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On reddit it's a joke, the G20 believes in it...
Remember, the first time you heard a Head of State or Finance Minister talk about cryptoassets? For me it was in March 2018 after the G20 Finance in Buenos Aires. The Ministers and Central Bankers of the 20 largest economies in the world said this:
"We acknowledge that technological innovation, including that underlying crypto-assets, has the potential to improve the efficiency and inclusiveness of the financial system and the economy more broadly. Crypto-assets do, however, raise issues with respect to consumer and investor protection, market integrity, tax evasion, money laundering and terrorist financing. Crypto-assets lack the key attributes of sovereign currencies." Buenos Aires G20 Finance Communique, march 18.
The outcome of the discussion was to recall the risks inherent to these speculative investments in terms of the fight against money laundering, tax evasion and terrorism financing. This approach was logical, at that time it was essentially a new asset class, particularly volatile, used mainly for illicit transactions. It was therefore necessary to protect investors, or at least to inform them. It was also necessary to regulate, or at least to think about regulating. To a certain extent, the G20 leaders were not wrong, this market is speculative and highly volatile, and naturally, an anonymous exchange protocol is very attractive when one wishes to remain anonymous...
But the Leaders also saw the potential of the underlying technology. And here again, they were not wrong. A little over a year later, the world discovered Libra. And the tone changed...
But then, it was the technology that was scary...
If in 2018 and early 2019, the issue of cryptoassets had not really evolved, from a regulatory perspective, June 18, 2019 marks a pivot. Central Banks and Governments realized that the lack of regulation of Big Tech had consequences that went far beyond competition policy. With Libra, a globally influential group, with billions of customers all over the world, was preparing to implement (not just think about the possibility of implementing) an asset that could in credible scenarios and in the medium term become a medium of exchange. At the height of the outrage, Libra wanted to be stable, non-speculative and linked directly to a basket of currencies. John Maynard Keynes dreamed of it, the IMF missed it, Facebook is implementing it.
So yep... the tone has changed. If as early as 2018, the G20 reminded us that "Crypto-assets lack the key attributes of sovereign currencies," it was really in 2019 that the realization came about regarding the potential of stablecoins. In a press release under the Japanese presidency we find the first ultimatum of the G20 :
"While acknowledging the potential benefits of financial innovation, we agree that global stablecoins and other similar arrangements with potential systemic footprints give rise to a set of serious public policy and regulatory risks. Such risks, including in particular those related to money laundering, illicit finance, and consumer and investor protection, need to be evaluated and appropriately addressed before these projects can commence operation." G20 Press Release on Global Stablecoins, Washington DC, October 18, 2019
And finally, the technology could save the Central Banks.
So it's painful to admit it, but Libra has a (several) point(s). First, Libra (now Diem), addresses the issue of cross-border payment performance. This is a problem that was as well known as it was ignored until 2019. It is a problem for banking institutions, it is also a problem for customers and citizens.
The issue of remittances is enlightening in this respect. These are financial flows, often originating from the diaspora in advanced economies to poor and developing countries. These financial flows are much larger than official development aid and some researchers consider them to be much more effective (cf., Storjanov et al. 2013). Diem, or other stablecoins for that matter, could free millions of people from the, often greedy, intermediaries for international currency transfers.
One could also raise issues of banking inclusion, monetary policy transmission, or even the legitimacy of the notion of central bank independence (all of which will be addressed in the coming months). But what hurt the most was sovereignty. A currency reflects the confidence of a people in its state, its institutions, its army etc. This has always been the case, it is still true. Today this is the main pitfall faced by stablecoins such as Tether ou USDC, how to produce trust. With its particularly large customer base Diem, to some extent, has not this problem, but the future will tell.
So, the CBDCs...
Central Bank Digital Currencies will be the equivalent of the current fiat currencies, guaranteed by the national central banks and therefore benefiting from their credibility. Essentially, one could distinguish between retail CBDCs and wholesale CBDCs. Retail CBDCs are intended to be used as a means of exchange in everyday life, to complement or even replace cash. Wholesale CBDCs are aimed at the interbank market and are supposed to improve cross-border flows and interoperability.
What would happen if Central Banks fail to implement CBDCs? It is hard to imagine, but the most likely outcome is substitution. It is certain that an initiative like Diem has the potential to act as an international digital currency. With all the associated risks in terms of loss of control over the transmission of monetary policy, substitution with respect to fragile currencies, privacy, etc.
What could happen if Central Bank succeeded? Great things in my opinion... The best case scenario, Central Banks succeed in implementing digital currencies, both wholesale and retail, these currencies are widely adopted, interoperable, they have both high level of cybersecurity and anti-terrorist financing systems. A success of CBDCs will impact a greater adoption of cryptos - mainstreaming the concept of digital wallet for instance. Such a success is therefore compatible with the predictions of some seeing bitcoin well above $100k.
Key takeaways:
- The regulator is not always wrong when it comes to a new topic, on cryptos and stablecoins, this is the case. On the other hand, the regulator's approach is not exhaustive and a significant amount of analytical work remains to be done.
- Libra / Diem raised awareness on the potential of a global stablecoins, almost every Central Banks and Governments are now working on the implementation of some form of CBDCs
- CBDCs, if they work have the potential to disrupt not only monetary policy but also the fiscal and social policy. They can also contribute to a wider adoption of cryptos as a whole.
This is just an introduction, many of the topics covered here will be explored in greater depth in future articles.
At the moment I am fascinated by HAPI, the reading of their white paper shows a deep knowledge and a perfect understanding of the institutional mechanisms and the current stakes in AML-CFT. The answer given seems very relevant and I will seriously look into it. An annotated reading of their white paper could come here. We will discuss cybersecurity, but before that we will continue to talk about CBDCs and in particular regarding the ongoing work of the BIS, then we will talk about the implication for the regulator (fiscal policy for instance...)
If you see any mistakes, misunderstandings or if you want to contribute in any way please feel free to comment.
Photo credit : Photo by Etienne Martin on Unsplash
