How the Digital Currency Agenda has Grown Amidst Resurgent ‘Nationalism’ – Part One

In my last two articles I examined the detail behind the simultaneous plans of the Bank of England and the Federal Reserve to establish new payment systems. From the evidence at hand, the objective of central banks has been to make their new systems compatible with distributed ledger technology (DLT) as a basis for introducing central bank digital currency to supersede physical money over the next decade.

As we will learn, the rhetoric from globalist institutions and figureheads on the subject of digital currency has developed significantly since the EU referendum and Donald Trump’s presidency.

But to begin with, it is worthwhile looking at some of the commentary from the central banking community prior to the onset of renewed political ‘nationalism.’

2015

A few days after the EU referendum bill passed through parliament, the Bank of England’s Chief Economist Andy Haldane delivered a speech which discussed negative interest rates on currency (referred to as the ‘zero lower bound‘). He brandished the idea of removing the lower bound by abolishing paper currency and issuing a government backed currency in electronic form which would be held in digital wallets. Such a move would ‘allow negative interest rates to be levied on currency easily and speedily.’

Haldane also remarked that the distributed ledger technology within Bitcoin ‘has real potential‘ before going on to say:

Work on central bank-issued digital currencies forms a core part of the bank’s current research agenda. Perhaps central bank money is ripe for its own great technological leap forward.

This generated some press coverage at the time, notably from the Financial Times who said converting paper currency into digital would ‘help the bank to manage inflation by enabling it to bypass the current constraint against lowering rates below zero.’

In November 2015, the Committee on Payments and Market Infrastructures issued a paper simply titled ‘Digital Currencies‘. The CPMI works through the Bank for International Settlements in that the BIS hosts the CPMI secretariat. The governing body presiding over the CPMI is the Global Economy Meeting, which is one of three bimonthly meetings held at the BIS. The CPMI is also a member of the Financial Stability Board, another association hosted at the BIS.

In the paper, the CPMI reflected on how the bulk of digital currencies such as Bitcoin are transferred via a distributed ledger:

This aspect can be viewed as the genuinely innovative element within digital currency schemes.

One option is to consider using the technology itself to issue digital currencies.

They concluded by recommending that ‘central banks could consider investigating the potential uses of distributed ledgers in payment systems or other types of FMI’s‘ (financial market infrastructures). This is something that central banks are now openly doing.

2016

As the UK was preparing for the upcoming EU referendum, the Bank of England’s Deputy Governor for Monetary Policy Ben Broadbent spoke at the London School of Economics in March (Central banks and digital currencies).

Speaking about Bitcoin, Broadbent was adamant that the most important innovation within this particular digital currency was the distributed ledger. He spoke of potentially widening access to the BOE’s balance sheet ‘beyond commercial banks‘, and how DLT would make this process easier for non-financial firms and perhaps even individual households.

If so, our accounts would no longer be a claim on commercial banks but, like banknotes, the liability of the central bank.

Broadbent aligned himself with Andy Haldane by agreeing that were a central bank digital currency to replace physical assets, it would ‘open the door‘ to ‘materially negative interest rates.’

That would require explicitly abolishing cash, not just introducing an electronic alternative.

CBDC’s, as explained by Broadbent, would become ‘the fundamental structure of the financial system.’

Seven days before the EU referendum took place, Bank of England Governor Mark Carney gave a speech at the Lord Mayor’s banquet at Mansion House in London (‘Enabling the FinTech transformation – revolution, restoration, or reformation‘). In my last article I outlined several quotes made by Carney from this speech that were relevant to DLT, one of which was:

If distributed ledger technology could provide a more efficient way for private sector firms to deliver payments and settle securities, why not apply it to the core of the payments system itself?

Suffice to say, Carney went on the record as saying that ‘in the extreme, a DL for everyone could open the possibility of creating a central bank digital currency‘.

2017

With the Brexit withdrawal process now underway and Donald Trump newly installed in the White House, media outlets began to promote the soundings of avowed internationalists on the subject of global currency. One of these was Mohamed El-Erian, a former deputy director at the IMF. In April, Project Syndicate published an article by El-Erian titled, ‘New Life for the SDR?‘. Here is the preface to that article:

The rise of anti-globalization political movements and the threat of trade protectionism have led some people to wonder whether a stronger multilateral core for the world economy would reduce the risk of damaging fragmentation. If so, enhancing the role of the IMF’s incipient global currency may be the best option.

In re-publishing the article, the UK Guardian mused that ‘amid the rise of populism and nationalism, some are asking if revamping the SDR could re-energise multilateralism.’

As for El-Erian himself, he asked whether ‘today’s anti-globalisation winds create scope for enhancing the SDR’s role and potential contributions?‘

A connection between rising nationalism and calls to reform the global monetary system had been established.

At the beginning of Autumn, the now former IMF Managing Director Christine Lagarde spoke at a Bank of England Conference under the heading, ‘Central Banking and Fintech – A Brave New World?‘ Here she commented that:

Citizens may one day prefer virtual currencies. If Privately issued virtual currencies remain risky and unstable, citizens may even call on central banks to provide digital forms of legal tender.

We want no holes in the global financial safety net, however much it gets stretched and reshaped.

I am convinced that the IMF has a strong role to play in this respect. But the Fund will also have to be open to change, from bringing new parties to the table, to considering a role for a digital version of the SDR.

