

A default by Kiev on $3 billion of debt owed to Moscow on Dec. 20 would have put its IMF-led $40 billion bailout at risk.

But the IMF on Tuesday changed its rules to allow it to keep supporting countries even if they fail to repay official debt, prompting Russian Prime Minister Dmitry Medvedev to accuse the multilateral institution of meddling and say the decision was politically motivated.

But Siluanov said that Russia did not plan to leave the Fund and that in general the IMF was conducting the "right policy."

"We are one of the Fund's key members. Despite the difficult situation that has happened, we don't consider it necessary to leave the Fund," Siluanov said.

. . . . . .

Click here to read the full Reuters article

Benjamin Cohen: Adding the Yuan to the SDR Basket Was a Mistake by the IMF

The recent announcement by the IMF to add the Chinese yuan to the SDR currency basket has created a lot of interest and comment. In this interview on Kitco, Professor Benjamin Cohen (U. of California) says the IMF made a mistake and added the yuan based on politics instead of on merit. Below is a text summary of the interview from Kitco.

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Dec 03, 2015

Guest(s): Benjamin Cohen Professor of International Political Economy, University of California

"Monday, the International Monetary Fund announced that the yuan — the Chinese currency, also known as the renminbi — would join the organization’s basket of reserve currencies known as special drawing rights (SDRs). The yuan will now sit side by side with the U.S. dollar, the Japanese yen, the British pound and the euro as one of the most significant currencies forming part of the global economy. And one professor says the move by the IMF is a ‘mistake.’ Benjamin Cohen, professor of international political economy at the University of California, told Kitco News that the IMF’s decision is clearly made on ‘political grounds and not technical grounds.’ ‘Until now, since the birth of the SDR in the late 1960s, the eligibility for the basket that determines the value of the SDR has always been treated as purely technical matter,’ he explains. ‘By most measures, the yuan falls short of what would be normally been accepted in the past.’ According to Cohen, the Chinese government has made every effort to persuade the major powers, behind the scenes, to push its currency towards reserve status. Using the British government as an example, he says it is no surprise the British were the first Western country to push for the yuan’s SDR inclusion given that the country is trying to promote what they call a new ‘golden era’ of relations with China. However, the Chinese government has implemented some improvements in terms of access to its currency, but Cohen says it is still not enough. ‘What they have done here is to move just enough to persuade the IMF staff that they’re moving in the right direction. Whether they will continue to move in this direction, now that they’ve gotten what they wanted, is another matter and we just don’t know,’ he says. Kitco News, December 3, 2015."

Click here to watch the interview on Kitco

Two Articles on Gold

Koos Jansen is widely recognized as a leading expert on the movement of gold into China. He provides a new article with some significant updates. Jim Rickards recently put this note on his twitter feed about Ken Dam. Ken Dam also has an interesting article on gold written back in 1984. Below are links to these two articles (one new and one from 1984) with a brief summary of each just below the links. A thank you to a blog reader for forwarding me the links to these two articles.

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Renminbi Internationalization And China’s Gold Strategy

(Koos Jansen - Dec. 4, 2015)

"Here we go!

A seminar about gold supporting the internationalization of the renminbi and China’s financial strength was held in Beijing on 18 September 2015. One of the keynote speakers was Song Xin, President of the China Gold Association(CGA), Chairman of the Board of China International Resources Corporation, President of China National Gold Group Corporation and Party Secretary, who believes China’s economic power must be serviced by appropriate gold reserves to support the renminbi. An article written by Song published on Sina Finance in 2014 stated (translation by BullionStar):

For China the strategic mission of gold lies in the support of renminbi internationalization. Gold … forms the base for a currency moving up in the international arena.

If the renminbi wants to achieve international status, it must have popular acceptance and a stable value. To this end… it is very important to have enough gold as the foundation and raising the ‘gold content’ of the renminbi. Therefore, to China, the meaning and mission of gold is to support the renminbi to become an internationally accepted currency and make China an economic powerhouse."

The Future of Gold  -  Kenneth W. Dam

"Changes in the international monetary system, whether by reform or evolution, are heavily influenced by political and economic developments. Those developments, by their nature, are difficult if not impossible to predict. Changes in the international monetary system are therefore also hard to foresee."   . . . .   

