David Hargreaves tries to make sense of the latest official global moves on cryptocurrencies - and concludes there's still a fair chance we'll end up with a dominant global cryptocurrency 'by accident'

As a general rule of thumb, I would say human beings are pretty good at deciding what they don't like and don't want. 

As for deciding and agreeing on what they like and want, however, well...not so much. Not at all.

I'm getting the increasing impression this little rule of thumb can be applied to the subject of cryptocurrencies - and more to the point of getting agreement (or not) on how these might be implemented and used on a truly global scale.

It seemed to me that the financial powers-that-be were happy to put cryptocurrencies in the 'too hard' basket.

Yes, we already had cryptocurrencies, most (in)famously through Bitcoin, but they were operating outside of regulation and in comparative terms were not widely used.

All that changed of course in the middle of this year when Facebook announced its Libra project.  

That got everybody's attention.

It's different

The proposed Libra is different to Bitcoin in that it would be a 'Global Stablecoin' (GSC). A stablecoin is backed by a basket of assets and theoretically should not be as volatile in value as the likes of Bitcoin have been. There are a number of existing cryptocurrencies that do answer to the stablecoin description, with perhaps the best known of these being Tether. 

The fact that Facebook and partners were aiming to get Libra up and running as soon as next year was a game changer in terms of forcing the world's financial authorities to sit up and pay attention.

In the wake of the Libra announcement the G7 group of developed economies established a working group to look at stablecoins. The working group has now issued a report, which is well worth a read. 

The report comes even as the Libra project appears to be struggling - probably in no small part because of the attention it has received from the authorities.

Cherry-picking

Ever the helpful one, I have cherry-picked some of what I think are the more interesting bits in the G7 working group report.

The first thing to note is that the report's pretty dismissive of the cryptocurrencies as we have known them (yes, Bitcoin et al), saying:

The first wave of cryptoassets, of which Bitcoin is the best known, have so far failed to provide a reliable and attractive means of payment or store of value. They have suffered from highly volatile prices, limits to scalability, complicated user interfaces and issues in governance and regulation, among other challenges. Thus, cryptoassets have served more as a highly speculative asset class for certain investors and those engaged in illicit activities rather than as a means to make payments..

That is pretty dismissive and suggests the working group don't see much future for the above-mentioned type of cryptocurrency. It may not have been coincidence that the prices of the cryptocurrencies slid after the report came out - although trying to pick why the cryptocurrencies go up and down in price and with the speed they do is a recipe for insanity.

So, anyway, then the report moves on to discuss stablecoins (and sorry readers, no chocolate fish for guessing who the 'large technology' firm referred to here might be) :

Recently, a number of stablecoin initiatives have emerged, some of which are sponsored by large technology or financial firms. With their existing large customer base, which additionally may be cross-border, these new stablecoins have the potential to scale rapidly to achieve a global or other substantial footprint. These are referred to as “global stablecoins” (GSCs).

Due to their potentially large size and reach, GSCs could additionally pose challenges to fair competition, financial stability, monetary policy and, in the extreme, the international monetary system. They may also impact the safety and efficiency of the overall payment system. These challenges stem, in part, from the fact that GSCs may transform from a cross-border payment solution to assets with money-like features.

The report goes on to say that the G7 believes that no global stablecoin project should begin operation until the legal, regulatory and oversight challenges and risks are adequately addressed, "through appropriate designs and by adhering to regulation that is clear and proportional".

That said, depending on the unique design and details of each stablecoin arrangement, approval may be contingent on additional regulatory requirements and adherence to core public policy goals. 

However, for stablecoins to meet the needs of the unbanked and underserved, they must first prove to be a safe store of value, ensure high levels of protection and legal certainty for their users, and be compliant with relevant regulations. Furthermore, they would have to overcome the barriers that currently restrict access to and use of transaction accounts.

And it goes on to describe how  the appropriate regulatory approach is likely to require both cross-border and cross-agency collaboration.

Beyond the regulation of the individual components, the GSC ecosystem as a whole could potentially become systemically important. If so, it will be important to consider how regulatory frameworks can be applied to the ecosystem as a whole. For example, the entirety of a GSC arrangement may constitute a payment system, critical infrastructure or financial service provider coupled with additional regulated services, necessitating oversight or supervision by central banks and other public authorities in different jurisdictions.

