It was announced this week that Circle Internet Financial Ltd (which is backed by Goldman Sachs) has acquired Poloniex, the world’s 14th largest cryptocurrency exchange.
Over the months Goldman Sachs CEO Lloyd Blankfein has publicly spoken ill of cryptocurrencies after claiming Bitcoin to be a “vehicle to perpetrate fraud.” What Goldman hold no hostility towards, however, is the blockchain technology behind cryptocurrencies. This is evidenced not only with Circle’s takeover of Poloniex, but through their own website. The ‘Our Thinking‘ page describes blockchain as ‘the new technology of trust‘.
- A new technology is redefining the way we transact. Blockchain has the potential the change the way we buy and sell, interact with government and verify the authenticity of everything from property titles to organic vegetables.
Goldman’s advance into blockchain comes as key figureheads from central banks have begun to openly speak about the future use of money. New Bank for International Settlements (BIS) General Manager Agustin Carstens used one of his first speeches to question the role of central banks in the ‘digital age‘. Whilst Carstens was dismissive of cryptocurrencies, he also said that,
- while new technologies have the potential to improve our lives, this is not invariably the case. Thus, central banks must be prepared to intervene if needed. This clearly falls under central banks’ area of responsibility.
- The buck stops here. But the buck also starts here. Credible money will continue to arise from central bank decisions, taken in the light of day and in the public interest.
Yves Mersch, who is a member of the Executive Board of the European Central Bank, followed on from Carstens by debating ‘the evolution of money in the digital age‘. Mersch insisted that virtual currencies could not be construed as authentic money, but in the same breath stated that this was subject to change.
A key line from his speech was:
One could imagine a digital representation of cash that replicates the features of cash
in the reasonably distant future, if citizens demanded it.
In other words, an evolution to a digital form of money will not be imposed without a growing chorus of approval from the general public.
Mersch gave a further speech a few days later about ‘the role of euro banknotes as legal tender‘. This one threw up some interesting information. Euro banknotes are protected under Article 128 (1) of the Treaty on the Functioning of the European Union (TFEU). The TFEU originated as the treaty that created the European Economic Community (EEC) in 1957. The UK has a similar provision with the Banking Act 2009, which enshrines Bank of England issued money as the only accepted legal tender.
What becomes clear further into Mersch’s speech is that the existence of Euro cash and it’s usability is predicated on the existence of Article 128 (1) in its current manifestation, meaning that adjustments to existing treaties would need to be implemented to pave the way for significant changes in how money is used.
Mersch concludes by saying:
- New legislative initiatives, such as those at EU level to define what constitutes legal tender, require intensive dialogue between the ECB and the legislators.
Just this week Valdis Dombrovskis, the EU’s financial chief, warned they are ready to regulate cryptocurrencies if the risks they pose are not rectified.
- This is a global phenomenon and it’s important there is an international follow-up at the global level. We do not exclude the possibility to move ahead (by regulating cryptocurrencies) at the EU level if we see, for example, risks emerging but no clear international response emerging.
This plays on the theory of global institutions not possessing the necessary regulatory power to respond to specific risks. As demonstrated throughout history, wide-scale reform generally occurs in the wake of crisis, which makes it easier to justify responses taken at the international level.
Jens Weidmann, who is President of the Bundesbank and Chairman of the Board of Directors at the BIS, has also been speaking on the advancement of digital money. His public position tallies with many of his colleagues. Cash remains king, and a newly devised digital form of paper currency would compliment rather than replace physical currency.
- I do not share the fear expressed by some that digital money, which is currently a subject of growing debate, is set to become a serious competitor for cash or bank deposits in the foreseeable future.
Weidmann goes on to say that he has concerns with the overall sustainability of Bitcoin, ‘both economically and environmentally‘. He reveals that a Bitcoin transaction consumes over 400,000 times more power than a standard credit transfer. Sustainability is one of the leading narratives amongst globalists, stemming as it does from the United Nations and their Agenda 2030 for ‘sustainable development‘. This makes Bitcoin an easy target for environmental criticism.
