Rapid technological change is increasingly spurring private – and often Big Tech-promoted – initiatives throughout the world of finance, particularly in the payments domain. As a result, the global financial system has arrived at a potentially game-changing moment.
Recent developments include so-called stablecoins, which avoid the volatility of their higher-profile crypto cousins, like Bitcoin, because their value is supported by a pool of assets. Stablecoins have the potential to support competition in payments, deploying technology and innovation to reduce cost and offer new services. But when used at scale as a means of payment, they can present material risks to the financial system.
Every day, millions of households and businesses, as well as the financial sector, rely on payment systems to transfer funds. These networks are the bedrock of the financial system, supporting virtually every transaction in the economy. If they are disrupted for any reason, or if users lose confidence in them, the impact on financial stability and the real economy can be enormous.
Technological change and innovation are essential to the continued development of monetary and payment systems. The way we pay today is very different from the way we made payments 50 or 100 years ago. Without technological innovation, we would still be using metal coins for all transactions. But, given the stakes involved, such advances must not lead to lower safety standards and higher risks. New payment initiatives should succeed because they offer better service and potentially greater financial access, not because they are able to operate according to lower or no standards.
In the wake of the 2008 global financial crisis, which clearly exposed the real-world consequences of unfettered innovation, central banks and securities regulators worked together to establish clear international standards for payment systems. These efforts produced the Principles for Financial Market Infrastructures (PFMI), which were issued in 2012 by the International Organization of Securities Commissions (IOSCO) and the Committee on Payments and Market Infrastructures (CPMI) at the Bank for International Settlements.
The principles are designed to ensure that all key elements of financial-market infrastructure, including payment systems, are safe and robust, and that users can have confidence in them. For this reason, the CPMI and IOSCO have just published a consultative report on applying the international payments standards to stablecoins.
The new report is a milestone in three respects. First, it confirms that the current international standards for payment systems apply fully to stablecoin schemes when these are used to provide payment services. The proposed application of the guidelines to stablecoins will provide individual jurisdictions with an internationally agreed baseline to use when developing their regulatory response to new domestic and cross-border payment initiatives.
Second, by explaining how the existing principles relate to stablecoins, the report is a major step forward in applying the “same business, same risks, same rules” approach to a fast-growing and important payment innovation. Both existing and prospective stablecoin payment schemes possess a number of features that distinguish them from other payment systems. They use different technologies and can have different governance. Moreover, unlike other payment systems, which transfer funds in the form of central bank money or commercial bank deposits, stablecoin schemes not only transfer funds but also create the money – the stablecoin itself – in which the funds are transferred.
The consultative report provides guidance on how the current international standards should be applied to these novel features of stablecoins. Crucially, it proposes that if a stablecoin scheme is, or is likely to become, systemic, the international standards should apply to all elements of the scheme, including to the stablecoin itself. The guidance clarifies that stablecoins can be used to settle transactions only if they meet the same high standards we expect of the money already used for settlement today. Specifically, it sets out expectations for stablecoins’ liquidity and creditworthiness and for the rights of coin-holders, including the right to exchange the coin on demand for cash at full face value.
Third, the proposed guidance will help current and future stablecoin operators to structure their schemes in a way that will not lower standards or create new risks to financial stability. This will help to ensure that they compete on a level footing with other providers of payment services. In our view, current stablecoins’ internal structures and legal frameworks might make it very challenging for them to comply with the PFMI without reforming themselves.
This new stablecoin report is an important step toward recognizing the promise and benefits of digital finance, while safeguarding the public from risks that must not be ignored. Ultimately, everyone should be able to make fast, low-cost, and transparent payments, whether domestic or cross-border. To get there, innovation and competition should be encouraged, so that users have access to new services and a choice of provider. But, equally important, payment services that are, or are likely to become, systemic need to be robust and safe, for the sake of users and to ensure the stability of the global financial system.
Ashley Alder is CEO of the Securities and Futures Commission of Hong Kong and Vice Chairman of the Board of the International Organization of Securities Commissions. Jon Cunliffe is Deputy Governor for Financial Stability at the Bank of England. Copyright 2021 Project Syndicate, here with permission.