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Added note: After I wrote this article a reader sent me another good article on gold. You can read that here.

VOX.com - China's Quest to Overthrow the US Dollar is "Laughably Overhyped"

Writing on Vox.com, Matthew Yglesias says the so called quest by China to "overthrow the US dollar" is "laughably overhyped." Below are some quotes from his article and then a few added comments.

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"China this week received official status from the International Monetary Fund as the issuer of one of just five globally influential currencies that are used to peg the value of the IMF's Special Drawing Rights (SDR). If this sounds boring to you, Neil Irwin at the New York Times spices things up by suggesting that this "akin to what happened about a century ago, when the United States dollar was gradually supplanting the British pound as the predominant currency for global trade and finance," a move that "was a crucial piece of the nation’s rise to superpower status." Similarly, Matt O'Brien at Wonkblograises the prospect that China "might be like the U.S. 100 years ago": poised to displace us as the world's financial hub, just as we were poised to displace Britain at the dawn of World War I."

"The good news for those of you who don't know what any of this is about is that it's honestly not nearly as important as these stories are making it sound."
. . . . . 

"So why the hype?

China has an ongoing and active program to send people to the moon.

Once upon a time, the United States and the Soviet Union were engaged in a high-profile "space race" to accomplish precisely this. It is not entirely clear to me why the superpowers became fixated on this moon goal, since there was never any indication that anything of value was on the moon. But it happened. And the US won. And then we sent a few more astronauts to the moon. And then having proved our point (whatever the point was), we stopped bothering. China is a large and important country whose large population and middling income combine to make it a major power on the world stage.

Consequently, the Chinese government is doing a bunch of "major power on the world stage" type of things. One of those is trying to send people to the moon. Lobbying the IMF to get into the SDR basket is a lot cheaper than sending people to the moon."

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Added Comments: This article makes some good points that we have also made here on the blog. It's true that the addition of the yuan to the SDR basket is mostly just a symbolic event. It's true that the yuan is no short term threat to the US dollar as the leading global reserve currency. The author also takes the view that SDR's used at the IMF are not anything that people need to concern themselves with and dismisses them as having any meaningful role in the lives of the average person. As things stand today, that is also true.

However, what the future might bring is another story. The author assumes that things will always be as they are now in the future. He does contemplate what another financial crisis worse than 2008 might do to the existing financial and monetary system. Jim Rickards believes that such a future crisis will bring major monetary system change and that the IMF will step in to try and solve the problem at the global level using the SDR as a replacement reserve currency for the US dollar (he repeats that forecast in this recent Bloomberg TV interview). That seems impossible today, but time will tell if it becomes a reality at some point in the future. We won't know unless such a new major crisis unfolds.

Jim Rickards Bloomberg TV Interview

Jim routinely does TV interviews on Fox Business, CNBC, and Bloomberg. Below are links to his latest interview (in two parts) on Bloomberg. He talks about the Fed, the ECB, the US dollar, the Euro, and SDR's used at the IMF.

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Part I Video link

"Jim Rickards, Chief Global Strategist at West Shore Funds and author of New York Times bestseller “The Death of Money” joins Bloomberg’s Pamela Ritchie for a look at why he believes the Fed is muddling its message with less transparent messages to the market and investors."

Part II Video link

"Jim Rickards, Chief Global Strategist at West Shore Funds and also the author of New York Times bestseller “The Death of Money” joins Bloomberg’s Pamela Ritchie for a look at what’s next for China’s Yuan and the U.S. dollar as the reality of a new currency war becomes that much more real."

In Part II Jim repeats his forecast that SDR's used at the IMF will become the new global reserve currency when we encounter the next major financial crisis which he says will be worse than 2008 and will be too big for the US Fed to handle.

Bloomberg: China Begins G-20 Leadership With Ideas to Reduce US Dollar's Role

Bloomberg runs this new article which directly relates to issues we have covered here on the blog for some time now. The article not only talks about China wanting to reduce the role of the US Dollar as the world's primary reserve currency, it mentions that China and others want to see an expanded role for the SDR used at the IMF. 

On top of all that China says it might be a good idea to add in some commodity pricing to the SDR. Below are some quotes with some key points in bold type, then some added comments.