The report then says that the "recent GSC initiatives" have highlighted the shortcomings in cross-border payments and access to transaction accounts, and the importance of improving access to financial services and cross-border retail payments.

However, the report says it remains to be seen whether GSCs will indeed be able to overcome the shortcomings of existing payment systems.

Moreover, their adoption is, as yet, uncertain as they face significant legal, regulatory, supervisory and operational challenges. Stablecoins, regardless of size, pose challenges and risks to AML/CFT efforts across jurisdictions, as well as operational resilience (including for cyber security), consumer/investor and data protection, and tax compliance. GSCs, by nature of their potential scale, may amplify those challenges and could also pose challenges to competition policy, financial stability, monetary policy and, in the extreme, the international monetary system.

Consequently, it is important that the private and public sectors continue to explore innovative ways to make payments better, reduce inefficiencies and be more inclusive. In particular, the public sector should redouble its efforts to reduce frictions in international payments and support measures to improve financial inclusion.  It is critical that such work be completed in a timely manner and in a way that is best able to support efficient transactions and innovation going forward.

To that end, the G7 working group has recommended that "relevant public stakeholders" (finance ministries, central banks and standard-setting bodies such as the Committee on Payments and Market Infrastructures), in collaboration with relevant international organisations, develop "road maps" for supporting and scaling up ongoing efforts to improve the efficiency and inclusiveness of payment and financial services.

It says these "road maps" could include recommendations to:

(a) Support initiatives to improve cross-border payments. This could include fostering standardisation of payment processes, promoting direct or indirect interlinking of payment infrastructures, considering whether applicable legal frameworks provide a sufficient foundation of certainty for emerging payment products and services, and facilitating useful and responsible innovation and competition.

(b) Promote financial inclusion by reviewing and updating the call for action by all relevant stakeholders and boosting support programmes for less developed countries.

(c) Improve coordination between authorities, both domestically and across borders, including through strong regulatory cooperation and harmonised standards, where practicable, and establishing information-sharing and cooperative oversight arrangements between relevant authorities.

The working group has now handed on the issue to the Financial Stability Board (FSB), the international body that monitors and makes recommendations about the global financial system.

The FSB submitted an issues note on global stablecoins to the October 2019 G20 Finance Ministers and Central Bank Governors meeting at the end of last week and it will be submitting a consultative report to the G20 Finance Ministers and Central Bank Governors in April 2020, and a final report in July 2020.

So, that's where we are up to.

A long way from decisive moves

What this tells me is that we are a long way away from anybody making a substantive and decisive call on this subject. The report is big on saying what's potentially wrong with stablecoins but doesn't offer much in the way of opinions on how such coins might be correctly designed and implemented.

Indeed, I get the distinct impression (and I could be wrong) that there is still a fair degree of resistance to the idea of having global stablecoins at all.

Libra was jumped on by the authorities because it was backed by Facebook - and therefore clearly carried the 'threat' (as far as the authorities would have seen it) of immediate consumer acceptance and usage. And it would have been too big to stop almost straight away. 

I really do not think though that the global authorities have got the time they would like to have (and possibly still think they have) to slowly work through every single issue. I don't think they have got time to decide in every detail just exactly what they want. If they dither too long the decision will be taken out of their hands.

The reality is that someone somewhere will push for and likely start getting traction with a broadly-based cryptocurrency, whether the authorities are ready or not. And  there will be immediate public demand for it.

It's inevitable

Some sort of globally used and accepted cryptocurrency seems inevitable. 

The only real question is whether we end up with cryptocurrency designed and regulated by the global authorities - or we end up with one pushed on us (as would be the case with Libra) and then have the authorities desperately trying to play catch up.

After reading that working group report I still do not have real confidence that there is widespread acceptance by those in power (as I think there needs to be) that the world will go crypto. 

And therefore I think the risk remains that we will see a very fractured and disorderly development of global cryptocurrencies.

In a world that doesn't look particularly financially stable, that's just another risk we don't need. Our unstable world needs a stablecoin that really is stable.

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