58 Comments
"If they are disrupted for any reason, or if users lose confidence in them, the impact on financial stability and the real economy can be enormous."
I think unfortunately Satoshi Nakamoto let the cat out of the bag when he released Bitcoin. There is no going back. The impact on financial stability and the real economy IS enormous not can be, some people just haven't realised it yet.
Even if Bitcoin isn't THE thing, it has given people some real context to the idea of dollar devaluation and debasement that we're living through. The fact that it's being talked about as something that could possibly be mitigated or worked around outside of the financial system was probably totally unimaginable at such a mainstream level without it.
I agree - but just trying to get people to think forward to the argument that decentralised finance is the answer and the consequences of that position.
Hypothetically run the concept through you mind, where say next year there is no central bank, there is no body that determines interest rates and there is no central power to try and maintain maximum sustainable employment.
Would we instead have rogue cartels of bitcoin owners bullying people?
I honestly think that the Fed are the most dangerous organisation on the planet at present, but I don't think we should throw the baby out with the bath water, because the water has gone bad. We just need to change the water (and not the bath).
We already have rogue cartels bullying and extorting people under the current financial system. Regulation should be used only to stop illegal and predatory behaviour from damaging the vulnerable. All events since 2008 have shown us that CBs aren't protecting the interests of the people, rather they are actively destroying what purchasing power they still have. Our own housing debt levels are a prime example.
'Humans are the water. Blockchain tech, devoid of human bias or self interest, is bath water 2.0'
So just to be clear, you want to move to use a system that is devoid of self interest, because it is in your own self interest to do so.
But you don't see the hyprocrisy in those two statements?
I think the Fed are terrible and central banks have got it wrong, but what other option have they had? What we are seeing is simply symptomatic of a generational turning and the end of a long debt cycle. Nobody with a working mind has seen this in their lifetime before so unless they have studied history are unable to recognise what is happening.
It's easy to say I'm a hypocrite and dismiss everything I say. What I will say is that the fact that the authorities are feel threatened by blockchain tech further validates the necessity to decentralise the system.
They chose the option to kick the can and look where that has lead us. It's become clear they are either incompetent because they didn't understand their consequences or they are complicit in keeping the debt bubble pumping along.
I didn't say you were a hypocrite, I simply asked if you could see the hyprocrisy in your own views. You want to have it both ways, but life doesn't work like that.
If you have time to read Ray Dalio 'Big Debt Crisis' and 'The 4th Turning' and you'll better understand where we are in the 75-100 year cycle and why central bankers are behaving the way they are.
Is it right for you right now...no. Will it last...no. Should we therefore jump to the view that we need to drop fiat and go to a completely de-centralised system because it removes self interest, but we're only doing it because its in your self interest to do so, probably not.
Look I would probably benefit more from it than many if we did, I don't see how you would ever make it work with out most likely war of some type. It wouldn't be peaceful and it would tear countries apart.
People will vote with the wallets so to speak. It's not just my self interest, I share the frustration of a generation left with the consequences of the last. It would be criminal for authorities to outlaw a technology that aims to solve the problems with the current system.
I don't disagree with any of that. But think it through. See if you can explain to me how the world would transition from where we are now, to where you want to be, without it causing civil and/or international war.
How would it impact trade with countries like China who wouldn't accept payment in your system. How your idea can be sold to people, of whom there are many, that wouldn't benefit from the transition?
I probably don't have the intellect to explain that to you but it doesn't really bother me what you believe. That's your opinion and you're entitled to it. I think the technology could be as disruptive as the internet was back in the 80s. And it's not my idea, it's the idea of a rapidly growing community searching for an alternative.
It's a peaceful, permission-less, opt-in system, that people can choose to exchange their worthless fiat dollars, into a digitally-secure system whose protocol cannot be manipulated by any centralised person or group. It provides a chance for billions of the unbanked to participate in a truely free and open global monetary network, all from their mobile phones. I have enough wealth to be more than content, so I'm just here for the revolution for my kids, and their kids. If that makes me part of a crypto-cult with my crypto "mates" then bring it on!
