The Incumbents Are Taunting Us

  
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To investors,

The Head of the Bank of International Settlement Innovation Hub, Benoît Cœuré, gave a speech yesterday at the 23rd Geneva Conference on the World Economy. The speech was titled “Finance disrupted” and contained a number of interesting insights into how central banks are thinking about new digital technologies. 

The main theme of the speech is that disruption is upon us. Cœuré opened with:

“Let me begin by stating the obvious: we live in an age of disruption. We hear every day about businesses, industries, and governments being disrupted. And, of course, our private lives have been disrupted by the pandemic. But tonight, I would like to talk about a specific type of disruption – disruption arising from technological innovation in the financial sector.”

He went on to explicitly call out that technological progress, and the subsequent disruption, can be both positive or negative:

“They tell us that technological innovation and associated disruptions can be good or bad. New technologies can foster greater efficiency, financial stability and inclusion. But they can also do the opposite, spawning financial instability, loss of privacy, and financial exclusion.”

The speech goes on to highlight three specific areas that the BIS Innovation Hub sees as examples of digital disruption:

  1. Digitalization disrupting payments and money

  2. Big data and algorithms disrupting banking supervision

  3. Changes in market structures

The first thing that jumped out at me is in a speech that discusses financial disruption, and specifically mentioned the digital disruption of payments and money, there was zero mentions of bitcoin. Zero! The speech spends considerable time on CBDCs but it never acknowledges the $1 trillion market cap asset that is now held by 100+ million people globally, almost every large financial institution, and has recently become legal tender in a nation state.

I’m not sure if the omission of bitcoin in the conversation is a sign of ignorance or malice, but it is a stunning revelation into the lack of importance that these legacy organizations put on the digital, decentralized, open monetary network. If hyperbitcoinization ever occurs, historians will point back to speeches like this to highlight how the central bankers were asleep at the wheel.

Next, there is a section of the speech that attempts to put non-central bank attempts at stablecoins in direct opposition of CBDCs. It reads:

“The history of private money initiatives is not a happy read. Whenever faced with the conflict of interest between making their money stable no matter what and making a profit, private issuers have always chosen profits.

This is where central banks come in.

Money is ultimately a public good whose stability and use needs to be protected by the public sector. This is why so many central banks around the world are working on central bank digital currency, or CBDC – essentially, to ensure that the next generation of money continues to serve the public interest.”

Now this talk track is interesting because it is based on two assumptions: (1) private actors always choose profits over stability and (2) central banks always act in the best interest of the public. Both are incorrect. A great example is the last 18 months in the United States. Through both monetary and fiscal policy decisions, the bottom 45% of Americans are drastically worse off than they were before. Official CPI numbers are over 5% and unofficial numbers are close to 10% inflation.

The goal of central banks is to have a stable currency and achieve full employment. We have neither in the United States. Approximately 40% of all dollars in circulation were created in the last 24 months and unemployment stands at more than 5% officially. The central bank is not achieving their goals, while also hurting the most vulnerable in our society.

To top it off, the central bankers have enriched themselves drastically at the expense of the public. We have had multiple Fed presidents who had to step down amid controversy of day trading and personal investing. There are many more central bankers who have made millions of dollars from asset ownership, while they destroyed the wealth of the bottom 45% of Americans. Did the Fed choose the public good over enriching themselves? That is a hard argument to make given the facts that we have today.

Let’s go back to Cœuré speech. The scariest part is when he begins to talk about data and the need for as much of it as possible. Here is exactly what was said:

“They [financial firms] collect enormous amounts of data about our preferences, spending habits and payment history – and those of our peers, who may be similar to us - even before we ask for a service or apply for a loan. By using artificial intelligence and machine learning to study a treasure trove of data – typically more than 1,000 data points – they can determine how much we can borrow and repay. And they do it in part by using information that until recently did not have much financial value, like the model of smart phone someone has, or their browsing habits…..

…..Technology can change this game, by giving supervisors access to a lot more data, structured, unstructured, with better quality and granularity than ever before. It can also give them effective means to extract, query and analyze data. To perform the same cross-check review that I just mentioned, a digitally native supervisor could build integrated platforms to avoid using spreadsheets and PDFs. She could use artificial intelligence tools to crunch the data and apply natural language processing and machine learning algorithms to real-time, typically unstructured data from news and market developments.