The subject of security is also never far away when it comes to cryptocurrencies. Weidmann too picks up on this:
- It is also important to ensure that the existing anti-money laundering provisions are upheld and to prevent crypto tokens from being used to finance terrorism, hence the ongoing revision of the EU Anti-Money Laundering Directive with a view to ensuring that currency exchange platforms and custodian wallet providers apply the same customer due diligence standards as other financial institutions.
Weidmann has therefore proposed that this subject be included in the G20 summit in Argentina later this year:
- Potential financial stability risks might also merit regulatory intervention.
There is a clear danger here that cryptocurrencies are eventually going to be used as a vehicle for generating economic distress and instability (perhaps through cyber attacks or acts of terrorism shown to have been funded through ‘unregulated‘ cryptos like Bitcoin). Digital currencies are today predominately recognised through the prism of Bitcoin. It is conceivable that in the end the current crop of cryptocurrencies will be sacrificed in favour of central bank issued forms of digital currency – under the jurisdiction of the BIS and the IMF, and regulated through adaptations to existing treaties that would allow digital money to become legal tender.
At present, bankers are saying the opposite. They are promoting the benefits of cash as being the safest form of money, based on the fact it is issued by central banks and therefore inspires trust and confidence. Nevertheless, the language they are using implies that this is ultimately open to change – particularly if there is demand from populations for digitized money.
For instance, Sweden are fast accelerating towards becoming a cashless society, with the Riksbank (the world’s first central bank dating back to 1668) said to be considering issuing an ‘e-krona‘ digital currency.
The UK is also advancing towards paperless currency. According to the Guardian,
- The volume of cash removed from cash machines (ATMs) is falling fast, while other data shows customers are eschewing cash for cards – even for small purchases such as a coffee or a beer.
- In 2006, 62% of all payments in the UK were made using cash; in 2016 the proportion had fallen to 40%. By 2026, it is predicted cash will be used for just 21%, according to figures from UK Finance.
This is a growing trend that central banks will inevitably attempt to take advantage of. If people are already accustomed to not using notes and coins, then the transition to digital money will be more widely accepted.
- Federal Reserve Chairman Jerome Powell played down concerns about recent market volatility, arguing Tuesday that the dramatic swings do not weigh heavily on his outlook for the economy and maintaining his expectation for further gradual increases in interest rates.
- “Despite the recent volatility, financial conditions remain accommodative. At the same time, inflation remains below our 2 percent longer-run objective. In the FOMC’s view, further gradual increases in the federal funds rate will best promote attainment of both of our objectives.”
- The Bank of England might need to raise British interest rates somewhat sooner than Deputy Governor Dave Ramsden had expected if wage growth picks up early this year, according to a newspaper interview released on Saturday.
- “We all will keep a close eye on what happens through the early part of this year to see if that (BoE) forecast of wage growth picking up to 3 percent is realised,” Ramsden was quoted as saying by the Sunday Times.
- “But certainly relative to where I was, I see the case for rates rising somewhat sooner rather than somewhat later.”
- As the month nears a close, companies have bought back $113.4 billion of their own shares, good for the highest total since April 2015, according to market data firm TrimTabs. That’s part of an overall strong trend for buybacks, which stand at $5.8 billion a day during the current earnings season, a record.
- Goldman Sachs, for instance, reported that its buyback desk had its two busiest weeks ever during the market tumult.
- “A rise in the 10-year yield to 4.5% by end-2018 would cause a sharp [economic] slowdown” while “a rise in rates to 4.5% by year-end would cause a 20-25% decline in equity prices.”
- Translated: a potential selloff in rates as a result of the market’s “sudden” realization that central banks are set to tighten conditions could unleash a far bigger surge in 10Y yields than what was observed so far, leading to dramatic consequences for stocks and to a lesser extent, the economy, and while a recession would be avoided despite a “short housing recession”, a market crash would be unavoidable.
- Germany’s central bank chief won’t rule out the possibility of taking one of the top jobs at the European Central Bank (ECB) next year.
- Speaking to CNBC in Frankfurt Tuesday, Bundesbank President Jens Weidmann said: “My position is that all in the Governing Council are of course interested in monetary policy and want to shape monetary policy. That’s why we’re there … That’s why we’re discussing together.”
- Weidmann has long been mentioned as a potential successor to outgoing ECB President Mario Draghi.