So you disagree with Pacman and not me?
Who is getting left behind from what exactly?
Those who have backed fiat and loaded up with debt have been doing just fine (for now..).
Its the crypto manics who are fearful that people might burst their bubble, especially if more large players like China ban their use and as such remove all their economic utility.
Its the crypto manics who are fearful that people might burst their bubble, especially if more large players like China ban their use and as such remove all their economic utility.
China has already banned crypto IO. Multiple times. The digital yuan has more utility than Bitcoin in China. Doesn't make it more valuable nor does it squash the demand for BTC.
"Do you mean crypto becoming something meaningful with economic utility, or people with little financial literacy gambling their life savings on meme coins?"
Ah yes, there's only meme coins, that's the only form of crypto there is. There is no such thing as utility tokens, we'll be paying our rent in SHIB, DOGE and ASS tokens for the rest of our lives, that's what we're all seriously proposing. Let me try something here:
"Do you mean housing becoming something meaningful with economic utility, or people with little financial literacy gambling their life savings on property investment?"
Your beloved Central Banking system doesn't see any problem with this. Have you considered you might have some form of Stockholm Syndrome?
Does that mean that crypto is the answer.....no.
Agreed, if you had said 'not necessarily.' It's said that the biggest threat to BTC in particular is if the central banks changed their behavior and belief systems. At present, those are looking like an extremely low probability outcomes.
Question to people who don't want the RBNZ managing the money supply: Why are you so keen on creating another asset class as a long-term store of wealth? Are you opposed to having to look to current asset classes like shares, property, commodities? Do you have a lot of money in term deposits and are unhappy about inflation (albeit very low inflation)?
And what do you want of a currency? Of course it must be a means of exchange - but do you also want it to be a finite resource at the same time? If so, how do you expect to counter deflation which would be the obvious result?
We want the value of the currency to reflect the "work" that the individual holder has provided. We don't want currency printed out of thin air and distributed without the proof that it was "earned". Low interest rates = low value currency which leads to our current debt debacle.
From my comment below:
" Why I want to measure my worth in Bitcoin that no one can create more of? Because my savings represents my time, and I do not want some random banker to be able to create more units that I store my time/wealth in for no cost. This is literally stealing my time and energy from me."
" Why I want to measure my worth in Bitcoin that no one can create more of? Because my savings represents my time, and I do not want some random banker to be able to create more units that I store my time/wealth in for no cost. This is literally stealing my time and energy from me."
Love it Gally.
I don't understand - do you mean that by having a finite resource, then this means that this is 'earned' (I am trying to infer from your comment about the existing currency being created out of thin air - presumably you are referring to the RBNZ's mandate to manage the money supply via inflation targeting).
Your second comment - I don't understand if this relates to your first comment or whether it is attempting to answer one of my questions? However, I presume you are foretelling that absent of RBNZ influence, market interest rates would be much higher than they are now? If that is what you are saying, how have you come to that conclusion, and how does that match up with long-term interest rates, which are market-driven?
First comment - fractional reserve banking
Second comment - the RBNZ to a point, but the Federal Reserve. If you don't think that CBs influence the value and cost of borrowing of a currency more than the so called "free market", then I don't think we'll agree on the topic.
Okay - so inflation. You want a finite amount of currency. Got it. This seems to be a common objection. How do you feel about deflation as a result?
Regarding interest rates - my goal here is to understand the exact argument - I can't agree or disagree before I understand that. So am I right that you think interest rates would be much higher, and if so, why? Another commentator below agrees there would be deflation (and says this is a good thing). That would be a downward force of interest rates. What would be the forces that would drive interest rates up?
From all the crypto manics I've discussed this with, none have considered the practical implications of how to implement such a system and the impacts it would have on inflation/deflation, employment levels, taxation, democracy.
So I ask them to describe how a transition to their system would work. But you never get a response - but they just tell you that you need to get 'educated' and 'don't understand the technology'.
