Poor, misunderstood BIS needs a hug
There are two ways to tell that cryptocurrency is actual money.
The first is that you can tip a stripper with bitcoin. No, I’m not kidding. There’s at least one club in Vegas where the girls where nothing but a QR code.
Here are the local news performers trying to do this as just another story leading into an add for some COPD treatment.
Readers of this blog are above such prurient interest, of course. Your Humble Correspondent, alas, is not. (Nor is he above trying to build readership with whatever cheesy options are available.)
But now that’s out of the way, so let’s get to the real reason why we can be assured that crypto will stand the test of time. To be clear, I don’t know if bitcoin will. It might be the 78 rpm record of digital currency. Ether might be the 45. The iTunes might not even have been invented yet. But here’s the sniff test the asset class as a whole just passed: It has caused people with all the money in the world to tremble.
You’re not going to read the Bank for International Settlements’ whole, 34-page white paper on central bank digital currencies (CBDCs), but that’s not because you didn’t have a link. But, let’s save you the trouble.
First, let’s define our term. A CBDC is a digital currency that has the full faith and credit of a sovereign government that already issues fiat currency.
And it doesn’t exist yet.
The closest to a true CBDC is Venezuela’s petro, which is widely viewed as a scam. Then again, Venezuela’s local currency is widely viewed as a scam. The International Monetary Fund projects a 2018 annualized inflation rate in the neighborhood of 13,000%. (When the market value of bitcoin jumped 1,000% in a year, everyone went nuts. And now the critics have that $20,000 number they can use as a cudgel when, unlike the bolivar, it’s since found a fairly steady trading range. I digress. It just bothers me.)
Dozens of countries as disparate as Russia and the Marshall Islands are talking—just talking—about CBDCs, and the BIS is hectoring them to stop.
Cryptocurrencies’ “volatile valuations, and inadequate investor and consumer protection, make them unsafe to rely on as a common means of payment, a stable store of value or a unit of account,” the authors — two separate committees — write. “[I]n periods of stress a flight towards the central bank may occur on a fast and large scale, challenging commercial banks and the central bank to manage such situations.”
A lot of space in the paper gives proper credit to the good that CBDCs could do: enhanced securities settlement efficiency, an expanded toolkit for monetary policy setters, basic convenience in an increasingly cashless society. And the authors note that there’s not just one flavor of CBDC, that a proposed sovereign cryptocurrency’s degree of restriction, anonymity, availability and even interest-bearing potential are all important design elements that could affect how and how much it’s used.
But then the tune changes. Cryptocurrency is so new—all this stuff can be done with existing tech! There’s the risk of money laundering and terrorism financing! Financial stability and supervision could be undermined! We’re all doomed!
That is, unless and until somebody writes the code to plug these holes. The IMF’s objections are legitimate causes for concern, but they don’t seem to understand the difference between the newborn baby and its placenta.
The paper’s tone turns positively condescending, like a teacher writing comments on a report card for a bright but unruly fourth-grader, trying hard not to insult the parents: “While future proofs of concept may rely on different system designs, more experimentation and experience would be required before central banks can usefully and safely implement new technologies supporting a wholesale CBDC variant..”
Ultimately, though, the BIS’s objections come down to this:
“CBDC raises old questions about the role of central bank money, the scope of direct access to central bank liabilities and the structure of financial intermediation,” the report says.
That means central banks dole out money to banks and banks eyedrop it to retail consumers. That’s the way it’s supposed to be because that’s the way it’s always been. (Regular readers of this space know that’s a crock.)
So here’s how you know that sovereign cryptocurrency (“Fialt”? You saw it here first.) is for real.
The BIS, the central banks’ central bank, the organization that literally has all the money in the world, is nervous about holding onto its franchise.