In part one of this series we looked at how the agenda to introduce central back digital currency (CBDC) was advancing prior to the EU referendum and Donald Trump’s presidency, and in the two years thereafter up to 2018.
We will now focus on developments in 2019.
With the year having just begun, the Bank for International Settlements released paper number 101 – ‘Proceeding with caution – a survey on central bank digital currency‘. Here we learned that whilst the majority of banks are engaged in active research programmes on CBDC’s, none are yet in a position to launch a digital variant of physical money.
Judging by the paper, the estimation is that only a few banks have strong intentions to launch a CBDC over the next decade. But according to the BIS, many are seeking to ‘replicate wholesale payment systems using distributed ledger technology.’ In this instance, wholesale refers to interbank payments.
Sixty three central banks took part in the survey, the identity of whom were not disclosed. Out of the sixty three, it was said that 85% are not planning to introduce a CBDC in the short term. For reference, the BIS measure short term anywhere up to three years, and medium term anywhere up to six years.
Perhaps the most significant takeaway was the revelation that two unnamed emerging market central banks are apparently considering issuing a general purpose (available to consumers) CBDC within the next three years. One of those appears to be the People’s Bank of China as we will look.
The paper signs off with this short paragraph:
To meet the payment needs of the future, physical cash is unlikely to be the main answer. Yet, most people will have to wait to use a CBDC. However, central banks are working hard to make sure the wait is worth it.
Two months later in March BIS General Manager Agustin Carstens gave a speech under the heading, ‘The new role of central banks‘. As it turned out this was a significant intervention. Besides using his platform to call for ‘technological developments‘ to be internationally regulated and coordinated, Carstens made a passing reference to a new initiative called Innovation BIS 2025. This initiative was officially launched at the time of the BIS’ Annual Economic Report in June (more on this as we go).
I wrote briefly about Innovation BIS 2025 in a blog post back in April (BIS General Manager Outlines Vision for Central Bank Digital Currencies) where I quoted Carstens as saying that it would be set up ‘in order to foster collaboration in innovation-related work, as well as a new unit which will undertake policy analysis and research on how key innovations and increased data availability should inform policy and shape central banks’ responses.’
In the same blog post I discussed another speech Carstens gave in March titled, ‘The future of money and payments.’ To pick up on one key part of the speech, Carstens was adamant that the introduction of central bank digital currency would mean the total abolition of all physical money:
Like cash, a CBDC could and would be available 24/7, 365 days a year. At first glance, not much changes for someone, say, stopping off at the supermarket on the way home from work. He or she would no longer have the option of paying cash. All purchases would be electronic.
Carstens also warned that a CBDC is ‘not necessarily anonymous.’
A month later, Project Syndicate published an article written by Jose Antonio Ocampo, the former United Nations Under Secretary-General for Economic and Social Affairs (the under secretary role at the UN is the third highest rank in the institution).
In the article, ‘Time for a True Global Currency‘, Ocampo spoke of how the IMF’s Special Drawing Rights (dubbed the ‘principal reverse asset in the international monetary system‘) remained an ‘unfulfilled ambition‘:
Most importantly, SDRs could also become the basic instrument to finance IMF programs. Until now, the Fund has relied mainly on quota (capital) increases and borrowing from member countries.
The best alternative would be to turn the IMF into an institution fully financed and managed in its own global currency.
Ocampo also raised how routine use of the SDR would allow the international monetary system to become more independent of US monetary policy:
One of the major problems of the global monetary system is that the policy objectives of the US, as the issuer of the world’s main reserve currency, are not always consistent with overall stability in the system.
With 2019 marking the 75th anniversary of the IMF, and 50 years since the SDR was conceived, Ocampo concluded by saying that this represented the perfect opportunity to ‘transform the SDR into a true global currency that would strengthen the international monetary system‘.
In June, just two weeks before the BIS issued their Annual Economic Report, Facebook announced plans to launch Libra – a blockchain digital currency. Facebook are part of a newly established grouping called the ‘Libra Association‘, which collectively plan to oversee the currency. The likes of Paypal, Visa and MasterCard are part of the association, as is a new subsidiary of Facebook named ‘Calibra‘. ‘Calibra‘ will be known to users as a digital wallet to store funds in, which can then be used through Facebook Messenger, WhatsApp and a new standalone app to make and receive payments. It has the potential of mirroring China’s digital payments system, which is dominated by Alipay and WeChat Pay.
The Libra Association Members released a white paper detailing their ambitions, which stated that ‘now is the time to create a new kind of digital currency built on the foundation of blockchain technology.’ The paper also confirmed that the target launch date for Libra is in the first half of 2020.
Perhaps most revealing is how the association believes that the world requires a ‘global, digitally native currency‘. In other words, a currency that is not bound by the concept of singular world reserve status that the dollar currently inhabits.
Curiously, Libra’s headquarters will be based in Geneva, Switzerland – only a three hour train ride from Basel where the BIS are located.
In the wake of Libra, the BIS used the setting of their Annual Economic Report to announce that they were establishing a new ‘Innovation Hub‘ for central banks. This was what Agustin Carstens had alluded to in March.
