Why regulators are not avant-garde
IMF Chief Christine Lagarde gave a speech last week at the Singapore Fintech Festival that was based around digital currencies. Her speech followed a well trodden path for regulators views on digital currency, where the benefits of decentralised currencies are dismissed or outright ignored for the purposes of pushing the role of fractional reserve banking systems. The full speech transcript can be found here — we dissect it below
The speech was called “Winds of Change” and is centred around the nature of the financial technology (fin-tech) revolution. She frames it as an exploration of the “changing nature of money”, before delving into the benefits and possible applications of central banking in the administration of digital currency (thereby totally missing the point of decentralised currencies).
In fact, throughout the speech look for the deliberate conflation of the two concepts of digital currency. One being central bank fiat currency without cash and the second being decentralised cryptocurrency. It’s a masterpiece of obfuscation even for a bureaucrat.
“A new wind is blowing, that of digitalization. In this new world, we meet anywhere, any time. The town square is back — virtually, on our smartphones. We exchange information, services, even emojis, instantly… peer to peer, person to person.”
Digitalization is the key theme of Lagarde’s opening section. Her discussion of a digitalized world paints the picture of a modern society where cash is becoming obsolete. The notion of a cashless society, where payments are done entirely in a digital fashion is a major part of the fin-tech revolution.
“Even cryptocurrencies such as Bitcoin, Ethereum, and Ripple are vying for a spot in the cashless world, constantly reinventing themselves in the hope of offering more stable value, and quicker, cheaper settlement.”
“Even cryptocurrencies” says it all really. Interesting the emphasis on a cashless world, Governments would love a cashless world, individuals are more likely to want a private world which, used correctly, crypto provides.
“Let me start with financial inclusion, where digital currency offers great promise, through its ability to reach people and businesses in remote and marginalized regions. We know that banks are not exactly rushing to serve poor and rural populations.”
Let’s face it. Most of the world is unbanked. Lagardes system has had a few hundred years to sort it out and it hasn’t worked because it is expensive and unprofitable to bank poor people. This system is better because it costs almost nothing.
Security and consumer protection
“The second benefit of digital currency relates to security and consumer protection. This is really a David versus Goliath argument. In the old days, coins and paper notes may have checked the dominant positions of the large, global payment firms — banks, clearinghouses, and network operators. Simply by offering a low cost and widely available alternative.”
Exactly, but consumers really need protection from government induced inflation and the monetisation of debt. No mention of Zimbabwe or Venezuela here. That is what digital currencies are able to do, enforce monetary discipline. The IMF and National governments have failed here — feel free to check their performance versus gold over the last 100 years.
“The third benefit of digital currency I would like to highlight lies in the privacy domain. Cash, of course, allows for anonymous payments. We reach for cash to protect our privacy for legitimate reasons: to avoid exposure to hacking and customer profiling, for instance.”
The IMF and every government forces people who wish to purchase digital currency to ID themselves as part of the process. We agree one of the real benefits of digital currency is privacy but the idea that the IMF supports this is ridiculous. Currencies like Monero (check out our article) implement levels of privacy well beyond that of paper cash — with the currency being untraceable and globally transferable quickly at a cheap price. Notably here she also suggests fully anonymous digital currency is a bad idea because of criminal activity, but it is very difficult to see a world where one exists without the other — as trusting the data to be managed by central banks is no better than trusting the data with private companies. The same argument applies to cash too but apparently that’s ok.
Lagarde also explores the downsides of digital currency, addressing risks to financial integrity, risks to financial stability and risks to innovation.
“Central banks might design digital currency so that users’ identities would be authenticated through customer due diligence procedures and transactions recorded. But identities would not be disclosed to third parties or governments unless required by law. So when I purchase my pizza and beer, the supermarket, its bank, and marketers would not know who I am. The state might not either, at least by default.”
So, not anonymous at all then because once again you have to trust the Central Bank. How about the last sentence, the Central Bank will know but the State won’t! Please.
“The second risk relates to financial stability. Digital currencies could exacerbate the pressure on bank deposits we discussed earlier.”
Unquestionably the adoption of decentralized digital currencies would destabilise the current system. Most states and many banks are technically insolvent so they would collapse overnight. That is not the fault of this new technology.
“If digital currency became too popular, it might ironically stifle innovation. Where is your role if the central bank offers a full-service solution, from digital wallet, to token, to back-end settlement services?”
Finessing the speech with a masterful sign off and demonstrating that the penny hasn’t dropped yet. There is no central bank in decentralised system. It doesn’t exist and this stifling of innovation idea is complete nonsense.
Full marks to her for showing up though.