Their primary purpose appears to be to enrich themselves by giving other people the false pretense that they are missing out on something very important - i.e. to stir up FOMO for their own financial benefit.
"From all the crypto manics I've discussed this with, none have considered the practical implications of how to implement such a system and the impacts it would have on inflation/deflation, employment levels, taxation, democracy."
Do you know the difference between an L1/L2/L3 when it comes to crypto? You've already shown you think meme tokens are representative of crypto as a whole, or at least prepared to disingeniously imply that it is.
Because what I'm seeing is something who thinks they can dismiss any argument against the current Central Banking system with folksy idioms like not throwing the baby out with the bathwater, and then pretending that resolves an argument instead of giving a shred of information about what that actually means.
For the record, I'm in favour of it because it would let me trade with anyone around the world instantaneously, without having to pay into a network that has crippled next 30 years of my earning power for rewarding banks who poured billions into our residential property market.
But sure dude, it's about FOMO or whatever.
Ask better questions if you don't understand the meaning of what I am saying.
If you think crypto is the future because you don't like central bank policy...good for you (nether do I by the way).
That doesn't mean that a good idea like blockchain in its current form is the answer.
Tell me how you would go about implementing it, in a global fashion, without causing WW3 to start....(honest question). And as I pointed out above, how will you manage inflation/deflation, maximum sustainable employment, taxation, democracy etc by bringing something like bitcoin online, replacing fiat. Go for it....
The transition is already occurring under your nose. The adoption of the bitcoin network is occurring faster than the adoption of the internet. This is allowing layer 2 solutions like the lightning network to be built on top, allowing instant and basically free, peer to peer transactions in ANY currency (eg Twitter has just rolled this out in the past few weeks). Not with just any crypto, but the apex one.
https://twitter.com/jchatterleycnn/status/1444037100609982465?s=21
In my opinion, sovereign currencies will not be replaced (CBDCs will be rolled out sooner rather than later), but there is now a fixed-issuance reserve asset that will be used for global settlement and pricing of scare resources. A re-pegging to keep control of reckless central bankers. Will there be lots of casualties? Definitely. But that will be the result of the massive debt shitstorm that has been building up for the past several decades, and there will be no soft landing. When I was brought up, I was taught to live within my means, and many have forgotten what that is like. There will be some very painful lessons learned about leverage and greed.
No never said that. I said we want currency to reflect the physical inputs used to earn that currency without risk of being debased by one large player. Why should one all powerful agency that has made significant cock ups govern the value of our medium of exchange?
The simple thought experiment to do for this is:
Imagine you have 100k in savings, and someone wants to borrow that form you. At what rate would you realistically lend to:
A bank (ie term deposit)
Your family with a solid income
A stranger with a sold income
A family member looking to quit their job and start a business
A stranger looking to start a business with no other income source
A person with high expenditure equal to or greater than their debts looking to buy a car?
You get my point, you would be wanting anywhere from 0.25% to 20% for some different situations.
Risk is what forces interest rates up. If you don't think you will get your money back, you will charge them more for giving them the ability to lend to the person.
Central banks artificially manipulate the cost of money by mandating that they will print money (add zeros to a digital ledger) and give this to people/banks at a rate of 1.5% for eg. Because they can source funds at this price, it drives down the interest rates in all other markets. Ergo, no one knows what the real cost of money.
Me for eg, i dont not risk my Bitcoin putting it in a platform for anything less than 6% (and even this is pushing it), the risk is just not worth the reward.
Lets start with inflation. I take it you are using the CPI as your measuring stick of price increases? the basket of goods that the bankers can just remove items from if they increase too much?
One alternative: http://www.shadowstats.com/alternate_data/inflation-charts
So using the definition of the CPI form the 1980's inflation is at least 13% and you cant have a fair comparison if you remove items...
One definition of inflation is the increase in money circulating in the economy. 30% of all USD that has ever existed ahs been created since march 2020. So that is a 30% inflation rate.