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As China takes the reins of the Group of 20 for the coming year, the first indications are emerging of its agenda.

Among the priorities: making the global system more resilient to shocks and, perhaps, less reliant on the U.S. dollar. China is setting up a working group led by South Korea and France to develop proposals, including on ways to strengthen the role of the International Monetary Fund’s reserve-currency unit, which is set to incorporate China’s yuan as a component next year.

China also wants a discussion around whether some commodities should be priced in the IMF’s reserve currency, known as Special Drawing Right or SDR, according to a European official involved in the G-20 talks.

. . . . 

Giving South Korea and France the job as chairs of the working group offers China some distance from the effort, after past failures to head off the repeated financial crises that afflicted the global economy since the G-20’s 1999 foundation. South Korea said last month that the provisional agenda will include action plans to address capital-flow volatility, sovereign-debt restructuring and ways to enhance the IMF’s unit of account, or SDR.

. . . . .

SDR Inclusion

China’s G-20 chairmanship began at the start of the month, a day after the IMF said the yuan met the requirements for joining the dollar, euro, yen and pound as one of the currencies backing the SDR, a sort of overdraft account for IMF members. China central bank Governor Zhou Xiaochuan in 2009 advocated expanding the use of the SDR unit in calling for a "super-sovereign reserve currency."

Nothing came of Zhou’s call six years ago, and changing the global financial architecture now remains difficult, analysts say.

"We will need another global crisis, and one whose roots can be clearly identified in the shortcomings of the current non-system, for this to happen," said William White, an adviser to the Organization for Economic Cooperation and Development. The G-20’s agenda can also become dominated by pressing issues of the moment.

"I suspect that geopolitical issues will trump economic ones," White said.

Click here to read the full article on Bloomberg

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My added comments: This sounds like an article that could have been written here on this blog. It talks about China wanting to reduce the role of the US dollar globally, enhance the role of the SDR used at the IMF, and adding a commodity pricing component to the SDR. These are all topics we have discussed here while writing about SDR's. For example. Dr. Warren Coats (former IMF) talked about using a "basket of goods" to value the SDR in his proposal for a "real SDR" which we wrote about here.

To top it off, the article quotes William White of the OECD as saying that we are not likely to see a major change in the monetary system unless we get "another global crisis, and one whose roots can be clearly identified in the shortcomings of the current non-system". That is a point we have made here repeatedly for some time now, so obviously we agree with Mr. White (no relation) on this.

Bloomberg: US Treasury Secretay Jack Lew on US Dollar and Other Topics

Bloomberg does this interview with US Treasury Secretary Jack Lew at the Financial Inclusion forum in which he talks about the US dollar, China, and other topics. Below are a couple of quotes and bullet points from the interview.

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"Treasury Secretary Jacob J. Lew said the U.S. intends to ensure the dollar stays the world’s leading reserve currency a day after the International Monetary Fund elevated the Chinese yuan into a basket alongside the dollar, euro, yen and pound.

The dollar “remains the reserve currency of the world for a good reason,” Lew said in a Bloomberg Television interview Tuesday in Washington when asked if the U.S. would consider converting any of its foreign-exchange reserves to yuan. “We’re determined to run a U.S. economy that continues to be a strong, safe and secure economy that makes that the case in the future.”

Bullet Points from the interview:

- Reasons why we need better financial inclusion ( a topic we have covered here)

-Government and private sector have to partner to assist financial inclusion

-Mentions mobile money using cell phones as one way to increase financial inclusion

-Says Dodd-Frank has "reduced the risk" of another financial crisis but may need adjustment to help small banks

-The US expects the dollar to remain the worlds top reserve currency

Click here to hear the full interview

BRICSPOST: New BRICS Development Bank Preparing to Go Live

This BRICSPOST article provides an update on progress being made at the BRICS Development Bank which intends to start making loans in April 2016. Below are some quotes from the article. I noted a couple of key points in bold type.

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"In his first public lecture in South Africa, the Indian President of the BRICS New Development Bank (NDB) KV Kamath said that speed was what differentiated his bank from others such as the World Bank.

Emerging market economies need to have projects approved and implemented quickly, he said on Tuesday.

“But we will not sacrifice transparency, good governance and prudential lending criteria in the pursuit of speed,” he said at the Department of International Relations and Cooperation (DIRCO) in Pretoria.