The BIS Innovation Hub is doing exactly that. The BISIH Singapore Centre is working with the Monetary Authority of Singapore, the Bank of England and the International Swaps and Derivatives Association on project Ellipse, a prototype which investigates the feasibility of an integrated regulatory data and analytics platform. Tools based on project Ellipse would enable supervisors to digitally extract, query and analyze in real time large and diverse sources of structured and unstructured data that are relevant to the residential mortgage market, and anticipate supervisory action. Looking ahead, we will also investigate ways to use the suptech toolbox to support the green and sustainable finance agenda.”

If I translate this correctly, the BIS wants more financial surveillance. They believe they are entitled to all the data. The more data, the better they can serve the people, right? That is the argument. But what we have found is that no matter how much data they have, the economists are wrong, the forecasts are wrong, and the policy decisions end up being quite negative. According to Stanley Druckenmiller, the Federal Reserve is the greatest contributor to wealth inequality in the US over the last decade.

There is a strong argument that giving the central banks and BIS more data is actually a net negative. It reduces financial privacy and the citizens get nothing in return. All the proposed queries, extraction, and analyzing still doesn’t solve the first principles problem — the debasement of the currency is the only way that the system doesn’t collapse.

Additionally, the shift to a central bank digital currency gives these overlords a new tool in their toolbox. They like to brag about the potential for real-time stimulus payments, which was explicitly mentioned in the speech:

“I believe in fact that CBDC could have a greater impact on fiscal policy. Think of the extraordinary support that some governments provided to the population during the pandemic. Some countries showed great ingenuity in using digital technology to reach those most in need. Others mailed cheques to people while bank branches were closed because of lockdowns and people were told to stay home. Imagine how much easier it would have been to transfer digital money to people's e-wallets in real time.”

And they like to point the finger at private companies for potentially nefarious use cases or motives. But it never seems to register that maybe the group we should be most scared of are the central banks themselves. Why should we trust them? What makes us more confident that they won’t use this increase in access to data in a nefarious way?

Are the central banks willing to commit to avoiding personalized monetary policy? Can we get confirmation that the central banks won’t create money that expires? Do they promise to avoid participating in the creation of a social credit system? Obviously, no one will commit to any of this. They want to keep their options open. And that is exactly why we should be very, very cautious when we see the talking points that are shared by folks like Benoît Cœuré.

The more someone wants to control something, the more skeptical I become. You can be the judge of these comments and their ultimate intentions for yourself. Just don’t wake up decades from now asking yourself “how did we let this happen?” The time to pay attention is now. Hope you have a great weekend. Talk to you soon.

-Pomp


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THE RUNDOWN:

Pro-Crypto Senator Lummis Discloses Bitcoin Purchase Worth Up to $100K: Senator Cynthia Lummis, R-Wyo., just disclosed a sizable bitcoin purchase as the crypto supporter continued to grow her stake in the volatile asset. The Republican senator scooped up the world’s largest cryptocurrency on Aug. 16 worth between $50,001 to $100,000, according to a filing on Thursday. The purchase was disclosed outside of the 45-day reporting deadline set by The Stop Trading on Congressional Knowledge (STOCK) Act. Read more.

Colombian Fintech Movii Raises $15M in Series B Round: Colombian fintech Movii raised $15 million in a Series B funding round to create a bitcoin purchasing service and expand other services, the company announced Wednesday. The round was co-led by payments services company Square and Hard Yaka, an investment fund founded by former Ripple Chief Risk Officer Greg Kidd. Read more.

Tesla moves headquarters from California to Texas: Tesla is moving its headquarters from Palo Alto, California, to Austin, Texas, CEO Elon Musk announced at the company’s shareholder meeting on Thursday. The meeting took place at Tesla’s vehicle assembly plant under construction outside of Austin on a property that borders the Colorado River, near the city’s airport. Read more.

New Chainalysis Report Reveals Who’s Leading the World in Crypto Adoption: Blockchain analytics firm Chainalysis’ forthcoming 2021 Geography of Cryptocurrency report examines crypto adoption in countries and regions across the world, placing the focus on dynamic trends in emerging markets. Starting last year, cryptocurrency use around the world grew dramatically, thanks to a crypto-asset price run partly fueled by large inflows of institutional investments into the space. Between Jan. 2020 and Jan. 2021, the number of crypto wallets in use worldwide increased 45% to an estimated 66 million. Read more.

South Korea’s 20% Tax on Crypto Gains Will Take Effect in 2022: South Korean Finance Minister and Deputy Prime Minister Hong Nam-ki said his country is moving ahead with its plan to tax gains on cryptocurrency trading starting in 2022, according to a report in The Korea Times. The policy, which will levy a 20% tax on crypto gains of over 2.5 million won (US$2,125) made in a one-year period, was originally supposed to go into effect on Oct. 1, but was delayed due to a lack of taxation infrastructure. Read more.


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