Like Michael Saylor points out, if you look at any scarce good such as fine art, high end property etc prices are all up 25% at least over the last year or so.
Why are shares, property commodities going up so much in price? it is because the central governments can print money out of thin air, and the use that to purchase shares. The Fed was literally buying junk bonds of businesses last year, so they are propping up/driving the market.
For commodities, they are scarce! It takes a lot of work to extract raw resources or grow wheat, and people need these things in an economy so demand is high. When you misallocate resources due to not knowing the real cost of money and no one can go bankrupt, this leads to waste and inefficiencies. So people will under invest in one area, and over invest in another. Eventually these will balance out and a free market will correct itself. Eg look at oil prices currently.
Its not the price going up, its the value of the money you are measuring things in going down.
We ran on gold standard for years, worked fine for the most part.
Why I want to measure my worth in Bitcoin that no one can create more of? Because my savings represents my time, and I do not want some random banker to be able to create more units that I store my time/wealth in for no cost. This is literally stealing my time and energy from me.
https://cdn.howmuch.net/articles/Rise-and-Fall-of-the-USD-64c2.jpg
Deflation is a good thing, it means that my hard earned savings today can buy me more in the future, when technology and productivity have resulted in more efficient methods to produce goods, so the real cost has come down. So by deferring current consumption today, I will benefit in the future. People will still spend, but they will weigh the opportunity costs more appropriately.
Remember Bitcoin wont become a day to day stable currency until the price is $5,000,000 a coin or so and a few thousand $ fluctuations will be nothing. So the opportunity cost of spending it will be significantly lower than today, so people will spend. This relates to the velocity of money. The more units you print, the less they move. With a hard capped supply of 21m it is the velocity that will change.
US M2 money supply going exponential: https://www.tradingview.com/x/AcJXgCfN/
M2 velocity falling off a cliff (all printed money just goes into stocks or property etc) https://www.tradingview.com/x/TImMAWxA/
Note the different time scales.
Not the most well put together discussion but there are so many different interconnected areas its hard not to jump all over he place. Fix the money Fix the world.
Looking through all this, I think the answers are: 1) You oppose any inflation; 2) You want another asset class because existing asset values are going up so fast in value (in dollar terms) (I'd love to know what you think of bitcoin), and 3) you genuinely think deflation is a good thing and therefore there is no need for a counter to the resulting deflation (I wonder what you think would happen to an economy where waiting until tomorrow is always a better option to spend the currency).
I would be interested in other views from people who don't want RBNZ to manage the money supply. I wonder if you all hold the same views, or whether you want the same thing but for different reasons.
Bitcoin is the biggest breakthrough for human civilisation since the printing press.
I don't oppose it under all circumstances, what I oppose is a very small group of people screwing over everyone else by forcing inflation on everyone.
Governments mandate that their fiat currency loose value so that they can borrow from the future, then devalue those debts so it costs them less to pay it back. Under the current system there is no way we could go to a deflationary system. There is just too much debt fueled by the rampant money printing.
Bitcoin is several things, one of these is Money by all definitions of the word, and one other is a pristine bearer asset. And I don't have to want the crypto currency asset class to exist, it already does and it isn't going anywhere. I would also rephrase your second statement to read "the dollars are going down in value to fast". Everyone with assets thinks they are getting rich in $ terms, but when your $s get you less real goods, your purchasing power has actually only stayed flat.
People still have to spend to live, and they save so that they can spend it on something at some point right? So its not like everything is going to freeze. But a lot of wasted spending on shit we don't need will decrease, so there will be a massive cull of worthless services that don't provide enough value to consumers to warrant them paying for it. But of course some will value the service so they will pay. It will encourage everyone to be more productive and minimize costs.
We separated religion and state, now it is time to separate money and state.
Countries are afraid of creating digital stablecoins. The fact of the matter is, if they create something digital like that, it would be properly tracked and traced on the blockchain. This would mean, they cannot simply "print more money" without everyone else knowing.
Countries are afraid of that accountability. They are addicted to the drug, which is "unlimited money supply".
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