“What we are doing is creating a start-up with many processes such as recruitment, project appraisal and discussions with capital providers taking place in parallel, so we expect to make our first loans in April next year,” he added.

During the lecture “From Concept to Reality: The BRICS New Development Bank” Kamath said that given the basic structure of the bank was only formalised in July this year, the NDB had already made tremendous speedy strides."

. . . . .

“The capital providers we have spoken to are keen on new instruments such as the bonds that we will be issuing, while the central bank governors said that they had no issues if we borrowed in one country and used the proceeds in another country as the $100 billion Contingent Reserve Arrangement has swap mechanisms in place,” Kamath told The BRICS Post.

To mitigate exchange rate risk, the NDB will initially focus on loans and borrowing in the national currencies of the BRICS."

. . . . . 

"After the lecture, Kamath told The BRICS Post that the NDB would not be issuing Special Drawing Rights (SDR's) like the International Monetary Fund.

“There is no direct link between how much capital a BRICS member paid into the NDB and how much that BRICS member can borrow. Each project will be evaluated on its own merits.”

Everything That You Ever Wanted to Know about Silver (and probably more)

We have long advocated here on this blog that everyone should make an effort to build an emergency cash reserve in case of any kind of unexpected event where the financial system is unable to function normally. Along with that we have suggested that keeping a portion of that kind of fund in actual physical silver is an idea worth considering. 

To understand why we say that about silver, you need to understand the basic supply and demand fundamentals for the metal going forward in the longer term. While recent news accounts reported that it may be possible to produce solar panels in the future without using silver, the supply and demand picture is still supportive of silver maintaining a solid purchasing power over time. We are not talking about a short term investment. Rather, a long term store of value that could even be passed on to heirs if not needed or used. 

The latest 2015 silver supply and demand fundamantals are now available. You can learn everything you ever wanted to know about silver (and probably a lot more) by reading this article.

Click here to get the latest 2015 silver supply/demand information

CPMI Report: Guidance on Cyber Resilence for FMI's (Financial Market Infrastructures)

The Bank for International Settlements puts out this press release on a new CPMI (Committee on Payments and Market Infrastructures) report on dealing with cyber attacks. This report is a reminder that the modern financial system is ALWAYS under threat from a crippling attack. Below I have pasted in the press release.

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CPMI-IOSCO consultative paper "Guidance on cyber resilience for financial market infrastructures"

24 November 2015

Press release

The Committee on Payments and Market Infrastructures (CPMI)1 and the Board of the International Organization of Securities Commissions (IOSCO)2 today released the consultative paper Guidance on cyber resilience for financial market infrastructures ("the Cyber Guidance").3

Financial market infrastructures (FMIs) play a critical role in promoting the stability of the financial system. Thus, the cyber risks faced by FMIs and their level of readiness to effectively deal with worst case scenarios have been considered top priorities by industry leaders and authorities alike. The Cyber Guidance aims to add momentum to and instil international consistency in the industry's ongoing efforts to enhance FMIs' ability to pre-empt cyber attacks, respond rapidly and effectively to them, and achieve faster and safer target recovery objectives if they succeed.

Key concepts built into the Cyber Guidance include the following:

• Board and senior management attention is critical to a successful cyber resilience strategy.
• The ability to resume operations quickly and safely after a successful cyber attack is paramount.
• FMIs should make use of good-quality threat intelligence and rigorous testing.
• Cyber resilience requires a process of continuous improvements.
• Cyber resilience cannot be achieved by an FMI alone; it is a collective endeavour of the whole "ecosystem".

The Cyber Guidance builds on previous studies conducted in this area by both the CPMI and IOSCO.4 When finalised, the Cyber Guidance will not establish additional standards for FMIs beyond those already set out in the Principles for Financial Market Infrastructures (PFMI). Instead, the document is intended to be supplemental to the PFMI, primarily in the context of governance (Principle 2), the framework for the comprehensive management of risks (Principle 3), settlement finality (Principle 8), operational risk (Principle 17) and FMI links (Principle 20).

The proposed Cyber Guidance sets out the preparations and measures that FMIs should undertake to enhance their cyber resilience capabilities with the aim of limiting the escalating risks that cyber threats pose to individual FMIs and thereby to financial stability. It also provides authorities with a set of internationally agreed guidelines to support consistent and effective oversight and supervision of FMIs in the area of cyber risk.

