I moderated a panel of central bankers discussing cryptocurrency last week at Money2020 in Amsterdam, I must say, one of the most enjoyable panels for me this year.
“Central banks unlikely to issue cryptocurrencies”, should be the headline of this piece, but it is really the byline.
The panel was comprised of heavy hitters in their respective areas: Dr. Thomas Moser, Swiss National Bank; Dr. Marius Jurgilas, Bank of Lithuania; Martin Etheridge, Bank of England; and, James Chapman, Bank of Canada.
Whilst most in the central banking community seem to agree that crypto assets, such as tokens, may play a role in new forms of global capital formation, by unlocking access to new sources of money for consumers and businesses, cryptocurrencies are off the menu for central bankers.
Lithuania, has been particularly focused on how the cryptocurrency and ICO (Initial Coin Offering) markets are driving new ways to fund innovation, and create new forms of capital. The Lithuanian Finance department has just this week issued guidance on security tokens, a popular global theme following the SEC’s Howey Test.
So lets be clear before we move on - we are not talking about security tokens, asset tokens, or utility / consumption tokens - we are talking about payment tokens – aka cryptocurrencies, like Bitcoin.
The nub of the issue for central bankers is that they just don’t see the job that cryptocurrencies like Bitcoin do as being useful to central banks in their role of serving society. This was one of the big themes in my discussions with central bankers at the IMF World Bank annual spring meeting in Washington this year. It’s not that they are vehemently against cryptocurrencies, they just don’t have a use for them.
With characteristics such a poor short-term store of value, volatility, and few redemption points for day-to-day use by consumers, central bankers’ see little evidence of wide spread adoption and use of cryptocurrencies.
This has not deterred the Swiss national railway, SSB, from launching a two-year pilot allowing customers to trade Bitcoin with Swiss Francs at ticket machines, though tickets cannot be purchased.
There are thousands of redemption points around the world that allow you to buy Bitcoin and other cryptocurrencies with your cash or other cryptocurrencies. There just aren’t many shops that you can use cryptocurrencies to buy your daily bread, yet.
The English and Canadians are keen to point this out, arguing that the ultimate success of any currency, crypto or not, is its practical day-to-day use - the redemption points - and the confidence of the consumer in the currency.
Cryptocurrencies such as Bitcoin and Ether are algorithmically generated and require significant computing power to digitally “mint”, through a process called “mining”, which is conducted on a decentralized network of computers on the blockchain or a distributed ledger technology (DLT).
There are all sorts of practical issues with currency economics and cryptocurrencies are no exception. Bitcoin has a supply limit of 21,000,000 bitcoins of which almost 17,000,00 are in circulation and may be viewed as “scarce” while Ether has no supply limit with 91,000,000 in circulation and may be viewed as “abundant”.
Dave Birch of Consult Hyperion, a crypto specialist, estimates that, of the total number of Bitcoins issued in circulation, one third are lost, a third are in the hands of a very small number of people, and a third are in the hands of the public.
Whose ever hands they are in, the fact is that in 2017, there was great demand and the Bitcoin price rose 1,300 percent. Ethereum was up 8,000 percent, while Ripple’s XRP was up 33,000 percent in 2017.
Nouriel Roubini, the outspoken economist, also known as “Dr. Doom” for predicting the 2008 Financial Crisis is critical of Bitcoin and claims it is “the biggest bubble in financial history”.
Eric Voorhees, the CEO Shapeshift, a crypto exchange says that the Bitcoin price bubble is only a surprise to those new the industry and tweeted, “One does not create a world-changing technology without a bubbly ascent. This is the fourth or fifth large bubble, and there will be more.”
Michael McDonough from Bloomberg posted my favorite chart of the week on Twitter overlaying the Bitcoin price with the Nasdaq index during the Tech Bubble bust period of the early 2000s.
Many lost money in the .com crash with estimates of $2 trillion in losses by November 2000. 18 years on, this must be taken into the context of the overall growth of a still nascent digital sector. The Nasdaq losses were greater in the Financial Crises in 2008 than in the .com crash of 2000. The Nasdaq has climbed steadily to 6000 from previous highs of 2500 in 2000 and 2008.
The top five listed US companies by market capitalization today are technology companies: Apple, Google, Microsoft, Facebook and Amazon. In 2000, Amazon as an on-line book shop, Google was only two years old and mostly unheard of, and Facebook was four years away from being founded.
Roubini also calls out the claim that Bitcoin is decentralized as “bull****” and complains of its negative impact on the environment – the annual power consumption for Bitcoin mining is estimated at 32 terawatts, comparable to the annual power consumption of Denmark. You would expect nothing less for someone called Dr. Doom!
Nick Spanos, the founder of the Bitcoin Center in New York, and the co-founder of Zap, a crypto smart contract platform, based in Zug Switzerland introduced himself to me as “Mr. Bitcoin” at the World Government Summit in Dubai in February. We were on cryptocurrency panel together where he stated that “Bitcoin is not a bubble, it is the pin that is popping the bubble of the legacy financial systems since it has been created”, one of the most shared quotes from the panel.
In any case, central bankers are not worried that Bitcoin or the total market of cryptocurrencies, currently estimated at $500 billion, poses a risk to the global financial system, unlike large banks with weak balance sheets, and that is worth noting.
Systematic risks to the financial system and society, and the right for banks to print money, has sparked a populist-like move in Switzerland against the banking sector. A national referendum was held last weekend in Switzerland asking the people to vote for taking away what is called fractional reserving from Swiss banks, leaving the creation of money solely to the Swiss National Bank.
I can only imagine the Swiss National Bank was happy that the referendum only garnered 23% of the public’s vote, no where near the majority required to carry it.
So how are central banks positioning to harness the digital revolution? The answer is digital currency. This is not by sleight of hand – central bankers are considering greater moves to digital currency.
The Swedish Riksbank is considering an e-Krona, though implementation options are at the early stages of consideration.
This may cause some confusion, even in the learned and lofty crypto circles.
A digital currency is just that, digital. It could, in the future, be a smart contract, on a distributed ledger consensus network limited to counterparties the central bankers invite to a digital currency consensus network, like say banks!
Whatever the underlying technology used by central bankers, it is unlikley to be an algorithmically generated cryptocurrency, and the store of value will likely be the unit of the national currency: dollars, pounds, euros, kroners, yen, etc.
I am not sure why this is big news to anyone who gets their salary paid directly to their bank account, pays bills through monthly automatic transfers, shops and travels with cards that are either security coded, chip and pin or tapped, and does not deal with much paper money throughout the month.
A growing number of people in the world increasingly use different forms of digital payments instead of cash.
Central bankers, in many countries, know that they have a strong brand in fiat currency, that is currency that the government has declared to be legal tender, whether it is cash and coin, or digital. To many, it is all about the trust.
Even with cash diminishing relative to overall digital payments, do not expect central banks will stop printing cash any time in the near future, though many of us have little use for it as long as the electricity is working.