2018

This was the year where the narrative around digital currencies was ratcheted up a notch. It began in February with BIS General Manager Agustin Carstens, who gave a lecture called, ‘Money in the digital age: what role for central banks?‘

Aside from asking what constitutes acceptable money, Carstens proclaimed that distributed ledger technology had ‘potential benefits‘, and expected central banks to ‘remain engaged on this topic.’

As with Andy Haldane and Ben Broadbent, Carstens singled out DLT as being the most attractive element of cryptocurrencies. In large part he denounced Bitcoin as being untrustworthy and inefficient. What he did not do, however, is denounce the technology that underpins it. The central message from Carstens was that only central banks can legitimise and regulate digital currencies to make them safe.

Credible money will continue to arise from central bank decisions, taken in the light of day and in the public interest.

Carstens’ intervention on the subject of money in the digital age created a path for national central banks to further the discourse.

Yves Mersch, a member of the Executive Board at the European Central Bank, took the baton with a speech two days after Carstens’ presentation (Virtual or virtueless? The evolution of money in the digital age).

Mersch labelled Bitcoin as ‘heavily resource intensive, and certainly not a green technology.’ Virtual currencies in general had no intrinsic value, particularly because they were neither legal tender or backed by central banks. For that to change, ‘regulatory acceptance is necessary.’ In other words, until central banks control the infrastructure and regulate their use, digital currencies will not succeed as real money.

In closing, Mersch said it would be up to citizens to demand a ‘digital representation of cash that replicates the features of cash‘. He did not go into specific societal circumstances that may occur to guide people in this direction.

Mark Carney was next with a speech in March titled, ‘The Future of Money‘. This speech in particular covered a lot of ground, but to summarise:

• Carney cautioned against anyone assuming that the Bank of England was an ‘archaic vestige’ that will be ‘swept aside by a digital, distributed future.’
• He called the rise of the ‘cryptocurrency revolution‘ amidst the financial crisis and rapid technological developments a ‘coincidence.’
• Expanding on Yves Mersch’s speech, Carney stressed that ‘bringing crypto assets into the regulatory tent could potentially catalyse innovations to serve the public better.’
• The chief take away from the speech was Carney’s call for payment systems to evolve to meet the ‘demands of fully reliable real-time distributed transactions.’ This is of course a nod to DLT, which at the time Carney said was not yet advanced enough to consider issuing central bank digital currency as a ‘near-term project.’

The Committee on Payments and Market Infrastructures then returned with a new paper, ‘Central bank digital currencies.’ They focused much of their attention on ensuring that a future central bank digital currency fulfilled ‘anti-money laundering and counter terrorism financing requirements.’

Add to this concerns raised by globalists on how cryptocurrencies are not environmentally friendly, and it becomes clear that there are multiple inherent weaknesses built into the current crypto network. Weaknesses which central banks are well placed to exploit over time. For example, the CPMI said that dangers arising from today’s cryptocurrencies may necessitate the need for a CBDC to be ‘non-anonymous‘.

For now, the CPMI recommended that central banks continue their ‘broad monitoring of digital innovations‘, which points to the introduction of a CBDC being a medium to long term objective.

The year closed out with new speeches from Agustin Carstens and Christine Lagarde (Money and payment systems in the digital age and Winds of Change: The Case for New Digital Currency respectively.)

Starting with Carstens, he cited the three tenets to ‘sound‘ money. It must be a unit of account, a payment instrument and a store of value. From Carstens’ perspective, cryprocurrencies meet none of these requirements, and he characterised them as ‘fake money‘ and an ‘environmental disaster‘.

As for distributed ledger technology, the versions used currently ‘are not any better than what we already have today.’ Which is why Carstens continues to advocate that central banks carry on experimenting with the technology:

I see central banks continuing to play a critical role in pushing the boundaries of how technology can enhance the payment landscape.

In November, Christine Lagarde’s speech prompted the mainstream press to pick up on her overriding message: central banks should consider issuing their own digital currency.

Making the case for central bank digital currencies, Lagarde envisaged a system where central banks provide the currency, with commercial banks providing the service through which the currency flows. According to her, this would represent ‘public-private partnership at its best.’

If digital currencies are sufficiently similar to commercial bank deposits—because they are very safe, can be held without limit, allow for payments of any amount, perhaps even offer interest—then why hold a bank account at all?

What if central banks entered a partnership with the private sector—banks and other financial institutions—and said: you interface with the customer, you store their wealth, you offer interest, advice, loans. But when it comes time to transact, we take over.

November also saw the European Central Bank launch an extension of its TARGET2 payment system called ‘TIPS’ (TARGET Instant Payment Settlement). This system allows access to payment service providers as well as banks.

As for where the ECB stand on DLT, their position is that it ‘cannot at this stage be considered as an option for the Eurosystem’s market infrastructure.’ But as you might expect, they in no way dismiss it entirely:

As DLT-based solutions are constantly evolving, the ECB will continue to monitor developments in this field and explore practical uses for DLT.

By the end of 2018, the Bank of England had advanced their plans to introduce a ‘renewed‘ RTGS payment system that would have the capacity to interface with distributed ledger technology.

In part two of this series we will look at developments so far in 2019 in regards to digital currency, and how this relates to the current geopolitical climate.