The Cyber Guidance is primarily intended to create meaningful shifts in the FMI industry towards greater cyber resilience. In this regard, Mr Benoît Cœuré, Chairman of the CPMI, stated: "This is an important report because cyber attacks in the financial sector have the potential to create widespread financial instability. Nobody should assume they will be able to prevent cyber attacks in all circumstances. Therefore, the Cyber Guidance addresses the need for an FMI to resume its operations quickly and safely after an attack has occurred. This is not an easy task and may require innovative thinking that goes beyond the traditional approaches to operational resilience."

Mr Greg Medcraft, Chairman of IOSCO, added: "The proposed Cyber Guidance is the culmination of extensive collaboration between IOSCO and the CPMI. It reflects an urgency to address the increasing risks that cyber threats pose to FMIs and financial stability, as well as the need for a coordinated approach. At the FMI level too, cyber resilience cannot be achieved by individual institutions alone in our highly interconnected financial sector. The broader 'ecosystem' needs to work in unison. The Guidance calls upon the ecosystem to do just that. We hope to collaborate with all stakeholders to meaningfully enhance the cyber resilience of our financial system as we refine these proposals and later implement them."

The consultative report is available on the websites of the Bank for International Settlements and IOSCO. Comments on the report should be submitted by Tuesday 23 February 2016 via e-mail to both the CPMI Secretariat and the IOSCO Secretariat.

All comments may be published on the websites of the Bank for International Settlements and IOSCO unless a commenter specifically requests confidential treatment.

CPMI Report on Digital Currencies

The Bank for International Settlements posts this new report on digital currencies on its website. They issued a press release that recaps the report here. Digital currencies are a hotly debated topic and the emergence of Bitcoin has created some interest in the idea. 

This new report confirms what we have reported here on the blog that so far widespread acceptance has not happened. But the report suggests there might be a future for the so called "blockchain" technology that Bitcoin is based on. Below are some quotes from the press release.

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"The Committee on Payments and Market Infrastructures (CPMI)1 today released its report on Digital currencies.

Innovations in the payments domain can have important implications for the safety and efficiency of the financial system and thus are monitored by many central banks. In this regard, Benoît Cœuré, Chairman of the CPMI, said: "Digital currencies and distributed ledgers are innovations that could have an impact on many areas, not only on payment systems and services. Even if today's schemes do not endure in their present form, it is likely that other products, services and business models based on the same underlying technology will continue to emerge and develop. This might lead to changes in the way that FMIs and other market participants operate."

The emergence of digital currencies was noted in previous reports by the CPMI on Innovations in retail payments (2012) and Non-banks in retail payments (2014). There are two key features of digital currencies.

• The first is the assets themselves (such as bitcoins). These assets can have some of the characteristics of a commodity and some of a currency. Currently, their monetary features (such as their use as a means of payment) are often more prominent, yet, these assets are not typically issued in or connected to a sovereign currency, are not a liability of any entity, are not backed by any authority and have no intrinsic value.
• The second feature is the technology used. Particularly noteworthy is the use of distributed ledgers. Most financial transactions are made via a centralised infrastructure, where a trusted entity clears and settles transactions. Distributed ledgers are innovative because they allow transactions in the absence of trust between the parties and without the need for intermediaries.

The development of digital currencies using distributed ledger technology is an innovation with potentially broad applications. In the financial market infrastructures (FMIs) sector, wider use of distributed ledgers by new entrants or incumbents could have implications extending beyond payments, including their possible adoption by some FMIs and more broadly by other networks in the financial system.

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My added comments: This is a common theme you see these days related to this topic. The idea is that while Bitcoin is unlikely to gain widespread adoption, the blockchain technology it is based on might be different.

Maybe so, but before you hop on that bandwagon please read the article we featured here on the blog earlier this year. It is written by one of the top experts in the world on this topic. He makes a convincing argument as to why this technology is unlikely to gain adoption beyond some niche applications for very high end customers. I would not expect to see this technology being used by the average person any time soon, if ever. The limitations built in to the technology are not well known but are pointed out in the article we published here on the blog in two parts.