According to the press release, the Hub will be used to:
- Foster international collaboration on innovative financial technology within the central banking community
- Identify and develop in-depth insights into critical trends in technology affecting central banking
- Serve as a focal point for a network of central bank experts on innovation
There will be three hubs initially – in Basel, Hong Kong and Singapore – with a ‘second phase of implementation’ to cover the Americas and Europe later on. The BIS have been advertising several prominent vacancies, one of which was for a Head of the Innovation Hub. With an employment duration of five years this would lead right into 2025, by which time the Bank of England and the Federal Reserve plan to have their new RTGS payment systems operational.
In commenting on the announcement of the Hub, Agustin Carstens said:
With the establishment of a network of central bank experts on technology and innovation, we will now intensify work on a set of projects that reflect the innovation priorities of the central banking community and which could be scaled up through international cooperation over a relatively short period of time.
The assumption has to be that ‘innovation priorities‘ is a reference to Fintech, which itself incorporates the technology behind digital currencies.
In an interview with the Financial Times immediately following the Annual Economic Report, Carstens confirmed that ‘many central banks are working on it‘ in regards to CBDC’s, and that the BIS are supporting them in their efforts.
He went as far to suggest that it ‘might be sooner than we think that there is a market and we need to be able to provide central bank digital currencies.’ Although he said that demand for CBDC’s was not yet sufficient to warrant issuing them, Carstens tellingly affirmed that progress towards this objective would ‘depend on the development of payment systems.’
As I have outlined in recent articles, the Bank of England, the Federal Reserve and the European Central Bank are or have been all actively engaged in reforming their systems.
The one central bank that appears closest to introducing a CBDC is the People’s Bank of China. In August PBOC official Mu Changchun said the bank was ‘almost ready’ to issue a CBDC. According to CNBC, the PBOC have been working on implementing the currency for the past five years.
Initial indications suggest it would incorporate a two-tier system, through which the central bank and commercial banks would have license to issue the currency. The PBOC are reported to have said that their new system would not be exclusively reliant on the use of blockchain due to the current rate of technological development not being advanced enough to handle the scale of transaction volumes in China. This obviously leaves open the possibility of a fully realised blockchain system as the technology grows more profound.
With August coming to a close, the annual Jackson Hole Symposium took place at the Federal Reserve Bank of Kansas City. In attendance this year was Bank of England Governor Mark Carney who delivered a speech called, ‘The Growing Challenges of Monetary Policy in the current International Monetary and Financial System.’
This was the stage in which Carney, using Facebook’s Libra as a beacon, questioned whether a ‘Synthetic Hegemonic Currency‘ would be ‘best provided by the public sector, perhaps through a network of central bank digital currencies‘.
Important to appreciate here is that Carney’s intervention was framed against what he called ‘the combination of structural imbalances at the heart of the IMFS (International Monetary and Financial System) and protectionism,’ both of which ‘are threatening global momentum‘:
Though some may be tempted to resort to protectionism, such policies would merely serve to make the problem worse.
How might central banks respond? Carney mapped out three stages:
In the short term, central bankers must play the cards they have been dealt as best they can. That means using the full flexibility in flexible inflation targeting.
In the medium term, policymakers need to reshuffle the deck. That is, we need to improve the structure of the current IMFS.
In the longer term, we need to change the game. There should be no illusions that the IMFS can be reformed overnight or that market forces are likely to force a rapid switch of reserve assets.
Included in the longer term vision is to use technological advancement as a means to ‘create a more balanced and effective system.’
Here is where Carney began to single out the dollar’s world reserve status as an effective noose around the global economy’s neck. He spoke about the dollar being the dominant currency for both the invoicing and settling of international trade, as well as the currency of choice for the issuance of securities and the holding of reserves. In his words, ‘the global financial cycle is a dollar cycle‘:
Given the widespread dominance of the dollar in cross border claims, it is not surprising that developments in the US economy, by affecting the dollar exchange rate, can have large spillover effects to the rest of the world via asset markets.
In addressing how over reliance on the dollar and ‘deficiencies‘ in the IMFS could be remedied, Carney was explicit:
Ultimately a multi-polar global economy requires a new IMFS to realise its full potential. The most likely candidate for true reserve currency status, the Renminbi (RMB), has a long way to go before it is ready to assume the mantle.
History teaches that the transition to a new global reserve currency may not proceed smoothly.
This history dates back to a century ago when, as Carney pointed out, trade was mostly priced in sterling. The dollar gained in prominence following the First World War before eventually superseding sterling as the world reserve, with the transition serving to ‘destabilise the international monetary system‘.
In the present, Carney admits that whilst a ‘multipolar IMFS‘ may be some years off, ‘technological developments provide the potential for such a world to emerge.’
It should not come as a surprise to anybody that this world ‘would be based on the virtual rather than the physical.’
And it should also not come as a shock to learn that Carney visualises the IMF as playing a ‘central role in informing both domestic and cross border policies.’ How might they do that? Let’s allow Carney himself to inform us, through the vision of a ‘Synthetic Hegemonic Currency‘:
The dollar’s influence on global financial conditions could similarly decline if a financial architecture developed around the new SHC and it displaced the dollar’s dominance in credit markets.
Widespread use of the SHC in international trade and finance would imply that the currencies that compose its basket could gradually be seen as reliable reserve assets.
Might this be a subtle reference to the IMF’s Special Drawing Rights basket of currencies, on this its 50th anniversary?
In the concluding part to this series I will offer a summary of what has been discussed so far, and map out how the resurgence of nationalism / protectionism serve to benefit the globalist ideal of an all digital world currency framework.